Modifying our Financial Management Guidelines

I’m discovering that sometimes important information is hiding in plain sight.

The Board of Aldermen and the Mayor’s Office hammered out guidelines about Newton’s financial policies. It’s dated January 2008. (Here is the link: http://www.ci.newton.ma.us/comptrol/fy08_update/adopted_financial_guidelines_01222008.pdf)

It includes a wide range of policies, including guidelines about forecasting, competitive bidding, compensation, and use of particular funds. For example, the document says:

• Annually, we’ll do a multi-year financial forecast
• We’ll make maximum use of competitive bids to buy goods and services to demonstrate that City resources are being used in an effective and efficient manner
• Our compensation policies will be designed to attract and retain the most qualified officials and officers possible
• The primary purpose of the monies left over annually after all the expenses have been paid (known in the accounting world as “free cash”) is to pay for third tier budget contingencies and to hedge against reductions in annual state aid distributions to the City. The target amount of free cash is 1% - 3% of revenue in the operating budget (known officially as the General Fund).

I gave it a close read. It’s a solid document.

I did notice two areas that should be modified.

1. FUNDING HEALTH CARE BENEFITS FOR RETIREES: The guidelines are SILENT about the policy for funding what we owe retirees for their health care benefits. Right now, we’re not funding this at all.

In contrast, the financial management guidelines say that the policy for funding the pensions that we owe retirees “shall not be less than the annual required contribution (ARC) prescribed by the Retirement Board’s actuary.”

If we instituted the very same policy for retirees’ health care benefits, we would have had to spend at least $26 million last year. (We spent $0.) We’re way behind on funding this liability and need to start catching up immediately.

2. FUNDING FOR BUILDINGS AND ROADS: The guidelines set a LOW floor of 3% of General Fund revenues for financing capital assets (e.g., roads, sidewalks, buildings, etc.)

To quote the guidelines on capital outlay and improvements: “… the difference between budgeted debt service (NOTE: this is what we already owe on our long-term debt) and a minimum of 3% of total estimated revenues for the year will be budgeted for future capital outlay and improvements.”

We’re substantially underfunding repair, renewal and replacement of our capital assets; these financial guidelines unfortunately reinforce that underfunding. Interestingly, Brookline has as a financial policy to spend 5% of revenues on long-term capital assets like buildings and roads.

MAKING PROGRESS: The last policy in the ten page financial management guidelines report puts the onus on the Mayor for changing these guidelines. It says: “It shall be the practice of the Mayor to inform the Board of Aldermen whenever these guidelines, goals, policies and practices need to be modified in a particular instance.”

We should ask our new Mayor to modify these guidelines and practices so we start contributing to our retiree health care liability and start spending more on our roads and buildings. Deferring these investments puts an unconscionable economic burden on future Newton residents.