At the MMA, pt. 2---Cash Flow and Planning Debt

As reported previously, a majority of Amesbury's Municipal Councilors made it to the annual meeting of the MA Municipal Association in January. Here are some of the things that I learned there:

"Sound Financial Practices" session with DOR staff:

This workshop covered a lot of ground. They talked a bit about using cash vs. borrowing. Much like in a home economy, cash makes sense for smaller needs. Making cash available in the flow of budgets takes planning: make conservative estimates of receipts (e.g. excise tax) and liberal estimates of real costs. The result is a positive cash flow ("free cash" after expenses and receipts have been certified at years end) that can be capitalized into community needs. The presenters emphasized that having a reasonable level of free cash at the end of the year is a positive, giving a community fiscal flexibility for unplanned costs (think snow removal!). As you would at home, put resources into a few pots: 1/3 for operations, 1/3 for capital improvements, 1/3 for reserve.

For larger projects (think: buying your own house), borrowing makes sense--we'll never be able to build a school building with cash, of course. Manage debt with a combination of 1-time 'debt exclusions' (which don't get added to the new Prop. 2 1/2 limit) and a rolling debt balance of 8-12% of total annual budget to create perpetual re-investment. 5% debt service (as % of budget) reflects a weak investment in the infrastructure of a community and will only add to costs in the future.

"Debt Management for the Generalist":

This workshop had a Director of Finance (Needham) and a Chair of a Finance Committee (Arlington) leading it. 2 main themes: make sure your community has CLEAR debt policies in place and forecasting, forecasting, forecasting.

Debt policy: Have a policy that articulates how cash and borrowing will be balanced (see above), sets a limit for debt service as % of budget, term of debts, and relation to Capital Improvement Plans. Needham has an ordinance that articulates these items and sets parameters administrative and legislative decision-making on debt. Both presenters emphasized the need for both branches to coordinate policy and decision-making, in order to have effective planning. Which brings us to....

Forecasting capital needs and debt: Policy and planning come together in a good Capital Improvement Plan that not only lays out capital needs and estimates costs but puts this data into a spreadsheet tool that shows the timing and long-term rolling effect of every given project on levels of debt service. The presenters gave us sample debt forecasting tools from other communities that clearly demonstrated how debt service forecasts over time (as obligations are paid off, as annual budget increases) and thus from year to year exactly what the capacity was to take on new debt and how specific capital needs fit into that.

Conclusions: In the context of these key ideas--established debt policy and good debt/capital expense forecasting--I think Amesbury still has a ways to go. The quality of our Capital Improvement Plan has improved but the 2008-2012 CIP released last year does not go beyond a simple cataloging of capital needs. Though needs are listed and priced, there is not even a simple totaling of what the needs are in each category. It tells the reader very little about how the cataloged capital needs fit into the planning of either direct cash expenditure or debt financing within the annual budget and future budgets. Contrast that with the CIP covering the same period from the City of Portsmouth, NH (posted on Amesbury's website by the Master Plan Implementation & Oversight Committee). Portsmouth's plan not only catalogs capital needs but also places those needs in the dynamic context of future budgets and levels of debt service.

Amesbury--starting with the Mayor's Office but working with the Council--should develop and articulate a debt policy and it should improve its capital need and debt forecasting. Successfully anticipating and planning for costly capital needs saves money in the long run and spares a community the budgetary (and social) shocks that come when big costs suddenly appear on the horizon. Perhaps the library improvements would have been approved in 2005 if residents had felt more confident about the Town's overall capital and debt planning.