Deficit Spending makes a comeback

About six or seven years ago, in what I remember was my first Acton Town Meeting, I was in the audience when someone got up to complain about the budget being presented that night.

"This budget is out of balance. You are using one-time revenues, called Free Cash, in order to fund operations. This is unsustainable."

That statement seemed self-evident. I knew from "Accounting 101" that one-time revenues shouldn't fund recurring operations. It leads to overspending.

The speaker, Charles Kadlec, was ignored by all the boards on stage and Town Meeting proceeded to approve the spending as presented.

Afterwards, I approached Mr. Kadlec and asked to be put on his email list so I could be kept informed about what was going on. The rest, as they say, is history.

A couple years later, the town was faced with a large operating override, which got its start at that Town Meeting.

Charlie was right back then. Deficit spending doesn’t solve budget problems, it only postpones them. But what is worse is that Acton doesn’t just spend its reserves inappropriately, it does so to excess.

And that leads to larger overrides that are much riskier for Acton taxpayers. We risk the override succeeding (the tax increase is very high) and we risk it failing (the consequences of such a high deficit would result in large cutbacks all at once.) This is a "no-win" scenario.

This deficit spending is done with the approval of all of our major boards. We spend all of our savings, we leave Acton vulnerable to some potential emergency, and then we ask for an "emergency" override. And then it really is an emergency.

Isn’t this very risky behavior? Why would we do something so foolish?

The simple answer is that this strategy is effective at passing operating overrides. If override proponents can coerce the electorate into approving an override, then they get to continue taxing and spending as they wish. Creating these "emergencies" every few years achieves their goals.

Their advice to those residents who can’t afford Acton’s high taxes? Take out a reverse mortgage, or leave town.

This strategy of spending reserves to zero and then pleading for an override was employed during the 2005 override for $3.8 million. The threat back then was massive layoffs of teachers, firefighters, and police, and the possible closing of an elementary school. The strategy worked as the override passed with 55% of the vote.

The current plan by the Acton Leadership Group (ALG) and endorsed by at least some of our major town boards, is to use $2 million per year of reserves (Free Cash, NESWC, and Excess & Deficiency) for three years, which will leave Acton with less than the recommended level of reserves, according to the Department of Revenue (DOR). And this assumes healthy reserve regeneration (which won’t occur at this year’s pace, which was augmented by federal stimulus funds.)

If anything should go wrong during the three years, like if the state cuts revenue further than anticipated, or there is an unexpected emergency, and we decide to use the reserves more quickly than we forecast, then our problem will come home to roost sooner than planned. And then we will hear how many teachers, firefighters, and police officers will be laid off if we don’t pass the override.

These no-win scenarios can be avoided if we act now. There are just two things we need to do.

First, we need to stop using reserves as a source of operating revenues.

The Dept. of Revenue is quite clear that one-time revenues (like free cash) should not be used for recurring expenses, and should be at a stable level of 3% - 7% of the annual operating expenditures.

A reserve policy should create target levels for free cash that range between three and seven percent of annual general revenue. Sources of funding should be identified, and the policy should specify that reserves could only be used for one-time expenditures. If the town chooses to direct a portion of free cash to a recurring spending purpose, then an equal amount should be retained as unexpended so that it might carry forward into the subsequent year’s free cash calculation, said the DOR in a financial review of the town of Canton.
http://www.mass.gov/Ador/docs/dls/mdmstuf/Technical_Assistance/FinMgtRev... (page 12)

See also:
http://www.mass.gov/Ador/docs/dls/mdmstuf/Technical_Assistance/Best_Prac...

Second, our leaders need to ask voters for an override before spending the money. If the override is approved, they can use the funds as they wish. But if it is defeated, then the voters have spoken and cutbacks need to be made instead.

There is plenty of time to organize an operating override campaign this spring. The only reason our town leaders have no plans to do so is they fear it would never pass.

If town leaders admit that an operating override would not pass, then they shouldn't deficit spend. There is plenty of time to get permission from voters. Our budget problems are not an unexpected emergency that reserves should be used for. They have known about this problem for years.

The only fair and honest way to solve our budget problems is to have truly balanced budgets, follow DOR recommendations, and if revenues are a problem, ask for an override.

Allen Nitschelm is Publisher of the Acton Forum and a former member of the Finance Committee.