Acton Needs an Endowment

Acton’s budget system is a mess. As a town, we rely on property taxes, which is a stable source of revenue, but we also depend on fees and state aid. State aid is particularly fickle. Every few years, there is a statewide crisis and that trickles down to us, which causes a local crisis.

And in a downturn, like we have now, we choose to spend reserves instead of cutting back expenses. This sets us up for an override in a future year. These overrides are divisive and cause catastrophe if they don’t pass. This is a terrible way to manage long-term finances.

But no matter what we do as a town, we are locked into union contracts and health costs that are hard to manage when property taxes can only increase 2.5% per year. This has been dubbed our “structural deficit.” What is the long-term solution to all of these budget issues?

We need an endowment.

If we can create an endowment for Acton and if it is sufficiently large, we can use the interest to supplement our budget, while allowing the endowment to continue to grow a bit each year, thereby ensuring a steady income stream forever. This solution has the power to transform municipal finances in Acton.

I would suggest a $50 million endowment goal. This may sound far-fetched, but I believe it is achievable, and I believe it can be done in the short term—within five or 10 years!

Before I tell you how, let me first say that we need to have a different mindset as a community if we are going to undertake this endeavor. We need to start tucking away whatever we can towards this goal. This means that we should be as frugal as possible on the expense side, and look for creative ways to take new revenue and windfalls and save them instead of spend them. Once we’ve achieved our endowment goal, we will have a lot more flexibility and that is when we can stop “hunkering down.”

The mindset is important because we all have to be in agreement that we need to push to achieve this goal. If town leaders start to cut corners (for example, if they start spending the money saved toward the endowment) then this won’t work.

OK, so how can we raise an endowment of this magnitude?

The way to do it is to have a careful and critical review of the town's land and building assets. As a town, we've been making real estate investments with little regard for their future use. But we also get properties by other means. Do you have any idea how many properties the Town of Acton owns? SEE EXCEL LIST HERE.

Acton has over 240 parcels of vacant land and 23 buildings it owns. Most of the buildings are in use, but a few are not and could be sold.

But of more value to us is the vacant land. The assessed value of the land is $63 million, and assessments are often lower than actual values.

What if we sold, say, $25 million worth of this land? And let’s say the new owners put up $75 million worth of improvements on the properties. That would generate an endowment of $25 million and an annual income stream of $1.25 million in interest (at 5% per year) PLUS the additional tax revenue on $100 million.

We tax at about $20 per thousand, so $100 million would be about $2 million per year in taxes. This tax stream would increase 2.5% per year.

If you take the $25 million and compound that with the interest and tax payments, you would have over $50 million in just seven years.

So if we sell $25 million of our fixed land assets, and we wait seven years, we have our endowment. And that is without any windfalls or selling any buildings. We would be trading our “land” assets for cash assets. And we would be taking assets that generate no revenue and turn them into revenue-producers.

And we would take a giant step, if not outright solve, our fiscal problems going forward.

For all those residents who talk about preserving town character, this would be a worthy endeavor, for what kind of place is Acton going to be if we are always financially insecure? If every few years we have to pit neighbor against neighbor by raising taxes more than many can afford? Acton already has one of the state’s highest tax rates.

One more thing. Once we have this pot of money, we would be taking advantage of the power of compounding interest. If we simply let the money sit there for a few years, we would have even substantially more down the road. The $25 million turns into $50 million in seven years (if we dedicate all interest and tax payments to the endowment.) If we wait another seven years, it goes up to about $100 million and in 20 years, it is close to $150 million. SEE ENDOWMENT GROWTH CHART HERE.

AttachmentSize
Town of Acton Properties 3-17-10.xls52 KB
Endowment Growth Chart.xls17 KB

Comments

MORE MONEY

Can't agree with any arguement for additional town revenue. When will we wake up to the ugly reality that the public sector will never have enough money! In my short visit (born 1940) there have been more taxes and fees added to ELIMINATE revenue short-falls than can be counted. A few are the tolls on the harbor tunnels and the turnpike, the lottery, the state income and sales taxes (and the additions to both). The ADDITIONAL monies the commonwealth was to raise from these fees and taxes were suppose to fully pay for education while maintaining an excellent infrastructure of roads and bridges.

What have we received in lieu of the promises? A vastly increased pool of employees in the public sector with benefits that far surpass those any of us -- of whom I am aware -- receive in the private sector. A group of state politicians who "work" to serve us on a full time basis while their counterparts in most states (see NH!) are part-time workers receiving about $50,000 to $60,000 per annum less than those in MA.

The increased fees and taxes have not helped to control the cost of education at the city and town level as far as I can tell. Nor has it helped to increase the value of the eduation we are supplying at greater and greater cost, if we measure the skill level of the kids we see working behind cash registers around town.

The roads and bridges are in deplorable condition - both those maintained by the commonwealth and the cities and towns. (Look at the guard rail on the "new" Main Street bridge -- all rusty and ugly in just a few years or the torn up sidewalks where municipal service companies have been allowed to make shoddy [read quick and dirty] repairs.

We give more and more money to the public sector and receive less and less. So, no more money. Freeze the budgets and force us to live within our means.

Bad idea

1. The table you use for finances used 7+% for a return on investment which is unrealistic or SAFE investments (aka BOND FUND). Would not be a good idea to sell the assets and then invest in risky investments.

2. These town assets were either purchased to keep the property open so it does not look like Brockton -or- it was gifted to the town. When the middle school was expanded under DR Dizzy, we broke gift agreements which I am ashamed of ... With this plan in place, we are desecrating the gift agreements and the gifts will stop.
REALLY DUMB IDEA

3. The land is sold (to developers) and under 40B (yes, we are not protected) and they put 2-4 houses per acre bringing in 1.8 children to the school system, which increases the expenses.

4. I guess we also need to add to the waste treatment system to support this new load.

Lets just keep the assets and be done with the spiral of lost assets, and higher expenses.

Responding to BobC

Hi Bob,

Thanks for your comments. Let me address them one by one.

1. Interest rate. I used 5%. I'm sure you could plug in 4% or 6%, but no one knows what future interest rates will be. But I don't think a 5% return on investment is unrealistic. Still, if we use 3% or 4%, it merely lengthens the time needed to achieve our goal, it does not change the basic argument.

2. Every parcel would have to be looked at. Some may have restrictions, and some may be undevelopable. But as to people not willing to give gifts, I would think just the opposite could be true.

This concept could transform municipal finance in our town. I'm sure there are people who are tired of the tax-and-spend mentality who would love to see a stable financial model to replace what we do now. Perhaps people who feel they have to leave town because of the high property tax values would support this plan for future generations' benefit.

Not everyone who donates property to the town wants it to sit vacant forever. There are some (and yes, we should honor those requests), but for those who make unrestricted donations or who support the concept of a permanent endowment, those would be properties that could be dedicated to this cause.

I did not ask this question to the assessors, but I assume much of our town-owned property comes from unpaid taxes and such. But I agree with your concept that if someone donates land and asks that it be undeveloped, we must honor that request.

3. We own the land, so we can put whatever restrictions on the deed we want. But I would prefer to think of this in terms of number of units to be built.

So let's say we have 100 parcels that we identify could be sold and developed, and let's say each parcel has a potential of 4 units.

If we decide that we only want a total of 50 units to come out of this program, we sell 12 parcels.

If we want 100 units, we sell 25 parcels.

And, as I said, we could put deed restrictions if necessary, but I'd rather sell the land and assume the highest reasonable density and use a target density figure overall.

4. Every development has to deal with wastewater. That is true for Avalon, for example, which has hundreds of units. This idea could produce 50 or 100 or 150 units over the five or 10 years we would need to implement it. It would not greatly increase our housing stock or put an undue burden on our town, in my opinion, based on the size of the town.

For example, 100 extra units would mean around a 1% increase in housing stock. If we have 500 kids in an elementary school, it could mean 5 or 10 additional kids. We have declining enrollments projected into the future, so this could be a good result.

Finally, we could also focus on more commercial development for some of these parcels, if that was one of our goals.

Allen

Allen Nitschelm has lived in Acton since 1998 and writes about fiscal issues at the
local and state level. He is a former member of the town's Finance Committee
and is an Associate Publisher of Acton Forum.

Endowment - Good idea, but...

If the money's there, they'll just use it for "expenses". That is, the budget will somehow manage to go up to include whatever the endowment provides.

I'm afraid that if, for example. we get a million bucks/year from the endowment, that money will somehow be "needed" every year, such that when the state aid decreases, we'll be in the same boat.

Budgets are like disk space (or closet space), that is, "necessary" junk expands to exceed any limit placed on it.

I think, in principal ( pun intended), this is a wonderful idea, but the cynic in me says that however set up, it will be misused. (I've seen this happen with an endowment set up for a religious institution, where "necessary" programs simply multiplied to make the extra income evaporate, and the budget problems remained.)

Signed,

Professor (resident cynic) Snape

Endowment Restrictions

Dear Professor Snape,

Where do you get that hair gel?

The endowment concept would have to be backed up by an iron-clad usage policy, perhaps one that cannot be changed unless there is a townwide vote of some sorts.

This is important because we wouldn't want to squander away our town-owned assets.

And this policy would have to be spelled out before anyone votes to create such an endowment.

The policy would have to include a provision for building the endowment over time, using the future revenue stream of the developed properties and a percent of the interest earned. But, yes, eventually there would be income generated.

That's the whole idea!

What the leadership does in 10 or 20 years with this income is up to them. But so long as the endowment continues to grow, I don't really care. If the principal remains intact, any mistakes made will be one-year mistakes because there will be new revenues the following year.

By the way, I have gotten an email about how this will encourage too much development. We can certainly debate how far to go with this proposal and how much development is reasonable. But in light of projects like Avalon, I see this as something more desirable (higher value homes, say), spread out over town, with less overall impact because there would be far few units than some other projects. But this point would have to be addressed squarely.

If it meant another 50 or 100 units, it is a "no brainer" to do, in my view. This would increase our housing stock by something on the order of 1%. A 1% increase in an elementary school is 5 kids.

But if it was 1,000 units, then that's probably too much growth and perhaps you'd need to supplement development with other fund-raising ideas to hit the target goal.

Allen

Allen Nitschelm has lived in Acton since 1998 and writes about fiscal issues at the
local and state level. He is a former member of the town's Finance Committee
and is an Associate Publisher of Acton Forum.