• Undesignated Fund Discussion Memo
• Undesignated Fund Analysis
• Standard & Poor's Cape Elizabeth Rating
• Moody's Investment Services Cape Elizabeth Rating

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The Town Council is considering a new budget policy that will govern the amount of undesignated surplus in future town budgets.

A series of three policy options will be discussed at a council workshop Wednesday, Aug. 11.

The policy proposals, on the council's plate for a number of months, comes at the same time two major investor services, Standard & Poor's and Moody's, assigned high and stable ratings to the town's general obligation bonds to be issued this week.

The bonds issue, used to finance at $7.9 million renovation to the High School, and a $1.5 million addition to the Pond Cove school, were approved by voters last November.

Moody's rating of Aa2, and Standard and Poor's rating of AA, were given despite the town's relatively low level of undesignated surplus. "The undesignated general fund balance fell below 6% in fiscal 2003, which is on the low end for an 'AA'-category credit," says the report from Standard and Poor's.

"The stable outlook reflects the expectation that the town will begin to replenish the fund balance to higher levels that are more characteristic of an 'AA'-category-rated municipality," it says.

Town Councilors will consider three options that may become policy for general fund undesignated surplus if approved:

1. The general fund shall seek to have an undesignated fund balance of not lower than 7% and not higher than 10% of regular general fund operating revenues.

2. The general fund shall seek to have an undesignated fund balance of not less than one month's general fund operating expenses.

3. The general fund shall seek to have an undesignated municipal fund balance equal to 10% of the annual tax commitment.

For all options:

If the targeted undesignated fund balance is exceeded, 50% of any excess funds shall be used to reduce the tax commitment in the next budget to be considered by the town council. The remaining 50% shall be placed in a capital reserve fund to replace equipment and/or to undertake needed infrastructure improvements.

If the undesignated fund balance is not at its target level, the annual operating budget shall not be supported by any use of surplus until the fund balance reaches its targeted level.

Councilors agreed to further discuss optimal levels of undesignated surplus during budget discussions last winter and spring. The timing of the workshop, on the heels of the bond ratings, was coincidental, said Town Manager Michael McGovern.

Last year's total (town and school ) undesignated fund balance of $1,412,508 was 5.9 percent of total revenues. The fiscal year ended June 30 showed an undesignated fund balance of 1,562,508, 6.4 percent of total revenues. Since 1997, the closest undesignated surplus has been to the 10 percent goal was in 1999, when the fund was 9.3 percent of total revenue.

The council currently has no policy on undesignated surplus. If a policy is adopted, it could be overridden or changed by the council.