After weeks of uncertainty and negotiation, the state has finally certified Harvard’s fiscal 2017 free cash, and the number is a big one: $1.67 million, possibly the largest the town has ever seen and way beyond the historical norm.
The number was confirmed last Friday, March 31, by the state Department of Revenue and Harvard’s Finance Director David Nalchajian, just as officials were preparing for this year’s Annual Town Meeting. Because the certification arrived too late for this year’s warrant, the selectmen are considering calling a Special Town Meeting before June 30 to appropriate free cash among several accounts before it expires.
Free cash is the money left unspent and unencumbered at the end of a fiscal year. Once certified, free cash is available for spending in the current fiscal year, but it disappears back into the town’s general fund at the stroke of midnight June 30. Havard’s bylaw specifies that the money be used to fill the town’s capital spending piggy bank, the Capital Stabilization and Investment Fund, provided the money is not needed elsewhere for unforeseen expenses that would hinder the town’s ability to deliver required services, or the balance in the Stabilization Fund has fallen below 5 percent of the omnibus budget.
The record free cash amounts of FY16 ($1.36 million) and FY17 ($1.67 million) far exceed the median $422,845 of the past 15 years. Free cash has exceeded the state-recommended minimum 3 percent of budget only four times during that period. (Sources: FY03–FY17 omnibus budgets; Mass. Department of Revenue) CLICK CHART TO ENLARGE
Typically, free cash comes from unspent departmental budgets, aggressive collection of delinquent taxes, or higher-than-expected revenues, such as money received from automobile excise taxes, building permits, or dog license fees. Since 2003, the median amount of free cash certified each year has hovered in the range of $425,000, or roughly 2.1 percent of Harvard’s annual budget. (See chart at right.)
Free cash spiked to $1 million for the first time in 2011, when the town received emergency money from the state to pay for cleanup following a damaging winter storm. But the outsized fiscal 2017 free cash number is the result of one-time fiscal 2016 events, aggravated by the absence of a finance director from July 2016 to February 2017 to oversee the closing of Harvard’s fiscal 2016 books. The bonanza is unlikely to be repeated in fiscal 2018.
Anomalies, one-time revenues
So-called FY2016 “anomalies” and FY2016 one-time revenues account for nearly half of this year’s free cash. A conservative revenue estimate and underspent departmental budgets accounted for the rest. The first two categories are unlikely to be repeated in FY2017. (Source: Harvard Finance Dept.) CLICK CHART TO ENLARGE
Approximately $623,000, or 36 percent, of this year’s number is due to what Nalchajian calls “anomalies.” (See pie chart at right.) The largest of these is a $175,000 health insurance bill left unpaid at the close of fiscal 2016, but later paid with fiscal 2017 money. A largely snow-free 2015–2016 winter left $114,000 unspent in the town’s reserve fund, while another $122,000 was left over after being set aside to cover potential changes to the mix of health insurance plans chosen by town employees.
The largest cache of this year’s $1.67 million resulted from higher than expected revenues: $708,000 or 41 percent of the total. Unspent dollars in departmental budgets accounted for the smallest amount of extra money: $206,000, or 10 percent.
The DOR recommends that towns aim for an annual free cash amount of between 3 and 5 percent of a given year’s omnibus budget. This goal can be met, the Division of Local Services says in its 2013 “New Officials Financial Handbook,” by “conservatively estimating local receipts [taxes and fees] and aggressively pursuing the collection of receivables [principally delinquent taxes and unpaid invoices].” Free cash “can provide a financial cushion to guard against economic downturn or to meet unforeseen expenditures,” says the handbook.
Harvard’s average free cash since 2003 is 2.8 percent, but the median—a better measure—hovers at 2.1 percent.
For the past several years, the capital committee has planned for an annual deposit of $300,000 to the town’s capital fund. But with the renovation of Hildreth Elementary School and an expansion of Hildreth House on the fiscal horizon, Harvard’s Capital Planning and Investment Committee wants to stash away as much free cash as it can to save for those future projects. With interest rates likely to rise in coming years, members say, having cash to defray debt will be valuable.
Unfree free cash
But this year, not all of the certified free cash amount is available. Because the $175,000 health insurance bill was paid for with unbudgeted fiscal 2017 dollars, some or all of that amount must be restored in order to end the year with a balanced fiscal 2017 budget, as required by state law. Moreover, the town’s Reserve Fund is showing an approximately $300,000 deficit because of higher than expected snow and ice removal expenses for this winter.
At recent selectmen, finance, capital, and School Committee meetings, acting Town Administrator Marie Sobalvarro has asked that the chairs of those boards meet and recommend how this year’s free cash be appropriated. Acting on their recommendation requires that a Special Town Meeting be held before June 30.
