Shutesbury has several capital funding projects on tap for the coming fiscal year. As taxpayers and voters, we will be called upon to approve the following items:
A new roof for the school gym;
Improvements to the school’s heating and cooling system;
The replacement of the Locks Pond Road culvert near the Lake Wyola dam.
Article 6 of the Annual Town Meeting Warrant proposes paying for the new roof with a transfer of up to $300,000 from Free Cash. Article 7 proposes transferring up to $17,000 from the Stabilization account to pay for the heating and cooling system (HVAC). The culvert project proposal involves using $250,000 from Capital Stabilization, leftover funds from a Municipal Small Bridge Program grant, and borrowing $500,000. The entire project is estimated to cost $1.1 million.
As the Finance Committee notes in its Fiscal Year 2022 Budget Report, the use of cash reserves on the Town Meeting warrant will, if passed, result in a decrease of 31% in Shutesbury’s reserves.
Still, the amount remaining will be a substantial $1.52 million.
Knowing this, does it make sense for Shutesbury to borrow the $500,000 for the culvert when tapping reserves instead will still leave us with over $1 million in our rainy day funds?
The Finance Committee’s Plan
This very question was raised during the Finance Committee Budget Forum on the evening of June 1, 2021. FinCom member George Arvanitis was given the floor to explain how borrowing this money would benefit Shutesbury taxpayers.
While noting that the interest paid on the town’s cash reserves is minuscule, he pointed out that interest rates for borrowing are quite low as well—making borrowing an attractive option. He said FinCom is planning to borrow the $500,000 for a five-year term at a rate of 2.75%. Unlike consumer loans, municipal loans require equal parts of the principal to be paid off for each year of the loan term. This results in a large annual payment but ensures that the loan is paid off timely and represents an affordable way for cities and towns to borrow necessary funds.
Other questions and concerns were addressed by Mr. Arvanitis, specifically a fiscal year 2022 budget item for $112,695 (line 178 on the Expense Budget). This particular sum has been the subject of much debate and two separate threads on NextDoor Shutesbury. Mr. Arvanitis confirmed that this transfer to Capital Stabilization does indeed represent the sum of the payments of two paid-off loans, as some townspeople have alleged.
Instead of bowing to criticism regarding the continued budgeting for debts that no longer exist, Mr. Arvanitis took the position that this tactic was necessary. His immediate reason was that this amount will easily pay for the first year of the culvert loan. He also defended the action as a budgeting technique that helps keep Shutesbury’s tax rate stable--although, in reality, Shutesbury’s tax rate has risen for each of the last 10 years, with the exception of last year:
As Mr. Arvanitis explained, the FinCom decided, about 10 years ago, that eliminating swings in the tax rate was a priority. He mentioned two reasons for this. One had to do with the idea that it is easier for taxpayers to budget when they have bills that don’t vary much. The other reason was budgetary: the town could save money when expenses were lower, thereby eliminating the need to borrow or use overrides for large or unexpected expenses.
This sounds reasonable. Many households do this very thing, turning a former debt or expense into a vehicle for savings. As a personal finance budgeting technique, saving for a rainy day in this manner makes sense.
Municipal finance differs from personal finance in many ways, however. The town makes decisions using taxpayer money, so being open and transparent is important. The FinCom decided that the town would borrow $500,000 for the culvert project and also decided to maintain former debt payments as a way to pay the loan.
To be upfront with taxpayers, the Finance Committee should have represented the former debt as paid and included a new line item in the budget for the yearly servicing of the new loan. If they had done so, voters would know exactly what they would be voting for in Article 4 approving the multi-page spreadsheet known as the Town Budget.
I can understand why the town would prefer to take the tact they did. For one thing, voters will not see upfront the cost of the loan and so will be less apt to question how much this new debt would truly cost—or suggest alternatives like using cash reserves instead of taking out a loan.
Also, keeping reserves higher than recommended state officials suggest 3% to 5% of a municipality’s annual budget as a reasonable cash cushion—means the town likely won’t have to ask for override votes to fund future projects.
In addition to being opaque and non-transparent, this method of budgeting is patronizing to the taxpayers. The town leaders seem to feel that voters would be unable to make prudent fiscal decisions if budget items were presented clearly. I don’t know about you, but I feel more than a little bit insulted.
The Cost of Borrowing
In a nutshell, here is what this new $500,000 loan will cost the taxpayers of Shutesbury:
$500,000 loan 2.75% interest rate x 5 years = $541,995.80. The total interest cost of borrowing is $41,995.80.
Less $250 earned interest on Free Cash = $541,745.80
Annual payment = $108,399.16. This will add approximately $0.48 to the tax rate and $120.12 to the annual average single-family tax bill every year for the next five years.
Less $50 earned interest on Free Cash = $108,349
That’s not a lot, but there is also the cost of the $112,695 which FinCom plans to use to pay the annual freight on the new loan. That amount will add $0.50 to the tax rate and about $125.00 to the average tax bill.
There’s nothing untoward about asking taxpayers to fund necessary repairs to existing infrastructure. As one of those taxpayers, I only ask that I be given all the information needed, in a clear and accurate format, to make an informed, fiscally responsible decision when these issues come up for a vote at Town Meeting.
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