Finance Committee Approves Updated Town Fiscal Policies
By Kim Siebert MacPhail
The Finance Committee unanimously approved the Town’s fiscal policies at their November 15 meeting, making official a set of guidelines that has increasingly been used in practice. The policies clarify how funds will be allocated and reserved so that Bedford’s infrastructure assets and public services are preserved. The policiesalso ensure that money will be secured to draw upon to address the Town’s obligations as well as for unforeseen needs or emergencies.
The approved document defines the policies as guidelines and goals that will act as “a cornerstone of sound financial management.” As such, they will:
- promote long term financial stability by establishing clear and consistent guidelines;
- maintain the highest credit and bond ratings possible;
- provide a comprehensive overview of Town finances;
- provide a framework for measuring the fiscal impact of government services against established benchmarks and indicators; and
- be reviewed periodically to incorporate new developments.
The policies also specify that Bedford is legally bound to balance its budget. Therefore, looking ahead to anticipate increased expenses or revenues is vital to being able to accurately forecast and keep steady control of Town finances.
To this end, the document states that: “Bedford shall maintain a six-year Capital Improvement Program developed and annually updated by the Capital Expenditures Committee. . . .The Town shall fund capital projects, wherever appropriate, with available funds such as free cash, water and sewer revenue, Proposition 2½ debt exclusions and Community Preservation funds. Capital projects will be prioritized with strong consideration to protecting existing capital investments in infrastructure and maintaining standards of safety, functionality, and lowest life-cycle cost.”
As for the reserve fund segment of the policy and the various reserve funds that act as cushions or emergency accounts, the guidelines address why reserve accounts exist and under what conditions they can be tapped.
- ensure continuity of services at desired levels;
- mitigate against unforeseen fiscal events;
- mitigate against diminished revenues during economic downturns; and
- allow flexibility to deal with future financial liabilities, such as post-employment benefits [also known as OPEB, which primarily covers Town staff retiree health insurance].
The various reserve accounts that the Town maintains include the following:
Free Cash: Bedford’s fiscal policy states that the Town’s free cash account should be kept at no less than 1% of the annual operating budget, following any appropriation made by Town Meeting. After balancing last year’s books with slightly over $3M from the Free Cash fund, the account’s balance stands today at $451,728.
The Massachusetts Municipal Association (MMA) defines free cash as “any unused, unrestricted funds from the previous year’s operating budget. It typically includes actual receipts in excess of revenue estimates and unspent amounts in departmental budget line-items for the year just ending, plus unexpended free cash from the previous year.
“Free cash plays a role in sustaining a strong credit rating. . . .Under sound financial policies, a community would strive to generate free cash in an amount equal to 3 percent to 5 percent of its annual budget. As a non-recurring revenue source, a prudent use of free cash would be to fund one-time expenditures, a capital purpose, or to replenish other reserves.”
The MMA further states that [f]ree cash is “a necessary component of sound local fiscal management and one indicator of fiscal health.”
A Stabilization Fund: The policy specifies that a Stabilization Fund “may be utilized to protect against a reduction in service levels, to manage temporary shortfalls and unpredicted one-time expenditures and, when practical, to avoid debt and borrowing costs and extraordinary increases in the tax levy. The desired funding level is between 2 and 6 percent of the annual operating budget.”Special Town Meeting just added over $200,000 to the Stabilization Fund; the account’s balance today is $2,300,000.
The MMA says that a stabilization fund “is intended to equalize the effect of capital expenditures over time and to provide a ‘rainy day’ fund. A community may appropriate up to 10 percent of the previous year’s tax levy into the fund, so long as the fund balance does not exceed 10percent of the community’s equalized valuation. A majority vote by the community’s legislative body (town meeting or city or town council) is required to appropriate funds into the stabilization fund. Two-thirds of the community’s legislative body must vote to appropriate money out of the fund.”
Reserve Fund:The policy says that the Town will maintain “a prudent level” of 0.5% of the annual operating budget in its Reserve Fund. The Reserve Fund is earmarked for “extraordinary or unforeseen expenditures.”Bedford’s current Reserve Fund balance is $445,847.
Pension Trust Fund: The policy states that withdrawals from this fund are used “to offset a portion of the annual pension assessment.” The Pension Trust fund balance is $1.81M.
Other Post-Employment Benefits (OPEB): This fund, according to the policies, is used to “offset health and life insurance costs for current and future retirees.” In FY2012, Bedford appropriated $525,000 for the OPEB trust account and adopted a goal of increasing this amount by 2.5% per year. As of today, Bedford has put a total of $2.97M toward these obligations.
The Governmental Accounting and Standards Board (GASB) describes OPEB as follows:
“Employees of state and local governments may be compensated in a variety of forms in exchange for their services. In addition to a salary, many employees earn benefits over their years of service that will not be received until after their employment with the government ends through retirement or other reason for separation. The most common type of these post-employment benefits is a pension. As the name suggests, these are other post-employment benefits (OPEB) besides pensions. OPEB generally takes the form of health insurance and dental, vision, prescription, or other healthcare benefits provided to eligible retirees, including in some cases their beneficiaries. It may also include some types of life insurance, legal services, and other benefits.”
Sick Leave Buy Back Reserve: The policies state that Town will annually ensure that reserves are adequate to pay eligible retiring Town employees for unused sick leave.The Sick Leave Buy Back Reserve Fund today stands at $356,891.
Finally, the policies speak to the Town’s debt management practices, establishing parameters for issuing debt as well as amortizing loans. Parameters include:
- limiting debt to funding of significant capital projects and purchases of large capital assets with a useful life of 5 years or more;
- considering Proposition 2½ debt exclusions for large capital projects, generally those costing over 1 million dollars and bonded for 10 years or more;
- supporting debt whenever possible with relevant sources of revenue, such as water and sewer revenue, Enterprise user fees, and with alternative funding;
- limiting the term of the debt such that it does not exceed the useful life of the project;
- amortize debt as rapidly as appropriate; and
- maintaining annual general fund debt service at 10% or less of the Town’s annual Operating Budget.
To access the approved budget for the current year, FY13, visit:http://www.bedfordma.gov/index.php/documents/cat_view/70-finance