Protect the reserves: Spending down the reserves is a risky plan

Thu, 2010-02-11

(ACTON) -- Acton Leadership Group (ALG) is planning to spend down Acton’s available financial reserves to risky low levels of 1.3 % within two years according to its 1 / 27 /2010 forecast. This is contrary to the Massachusetts Department of Revenue (DOR) recommended safety reserve levels of 5%.

The ALG plan does not explain how Acton will replenish the reserves. In this down economy who can predict when reserves will build up again? Acton citizens need to speak up on whether this is the right way to protect Acton’s financial future in this difficult economy.

This entire debate was made more critical at the February 10, 2010 ALG meeting when Acton's Finance Director announced that the Mass DOR is likely going to require Acton to move $1.5M of the NESWC funds into a separate reserve fund, no longer available for spending. This new fund would recognize the potential liability from environmental issues relating to the transfer station.

Removing these reserves from the NESWC fund means Acton's reserves available to cover difficulties would immediately be reduced from the present $7.5M to $6.0M, and reduces available reserves for future years accordingly.

What is the appropriate level of reserves for Acton? Acton debated how best to preserve the reserves at the Special Town Meeting in September 2008. The ALG plan at that time was to spend the reserves to a risky low level of 1.5%. Mr. Peter Ashton offered solid research and a convincing presentation that showed that Acton should maintain the prudent reserve level of 8.3% in accordance with the bond rating agencies recommendations , and in order to match reserve levels of comparable towns.

To be clear, Mr. Ashton never recommended a specific safety reserve level, but his research showed that the bond rating agencies recommended it be between 5% and 10%, and that comparable towns to Acton did this on average. Mr. Ashton’s research prevailed and the Special Town Meeting voted to maintain Acton’s reserves at 8.3%, rather than retaining the safety reserves at greater than 5% while returning a portion of the excess reserves to taxpayers.

The warrant, briefings, charts and record of that meeting are available at http://doc.acton-ma.gov/dsweb/View/Collection-2257.

As a related issue, preserving the reserves to 8.3% was a key element that led Acton to achieve the AAA bond rating from Standard and Poor’s. This is the gold standard of bond ratings, and leads directly to savings in interest costs for Acton’s capital projects. Acton's staff has worked hard to achieve this AAA rating.

If there are so many good reasons to protect a safety reserve level of 5% to 10%, why exactly is the ALG considering spending to well below that recommended level? The answer is simple: spending the reserves will temporarily postpone budget reductions being forced on towns like Acton by the economic downturn. The ALG is recommending spending reserves to cover operating budget shortfalls for the next two or more years, a practice the Massachusetts DOR recommends against.

With all due respect to the ALG, rather than reduce budgets now, they plan to spend down reserves instead. This may work for a year or two, but what happens when the reserves run out? The budget cuts will still be needed, and there will be a need to replenish the safety reserves.

The School Committee had a rather heated debate on reserve use at its December 3rd meeting (see video on Acton Forum). Some members wanted to spend the reserves as much as possible to protect staff positions as much as possible. Some wanted to maintain the reserves to some level, which meant recognizing the some staff has to be reduced. It will be an ongoing debate.

The discussion of spending down the reserves is made more difficult by the lack of a specific reserve policy that sets the level of a safety reserve. FinCom did publish a reserve policy in 2009, but it does not set any guidelines, other than that Acton officials should be allowed to use their judgment and should have the flexibility to spend as much of the reserves as they deem appropriate. This is not in accord with the Massachusetts DOR guidelines.

Acton needs an open debate in the next two months on the level of a safety reserve. Issues that need to be discussed:

1. Should Acton maintain its safety reserve at 5%, per Mass DOR, Moody’s, and S&P?

2. Should Acton manage its reserve to maintain the AAA bond ratings?

3. Should Acton produce a plan to replenish any reserves below a safety level, before it spends below that level?

The ALG has the responsibility to explain clearly to citizens of Acton the consequences the ALG spending plan. Until the prudence of the risky ALG plan is explained and accepted, the reserve levels should be maintained above the Mass DOR recommended 5.0% safety level.