11/10/04
Councilors agree to move toward
high undesignated fund balance
In a move to more firmly secure Cape Elizabeth's good bond rating, and as
a practice of sound fiscal policy, the Town Council Monday
approved a policy that sets a target of 8.33 percent of Town revenues
for the Town's undesignated fund.
The target represents an amount to cover one month's of the Town's expenses.
As of June 30, the Town's undesignated surplus was $1.5 million, 6.4 percent
of combined school and town revenue. While bond rating houses may consider
the undesignated fund level "adequate", the majority of Town Councilors agreed
with Town Manager Michael McGovern's assessment that the balance needs to
be higher.
Maintaining a higher balance in the undesignated fund will help assure a
high rating from investment services, McGovern said, and is better for cash
flow since taxes are only collected twice a year. He supported his position
with reports issued by two major investment services, Moody's and Standard
and Poor's, and with recommendations from the town auditor and financial
advisor.
Two of the Town Councilors, however, were unswayed by the manager's arguments
and voted against the new policy.
Councilor Mary Ann Lynch was the most vocal opponent of the new policy Monday
night, saying the real question boiled down to how much undesignated surprlus
was "enough." Reaching the target proposal in the next budget year would
require an additional $600,000, Lynch said. And, even though Cape Elizabeth
had attained the 8.33 percent level only once in the last nine years, the
investment services have still given the town a high rating, placing Cape
Elizabeth in the top 6 percent of all municipalities for creditworthiness.
"We need to look at what the bankers have accepted, and will accept,"
Lynch said. Factors other than surplus determine stability and credit
rating, she said, referring to a list of highly rated towns with low undesignated
fund balances, and poorly rated ones with high fund balances.
"How much is enough? For me, the current level is enough. It's enough for
Wall Street. I can think of better uses for that money, first and foremost
I would like to see it in the taxpayers' pockets," Lynch said.
McGovern countered, "She and I are in disagreement on whether or not we ought
to be strong or we ought to be adequate." He said a vote for an undesignated
fund balance of anything less than 8 percent of revenues "is a message to
the bonding agency that we are willing to lower the bond rating, and that
we are willing to be adequate and not strong," he said.
A rating lower than Cape Elizabeth's AA would mean a .3 percent difference
in borrowing rates, McGovern said, but the rate varies daily.
While the policy sets a target level for undesignated funds, it only stipulates
that the council shall attempt to increase the balance during years when
it falls below target. The policy does, however, prevent the council from
using undesignated funds to support the annual budget or capital needs, if
doing so would reduce the undesignated fund balance to a percentage of revenues
lower than it was the year before.
Councilor Michael Mowles joined Lynch in voting against the policy, which
passed 4-2. Councilor Jack Roberts said he supported the policy because it
would be very difficult to re-build a credit rating once it is lost, and
that having a month's worth of undesignated funds is fiscally prudent. Councilor
David Backer said he supported the policy because the council was only required
to move toward the goal, not make great leaps, and that it would send the
right message to the bond-rating companies. Councilor Carol Fritz, and Chairman
Anne Swift-Kayatta, also voted in favor.
While the council was divided on the policy as a whole, they were more agreeable
to an amendment to the policy as it was originally proposed. That amendment
says that if the undesignated fund balance exceeds the target amount, 100
percent of the excess would go toward lowering the tax commitment the following
budget year. The original proposal had 50 percent going to tax-commitment
reduction and 50 percent to a capital-reserve fund for equipment replacement
or needed infrastructure improvements. The vote for the amendment was 5-1,
with Roberts opposed.
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