Several days ago I posted an article called “The First Cut“. In that article I suggested that PWCS ought to cap the beginning balance at $15 million next year, and each year thereafter. Some folks expressed concern with this idea as having money left over at the end of the year seemed like a good thing to them. After all, a good financial person always budgets expenses a little higher than they expect them to be so that they don’t get caught short.
Those folks would be absolutely correct, good financial managers do plan for expenses to be a little higher than they actually expect them to be, and the financial folks in PWCS are very good financial managers.
In my opinion, $50 million to $70 million extra each year is probably a bit much.
It’s not like PWCS doesn’t have a plan for contingencies – they do, in the reserves (see this chart – reserves). Each year, for the past 3 years, PWCS has budgeted $35 million to $40 million in reserves. So they’ve got a huge budget for contingencies.
In addition to the reserves, they’ve planned to have between $50 million and $64 million left over at the end of each year to carry forward as Beginning Balance.
I can’t imagine any financial manager budgeting $40 million for contingencies AND planning to have $50 million left over at the end of the year, yet that’s what PWCS has done every year.
Capping the Beginning Balance at $15 million isn’t unreasonable, it’s the first cut.