Theo Kalivas - Technical Assistance Bureau Project Manager
Now that we are entering the rainy season in Massachusetts, we thought it appropriate to revisit the topic of free cash and stabilization (“rainy day”) funds. These reserves enable cities and towns to make one-time purchases, fund capital acquisitions, and prevent spending deficits caused by emergencies. This article updates an earlier FY2015 stabilization fund and free cash analysis. Free cash amounts utilized in this article are certified as of July 1st, 2016 (start of FY2017), and represent all free cash amounts certified for FY2017. As stabilization fund data for June 30th, 2017 (year-end FY2017) is still being collected, the stabilization fund values shown here are as of June 30th, 2016. Please also note that the data does not distinguish between stabilization funds and specialized stabilization funds, as they are combined into a single category.
In FY2017, Massachusetts cities and towns held approximately $2.7 billion in combined reserves comprised of free cash and all stabilization funds.
As we did in a previous article, let’s divide the state into six regions based on geography: Suffolk County (which includes Revere, Chelsea and Winthrop in addition to Boston), Northeast (Essex and Middlesex Counties), Southeast (Norfolk, Bristol and Plymouth Counties), Central (Worcester County), West (Franklin, Hampshire, Hampden and Berkshire Counties), and the Cape and Islands (Barnstable, Dukes and Nantucket Counties).
Statewide Combined Reserves
FY2017 Combined Reserves as a Percentage of Total
We can see that nearly all regions of the Commonwealth have experienced an increase in total reserve dollars since we first performed this analysis for FY2015, except for the Cape and Islands, which experienced a minimal decrease. Areas with larger budgets and higher community wealth (in and around Greater Boston) still hold the majority of the state’s combined reserve dollars. The Northeast in particular stands out, in part because Middlesex and Essex are respectively the first and third most populous counties in the state. We can better see gradations and variances within each region when the data is plotted to a map.
(To view this map on a larger scale, please click here.)
As
we can see on the map, Middlesex and Suffolk Counties have the highest
concentration of reserve dollars, with Suffolk County containing the
most reserves for a single community (Boston). But while aggregate
dollar amounts can be interesting from demographic and economic points
of view, they do not take into account the size and financial needs of a
municipality.
As a way of determining whether a city’s or town’s reserves are reflective of its needs, we should examine their reserves as a percentage of total budget. This is one factor that may determine how prepared a community is for a fiscal emergency. As a rough indicator, the chart below takes total combined reserves as a percentage of all budgets in each region. In FY2015, the Cape and Islands held the highest amounts of reserves relative to budgets. While this is still true in FY2017 (despite a slight decrease in the Cape and Islands), all other regions have narrowed the gap and hold more in reserve as a percentage of their budgets than they did in FY2015.
Combined Reserves as a Percentage of BudgetsAs a way of determining whether a city’s or town’s reserves are reflective of its needs, we should examine their reserves as a percentage of total budget. This is one factor that may determine how prepared a community is for a fiscal emergency. As a rough indicator, the chart below takes total combined reserves as a percentage of all budgets in each region. In FY2015, the Cape and Islands held the highest amounts of reserves relative to budgets. While this is still true in FY2017 (despite a slight decrease in the Cape and Islands), all other regions have narrowed the gap and hold more in reserve as a percentage of their budgets than they did in FY2015.
The following map shows that most Massachusetts communities continue to have moderate-to-high reserve levels relative to their budget into FY2017. In fact, most communities’ reserves are at or above the minimally advisable 5% to 7% range. From this perspective, Western Massachusetts stands out by having the most communities with reserves greater than 15% of their FY2017 budgets.
(To view this map on a larger scale, please click here.)
On the whole, it seems that the Commonwealth’s 351 cities and towns have been able to maintain healthy stabilization fund and free cash balances. For any community, a well-crafted policy is a key component in effectively managing these important reserves. A good reserve policy should define authorized uses and funding sources, establish target balances as either a total dollar amount or percentage of the community's annual budget, and include a replenishment requirement.
The Technical Assistance Bureau (TAB) provides guidance on reserves and other subjects on this webpage. To directly download reserve topics, click on the following links: Reserve Policies, Free Cash, Special Purpose Stabilization Funds.
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