Managing Wayland’s Finances
By Wayland Finance Committee
Much has been written about the questions residents have raised about our free cash balance and our finances. We would like to spend a few minutes to explain our strong position, how we got here and the Finance Committee’s plan to move forward.
Over the years, Wayland has built a strong financial position through conservative budgeting and efficient operations. The Town’s financial prudence has been recognized by outside agencies, and we are consistently ranked as a top town in Massachusetts by bond rating agencies
One significant measure of financial strength is free cash as a percent of the operating budget. Free cash means unrestricted funds generated from past years’ operations.
Each year, Town Meeting approves an expense budget based on the projected needs and on an estimated revenue budget. Budget line items approved at town meeting have firm expenditure caps and departments may not move funds between line items. When Town departments spend less than their budgets during the year through good cost management and unexpected savings, the unspent amounts (or “turn backs”) grow our free cash balance. Given how municipal budgets must be structured, it is not unusual for overall budget turn backs to be in the 1-2% range.
Similarly, when revenue receipts come in higher than estimated, the excess also adds to free cash. We make conservative revenue estimates, because it is difficult, especially in this economy, to predict auto sales and building starts, two of the more significant components of estimating revenues. Further, state aid is not finalized for weeks after Town meeting concludes.
Wayland has other sources of cash reserves. For example, the Town has various defined reserve accounts, such as the overlay reserve account, water reserve account, and the school revolving accounts. These accounts, which reflect unused funds, each have an owner (board, committee, or department) responsible for budgeting, spending and monitoring the balances. When these account balances exceed their needs, the overseeing board may vote to change policies, reduce fees, enhance services or, if allowed, return the excess to free cash. These are not necessarily recurring sources of funds.
A community's free cash level not only affects its bond rating, but also provides a financial cushion to guard against economic downturns or to meet unforeseen expenses. Experts recommend that a town like Wayland should aim for a free cash position of 5-10% of its operating budget.
As recently as 2006, Wayland’s free cash levels dropped to dangerously low levels—about 2 percent—in part because we used large amounts of free cash to help pay for our operating budgets several years in a row to avoid raising taxes beyond the 2 1/2% allowed under Proposition 2 1/2. This was not a good long-term strategic plan.
As the Finance Committee develops and refines its multi-year financial strategy, it takes many factors into consideration. In 2006, the four major components of the multiyear plan were: (1) grow commercial revenue (town center), (2) control costs through efficient operations and conservative budgeting, (3) modify healthcare programs, and (4) create a financial situation that avoids regular overrides. While implementing this strategy, the Finance Committee still had to propose operating overrides to the voters in FYs 2007 and 2009. The objectives of these overrides were to reduce the future need for overrides, raise free cash amounts to our target 5 – 10% level, smooth the rate of tax increases, and maintain the Town’s service levels.
By 2011, we had attained our goal. Free cash has hovered around 5-10% of the total operating budget for the last four years, service levels have been maintained, and no operating overrides have been requested in the last four fiscal years. We have positioned the Town to withstand potential downturns in state aid and revenues resulting from the worst economic crisis in years.
However, by the end of fiscal year 2011, our free cash balance rose to over $10 million, representing approximately 15% of the total operating budget. This occurred for a number of unexpected, but positive, reasons.
First, local receipts came in higher than estimated (auto excise tax and new growth were significantly greater than projections).
Second, our planned health care savings achieved through years of multi-pronged efforts were more successful than anticipated.
Third, we received a better interest rate than anticipated on the high school construction bond and this was reflected in a bond premium that provided immediate revenue —in part because of the Town’s strong financial position.
Fourth, investment income was higher than planned due to the high school borrowing’s interest earnings.
All these are predominantly one-time occurrences. We cannot expect nor should we plan to repeat these savings in the future.
In August, the Finance Committee began the process of developing a multiyear plan that is designed to incorporate changing financial conditions, including the opportunity to provide tax relief in this difficult economy. We understand adjustments must be made regularly. Accordingly, we have developed a go-forward strategy to address the current situation, while maintaining our solid financial position. Our strategy is as follows:
- Maintain current service levels.
- Continue to plan for no operating overrides through FY2015 or later.
- Reduce free cash levels steadily until we meet our 5 -10% target.
- Reduce the FY2012 tax rate to provide immediate tax relief. The Finance Committee is supportive of immediate tax relief in FY2012 that takes into account the impact on Town services and future tax increases.
- Tighten future revenue estimates. We implemented tighter revenue budgets that will track actual revenues more closely, thereby reducing that source of free cash generation.
- Minimize expense budget increases. Expense turn backs reflect good cost control by departments, and although it is difficult to estimate employee turnover, utility costs, and many other variables, we are implementing processes to more accurately forecast these amounts. For at least the seventh consecutive year, we have already given guidance to Town departments to continue flat or decreased non-personnel budgets or to provide a detailed and compelling case as to why an increase is needed.
- Continue to use free cash to minimize increases in the tax rate beyond the amount allowed under Proposition 2 ½. For future years, we plan to avoid large swings in the tax rate in any particular year through measured and targeted use of free cash.
- Closely monitor build-ups in reserve accounts and discourage boards from accumulating excesses. We expect to achieve this goal through improved and more frequent financial reporting as has already been planned as a result of The Abrahams Group review and the Operational Review Committee’s recommendations.
These financial steps give the best long-term results, while taking into account the desire we all share for meaningful and immediate tax relief.
This month, a group of citizens filed a petition calling for a Special Town Meeting to consider additional use of free cash to reduce taxes. Last week, petitioners calculated this request at $4 million. Conversely, other residents have voiced concerns that it might be more prudent to address the higher than desired level of free cash in a manner that protects our level of services while minimizing the need for operating overrides or large tax increases in future years.
We can only use the free cash once. So, the larger the amount of free cash we use now, the greater the tax increase we face in the future to maintain services. The Finance Committee’s goal is to present the Town with a plan that responsibly provides tax relief now while preserving our services and minimizing future tax increases in FY2013 and 2014.
The Finance Committee plans to provide a supplemental mailing that further analyzes the proposed articles from the petitioners and the Board of Selectmen. Working together, we can continue the responsible fiscal management that has served us well over the past years, provide level services, and reduce our high free cash position with some immediate tax relief.
We look forward to seeing you at Special Town Meeting on Thursday, November 17th at 7:30pm, at the Wayland Middle School. Please plan to attend and show your support for our balanced approach to managing the Town’s finances.
The members of Wayland’s Finance Committee are Cherry Karlson, Bill Steinberg, Paul Grasso, Tom Greenaway, David Gutschenritter, Sam Peper and Rich Stack.
