Orange Beach's reserve fund is approved

Published by the Mobile Press Register

City's reserve fund is approved
Orange Beach aims to stash away enough to pay bills, employees for a year

Thursday, July 19, 2007
By RYAN DEZEMBER
Staff Reporter

ORANGE BEACH -- Should a hurricane strike, city officials hope they will be able to weather the storm financially with an emergency reserve fund designed to eventually have enough to pay the city's bills for a year.
The fund, which will start off with $6.6 million from a recent bond issue, is expected to grow to more than $12 million -- about six months' operating revenue under this year's $24.5 million budget -- within two years under a plan adopted unanimously by the City Council on Tuesday.
Within five years, according to the plan, Orange Beach should have saved up enough money to operate for a year.


"I think the reserve fund is probably one of the most important ordinances that we've passed in a long time," Mayor Pete Blalock said.
Orange Beach, a top Southeastern vacation destination, is arguably the wealthiest city in Alabama with a per capita property tax base of almost $720,000. But the same balmy waterfront location that lures millions in tourist dollars, billions in real estate investment and droves of well-heeled retirees also makes the city susceptible to devastating hurricanes.
From 1998 until late last year, Orange Beach carried business interruption insurance that replaced sales and lodgings tax proceeds -- historically about 60 percent of Orange Beach's income -- in the event of a major storm.
Though expensive, having the policy paid off when Hurricane Ivan struck in September 2004 and effectively shut down tourism business for several months. In all, Orange Beach recouped $1.78 million in lost revenue after Ivan, which helped City Hall pay its bills and its employees in the storm's aftermath.
But because of Ivan, 2005's Hurricane Katrina and the rest of the storms that struck the Gulf Coast and Florida in 2004 and 2005, the cost of business interruption insurance has soared. When the city went to renew its policy in December 2005, for example, its annual premium tripled as the maximum amount of coverage was reduced from $6.5 million to $3 million.
"It, in our opinion, wasn't cost-effective," Blalock said. "So what we're going to do now is basically insure ourselves, build up a fund that will enable us to withstand any type of hurricane where we'll be able to keep all our city employees working and rebuild our city and not have to worry about the financial restraints that come from the damage that a hurricane can do, or any natural disaster."
The plan, developed by City Administrator Jeff Moon and Finance Director Clara Myers over the past several months, outlines how Orange Beach will build its reserve beyond the initial $6.6 million. With adoption of the plan, which is effectively law, elected leaders will be required to: Earmark in each year's budget 10 percent of projected revenue and deposit it in the reserve account until the desired fund balance is achieved. Had the ordinance been in place last year, for example, this year's deposit would be about $2.45 million.
Make yearly deposits of $318,795 to the fund, which is equal to the annual premium the city last paid on its business interruption policy. Deposit in the account all of the city sales tax originating from businesses at The Wharf, a 220-acre mixed-use development, until the reserve is fully funded.
Though the fund, with $6.6 million, is only large enough to float the city for more than three months at the moment, Moon said that having that cash at the ready this summer was important.
"Although it's not at the level of the goal, having that money in the bank going into storm season provides a level of comfort that that money is in reserve right now and restricted right now should we have another tropical occurrence," Moon said.
To manage the money and handle investments of the reserve fund, the plan calls for the council to select a financial advisor.
Moon has said that the investments cities can make under Alabama law tend to be conservative. Orange Beach won't be gobbling up stocks or betting on derivatives, he said. Buying certificates of deposit is a more likely prospect, he said.
To reach into the reserve, the City Council must first hold a public hearing spelling out why it needs to use the money and at least five of six council members must approve an ordinance to use the money. In the event of emergencies, the money can be spent with a simple majority vote, but all withdrawals must be reported in detail by the city administrator and replaced as soon as possible.
"I feel like once we get it to the way we want to," Blalock said, "we'll probably be one of the most sound cities in the Southeast at the very least, if not the country."