Municipal fund balances at 5 percent fall far short of needed financial buffer

Municipal fund balances at 5 percent fall far short of needed financial buffer

CT Mirror, August 17, 2017

Susan Bransfield is President of the Connecticut Conference of Municipalities and First Selectwoman of Portland.

The CT Mirror’s August 14 report on “The state of CT’s cities and towns in charts” is a detailed, reasoned analysis, consistent with the high quality of work we expect from the CT Mirror.

Yet, one of the essential parts of the Mirror’s report — its analysis of municipal fund balances — falls short of presenting the most accurate and clearest understanding of this critical component of municipal finances.   The story states, “Towns typically need 5 percent of their budgets in reserve to protect their credit rating when selling municipal bonds. But everything over 5 percent could be used as operating funds.”

Veteran municipal finance directors across Connecticut will tell you that a municipality’s fund balance should be in the range of 12 to 15 percent of the town’s previous operating budget, with some flexibility depending on the size of the community.  Finance directors repeatedly argue how critical it is for municipalities of all sizes to operate from a position of financial strength year in and year out.  Towns would harm their credit rating and impair any bond sales if the fund balance is less.

Here’s what the experts say: the widely respected Government Finance Officers Association (GFOA) recommends, “At a minimum, that general-purpose governments, regardless of size, maintain unrestricted budgetary fund balance in their general fund of no less than two months of regular general fund operating revenues or regular general fund operating expenditures.” That recommendation translates to a municipal fund balance that is much higher than five percent.

Here is a more detailed discussion of why this is so.

To disassemble municipal fund balances as part of any effort to restore balance in the state budget, and the impasse that continues to drag on, would only shift the state budget instability onto town budgets.   Cutting back on municipal fund balances is a not a wise “reform” to solve the state’s budget crisis and it will not move the state and its towns and cities forward together on a sustained path of economic growth for Connecticut’s residents and businesses.

And state budget proposals to date, as they relate to towns and cities, remain mired in partisan bickering, with each still falling short of truly meeting the reform needs of towns and cities in 2017 and beyond.

Local leaders are frustrated back to top

Municipal leaders are deeply frustrated at not having a state budget as the school year commences. We are committed to providing a quality public education, viable police and fire services, and maintaining  local roads – among many other services.  It is extremely difficult to provide these essential services without knowing what you will receive in state aid and whether there will be meaningful mandates relief – or whether new mandates will be imposed.

The Connecticut Conference of Municipalities’s legislative agenda is broad, deep, and steeped in reform of the provision of services locally and regionally, and reform of our state-local tax system. We also put forth a proactive agenda recognizing that the General Assembly shouldn’t claim victory by preserving the status quo. We need true municipal reforms in the areas of cost containment, shared service delivery and municipal revenue diversification. This is the message crafted by our membership and codified by our board of directors. It was our message the first day of session and remains our message today.

Gov. Dannel Malloy’s budget would preserve the broken system of funding municipal services solely through property taxes. The proposal redistributes funding but does little to reform the system in a way that would provide for growth and opportunity at the local level. State gets out of a jam it created by shifting responsibility for teacher’s retirement off onto the towns and cities.

The House Democrat budget takes a “hold harmless” approach for cities and towns. The proposal mirrors what was done two years ago in the creation of the MRSA account by raising the state sales tax on the promise that new revenues would go to cities and towns to replace revenues that are being cut. (This is not the local sales tax cities and towns had asked for.) The proposal changes the paradigm very little in terms of local cost control or service delivery. Instead of reforming the property tax structure, it raises new revenues to maintain the status quo.

The House and Senate Republican Proposals took a “hold harmless” approach and brought the budget into balance based off of additional projected labor savings. Now that the SEBAC union concession deal has been finalized these proposals are no longer in balance. The proposal did nothing to reform the property tax structure. Its objective was to avoid reforms to the current municipal system by maintaining state aid through no longer attainable state labor concessions.

The legislative agenda developed by towns and cities outlines a great deal of structural reforms that the General Assembly should enact at the local level. To date, while various budgets have addressed structural reform at the state level, none of these budget proposals have addressed the badly needed reforms that have been called for by towns and cities.

CCM and its member towns and cities are committed to working with the governor and all caucuses of the General Assembly to develop a budget that protects property taxpayers and places towns and cities and our state on a path toward sustained economic growth.