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February 20, 2014

A Lesson For Rodney On Reserves

by at 12:22 am.

I wanted to take a moment to teach our new Mayor some things he already ought to know about the city’s money reserves, about saving taxpayer dollars, and proper budgeting. Since he thinks he knows better than a professional city manager who has taken us from negative $4.5M in reserves to a cozy but not complete positive, and all of that negative drawdown of free cash and then some happened on Rodney’s watch during the Cox years, I figured maybe he just doesn’t really understand budgets. I mean, he claims to all the time, dubbing himself a fiscal watchdog, but every time he opens his mouth, he belies this supposed expertise.

I hope he finds this primer informative! I certainly look forward to his better understanding showing itself in future discussions. Click to read more:

First, is what is a reserve? A reserve is considered any amount you have saved, or what you can further levy in taxes, etc. Kind of like the process when you apply for a home loan; lenders like to see you have savings, but they also like credit cards with lower balances and credit still available to you. The reason: in case of an emergency (being laid off, injured, etc), if you can’t pay your monthly mortgage with your primary income source, you have available credit to pay your mortgage temporarily.

In Massachusetts, we have Prop 2 1/2. Rodney might want to brush up on this using that Primer I linked; he wants to be considered a tax expert so I know he’ll learn something from this document. Prop 2 1/2 states that no municipality can levy more than 2.5% “of the total full and fair cash value of all taxable real and personal property in the community.” So as the real estate in a community rises in value, so too can the total amount collected in property taxes. Up to 2.5%, and no more, of absolute total value. How a city divides this up between commercial and residential is up to the city.

There’s more complex issues around year-over-year increase limits and other items, but suffice to say, if you are only taxing %1 of the total fair value of all real and personal property in your city, that means 1.5% is your excess levy capacity. It means that, in an emergency where you can’t pay your bills to your creditors due to…let’s say…big budget cuts at the state level and a loss of Chapter 70 money and/or local aid, you can suddenly raise taxes another 1.5% to make up for some of it (at least, enough to pay down your capital investment loans) legally, under Massachusetts law. Maybe that’s not a likely nor a desirable scenario, but you have that ability in reserve, like the homeowner who loses his job and has four months’ worth of mortgage payments he can make using his credit cards. Is it a good idea to rack up credit cards? Or suddenly add 1.5% to your citizens’ property taxes? No, but if the you know what hits the fan…at least you aren’t out of your house (or defaulting on your muni debt and going bankrupt like Detroit).

Then, there is the certified Free Cash. This is money you took in as taxes etc, over and above what you spent last year. The state certifies the number. A city can decide what to do with that money in the next budget. It’s generally thought that this should be used for non-repeating expenses, because next year you aren’t really 100% sure you can keep up the same level of free cash. It’s a bad idea to, say, expand a municipal office with full time staff, only to have to lay them off again. The best thing the government orgs say you can do is turn that into permanent Stabilization funds (basically, savings accounts). Because our reserves were coming out of a deep hole from Bernie Lynch’s predecessor, Bernie has been recommending we take Free Cash and put it all into the stabilization fund, which is what the Council has been doing. (Over Rodney’s vociferous objection; there isn’t a free cash dollar he doesn’t think should go towards cutting taxes, notwithstanding best practices long written about by muni budget professionals.)

The last element of our reserves in Lowell, in particular, is money (called Chapter 17 Reserves) set aside in the 90s when Lowell nearly went into receivership. (We seem to cycle between competence and incompetence in this town…). That money cannot be depleted without being replaced the next fiscal year. So, it would seem to be a bad idea to touch it without a really good reason.

If you’ve been keeping up with the blogs or local budget docs, you’ve seen this chart before:

 photo excesslevycapacity_zps40321593.png

It’s the trend lines on the city’s reserves. It includes all of the items like Free Cash (amount over your budget in any given year you have), Stabilization fund (a more permanent place to put your savings), the mandatory Chapter 17 fund, and excess levy capacity. What do you observe?

If you said that excess levy capacity makes up a huge chunk of our reserve funds, DING DING DING we have a winner! Eyeballing this chart, excess levy capacity (the amount we could tax more if we wanted to) doesn’t quite make up 50% of our reserves, but close. (Also of note: Stabilization funds are new in Lowell under Bernie!)

So…there you have it, the makeup of our reserves. Why are the reserves important, and why does having reserves save taxpayers a LOT of money in the long run? I want Rodney to pay particular attention to this, because he says he looooves to save taxpayer dollars!

Bottom line: the cost of borrowing money. It goes up when you have a bad set of factors going into your bond rating. It goes down when you do the right things and the ratings agencies like Moody’s give you a better grade.

All municipalities borrow money. You borrow for things that need to be paid for all at once today, but are too large to really put in one or a few annual budget(s). Things like new or rebuilt parking garages; new school buildings (the portion that the city pays, anyway), or other large investments that pay off in the long run but cannot be done in small chunks (go ahead, ask your plumber the next time he does some work for you if you can pay him in small installments for the next 30 years.)

How much you pay in interest in long term loans is very dependent on how good the ratings agencies think you are for the money. And like a home mortgage, a single percentage point over 30 years is a LOT of difference in the total amount you pay over the life of the loan! There are many factors that go into a ratings agency grade for a city/town…but one big one is the level of reserves. The bare minimum is generally considered 5% of your budget. The gold standard is 10% or higher. In the budget proposal for Fiscal Year 2014 (the current FY), Bernie stated that our reserves (all reserves, including excess levy capacity) were at $23.8 million, or about 7.25% of the FY2012 year budget. He stated, “We have met the 5% goal that we set in last year’s budget document and are well on our way toward our longer-term goal of 10%.” 10%, because that is the gold standard and cities don’t reach the top bond rating without that. Maximizing saving money on borrowing costs is sound fiscal policy.

So when Rodney says he likes to save taxpayer dollars, but messes with the things that have gotten us great ratings from places like Moody’s by pretending we don’t need to have stronger reserves, what he’s really saying is he’ll give you a dollar today and steal ten dollars from you over the next decade. Penny-wise, pound-foolish. (In case that’s too obscure for Rodney, replace “pound” with “dollar.” What can I say, it was a British proverb first.)

On top of that, until we reach that ideal 10% of our budget being in reserves we probably won’t get to the top bond ratings, which means we’re spending more money on loans for capital investments than we could be. This is why Bernie has been asking for more money to go into the stabilization funds and not things like, say, lowering taxes. We’re at near-historic lows for taxes (excess tax levy) as it is! And keeping the taxes low was at the behest of the City Council, which constantly puts downward pressure on taxes because those are easy things on which politicians can run for reelection. Our net school spending has been sacrificed for years for political expediency. And Rodney’s been leading that charge every step of the way. For him now to complain about a net school spending shortfall, when he demanded all savings from the health care union negotiation go to tax cuts and NOT schools…it’s nothing short of breathtaking. He’s either a really cynical flip-flopping politician, or spectacularly block-headed. (That’s a nice word for stupid…)

Now, go back to that chart:

 photo excesslevycapacity_zps40321593.png

If almost half of our reserves are made up of how much more we could be taxing Lowell residents on property, and another chunk (Chapter 17) is virtually untouchable, that makes less than half of our reserves made up of savings or temporary savings. Since Rodney hates taxes so much, you can consider that part of the chart null for purposes of considering our savings if we need them. If it came down to needing some of those reserves, he’d vote no every time on raising taxes.

Now, put this together with Rodney’s suddenly getting religion on the city’s school spending…what do you get? Rodney will suggest eating into our Free Cash. Like Cox did. Lowering our bond rating (you can bet on a swift reaction from ratings agencies). Increasing the long term borrowing costs for capital investments we’ll need to make later on. Serving Peter to rob Paul, Mary and a bunch of other folks singer friends of theirs.

Now does anyone still think that Rodney is a real fiscal watchdog? I didn’t think so. We’re in this net school spending boat because Rodney and his ilk have insisted, every moment of every budget consideration, to put cutting already historically-low taxes ahead of schools, staffing, services, and capital expenditures. The only reason any of those things have been possible at all is because Bernie, along with people like Mayor Muprhy, have been a whizz at saving money. Between LowellStat creating efficiencies, green initiatives (which Rodney totally fought against, go back and watch City Council meetings where the Ameresco contract was the subject) and smart capital investments like new salt/sander trucks with monitors which save us a ton of road salt (thank goodness, or we’d be out like everyone else is…on location with Threads, I saw our salt levels, they aren’t full any more…). And the health care savings with the union negotiations. Huge!

Anyway, the point is, any excess in good stuff we’ve seen is all in Bernie’s monitoring of savings and efficiencies in the budget, because the Council wouldn’t let any talk be about increasing taxes. Now that we’re losing him, and with a good chance being that someone with zero relevant experience will take the helm, we’ll be back to 2006 and negative free cash in no time…because it took a very experienced mind to bring us to where we are today, and that’ll be gone. Someone political like Kevin Murphy will deliver exactly what the Council asks for…because the Council wants political expediency in the form of lower taxes, and there’s really only one way left to do that. By eating reserves and ruining our credit rating.

16 Responses to “A Lesson For Rodney On Reserves”

  1. Lynne Says:

    By the way, this would be a good primer on city budgeting for “economic development chair” Corey Belanger. I expect Kennedy to know most of this, but maybe he needs a refresher as well.

  2. Art is Fun Says:

    Lynne, if I may quote you, “a professional city manager who has taken us from negative $4.5M in reserves to a cozy but not complete positive,” I’ve heard this or similar comments for years. I don’t agree. I’m not defending John Cox anymore than I’m praising Manager Lynch. I pulled my real east ate tax numbers for my business condo, my last tax bill under John Cox was $898.51 my first bill under a Lynch budget was $3044.65. This increase was one year to the next. How difficult is the process if all you have to do is increase taxes. I could balance the budget doing that. If you doubt my #s you know me and I will be happy to produce my records for you.

  3. Lynne Says:

    Then something else happened to your property. Like, it might have been seriously undervalued and left that way far too long. There is NO way that the manner in which taxes have been very moderately raised accounts for that jump. Someone wasn’t doing their job prior, and the correction was harsh but, likely, fair.

    Most people have NOT had their taxes increase that much. My tax bill for my house hasn’t gone up much more than a couple hundred per year. I don’t think the commercial rate is great here, but its increases were also modest. That ratio should be looked at - but your case is something completely else, and I’d bet dollars to donuts it had everything to do with someone sleeping on the job for a decade prior. Unfair to you, but fair based on what everyone else is paying.

  4. Mr. Lynne Says:

    600 is a great number. 800 is an even better number. Or is it a worse number? I forget.

    For any inquiry into a given number or number comparison, in order to judge the number as too high or too low you need context and details.

  5. Art is Fun Says:

    Correct, not most people, but quite a few commercial owners in the city that I’ve spoken to over the years, commercial condo owners seem to have specifically targeted. Valuation is extremely high. Coupled with the commercial tax rate. Voila!

  6. Lynne Says:

    The thing is, a lot of stuff got reevaluated downtown…I wonder how they compare to some of the new office space/commercial development coming on line? I don’t have those answers.

  7. Gail Says:

    There used to be some triennial assessment and the year I purchased my home the taxes doubled. As a result my escrow payments went through the roof in 2002.

    As a home owner, I know that if routine maintenance isn’t done or if certain repairs, say a roof, are put off, you are going to end up paying more, possibly a lot more, later. I am concerned that the line on tax increases is likely to end up costing us more in the long run. Very few things do not see price increases from year to year. Expecting to be able to do the same with the same and count on efficiencies and elimination of waste as the solution is unrealistic –of course every time I say that we have some huge scandal (e.g., someone literally sleeping on the job) with someone doing something I find inconceivable.

  8. Mr. Lynne Says:

    I’d note that while I’m sure LowellStat creates new efficiencies, the lion’s share of what LowellStat has done for us in the past was identify fixable inefficiencies.

  9. Laura Says:

    This was really helpful. Thank you.

  10. Thayer Eastman Says:

    Mr Lynne…
    The first step in saving the sinking ship has to be plugging all the holes. I’m hopefully watching the savings generated by the LowellStat over time. I’m sure it will become more difficult as time goes by, the margins will get slimmer and slimmer, but it will pay for itself for a long time.
    Jack…
    Excellent informative article. Now if we could just get the low info voter to actually read and comprehend it.

  11. Bernie Lynch Says:

    Weighing in here on the tax issue.

    To Art is Fun: I’d be interested in the specifics of your case because it really doesn’t seem right. Its likely too late to remedy now if it ocurred in 2007/8 sice tax appeals need to be considered in a timely manner set by state law. However, there may be something possible moving forward on your valuation if it is incorrect. There are no properties targeted in the assessment process. All property values are adjusted up or down by market data.

    On the issue of improving the City’s fiscal condition by the simple act of raising taxes, it simply isn’t true. A simple measure ofd this is that in FY2007 the “excess tax capacity” of the city (the amount we could legally raise under Prop 2 1/2) had shrunk to $5M. That figure now stands at about $12M. Simply stated, we reversed the trend of increasing taxes to holding the line on tax increases. That said, I do worry that our quest to meet that objective may have been a bit extreme in that we stretched the finances a bit too much, such as in school spending, and we will likely need to spike a bit above 2.5% tax growth in FY15. We should maintain steady moderate tax increases, not a series of peaks and valleys.

  12. Mr. Lynne Says:

    “Jack…
    Excellent informative article. Now if we could just get the low info voter to actually read and comprehend it.”

    Actually, that’d by my wife Lynne you’d be thanking.

  13. Lynne Says:

    Jack didn’t write it, I did, Thayer! :) Jack has his own blog now, which is well worth putting on your reading list!

  14. Paul@01852 Says:

    It’s always nice to see city officials reading local blogs (see Comment 11. above) and offering explanations and potential solutions. I wonder how well this will continue under a new city administration?

  15. Thayer Eastman Says:

    Oops. My bad. Thanks for the info Lynne.

  16. joe from Lowell Says:

    I don’t doubt you for a moment, Art is Fun, and I can’t say one way or the other whether your tax hike was legit or not.

    However, I can say with confidence that such tax hikes do not explain the turnaround in our fiscal position, because overall revenue has grown at a low rate. See the red “excess levy capacity” bar? That is a measure of how taxes collected stack up against the maximum the city could be collecting if it hiked taxes as high as they are allowed. That bar shrunk under John Cox, showing that the city’s overall tax revenues were catching up to that theoretical maximum. It then got wider under Bernie Lynch, showing that taxes were rising only slightly overall.

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