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Committees: Advisory Committee
Financial Policy (revised June 22, 2010)
General Comment: Where percentages are used to suggest policies for levels of expenditure, only two uniform common denominators will be used throughout this Policy document: Total Annual Expenditures when used in relation to Fund Balance and Debt; and Operating Budget everywhere else. These terms are defined in the body of the Policy.
The purpose of this Financial Policy is to stabilize tax rates, control expenditures, and minimize the possibility of significant changes to Town services from year to year. The Policy includes guidelines which are intended to be used by the Board of Selectmen and other executive bodies in preparing budgets, by the Advisory Committee in reviewing and recommending budgets, and by Town Meeting in evaluating and approving budgets. The Financial Policy applies to three principal areas of Town finance: financial management, capital outlay, and debt service.
FINANCIAL MANAGEMENT
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The Financial Policy assumes there is a sound financial control system based on budgeting, monthly financial reporting, and independent verification of the reporting. All financial transactions of the Town should be recorded in the general ledger under the control of the Finance Director/Town Accountant. All balances in the general ledger should be closed into Available Reserves of the General Fund at year’s end unless encumbered or specifically required to be continued. Annual financial statements should be prepared in accordance with generally accepted accounting principles. Independent accountants should audit the financial statements and issue recommendations to improve financial procedures and internal controls. The Town’s Audit Committee shall review the work of the independent accountants’ periodic audits, and report annually to the Town on its findings.
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Financial forecasts estimate the Town’s revenues and expenditures in the current and ensuing five fiscal years. Forecasts are inherently imprecise and, therefore, should be updated regularly throughout the budgeting process as new information becomes available. The forecasts prepared by the Finance Director/Town Accountant for the annual budget process begin with a preliminary forecast, which is used to make tentative decisions on budget instructions, borrowing expectations, and capital expenditures. Periodic and final forecasts, which are the basis for the Advisory Committee’s budget recommendations, should be made available to interested parties on request.
- For the purposes of this Financial Policy, Total Annual Expenditures is defined as the sum of Warrant Articles 4, 5, and 6; the Operating Budget is defined as Total Annual Expenditures, less benefits, debt service, and parts of the budget which are financed by user fees (e.g., the Sewer Department and the South Shore Country Club).
- The Operating Budget incorporates: a) an implicit definition of recommended activities and service levels; b) personnel costs at contracted or expected compensation levels; and, c) estimated non-personnel costs, miscellaneous expenses, and those capital expenses that are not funded by borrowing. The Operating Budget takes into account prior experience, changing operating conditions, and general inflation expectations.
- A Reserve Fund of approximately 0.75% of the Operating Budget should be budgeted annually to provide for extraordinary or unforeseen expenditures that could not have been anticipated before Town Meeting, and/or to allow immediate expenditures of funds in the event of an emergency. A Reserve Fund Transfer request should not be used to reverse a vote of Town Meeting or as a “backdoor” means of increasing the budget.
- Fund Balance, also known as Available Reserves or Available Funds, is the accumulation of each year’s actual surpluses and deficits. For purposes of this Financial Policy, Fund Balance refers to unrestricted amounts that can be appropriated and/or spent—primarily unassigned funds within the Town’s General Fund. Fund Balance also includes funds designated for subsequent expenditure, but unspent as of the close of the fiscal year, as well as funds designated for continued appropriations. Adequate Fund Balance provides debt holders with assurance, improves the Town’s bond rating, and can be used to minimize undesirable service-level reductions if the Town experiences unanticipated revenue reductions or expense increases. Fund Balance also can provide an alternative to tax increases or debt issuance for funding the Town’s non-recurring needs under extraordinary circumstances. The Town should strive to maintain a Fund Balance at a level of no less than 14% and no more than 18% of Total Annual Expenditures.
- Long-term financial obligations and liabilities (contributory retirement, other post-employment benefits, and other such obligations as the Town might incur from time to time) must be funded, at a minimum, as required by law, and also should be funded so as not to burden future generations with unsustainable or disproportionate financial obligations.
- From time to time, the Town experiences growth in its tax base that can provide increases to annual tax revenues. Since such ‘new growth’ is cyclical in nature and may slow down or stop as suddenly as it appears, the Town should be cautious in incorporating long-term growth assumptions into its financial forecasts and consequent expenditure growth.
- New spending initiatives, departmental reorganizations, By-Law amendments, property purchases, gifts, and grants can have significant long-term impact on tax receipts and operating costs that may not be immediately apparent. Reasonable efforts should be made to identify such long-term costs for incorporation into future capital improvement plans and operating budgets.
- Excise taxes, building permit fees and other non-recurring revenues are significant components of Local Receipts. As a rule, such revenues should go to the General Fund, unless Town Meeting decides to dedicate specific revenues to revolving funds or enterprise funds, or unless such revenues are required by statute to be dedicated to specific departmental use(s). As with revenue from new growth, fees and other non-recurring revenues may be cyclical in nature, and the Town should exercise the same caution in incorporating related long-term revenue assumptions into future financial forecasts.
CAPITAL OUTLAY
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The capital assets of the Town comprise the Town’s physical infrastructure, inherited from previous generations and intended to be passed on to future generations. It is the aggregate property, plant, and equipment used by the Town. It includes the roads we use, the harbor which must be dredged periodically, the buildings and equipment needed by our Town staff, and the landfill which must be safely closed. We are the current caretakers. It is our responsibility to maintain, replace when necessary, and expand – as directed by Town Meeting - the Town’s capital assets.
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The Capital Outlay Committee, working in conjunction with the Municipal departments and the School Committee, is responsible for determining what capital assets will be required, and for recommending a five-year schedule of capital expenditures and the financing required. Capital assets, for purposes of this Policy, have a useful economic life of more than five years, and cost more than $10,000, or are otherwise classified as fixed assets on the Town’s financial statements.
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The scheduled replacement of operating assets, and a sound, ongoing maintenance program, require that the Town spend funds regularly to keep property and equipment in good operating condition. The absence of maintenance results in shortened life, unsafe conditions, and unexpected expenses. In times of fiscal restraint it is easy to defer regular capital investments, but this generally proves to be “penny wise and pound foolish.”
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The Five-Year Capital Plan prepared annually by the Capital Outlay Committee incorporates the purchase of major capital assets (which are sometimes financed by debt), the regular replacement of operating assets, and the attendant maintenance of all assets. When considering the acquisition of new or replacement capital assets, consideration should be given to the total cost of ownership during the asset’s expected life (life-cycle cost).
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The Capital Plan for any fiscal year, excluding expenditures financed by debt, should budget an expenditure amount equal to between 2% and 5% of the Town’s Operating Budget for that fiscal year, except in extraordinary circumstances. Capital expenditures that are not financed by debt or by dedicated grants should be funded from recurring revenues, departmental revolving funds, user fees (e.g., Sewer Dept.), Enterprise Funds (e.g., SSCC), and the like, and not from Fund Balance.
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The Capital Outlay Committee prepares the Five-Year Capital Plan in a timely manner each year so that both the Board of Selectmen and the Advisory Committee are able to incorporate it into their respective budget considerations, and the Town Finance Director is able to update the Town’s Long-Term Debt Schedule as appropriate. Increased operating expenses (which may result from new building construction) or decreased operating expenses (which may result from energy-saving modifications to existing public buildings) should be identified by the Capital Outlay Committee for inclusion in the appropriate departmental Operating Budgets.
DEBT SERVICE
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The Town Finance Director is responsible for managing the Town’s debt and maintaining a Long-Term Debt Schedule.
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Debt financing of major capital expenditures provides a smoothing effect on both the Town’s annual expenditures and the associated tax levy. Prudent debt financing entails taxpayers paying for the use of capital assets over the timeframe during which those assets are in service, so that the taxpayers who enjoy the benefits also bear the costs. However, debt financing should be undertaken prudently, since it burdens future taxpayers by deferring, not avoiding, expenditures.
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Debt should not be incurred for operating expenses. Debt should be reserved for the purchase of large, non-recurring capital items which have a life of five years or more, and the term of the debt should not exceed the life of the asset.
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The objective of debt management is to borrow funds only when needed, and at the lowest possible cost. It is a corollary that good cash management—including the timely billing and collection of taxes—reduces the need for borrowing.
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The Town’s bond rating is a statement of the Town’s overall financial health as a government and a community, and of the quality of the financial management of the Town. An excellent bond rating is desirable because it determines the cost of borrowing, the level of investor interest in the Town’s bonds, and, in certain economic conditions, the ability to borrow at any cost. The Town’s capacity to incur debt is determined, in part, by its ability and willingness to meet debt-service requirements without disrupting the scope and level of public services which are expected by the citizens of the Town. Therefore, the Town should strive to maintain the highest possible bond rating consistent with its ability to deliver the services expected by the citizens.
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The decision to fund capital expenditures by current taxes, a Capital Exclusion (also current taxes), or debt, generally should be determined by the dollar amount and the life of the asset—a new building is a more likely candidate for long-term debt than is a new computer. Consideration also should be given to the overall increase in property taxes when a Capital Exclusion is proposed.
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By statute, the Town may not issue, or have outstanding at any one time, debt exceeding 5% of the value of taxable property in the Town. Debt issued by the Light Plant, or other non-tax-supported unit, but guaranteed by the Town, is not legally included within this limitation but should be included for purposes of this Financial Policy. The Town should strive to maintain average annual debt service (repayment of principal and current interest) for borrowings at a level equal to approximately 5.0% of Total Annual Expenditures, and annual debt service should not exceed 7.5% of Total Annual Expenditures for any extended period of time.
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The Report of the Advisory Committee to Town Meeting should describe the status of the Debt Service Program by comparison to the guidelines, and how the Five-Year Forecast will impact the Town’s debt capacity and bond rating.
REVIEW
This Financial Policy is intended to be used, and, therefore, it must be flexible enough to accommodate changing social and economic conditions. It is appropriate for the Advisory Committee to review this Financial Policy in its entirety at least every three years, and, in consultation with the Board of Selectmen and the School Committee, make adjustments as required.
ADVISORY COMMITTEE, June 22, 2010
Jerry K. Seelen, Chair John F. Manning, Vice-Chair Jonathan R. Asher, Secretary
Daniel J. Dwyer Elizabeth A. Eldredge David H. Ellison
Amy W. Farrell Dennis C. Friedman Richard J. Innis
Karen A. Johnson Irma H. Lauter Gregory M. MacCune
Laura E. Marwill Andrew P. Mooradian Mary Jane O’Meara
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