An operating reserve is a fund set aside to cover unexpected operating costs, revenue shortfalls, or emergency situations without disrupting normal services or requiring immediate tax increases. Financial best practices recommend municipalities maintain operating reserves equal to a percentage (often 5-15%) of annual operating expenditures. Adequate reserves provide financial flexibility to handle emergencies, smooth out revenue fluctuations, and maintain stable tax rates. Reserves below recommended levels create vulnerability to unexpected events, while excessive reserves may indicate undertaxation or deferred maintenance. Reserve policies establish target levels, permitted uses, and replenishment strategies for prudent financial management.