Inside the Budget, Part 8: Free Cash
On December 3, the Board of Aldermen approved an appropriation of almost $1.2 million from “Available Free Cash” to various accounts, including the School Department. Since people have been discussing it online, I would like to explain just what “Free Cash” is.
Available Free Cash is the surplus that accumulates from previous fiscal years. Once all expected revenues have been received and all bills have been paid for the fiscal year, we send a final budget report to the state, and the Department of Revenue certifies the remaining money as free cash. The money then becomes available for the city to use.
There are many reasons why we have free cash. The city budget approved annually by the Board of Aldermen each year is a good-faith estimate of revenues and expenses. We are conservative in our estimates, because we don’t want to put the city at risk of running short, but there are other factors in play as well. If the economy is strong, we will see extra revenue from new development, both taxes and permit fees, although most available properties in Melrose have already been redeveloped. If a senior employee leaves and is replaced by someone at a lower salary, or if we have less snow than we budgeted for, or for any other reason we don’t spend the full amount allotted in the budget, that money goes to free cash. When you add it all up, free cash can be anywhere from zero (or even negative) to a substantial amount. The Massachusetts Department of Revenue recommends that communities try to have a free cash balance of 3-5% of their budget, and Melrose has met that target.
It is important to say, however, that free cash is one-time money and should not be used as if it were recurring tax revenue. For one thing, we only see it after the fiscal year is over, and it is not certified until the fall. More importantly, it is not dependable, because the amount changes in unpredictable ways from year to year. Therefore, it should be used for one-time expenses, such as capital improvements or matching funds for a grant. If the state gives us less aid than we anticipate or cuts a grant we have been depending on for staff or equipment, we may need free cash to fund that budget line for the rest of the fiscal year. Paying year-to-year expenses with free cash would be like paying your mortgage or your rent with your tax refund.
On December 3, the Board of Aldermen approved a free cash appropriation of $1,162,187 for the following items:
- Schools: $525,000
- Schools, Medicaid Fund: $300,000
- 3 Police Vehicles: $163,500
- Upgrading rooftop ventilation units at the Lincoln School: $93,687
- New Computer Server: $80,000
The police vehicles, ventilation units, and IT technology are good examples of the way free cash should be spent: They are one-time expenses.
The two appropriations for the schools total $825,000. This includes a $75,000 Medicaid reimbursement the City received in Fiscal 2018, which is deposited in the General Fund and then passed along to the schools. Therefore, the total free cash appropriation for the schools to close their funding gap in Fiscal 2019 is $750,000.
This concerns me. Since Fiscal 2013, we have been allocating significant amounts of free cash to the school operating budget. This is necessary to avoid cutting staff and services, but it is not a prudent use of free cash. After all, we are using last year’s money to pay for this year’s services. We should be funding our entire school budget at the beginning of the fiscal year, not adding more money later on. When we talk about a funding gap regarding the schools, this is it.
What’s more, this not only puts our schools at risk, it affects other departments as well. For instance, Chief Lyle needs five police cruisers, but we asked him to only replace the three that are in the worst shape. Here’s a list of some other items that could be addressed with free cash if we didn’t have to put so much of it toward the schools:
- A new fire engine
- Replacing the city’s antiquated phone system
- Road and sidewalk improvements
- Memorial Hall repairs and upgrades
The override question includes $750,000 designated for “supplementing the budget of the Melrose Public Schools” to close the current funding gap. If the override passes, this will be the last year for the foreseeable future that we will need to use free cash to close this funding gap.