2005-02-24-AC-min - Laserfiche WebLink

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February 24, 2005 McNerney pointed out that debt is rated based on a community’s ability and willingness to repay. Reserves are important to preserve a community’s liquidity, just as one must maintain personal savings to deal with potential setbacks and crises. It is important to build reserves into the base budget, otherwise reserves have to compete with the threat of a cut in services. Reserves are necessary for financial flexibility. When a town has adequate reserves, it has room to make adjustments; without adequate reserves, there is very little wiggle room. Reserves can be built into a base budget by use of conservative estimates. There should be continued attention to promoting efficiency by each department and building financial strength in many ways. Diversification of the revenue base, however that might be achieved, is desirable. Ultimately, it is critical that the Town live within its means; it is imprudent to buy a Cadillac if you cannot afford one. There must be a structurally balanced budget. McNerney explained that the rating agencies typically look at the total general fund balance and undesignated fund balance, rather than “free cash.” Free Cash is an accounting concept unique to Massachusetts. Fund balances are more useful because they are the recognized measure of reserves under GAAP and enable financial comparison of communities across the nation. Free Cash is a very conservative estimate of the funds the Town has available for appropriation. For example, unlike the UFB, it does not include uncollected receivables and state aid payments that are anticipated but have not yet been received. The precise ingredients of Free Cash can be determined by looking at the DOR’s calculations when it makes its Free Cash certification after the end of each fiscal year. The stabilization fund is not considered part of either the General Fund Balance or the Undesignated Fund Balance, but it is treated as an additional reserve. The town gets credit from the rating agency for both the UFB and the stabilization fund. McNerney pointed out that Lexington had experienced two years of decline in its UFB after 2001, and had yet to get back to the reserve position it maintained in 2001 when it enjoyed a “solid” Aaa rating. The 2001 UFB was $6.7M ($5.4M free cash), and the 2004 UFB was $3.2M ($2.3M free cash). Increasing the stabilization fund from virtually zero in 2003 to about $1M has brought total current reserves to about $4M. Four fundamental factors go into a credit rating: management, debt (which is a huge factor), economics and financial results. The town’s debt position is strong. Paying debt back relatively quickly (less than 20 years for long-term debt) is perceived as a strength. To help manage its financial health and build reserves, the Town should establish and follow a clear set of financial policies. Guidance can be found from financial policy statements recently adopted by the Towns of Brookline and Concord, which are available on their town web sites. Other towns that have done a good job in this area are Danvers and Wayland. - 2 -