Saturday, October 28, 2006

Those Rainy Days

The old aphorism advises us to “save for a rainy day”.

Most states and many municipalities maintain “rainy day funds”. One of the more prudent actions of the Massachusetts legislature during the go-go economy of the late 1990’s was to stash a significant amount of money away in anticipation of an inevitable economic downturn. Just before the recession of 2001 that fund had grown to around $2.3 billion. During the next two years a significant portion of it was used to cushion the blow caused by a drastic decline in state revenues.

Although tapping this fund didn’t prevent reductions in state aid, it prevented an even greater impact on local government budgets. Returning the state’s rainy day fund to proper levels is one of the reasons, in addition to returning local aid to the level of 5 years ago, that Kerry Healey’s support for an immediate cut in the state income tax is misguided.

Massachusetts state law provides for cities and towns to create their own emergency funds, called Stabilization Funds. All but 13 of 351 communities have established and funded accounts. Their total balance is $440 million. Some of those who have not include Belmont, Concord, Hingham, Newton, Wilmington and Boston. The Department of Revenue recommends funding levels equal to 5% of annual operating budgets. Most reserve under this level, but the range is wide with the highest found in the town of Rowe at 67%. This is no doubt an effort to plan for life after the nuclear power plant and the massive revenue it provided. Milton has just under $1 million in its fund, about 1.28% of our annual budget. The statewide average balance is 2.33% of budgets.

We owe the establishment of our Stabilization Fund to resident Mary Fitzgerald. In 1996 Ms. Fitzgerald was the Chair of the Warrant Committee. She was concerned that the Town had no reserve of this kind. Through persistence and persuasion she convinced the Warrant Committee and the Town Meeting to appropriate $500,000 to fund the beginnings of a reserve. This was no small accomplishment. Diverting $500,000 from our perennially tight budgets meant some pain and some tough budgetary decisions.

Experience has shown that to be effective a Stabilization Fund must satisfy two criteria. It must be large enough to provide a significant infusion of money during hard times without being completely depleted. And it must have a funding mechanism that provides for both consistent and meaningful contributions to quickly return the fund to appropriate levels after it has been tapped. Without these features Town Meeting is unlikely to use the fund for fear of having nothing in the event an emergency even more serious than a short recession occurs.

Today neither of these needs are being met. At just under a million dollars the fund is not large enough. Looking at the last two recessions, we probably need enough to make a difference for two fiscal years, perhaps $500,000 per year. This wouldn’t preserve everything, but it would reduce the impact on lost services and make recovery of those services less onerous post recession. A balance of say, $2 million, would allow the town to do this while preserving a significant amount of money as a base for rebuilding the balance.

But our current funding mechanism is also inadequate. The year after $500,000 got the fund started no contribution was made. In 1998 the Warrant Committee requested a $100,000 contribution and Town Meeting said no. Budgets were just too tight. The only other sizeable addition to the fund occurred in 2000 when Warrant Chair Charlie McCarthy fought for depositing $200,000 in supplemental Lottery Receipts in the fund. Our budgets are simply too tight to expect regular, sizeable contributions to come from diverting money from immediate needs. What we need is a source of new revenue.

A change made in 2003 to Massachusetts General Law presents an opportunity. That year the Legislature expanded the number of Stabilization Funds a community could have. As part of that effort they also added a new provision to the Proposition 2 ½ law. Before this provision, proceeds of a Prop 2 ½ override could only be earmarked for a stated purpose for one year, after which the money would be allocated as all other funds during the annual budgetary process. The new provision states that an override passed for purposes of funding a Stabilization Fund must be allocated for the same purpose in subsequent years. Town Meeting, the final budgeting authority, could not change this and divert the funds to another use.

We now have the means of creating a separate source of funding that is both significantly large and reliably consistent. An otherwise insignificant Stabilization Fund Prop 2 ½ override in the amount of $100,000 would cost the average taxpayer somewhere in the vicinity of $10-$15 per year. And yet it would result in a doubling of our fund in under 10 years. It would grow annually by 2 ½ %, preserving its buying power over time. It would remove the funds from the annual struggle to balance our budget. And the fiscal discipline it demonstrates would be viewed favorably by our bonding agencies.

We need to prepare better for shocks to our fiscal well-being, because our margin for safety is too small and budgetary pressures are not likely to go away. In addition we should look for other “one-time” money to add to the fund. Former Warrant Committee Chair Emily Innes championed the idea of placing the remaining money in the Land Escrow Account in the fund; and current chair Katie Conlon proposed this at the 2006 special town meeting. We should resolve the issues that arose and put that money in the fund.

I encourage elected officials to investigate this approach.

More information on the new law can be found here:


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