Record Free Cash Level Likely To Lower Override Dollar Ask

Photo: Free cash isn’t free

The holidays came two months early to Belmont Town Hall as the Massachusetts Department of Revenue certified the town’s fiscal year 2020 free cash account – officially known as the Unreserved Fund Balance – at $11,239,464, a record high level for the budget line.

“The free cash amount this year is good news all around. The town was diligent in its conservative practices and we are seeing the fruits of our efforts,” Town Administrator Patrice Garvin told the Belmontonian.

Free cash is made up of receipts – taxes and fees – in excess of revenue estimates along with unspent amounts in departmental budget line items known as “turn backs” for the previous fiscal year, plus any unspent free cash from the previous year. Before it can be used, free cash must be certified by the state.

The size of this fiscal year’s amount dwarfs the average account over the past decade ranging from $5 to $7 million. The $11.2 million outpaced last fiscal year’s robust $8.1 million in free cash which allowed the town to balance the fiscal year ’19 budget without the need of a Prop. 2 1/2 override.

“I’m pleased to see that the town and school’s efforts earlier this year to proactively freeze hiring and curtail spending, combined with our focus on maximizing federal reimbursement for COVID expenses, has substantially improved our free cash position,” said Select Board Chair Tom Caputo.

It comes as no surprise that both town and select board are viewing to use some of this fiscal year’s bounty to reduce the $12.5 million the town is seeking in a Prop 2 1/2 override which will be on the ballot at the annual Town Election set for April 6.

“While this healthy free cash balance doesn’t address the structural deficit that we will confront in the coming fiscal years, it does give Belmont some more flexibility as we look to an April override,” said Caputo. “The free cash may be available to help stabilize the budget for a few years and reduce the size of the required override.”

And Garvin isn’t wasting any time presenting scenarios how the fund can be used, going before the Financial Task Force II on Friday, Nov. 6 meeting and presenting a preliminary free cash plan to the Select Board on Monday, Nov. 9.

“We are currently running models to see what can be used from free cash to lower the override request,” said Garvin.

Yet it’s unlikely the select board will attempt cut the lion’s share of the override with free cash. For more than a decade, town policy is to maintain a level of free cash that will help secure the town’s Triple-A bond rating. In 2018, that goal was set at four percent of the current fiscal year’s General Fund Revenue Budget.

“I will tell you that I have had many conversations regarding the town’s Undesignated Fund Balance, and its impact on the bond rating. This work is ongoing and answers are forthcoming,” said Garvin.

Four factors for free cash

The increase in free cash reflects the town’s conservative budgeting practices and our response to managing the financial impacts created by COVID-19, such as controlling spending, freezing hiring and maximizing available Federal and State reimbursements.

“This level of free cash gives the town greater flexibility to reduce an operating override request, without reducing services,” said the press release announcing the record free cash level.

The factors leading to this favorable result include:

  • Proactive management of the Town and School hiring and spending at the end of Fiscal Year ’20
  • COVID-19 slowdowns in spending, resulting in large turn backs (underspent budgets) from departments;
  • Federal Assistance for COVID-19 through the Coronavirus Aid, Relief, and Economic Security(CARES) Act Reimbursement for Town and School Expenses, of approximately $1 million;
  • Accounting adjustments for prepaid property taxes in prior fiscal year.

The line items contributing to the Free Cash balance are:

FY’19 Rollover Unreserved Fund Balance (Free Cash)$425,160
Prior Year Reserve for Subsequent Taxes (Prepay that should have been reserved last year)$2,151,248
Reserve Prior year bond premium$18,000
Reverse prior year reserve for continued appropriations$1,711
Tax Deferral Redeemed$274,899
Tax Title Redeemed$489,099
Estimated Receipts Surplus (Revenue)$1,430,258
Turnbacks from Departments$6,405,517
Prior Year Fund Deficits/etc.$43,567
CERTIFIED FREE CASH as of July 1, 2020$11,239,464

The line items in the table are explained in more detail as follows:

FY19 Rollover Unreserved Fund Balance (Free Cash)

The FY20 budget included a high use of Free Cash. This drawdown reduced the FY19 Unreserved Fund Balance (Free Cash) to $2.4 million. A subsequent review of our accounting revealed the need for two additional adjustments related to classification of property tax and water and sewer revenues. These were one-time adjustments. The effect of the adjustments reduced the FY19 rollover to $425,165.

Prior Year Reserve for Subsequent Taxes

Tax payments by residents sometimes cross over the fiscal year, which begins on July 1. $2.1 million of FY20 Free Cash represents tax revenue that was prepaid and not estimated in the FY20 Fiscal Year. This $2.1 million should have been part of the FY19 Certified Free Cash.

Tax Deferral Redeemed

The Town has tax deferment programs that delay the collection of taxes. Free Cash is credited for the taxes in the Fiscal Year they are actually paid. For FY20 $274,898 of tax deferments were collected.

Tax Title Redeemed

Free Cash is also increased when delinquent taxes are finally paid. The Town Treasurer works diligently to collect delinquent taxes.

Estimated Receipts Surplus (Revenue)

The Town budget estimates revenue receipts for the year. Actual FY20 revenue exceeded the estimate by $1.4 million. Most of this excess can be attributed to investment income on amounts borrowed for the new middle and high school. The Town saw a reduction is some local receipts due to COVID-19, but the investment income resulted in a surplus.

Turnbacks from Departments

Turnbacks, underspent department budgets, returned to Free Cash, totaling $6.4 million are the largest contributor to the increase in FY20 Free Cash. This amount almost doubled from the previous year. Turnbacks can be generated by vacancies in positions, and spending less on supplies and services. COVID-19 is the main explanation for the FY20 turnbacks. The Town realized in March that the pandemic would significantly impact revenues and wanted to make sure we capitalized on every dollar. The Town was also mindful of the budgetary challenges and the potential need for an operating override. We started to slow down spending beginning in March and April. The Select Board imposed a hiring and spending freeze for May and June. Also, the COVID-19 CARES Act reimbursement enabled Belmont to receive reimbursement of over $1 million for Town expenses associated with COVID-19.

Prior Year Fund Deficits/etc.

$43,567 remains of Prior Year Fund Deficits, which are created by not expending the entire amount of available funds.