DLS City & Town

In this certification period, only North Adams was certified in negative amount ($437,098). three towns not certified last fiscal period were certified this fiscal period and two towns not certified this fiscal period were certified last fiscal period.

The following tables show more certification results.

To see free cash certifications to date, please see the Data Highlight of the Month in this issue of City & Town.

It’s How You Look At It

Although a new record dollar amount was established as of July 1, 2018, the 2.5% increase over the previous year’s certification represents the second smallest year-to-year percentage increase over the last 10 certification periods as shown by the totals in the graph above. The smallest percentage increase, 2.3%, was between July 2012 and July 2013.

Did outliers have any effect on the statewide total? For example, July 1, 2018 certifications for Boston and Cambridge were $375 million and $232 million respectively, or 34.6% of the total. If their certifications are removed from the total of the last two fiscal periods, the statewide total for the remaining communities reveals a slight reduction of about $6,000,000, or .5%.

At the same time, Chelsea’s July 1, 2017 certification of $33.7 million decreased by $24.1 million for July 1, 2018 as the city transferred much of its free cash into other reserve funds. If Chelsea’s certification is also removed, the statewide total for the remaining communities reveals an increase of over $18 million (1.6%).

Despite the rise seen in the statewide total, not every community experiences an increase from the previous period as shown in the graph below. Note also that in only one fiscal period shown did the number of communities with a decrease in certified free cash exceed those with a certified increase. In addition, whether future free cash certifications will increase or decrease from the July 2018 figures is currently unclear and will depend in part on whether communities will spend or retain new local revenue sources if available to them such as excises from marijuana sales and short-term rentals.

Adopting a Free Cash Policy

Adopting a policy regarding the use of certified free cash is a best practice. The Division of Local Services (DLS) encourages the adoption of such a policy and advises that:

• communities understand the role free cash plays in sustaining a strong credit rating

• a free cash goal helps deter free cash from being depleted in any particular year and enables the following year's calculation to begin with a positive balance

• a free cash policy should avoid supplementing current-year departmental operations. By eliminating the expectation of additional resources later in the fiscal year to backfill budgets, department heads will produce more accurate and realistic annual appropriation requests

DLS recommends that free cash:

• be restricted to paying one-time expenditures, funding capital projects, reducing OPEB or pension liabilities, or replenishing other reserves

• be maintained at 5% of the annual budget

Let’s summarize what’s been learned about the most recent free cash certifications:

• the total continues to exceed $1 billion, but the most recent total shows a slowdown in the increase over the previous total

• more communities exited the < $1 million category and more communities entered the >$10 million category than in the last fiscal period

• 51.0% of communities with certified free cash in the last fiscal period increased their certifications over the previous fiscal period

• adopting a policy on the amount and use of free cash is a best practice.

Frequently Asked Questions

Four questions are often asked of Bureau of Accounts field representatives:

1.) What effect does a vote to reduce the tax rate actually have?

When such a vote has been approved, a specific dollar amount of free cash is applied as a funding source against all appropriations from the tax levy, not to one particular appropriation. Although the tax levy is reduced, a taxpayer may or may not see a reduction to their tax bill as a result depending upon where the community was relative to its tax levy limit or depending on the assessed value of the taxpayers’ property.

If the community was above the levy limit and free cash was voted to reduce the tax rate down to the levy limit, this vote merely balanced the budget to its Prop 2½ levy limit and the vote provided no further property tax relief. However, if the community was already at or below its limit, such a vote does reduce the amount to be raised through taxation, which may result in property tax relief to the taxpayer, if property values remain the same from the prior year, or any increases in appropriations are less than the free cash voted to reduce the tax rate.

2.) What happens to free cash that isn’t appropriated by the end of a fiscal period?

The unappropriated amount of free cash at the end of a fiscal period becomes a part of the certification for the next fiscal period. For example, the unappropriated amount from the July 1, 2018 certification becomes part of the July 1, 2019 certification.

3.) For what purpose can free cash be appropriated?

Free cash can be appropriated for any legal purpose. However, free cash is a one-time source of revenue. Because free cash may decrease from year to year, free cash appropriated for ongoing operations is not recommended.

4.) Can free cash be appropriated for use prior to certification by the Bureau of Accounts?

No. Once the period of time for appropriating the free cash certification expires, new documentation must be submitted to the Bureau of Accounts and free cash must be recertified prior to appropriation.

For more information on free cash including the rules for its use, how to improve your free cash position and policies on generating and using free cash, please review our City & Town article from December 15, 2016.

Ask DLS: Other Post-Employment Benefits Trust Fund - Part 3

This month's Ask DLS features part three of frequently asked questions concerning the local option Other Post-Employment Benefits (OPEB) Trust Fund under G.L. c. 32B, § 20 and 20A, as amended by Sections 15 and 238 of Chapter 218 of the Acts of 2016, the Municipal Modernization Act. For Part 1 of the series, see the August 1, 2019 edition of City & Town. And for Part 2, please see the September 5, 2019 edition. Please let us know if you have other areas of interest or send a question to cityandtown@dor.state.ma.us. We would like to hear from you.

What monies are credited to the OPEB Trust Fund?

(1) Appropriations to the OPEB Fund - The governing body may, by majority vote, appropriate monies to the OPEB Fund. In a regional school district, appropriations to the OPEB Fund may be made only in the annual budget submitted to the member cities and towns for approval. As we stated in Part 2 of this series, the governing body is the legislative body in a city or town, the county commissioners in a county, the regional district school committee in a regional school district, and the district meeting or other appropriating body in any other governmental unit.

(2) Gifts, Grants and Other Contributions - The treasurer of the governmental unit, as custodian of the OPEB Fund, may accept gifts, grants and other contributions to the fund.

(3) Income - Any interest or other income generated by investment of the OPEB Fund becomes part of the OPEB Fund.

(4) Medicare Part D Funds - The governing body may, by majority vote, dedicate to the OPEB Fund reimbursements that the governmental unit receives as a sponsor of a Medicare Part D qualified retiree prescription drug plan. 42 U.S.C. § 1395w-132.

Where can OPEB Trust Fund monies be invested?

Monies in the OPEB Fund that are not needed for expenditures or anticipated expenditures within the investment period must be invested and reinvested by the treasurer as directed by the trustee or board of trustees from time to time. The treasurer may employ an outside custodial service to hold the monies in the OPEB Fund consistent with the procedures and standards described below.

(1) State Retiree Benefits Trust Fund - The trustee or board of trustees may, with the approval of the State Retiree Benefits Trust Fund board of trustees, direct the treasurer to invest the OPEB Fund in the State Retiree Benefits Trust Fund established under G.L. c. 32A, § 24. In that case, fund monies are invested under G.L. c. 32A, §§ 24 and 24A.

(2) Other Investments - Where the trustee or board of trustees does not direct the treasurer to invest the OPEB Fund in the State Retiree Benefits Trust Fund, investments must be made as follows:

• Retirement Board as Board of Trustees - Where the retirement board is the board of trustees, investments are made under G.L. c. 32, § 23.

• Treasurer or OPEB Fund Board as Trustees - Where the treasurer is the trustee or an OPEB Fund board of trustees has been established by the governing body, investments are made in the same manner as municipal trust funds under G.L. c. 44, § 54. However, the governing body may, by majority vote, authorize investments under the prudent investor standard for private trusts under G.L. c. 203C.

Is an appropriation needed to spend OPEB monies?

Yes. An appropriation by a two-thirds vote of the governing body is required to spend any monies in the OPEB Fund.

What are the accounting obligations associated with OPEB Trust Funds?

The accounting officer must establish and maintain the OPEB Fund as a separate fund and record all activity in the OPEB Fund. The governmental unit (city, town, or district, etc.) is responsible for completing an actuarial valuation of its liabilities for health care and other post-employment benefits for its retired employees and their dependents and funding schedule that conform to the Governmental Accounting Standards Board (GASB) requirements.

When a governmental unit obtains an actuarial valuation report in accordance with GASB requirements containing statements of the liabilities of the unit for health care and other post-employment benefits for its retired employees and their dependents, it must submit a copy to the Public Employee Retirement Administration Commission (PERAC).The report must be submitted no later than 90 days after the governmental unit receives the report. PERAC may require that the governmental unit provide additional information related to its liabilities, normal cost and benefit payments, as specified by the Executive Office for Administration and Finance, in consultation with PERAC. In that case, the governmental unit must also submit the additional information to PERAC. A copy of such report and additional information, if any, must also be submitted to the Bureau of Accounts at the time of its submission to PERAC. G.L. c. 32B, § 20A. These reporting requirements apply to all governmental units whether or not they have established an OPEB fund under the general laws or a special act.

The annual report a regional school district submits to its member cities and towns under G.L. c. 71, § 16(k) must include a statement of the balance in the OPEB Fund and all additions to and appropriations from the fund during the period covered by the report.

What is the process to participate in the OPEB Fund of another governmental unit?

A governmental unit that accepts G.L. c. 32B, § 20 may participate in the OPEB Fund established by another governmental unit under G.L. c. 32B, § 20. Participation of one governmental unit in the OPEB Fund of another governmental unit must comply with the procedures and criteria established by the trustee or board of trustees of the OPEB Fund it wishes to join.

A governmental unit that accepts G.L. c. 32B, § 20 may participate in the OPEB Fund established by another governmental unit upon approval by majority vote of the governing bodies of:

a. The governmental unit wishing to participate in the OPEB Fund of the other governmental unit; and

b. The governmental unit that has established the OPEB Fund in which the other governmental unit wishes to participate.

Each governmental unit participating in the OPEB Fund remains responsible for all costs attributable for the health care and other post-employment obligations for its retired employees and their dependents and for completing an actuarial valuation of its liabilities and funding schedule that conforms to GASB requirements. A participating governmental unit is separately credited for its contributions to and appropriations from the OPEB Fund, and interest or other income generated by the fund, in the accounting of the relative liabilities of each governmental unit for its retirees and their dependents.

Data Highlight of the Month: Certified Free Cash

Donnette Benvenuto - Data Analytics and Resources Bureau

Certified Free Cash, also known as budgetary fund balance, is a community’s remaining, unrestricted funds from operations of the previous fiscal year including unexpended free cash from the previous year, actual receipts in excess of revenue estimates shown on the tax recapitulation sheet, and unspent amounts in budget line items. Local accountants and auditors submit free cash calculations to DLS based on balance sheet amounts as of June 30th. Unpaid property taxes and certain deficits negatively impact free cash, and until certified by the Director of Accounts, free cash is not available for appropriation by the community. The calculation can be found in Gateway. For more information on free cash, see the DLS Technical Assistance Bureau’s best practices.

The Municipal Databank features a report on certified free cash data from 2003 to present. This data is available as a state total (351) and can be filtered by one or more communities. The report includes instructions, net free cash aggregates (state totals only) and a certification count.

We also provide an expandable bar graph for visualization., and all data can be exported to excel, PDF or both.

We hope to better acquaint you with the data the DLS has to offer through the Data Highlight of the Month. For more information contact us directly at databank@dor.state.ma.us or (617) 626-2384.