City Ends Year with $10.7m in Free Cash

Ever finish balancing a checkbook and become pleasantly surprised to see that there is more money leftover than expected?

City Manager Jay Ash again had that experience while balancing the City’s checkbook recently.

After all revenues were taken in and provisions to pay all expenses were made, the City ended FY’12 with a $10.7 million surplus. That “free cash” balance reflects the fiscal discipline that has been the hallmark of City’s financial management under City Manager Ash and the City Council.

“It’s not by accident that we’ve been able to avoid the fiscal pitfalls that others have faced,” exclaimed Ash.  “More than 40 communities sought (Proposition 2 ½) overrides this past year to meet desired spending levels, but none of them were named Chelsea. That’s because we’ve learned how to live within our means and still find the ways to offer great public services at a reasonable cost to taxpayers.”

“That has, is and will always be our top priority,” added Councillor Brian Hatleberg, the City Council’s chairman of finance, in reference to ending the fiscal year with a surplus. “We’re constantly looking for ways to be more efficient, and making sure that we never fall back to a place and a time when fiscal shortfalls plunged our community in total chaos.”

The time that Hatleberg was referencing was more than 20 years ago, when Chelsea was placed into State receivership as a result of numerous years of poor fiscal management and bulging annual deficits.  Fast forwarding from 1991, the City is now an example of a well-managed and fiscally sound local government.

“It sure is a better place to be,” said City Council President Leo Robinson, “but we can’t let our guard down, not even for a moment.  For those of us who were involved in municipal government back then, we know how awful it can be to be running deficits and having no real plans as to how to get through the year.  We’re so far away from those days now, but we also know that a couple of poor decisions on spending or a couple of bad episodes on revenues can quickly upset all that we’ve worked hard for over the last two decades.”

That hard work, according to Ash, includes generating free cash.

“The easy thing would be to spend every dollar that comes in, but not every dollar that we plan on collecting is collected, and unforeseen expenses can pop up,” said Ash. “So, it becomes more challenging to not spend every dollar, but instead make sure that every dollar that is being spent is being spent in a prudent and responsible way.”

A strategy that Ash and the Council have adopted regarding free cash is to use it for one-time projects, the types that other communities typically borrow to fund. That way, Ash reasons, the City saves on interest payments and can expand or contract the capital projects depending upon the fiscal situations facing the City. Ash went on to say that City leaders continue to fight the temptation to spend all the free cash, especially on items that have recurring costs.

“Free cash is essentially a one-time balance that isn’t necessarily regenerated year after year,” said Ash. “Thus, spending one-time money on recurring expenses, like debt service or salary increases, is not a very prudent thing to do. Instead, we look at free cash as a way of paying for specific, one-time projects, like a street repaving, or as a short-term fill if a budget gap occurs. In that case, free cash plugs holes in the budget until we can find a permanent fix for those holes.”

Councillor Dan Cortell, the Council’s incoming president, noted that having free cash is also something that ratings agencies look at to determine the City’s bond rating. That point is supported by a definition found on the Mass Municipal Association’s website which describes free cash as “a necessary component of sound local fiscal management and one indicator of fiscal health that can positively affect bond ratings and reduce borrowing costs.”

Ash agreed that free cash is an important factor in the City’s bond rating, but he suggested there is an even more critical consideration when thinking about the excess balance.

“Ultimately,” stressed Ash, “free cash belongs to the taxpayers.  We have a responsibility, therefore, to make sure that free cash is best spent on taxpayer priorities, because it is, in effect, their money that we collect to support municipal services and programs that address their needs.”

Projecting forward, Ash said that about $3 million of free cash is targeted to plug a shortfall in school funding, nearly $2 million is scheduled for capital improvements, and almost $1 million is being set aside for the purchase of land that could advance the City’s economic development agenda.

“That’s about 60 percent of the free cash going out to educate our kids, improve city streets and create new economic development opportunities which will, in turn, increase revenues back to the City,” said Ash. “I’d argue that’s the best way to look at what to do with free cash, with the rest being left over to fund the occasional shortfalls that can happen in any one of our thousand accounts or any particular emergencies that might arise.”

An example of the unexpected is Governor Deval Patrick’s recent announcement that he would be seeking authority to make a mid-year cut in local aid in order to deal with the State’s own budget problems.

“That’s a perfect example of the benefit of having free cash.  For some communities, even a 1 percent cut, as being proposed by Gov. Patrick, would cause severe disruptions. However, because we have free cash available, we could assume the loss by relying on the free cash balance in the short-term, and then we would plan during the next budget cycle as to how to best deal with the loss of revenue over the long-term,” theorized Ash.

The City’s $10.7 million free cash balance was recently certified by the State as having been generated as of June 30, 2012.  Now in FY’13, Ash said he thinks every day about the decisions he makes and how they will impact the City’s various bottom lines, including free cash.

“All good things come from having a balanced budget.  We keep that concept foremost in our minds as we think about how our finances impact our efforts in other areas, from public safety to public works.  Having a positive free cash balance is a way to really see if we’re truly being mindful of our financial responsibilities and limitations, and, ultimately, which direction our community will be heading in the future,” concluded Ash.”

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