Saving for a Rainy Day

The Boston Globe ran a front page article on Nov. 8th about cities and towns bolstering their reserves even as they are making deep cuts to schools and services and laying off employees. (See the link to the right.)

The City of Newton has almost completely depleted its financial reserves in the last few years. The reserves have been in a Capital Stabilization Fund and we’ve dipped into them to balance the budget and help pay for the new Newton North. (In FY09, FY10 and FY11, we’ve used $2.6 million, $1.2 m and $5.8 m respectively … in FY12, FY13 and FY14, we’ll use up the rest of these reserves when we spend $4.8 m, $3 m and $1.8 m respectively … Look in the Mayor’s Five-Year Financial Forecast dated Oct. 18, 2010 for the backup.)

A group of us have been working on financial management guidelines for the City of Newton. They’re still in draft form. The guidelines acknowledge that funds for financial contingencies and reserves are necessary in order for the City (1) to continue to provide essential public services in the face of extraordinary and unforeseen financial and natural events and (2) to satisfy credit rating agencies and therefore keep our AAA bond rating and the lower borrowing costs that rating provides.

While still in draft form, the idea is to have four types of reserves.

First, we’ll have an annual appropriation for budget contingencies. These are non-recurring and unforeseen expenses.

Second, we’ll have an inclement weather stabilization reserve fund for unusual but not extraordinary weather related costs. It is likely to be a non-lapsing reserve fund of $1 million. (These funds help us in a heavy flood or snow year, for example.)

Third, we’ll have a rainy day stabilization reserve which we’ll dip into when we face a multiple year economic recess or a rare, catastrophic expenditure. The target size is 5% of the annual general fund operating budget. It will take us a while to fully fund it. (These monies help us in periods like this when the state cuts local aid or when we face a 100 year storm.)

Fourth, we’ll establish a capital project stabilization fund to set aside money for significant capital projects (the next elementary school replacement, for example). (Monies here will supplement funds from the general fund, debt, grants, etc.)

I’m feeling good that the folks in City Hall are thinking proactively about these issues and have a plan.