Is Templeton Fiscally Stressed?

Identifying Fiscal Stress Using the DLS Trend Dashboard
Tony Rassias - Bureau of Accounts Deputy Director

This article follows Deputy Commissioner Sean Cronin’s introduction of the Division of Local Services’ (DLS) Municipal Finance Trend Dashboard. As outlined in that article, the Dashboard “is comprised of key municipal fiscal health indicators based upon data that is part of required municipal submissions to DLS, annual financial statements, state agency databases, and the US Census. It graphically displays trends in revenues and expenditures, municipal operating positions, demographic information, unfunded liabilities, property taxes, Proposition 2½ data, and debt.”

It is our hope that this new resource will help local officials identify areas that may be trending in the wrong direction and negatively affecting fiscal health. Cities, towns, school and special purpose districts can utilize these metrics to both assess current conditions and track performance over time. To assist in these efforts, this piece will define and highlight indicators of fiscal stress as they relate to governmental financial operations. Utilizing the DLS Municipal Finance Trend Dashboard, local officials can identify and monitor these early warning signs. In future articles, we will outline approaches, practices, and procedures to address difficult circumstances and prevent their re-occurrence.



What is Fiscal Stress?

Fiscal stress doesn’t necessarily imply that the fiscal roof is about to collapse, but rather foretells that significant challenges may loom ahead should a community or district continue down a certain path. These challenges may then eventually affect taxpayers, creditors, vendors, employees, retirees, local officials and the local governmental entity itself.

According to a Pew Charitable Research Report of July 2013:

When budget gaps widen and a city cannot pay its bills, meet its payroll, balance its budget, or carry out essential services, the local government is viewed as distressed. Officials usually respond with some combination of service cuts, worker layoffs, tax and fee increases, reserve spending, and borrowing. If those measures do not work and the city no longer has the money to meet its obligations, the distress can escalate into a crisis or financial emergency, which may include defaulting on a bond payment or, in rare instances, filing for Chapter 9 bankruptcy protection.

A fiscal crisis can occur in any city, town, regional school or special purpose district. It causes public discontent with government, breeds low morale with its employees, prompts concerns by retirees about retiree benefits, and sends signals to the credit market of heightened credit risk.

Identifying Fiscal Stress Using the Dashboard

Monitoring fiscal activity within a fiscal year and trended over multiple fiscal years can determine whether a community is meeting its objectives. Our Municipal Trend Dashboard can be used to view indicators of fiscal stress including operating position, unfunded liabilities, property taxes, revenues and expenditures, demographics, and debt. Below please find some examples of Dashboard information revealing potentially problematic trends.

 ( Looks a lot like Templeton's Data)
Combining the above metrics, we see a community that has no available reserves. Obviously, this is a very precarious situation to be in financially. DLS recommends that the local government establish a sound reserve policy as outlined here.

Taking the above three metrics together, we see $250 million in unfunded liabilities. Such liabilities could put a strain on the community's future ability to provide core services to the public.
(Can't be Templeton's data - no actuarial study has been performed to calculate Templeton's OPEB liability.)

 In the above combination, there is excess levy capacity to tackle additional expenditures inside the Proposition 2½ levy limit, but this community’s average single family tax bill as a percent of income is one of the highest in the Commonwealth. As a result, policymakers must reconcile the need for revenue with the demands of the overall tax burden on residents and businesses. Such challenges are faced every day by local officials across Massachusetts.

( Templeton is not alone in spending more than it takes in. Give 'em a dime, they spend a quarter!)

The above are just a few examples of how city, town, regional school or special purpose district officials can use the DLS Municipal Trend Dashboard to identify fiscal stress indicators. In coming issues, we will delve further into other areas of concern and establish a road map back to fiscal health for distressed communities.