Building Literacy: Public Library Construction

Taxes and Capital Projects: A Conversation with the Division of Local Services

February 18, 2021 Massachusetts Board of Library Commissioners Construction Team Season 4 Episode 2
Building Literacy: Public Library Construction
Taxes and Capital Projects: A Conversation with the Division of Local Services
Chapters
Building Literacy: Public Library Construction
Taxes and Capital Projects: A Conversation with the Division of Local Services
Feb 18, 2021 Season 4 Episode 2
Massachusetts Board of Library Commissioners Construction Team

In this episode, we are taking a mini detour from the nuts and bolts of Advocacy to focus on the financial component of public library building projects. While many projects like these have a combination of funding sources- municipal funding, grants, private fundraising, etc., most of the conversation revolves around the impact on taxes. In order to understand the landscape of local taxes in Massachusetts, we reached out to the Division of Local Services (DLS).  Sean Cronin, the Senior Deputy Commissioner of DLS, provides a primer on this topic and discusses the resources and tools available on the DLS website, which can be [email protected]/DLS. Additional links include:

Municipal Finance Training and Resource Center: https://www.mass.gov/resource/municipal-finance-training-and-resource-center

Municipal Finance Training and Resource Center – Capital Planning, Forecasting:
https://www.mass.gov/info-details/municipal-financial-management-training-and-resources#capital-planning-

Municipal Finance Training and Resource Center – Debt and Borrowing: https://www.mass.gov/info-details/municipal-debt-and-borrowing-training-and-resources

Municipal Finance Trend Dashboard: https://www.mass.gov/service-details/municipal-finance-trend-dashboard

Municipal Finance Snapshot Dashboard: https://www.mass.gov/news/dls-introduces-new-municipal-finance-snapshot-dashboard

State House Notes and Other Borrowing Guidelines: https://www.mass.gov/service-details/state-house-note-program-and-other-borrowing-guidelines

Show Notes Transcript

In this episode, we are taking a mini detour from the nuts and bolts of Advocacy to focus on the financial component of public library building projects. While many projects like these have a combination of funding sources- municipal funding, grants, private fundraising, etc., most of the conversation revolves around the impact on taxes. In order to understand the landscape of local taxes in Massachusetts, we reached out to the Division of Local Services (DLS).  Sean Cronin, the Senior Deputy Commissioner of DLS, provides a primer on this topic and discusses the resources and tools available on the DLS website, which can be [email protected]/DLS. Additional links include:

Municipal Finance Training and Resource Center: https://www.mass.gov/resource/municipal-finance-training-and-resource-center

Municipal Finance Training and Resource Center – Capital Planning, Forecasting:
https://www.mass.gov/info-details/municipal-financial-management-training-and-resources#capital-planning-

Municipal Finance Training and Resource Center – Debt and Borrowing: https://www.mass.gov/info-details/municipal-debt-and-borrowing-training-and-resources

Municipal Finance Trend Dashboard: https://www.mass.gov/service-details/municipal-finance-trend-dashboard

Municipal Finance Snapshot Dashboard: https://www.mass.gov/news/dls-introduces-new-municipal-finance-snapshot-dashboard

State House Notes and Other Borrowing Guidelines: https://www.mass.gov/service-details/state-house-note-program-and-other-borrowing-guidelines

Andrea Bunker

0:00

Welcome to Building Literacy: Public Library Construction, a podcast for librarians, trustees and local officials who are exploring or undertaking a renovation, expansion or new construction project for their library. My name is Andrea Bunker, 

Lauren Stara

0:15

and my name is Lauren Stara. And we are the library building specialists who administer the Massachusetts Public Library Construction Program, a multi million dollar grant program run by the Massachusetts Board of Library Commissioners, which is the state agency for libraries.

Andrea Bunker

0:34

While this podcast is Massachusetts focused, stakeholders in library building projects everywhere may find helpful information within these episodes. From fundraising and advocacy campaigns to sustainability and resilience to the planning, design, and construction process, there is something for everyone. If there is a public library building project topic we have not covered but that is of interest to you, please email me at [email protected] 

Lauren Stara

1:01

or me at [email protected]

Andrea Bunker

1:05

We are currently in the midst of a series on advocacy. However, in this episode, we are taking a mini detour from the nuts and bolts of that topic to focus on the financial component of public library building projects. While many projects like these have a combination of funding sources- municipal funding, grants, private fundraising, etc., most of the conversation revolves around the impact on taxes. In order to understand the landscape of local taxes in Massachusetts, we reached out to the Division of Local Services (DLS). We are lucky to have Sean Cronin, the Senior Deputy Commissioner of DLS, with us to provide a primer on this topic and discuss the resources and tools available on the DLS website, which can be [email protected]/DLS. Additional links are at the end of this transcript. Thank you so much for joining us, Sean, we would love for you to share with our listeners a little bit about your background and your role at DLS before we jump right in.

Sean Cronin

1:59

My pleasure. Thanks for inviting me to do this. My name is Sean Cronin. I've been at the Division of Local Services now for six years. Prior to that I had the pleasure of serving 17 years in local government all in Brookline dealing primarily with financial management, but a whole host of other ad hoc initiatives as well. So very familiar with the municipal landscape, the local politics of budgeting with all the different advocacy groups, including fans of the local library. So five, six years ago now actually, I can't believe it six years, came back to the State to head up the Division Local Services. And a question might be what is the Division of Local Services. So we're a smallish group of about 60 employees that is housed within the Department of Revenue. And we really have two primary purposes to really simplify things. We're a regulatory body, and we also provide a lot of technical assistance. On the first side, the regulatory, every year when a community goes through a process to set its local property tax rate, we regulate that process to make sure that each of the 351 cities and towns are complying with Mass. General Law, complying with the constitutional requirement for full and fair cash valuation of property. So each of the 351 has to go through a standardized process with us. We make sure that on the valuation side, the assessing side and then also on the accounting and budgeting side that all of the State laws complied with. On the technical assistance side, we actually have a Technical Assistance Bureau, which is a small group that serve as consultants to municipalities. But even aside from that each of our bureaus, we have five euros, each of them provide technical assistance. We like to approach those types of projects as a team. So if communities have questions about or desire about looking at how their financial management team is constructed, or if they want to focus on a particular part of municipal finance, we can go in and provide some best practices. And then related to that, we have a very robust website, which I'll probably touch on multiple times during this conversation. We have all of our legal guidance is on the website. We have more data than you can probably ever imagine. We have visualization tools. You can pull down raw data, if you're an Excel jockey like me and want to pivot tables to death, we have tools, calculators, all those types of things on the website, which is all part of our training initiative. And we have multiple, multiple videos now or voiceover PowerPoints, and specific parts of municipal finance, you know, big picture stuff, but also really, really in the weeds type of issues. So if you're not familiar with us, go check out our website, which is mass.gov/DLS, and it will take you to our main page and hopefully you find it easy enough to navigate around from there.

Andrea Bunker

4:39

It's a great resource. And I think especially because our Commonwealth is made up of municipalities that differ so much in governing structure that one size does not fit all. So having these tools and being able to figure out what the situation is in your own context is very good. Can you give us a little bit of an overview of the local Governments within the Commonwealth of Massachusetts and the local tax landscape?

Sean Cronin

5:05

Sure. So, again, generally speaking, there's some nuances to what I'm about to say. But to keep it pretty high level, there's really two types of government in Massachusetts. There's a city form of government and a town form of government. And the easiest way again, there's some nuances in this but the easiest way to describe them is a city has a mayor, you know, although there's a couple with city managers, and then a town has a town meeting legislative body with a town manager and board of selectmen, or you have a town council with a town manager. But bottom line is, city form of government will have a city council and most likely a mayor, town form of government would have a selectboard with town meeting. So those are the two most popular types, but again, there are some variations in between. So just like state government, just like federal government, you have an executive branch and you have a legislative branch, no matter what the form is whether a town or city. Like Feds and like the state, the legislative branch is responsible for appropriating money and the executive branch is responsible for basically day to day operations complying with local bylaws, ordinances, etc. And in terms of the second part of the question, I can give a, again, a relatively brief overview of how municipal finance kind of all hangs together in Massachusetts, which is different than you know, other parts of the country. You know, Massachusetts, the town meeting form of government is really a New England thing. You go outside of New England and say town meeting, people have no idea what you're talking about. And then you got to marry that with the different statutory frameworks for municipal finance, primarily prop two and a half, which I'll talk about. But again, generally speaking, big picture, you always have two sides of the ledger, you have revenues and you have expenditure. In Massachusetts, the key thing to know about on the revenue side is that the only tax that a local government has is property tax. State income taxes go to the state, there's no local income tax. Sales tax goes to the state, there's no local sales tax. Although there's excise taxes on meals and lodging if the community adopts those, but a community does not have the ability to adopt a local income tax or, you know, add three percentage points to the sales tax or anything like that. Corporate tax all done at the state level. So local government, in the vast majority of 351 cities and towns the largest revenue sources property tax, and that's why there's so much discussion when we get into capital projects and borrowing and all that type stuff. So the state when they take in those large revenue sources, they have a revenue sharing formula with local government. The two most prominent ones are, it's called chapter 70, which is education aid. It's just under $6 billion, five point something billion dollars that gets allocated through a very complicated formula. And then the second piece is called unrestricted general government aid. And that's about a little bit north of a billion dollars that gets distributed to cities and towns through a formula as well. It's not really a formula over the last couple of decades, it's been kind of mished and mashed a couple programs together. And now you get this thing that everybody calls other, which is unrestricted general government aid. So you have property taxes, you have a revenue sharing program, which is called state aid or local aid. And then you have what are called local receipts, which is the smallest portion for the majority of communities which is the smallest part of the revenue side of the budget. Those are things like building permits, interest earned on available cash, motor vehicle excise, you know, that nice bill that I just paid last week. Library fees are example of those, but in the big scheme of things, for communities, it's the smallest, it's important, but it's probably the smallest part of the revenue pie. On the expenditure side, no surprise, since local government is a service industry, and I still consider myself part of local government. It's the best form of government, that's where everything that impacts your daily life gets done. So it takes people to get that done, so whether it's teachers, police officers, firefighters, librarians, Public Works employees, you know, whatever it is, it takes those employees. And you pay those employees, wages, and they have benefits. And in Massachusetts, you know, the benefit structure, I think a lot of people would argue is pretty good. You know, there's a defined benefit pension program, which is a expensive proposition. You have health insurance in Massachusetts, not just as an active employee, but when you become retired, in most cases, that health insurance carries forward. So you have to major cost centers in local government, wages and benefits. Again, on the benefit side, it's really health insurance and pension, there's some other you know, like Medicare, payroll tax, life insurance, those types of thing. But that cost center, those two, it's really people that are needed to deliver the core services that residents expect because they pay taxes for. Then there's other things like solid waste, which is obviously really important, those types of costs. A lot of times those are done contractually. But when you really step back and you look at your budget, it's people looking at it departmentally, which is a way most people look at a budget, education is I want to say all communities is the number one cost center. You know, education is obviously critically important. And if you look at the expenditure breakout of communities, that's normally number one. Then you've got public safety, which is police, fire, EMS, traditionally, normally that's the second biggest cost center. Then you'll have public works, which I gained a huge appreciation for in my time at Town Hall. They do pretty much everything that police fire and schools don't do, whether it's maintaining parks, playgrounds, water, sewer systems, you know, solid waste, everything they do. So that's normally another large cost center. And then you have the smaller parts- libraries, Council on Aging, planning, administration, finance, those types of things. But if you're able to look at a graph, you'll see education, public safety, public works will be the three primary, all normally done with people. From there, if I can just bleed into prop two and a half since I said property taxes is, from the vast majority of communities, the largest revenue source. So prop two and a half was the ballot question that was approved back in 1980, was on the heels of Proposition 13 out in California back in '78. It's really a property tax limitation program. It went into effect in fiscal 1982. So we've got almost 40 years of experience with it. And let me say what it doesn't do, which is the biggest misperception. It does not cap your property tax bills growth by two and a half percent each year. It was like clockwork when we issued the third quarter tax bills, the selectman's office, the assessor's office, the collector's office would be getting phone calls saying my property tax bill went up by 4%. How is that possible? That's not how property one half works. Prop two and a half really has two limitation features to it. The first is called the levy ceiling, which is two and a half percent of the total community's assessed value. So when your local assessors value all property in the community, and let's just say that it's worth a billion dollars, your property tax levy cannot be more than two and a half percent of that assessed value. And that's what's called the levy ceiling. The second one, and more folks understand this piece, is called the levy limit. Each year, your property tax's levy can grow by no more than two and a half percent. So from fiscal year one, my levy's $100 million, in fiscal year two it's going to be $102.5 million. So you're guaranteed two and a half percent growth. Even if your values drop, your community can increase the levy by two and a half percent. Then there's this thing called new growth, which in municipal finance circles is hugely important. It's really the only way you can grow your levy, property tax levy, above and beyond the restrictions of prop two and a half, unless you want to do debt exclusions and overrides, which we'll get to in a second. So new growth is basically new development in the community. And that can range from putting an addition on your house, to having Amazon come in and building a, you know, 300,000 square foot new warehouse, right? I'm telling you that additional revenue is critical. Because A it grows your base, and then B that's the base that grows two and a half percent each year. So we always kind of joke, it's the gift that keeps on giving, because it always is going to grow by 2.5%. And if you look at the Commonwealth, again, this is a somewhat a blanket statement. And we have heat maps on our website, if you want to go check it out. If you look at new growth, there's a lot of it's centered in eastern Mass. Because you know, around Boston, Cambridge, Somerville, there's a lot of economic activity, and then you'll see a lot of it in the central part of the state, you know, Worcester, there's been a lot of activity in there. And then, you know, not so much in the western part of the state. So depending upon the community's location, they might be seeing property tax growth of two and a half percent, because they really don't have much economic activity going on. In some cases, mostly eastern mass, you can see property tax levy increases a 4%, 5%, 6%. Because there's so much economic activity, so much building going on, if you come into eastern mass, and you just count the cranes, that are in the skyline, Boston, Cambridge, Somerville, etc. And then you look at the heat map, you'll see that those are the ones that are darker shaded, because there's been a lot more new growth coming from that economic activity. So those are the two primary things: your ceiling can't be more than two and a half percent of your assessed value, and then the levy limit each year, it grows by two and a half percent maximum plus something called new growth. So then the question arises, well, what if I need more money to fund my core services, or if I want to expand something? I'll just give you some personal examples of Brookline. They wanted to enhance some curriculum and programs being offered to the students in the schools. And there was a cost associated with that that was well in excess of the annual revenue growth. So you go to the voters, and you ask for what's called an override. An override is for operating purposes. So that example I gave, you might want to hire new teachers or whatever it might be. Those are ongoing costs, so you need an ongoing revenue stream to match that. So you go to the voters and you say I want to x dollar override, they go into the booth and check yes or no, if it's a simple majority of 50% plus one votes for it, you are now authorized to increase your property tax levy, above and beyond two and a half by the amount that was approved by the voters. If they say no, you can't. Then the other way to increase, similar to an override, it's called Debt exclusion. The difference is debt exclusion is a temporary increase in the property tax levy, and it's done for capital projects. So override- permanent, operating; debt exclusion- temporary, capital. Now by temporary, it can range from five to up to 30 years. So I guess a temporary can be a long, temporary time. And that's relevant to this conversation about capital projects, and how do you fund a library project and those types of things. So when you have a debt exclusion, same thing, you go to the voters and you say, and I'll give an example in the community that I live, in a couple months, I'm going to be going to the ballot box and voting on a new high school. And then what that allows is the community to issue debt that has a dedicated revenue stream to pay it back, so you don't have to fund it out of existing revenues. You've got this dedicated revenue stream, additional property taxes, to pay for that. So let's just say for easy math that the principal and interest on the borrowing is $5 million. Each year, when you set your property tax levy, you know, last year times two and a half plus new growth, then you add that $5 million of additional tax and capacity to cover the debt service. Once that final payment goes away, and the school will probably be 30 years, 30 years later, that $5 million drops off, and then your tax bill would would drop by the equivalent of whatever $5 million is for your tax bill.

Andrea Bunker

16:20

And what you're also saying is that the debt exclusion does not factor into what the two and a half percent increase would be here, right? For the override, it does. But the debt exclusion it does not.

Sean Cronin

16:31

Yes, yeah, great point. In that example, that $5 million does not grow by two and a percent each year. You have to, and this is where we come in as DLS regulatory body, your debt exclusion cannot exceed what your principal and interest cost is for that fiscal year. So this might get in a little weeds a little bit. But when you issue debt, there's a couple of ways that you can structure that debt. And there's really two simple ones. One, think of your mortgage, your principal and interest payments are the same every month, whether it's 15, 20, or 30 years of your mortgage, right? And in municipal finance, that's called level debt service, and the amounts not going to change. The other one is called level principal, which is the principal of the amount every year, but your interest actually is reduced every single year, because you're paying more upfront than you would under the other schedule. So in that model, the amount added to the tax levy decreases every year. So again, we can get into that if you want about the pros and cons of those types of things. But to your point is whatever that amount is, it does not grow by two and a half percent, and we have DLS each year as part of setting the tax rate, we make sure that the amount that they're adding from the debt exclusion is equivalent to what the debt service is.

Andrea Bunker

17:38

This is a question that came up for one of our libraries that's on the waitlist. How do you decide between an override and a debt exclusion when you're a municipality?

Sean Cronin

17:49

So again, to really simplify: override is for operating, capital is for debt exclusion. So let's just say you're looking to construct a additional library, not replace main library or a branch, but you want to do a new one, because, you know, your population has increased 20% over the last decade, whatever. You might need both a debt exclusion and an override, right, because you have to staff the facility, you got to heat it, you got to light it, you've got to maintain it. That takes additional operating costs that the community might not have. In an example like that, you probably need both. But you don't do override for a capital project, because again, that operating stays in your base forever. And the whole concept behind a debt exclusion was well, okay, if a community wants to tax themselves more for a, you know, insert capital project here, let them do it, go to the electorate, 50% plus one. If they want to tax themselves more, go ahead. But don't worry electorate, it's going to go away after the last principal and interest payment. So that was the whole mindset behind why do a debt exclusion. Similar for operating in terms of the mindset let the voters vote, but it is more impactful because it's staying in your base forever, unless you do something what's called an underride, which I think there has been, I don't know, five or 10 in the 40 years, which actually reduces your levy, but I won't even get into that. So does that answer the question?

Andrea Bunker

19:09

Yes, it does. And, you know, in terms of our property taxes as part of Prop two and a half, there is also classification that was introduced. Can you just talk a little bit about that?

Sean Cronin

19:21

Sure. So communities have the option of what's called classifying their tax rate, which simply means having a higher tax rate for the commercial industrial classification and a lower tax rate for the residential. You look at the data, again it's on our website, I want to say maybe a third, give or take of the communities have a split tax rate, and you would find a split tax rate in communities that have a somewhat decent level of commercial property. So Brookline had it, obviously Boston Somerville, Cambridge, Worcester, I think even in Pittsfield, Springfield definitely. If you're not just a small bedroom community, you're probably been a classified. If you're a small bedroom community, you're going to have a single tax rate. So then the question is, why do you have a split tax rate? Well, and again, there's different schools of opinion on this, but the theory is that the commercial sector has the ability to cover more easily than the residential class can't. You know, if your Boston, the hub of Massachusetts economically, you know, you can push additional tax burden off to the commercial, which takes some of the pressure off the residential. It's just a balancing act between how much break do you want to give the residential and put that additional burden on the commercial. And again, if you're looking at data, I want to say it's about a third might be slightly less. But it would be those places that you would think that has some form of economic or some commercial activity, probably at least 10 to 15% of the value. If you're a community that's mostly residential, say you're 95% residential, you probably won't be having a split tax rate. But if you're 70/30, or 80/20, in terms of residential versus commercial, you're probably going to split. And then there's some maximums that you can push off, the maximum is called 1.75. So the commercial would pay up to 75% more in the total levy than they otherwise would, which gives the residents a pretty decent tax break depending upon what community you're in.

Andrea Bunker

21:22

And even within the residential taxes, there have been acts of special legislation, right, to help those in the community who may be on fixed incomes. Oftentimes, we'll hear the argument that maybe property tax is what they call a regressive tax. And I was wondering if you can talk a little bit about regressive and progressive and then how it impacts those who are lower wage earners or those on fixed incomes within the communities.

Sean Cronin

21:50

Well if it's okay, I'll skip the first part, because that's up for public policy debate, which, you know, you can make an argument either way. But it is important to talk about what tools might be available, whether it's under general law, or what options communities might have through special acts to share some of the tax burden a little bit differently, right. So there are some property tax exemptions under the general laws now. There's some strict income and asset requirements for you know age, income, asset, one of them is you've got to be at least 65. And then there's some income and asset limitations to it. And if you meet those, you get reduction in your tax bill. There's something called the residential exemption. In a nutshell, what it does is within the residential class, so forget the commercial. Okay? Whether you classify a not doesn't matter? Now, you've got this residential share. And as policymakers, selectboards are saying well, how should we distribute this burden? And the residential exemption gives the community opportunity to basically pass off more of the tax burden to higher valued property so that lower valued properties have a tax bill that's less than it otherwise would be. And that's what we get in Brookline. And there's a cap as to how much you can shift from one end to the other. Places like the cape use it, and they'd use it down there really to give the year round residents a tax break, because the key part of it is you got to own and occupy the home. So if you own and occupy it, you are eligible for the residential exemption, which reduces your tax bill, at the expense of the higher value properties. Again, 13, 14 communities use it. It's a public policy discussion to have at a local level. And what we've seen recently is similar to that, and this is not allowable under general laws yet, so it's taken some communities to do it via special legislation. It's a version of residential exemptions for seniors. So the particulars differ between the special acts, but in a nutshell, it's saying if you're over 65, and you meet some sort of threshold, you'll have a tax bill that's lower than it otherwise would be. So again, within the residential class, there'd be a shift of the property tax burden from one segment, in this case senior, to everybody else. I know Sudbury's done it, I think Needham, for this, I want to say six to 10 of them that have done it. So if you're interested in that, unfortunately, we don't have any information on our website, because it's not a statewide program or anything, but you could reach out to one of those communities and ask them the particulars how it works and everything. The bottom line is in order to do it, first, you need your town meeting to approve it, then it goes to the legislature. It's got to go through the legislative process, which can take a while. Their sessions are two years and pending upon what the big issues of the day are sometimes the local bills get pushed back a little bit. But it's something that if people are interested, I know for a fact that Sudbury has, so that's one place you could definitely start with.

Andrea Bunker

24:36

Thank you for that. I don't think a lot of people are aware of the various ways of mitigating taxes for those who might not be able to handle an increase.

Sean Cronin

24:44

There's also, it's not directly related to prop two and a half, but there's a thing called the senior workout program, which communities can take advantage of and they can structure it the way they want. I think the maximum went up to $1500 bucks; it used to be $1000. So you can have a program, and you can have senior citizens come and work in whatever the town department, whether it's a library, selectman's office, treasurer's office, whatever, do some work, the number of hours would be limited up to, again, I think it's $1500. So they actually get a reduction in that tax bill of up to that amount. So that's another one. I think it's a little bit smaller in scale. But that's something that's folks can talk to their local assessors about.

Andrea Bunker

25:24

I know that was definitely utilized in the community where I was a library director. Before we talk about bonding and property taxes, I was wondering if you could also discuss free cash, or rainy day funds a little bit, because that is something that is a little bit tricky for some people to understand and how it can be of help.

Sean Cronin

25:46

Okay, again, I'll give a broad overview, but we have some really good information on our website that's relatively new. We did a couple of the voiceover PowerPoints, one the 30,000 feet above and then one really for people who are accountants orwant to get into the weeds about how it's actually calculated, because we wanted to let folks know how it actually works. But in a nutshell, what it is, is it's the amount of money you got left at the end of the fiscal year. It's you know, unassigned fund balance that you submit to us at DLS. And then we go through this whole process to make sure that there aren't deficits in other parts of the budget, because this is just looking at the general fund. So think of it this way, if you're a town government, or if you're a business, say you budgeted $100 million of revenue and $100 million of expenses. Say revenues came in at 110 in revenues came in at 90, that's a $20 million delta. Right? So that's what you got left at the end of the year. Right? And that's an oversimplification, but it's a pretty easy example. In a business, you know, it's basically like what you made after everything. The community submits to us their balance sheet at the end of the, well, whenever they want, actually, it doesn't have to be right at the end of the fiscal year, it can be into the spring, or whatever the community wants. They submit it to us, we go through this process with them. And we then say, okay, your free cash has been certified at, you know, whatever the dollar amount is. At that point, under the law, the community can use it for any legal purpose. So you can appropriate it to augment your operating budget, which is something we'd actually preach against, that's definitely not a best practice. The whole mantra of using one time revenue for one time expense is something you might get into a little bit later as well. But, you know, municipal finance one on one or public finance one on one is ongoing revenue for ongoing expenses, one time revenue, one time expenses. Free cash can fluctuate. Sometimes it can go negative. So the last thing you want to have is a revenue source that might have been here in year one, and then in year two, it's all the way down here, and if you've got expenses associated with that, where are you going to make up that money. But legally, you can do that. Another use of it is for capital, PAYGO capital or cash capital goes by different names. And that's a really good use of it. And we'll talk about capital plans a little bit. In Brookline, we used it a lot, and other places are using it to help pay down some unfunded liabilities, pensions and this thing called OPEB, which is basically an unfunded liability for retiree health insurance. So you can deposit those monies into dedicated funds for those. And another way you can use it is to, it's called reduce the tax rate. And I could spend hours talking about this piece of it. But some communities actually, each year, take a piece of free cash, and they say, well, let's use that instead of the property taxes, so that the property tax rate will go down, it'll be lower than it would have been otherwise. The problem with that is the next year, if that free cash isn't there, and you still have expenses, then you've got to increase your property taxes higher than you would normally in that year, so maybe it's a one year break. And yeah people have differences of opinion of that. Some places do that religiously and if it works for your community, you've been able to maintain services, great. But those are really big picture the three purposes: operating, capital, well, four, unfunded liabilities, I would argue, and then to reduce the tax rate. But it's basically the amount of money you've got left at the end of the year.

Andrea Bunker

29:03

And when you say reduce the tax rate, that doesn't mean that the assessed value of your property goes down. Can you talk a little bit about the interplay between the tax rate and the assessment piece?

Sean Cronin

29:15

Yep. Great point. Yep. So the whole property tax rate setting starts with property valuation. So if I had a diagram of how we, DLS, work with municipalities to set a tax rate, it all starts with valuation. So the local assessors do their work, and they submit a ton of information to us, including sales data. And going back to our regulatory role, we make sure that assessors are using statistical analysis making sure that they are valuing properties via the full and fair cash valuation method. Now we don't go and, you know, house by house and make sure that it's done right, but we look at the numbers in the aggregate. So your local assessors are using market trends or sales data, that type of stuff, to say, well, the single family homes in this neighborhood, you know, ten of them just sold, and they were, you know, 10% above asking, alright. That then might bleed into my property, even though I've been living in it for 16 years, and I haven't done much to it. The fact that, this actually happened in a community I won't name in a very big way. There was a part of town that they were tearing down and building up, and some smaller homes saw their values go up significantly, and they're saying, "Why are my values going up? I didn't do anything in my house." And it was the land, right, because there's the land and there's the house. So it can get tricky and complicated and confusing in your property tax bill, so you can get frustrated about it. But your local assessors and making the determination so what's the value of your property. Then it kind of gets divorced at that point from the tax rate. So you get the total value of the community, then you make a determination of how much you're going to levy in property taxes. You don't have to go all the way up to your maximum amount. And using that example, if I got $100 million in year one, I can get $102.5 in the next year, and then say, I've got a million dollars in new growth, so I've got $103.5 million I can levy. I could only levy $100 million and leave $3.5 million dollars of what's called excess capacity, it's just a difference between what you can and you choose to do. The closer you get to the maximum, obviously, the higher your tax rate is going to be. If you choose to not fully utilize your maximum allowable tax levy, the rate will be less than it would be. But that impacts your property tax bill. But still, the starting point for you as an individual is what was my home valued at. And if you disagree with the value, what ends up happening is once the- this is different for semi-annual, in the community that issues four quarterly tax bills- when you get your third quarter tax bill, which is the actual tax bill, because the first two are estimates, and you look at it and say, "Oh my, you know, this just doesn't seem right." You can go for an abatement, and you're not technically challenging your tax bill, you're challenging the valuation of your property. And you know, you look at the property tax record card that should be online in an assessors' database, and, you know, "they got me down to three bathrooms, I don't have three bathrooms, I only have two." So then you go to the Board of Assessors, and you challenge it. And if they agree, they'll give you your money back because you have to pay your taxes in advance. And if they deny you, you can go to the ATB (Appellate Tax Board), which is a quasi judicial bodies, and they can overturn the local Board of Assessors. It's directly related, because the tax rate times the value gets you your tax bill. But the rate is dependent upon how much property taxes the community chooses to levy.

Andrea Bunker

32:38

And the assessment practices across the Commonwealth are uniform, right? 

Sean Cronin

32:42

Yes.

Andrea Bunker

32:42

Because they have to follow law.

Sean Cronin

32:45

Correct. And that, again, that's a critically important part of what our office does. We have a bureau, it's called the bureau local assessment. We get a hold of a bunch of information and from the communities. We have a pretty robust system that runs some analyses for staff, and it will spit out some information if it just doesn't look right. And then they'll engage with the community and say, "This just doesn't seem right." We do it on a cyclical basis, we'll go into a community and do a random check of property cards. Because it all starts with the data. Like a lot of things in life, if you don't have good data, you're not going to have a good outcome. So we actually go into the field, randomly choose some property cards, go and look- does this property record card match the house that I'm looking at? And if there's a number of errors, we actually go back to the community and say, "There's a problem with your data." So again, we're not doing this house by house by house for all 351 communities, but we're running some tests for communities on an annual basis to make sure that the local assessors are actually doing the job per Mass. General Law.

Andrea Bunker

33:49

So there are checks and balances throughout the entire system.

Sean Cronin

33:52

I believe there is, yes. But at the end of the day, your value and the tax rate is determined locally. And you as a tax payer have that abatement process that you can go through if you don't believe that your house is valued correctly.

Andrea Bunker

34:08

And now if we shift a little bit into capital expenditure and the need for maintaining, improving, or building new for public assets, and how that impacts taxes. I know we've already talked about debt exclusion as being used for capital expenditure. But if we could talk a little bit about good debt, and, you know, maybe bond ratings for municipalities and how that's determined and are there any mechanisms for communities that if they're not in a good position for borrowing money, I think the state of the mechanisms for them to be able to borrow in order to improve their assets as well.

Sean Cronin

34:50

So fundamentally, issuing debt, you're taking out a loan, somebody's loaning you money, you need to pay it back plus interest, right? It's just like a mortgage on your house or a car loan, or whatever. Public debt's a little bit different, but I mean, it's conceptually the same thing. The first thing that community should do is have a capital plan, capital improvement plan, capital improvement program, it might go by different names. But at the end of the day, the best practice is having an annual CIP (capital improvement plan) that you get information from all the department heads, they submit needs. You should have policies about what the thresholds are to get into a capital plan. What's the dollar amount? What is capital? You know, is a computer capital? No, it doesn't have a lifespan of more than a couple of years. But yes, a library is a capital, right? So you have a bunch of policies that dictate what is capital. And then you rank them, you know, you prioritize the requests, what's the most important and there's different ways you can come up with ranking criteria. Then you have some financial policies within your capital plan that says, "you know, X percent of our budget annually will go toward capital." Again, my Brookline experience the numbers on fresh in my head as they used to be. I will say this, as a little footnote, this stuff is not rocket science, you can steal from other communities. In Brookline we used to, you know, talk with our neighboring communities, say, "what are you doing for this, we're doing for that?" You know, you don't have to be the subject matter expert to come up with great policies. You can look around, you can talk to us; it's not that complicated. What you need to do is figure out what metrics actually work for you. What I mean by that is, so in Brookline, we had it was something like 6% of our annual revenue, would go to the capital budget. So I'm putting together the operating budget, I know that 6% of revenue needs to come off the table for operating, it's going to go to capital. So then I put my capital budget together, I know exactly how much revenue I have to pay for either pay as you go projects, or to pay back debt. So that 6% doesn't work for everybody. Some places, it's a lot lower, a couple places it might be higher. But the point is, you should have a policy that says X percent of our revenue on an annual basis is going to go to fund capital projects. If you don't have something like that, then you will be reliant on debt exclusions for capital. Okay? Unless you want to pay for them all in cash. And you can build up a stabilization fund. And when the time comes, you can pay for the project in cash, because some parts of the state look more favorably upon debt than others. Some don't want to pay interest on anything, so they'll build up a stabilization fund and pay for that project when it comes due. There's pros and cons to everything. But if you don't have a capital plan with financial policies embedded in it, you're going to be relying upon debt exclusions. And some communities are fine with that, you know, if you look at our website, we have all the debt exclusion and override information: how many times a community went for it? Was it successful? What was the dollar amount? What was it for? Some communities like that. You know, they want the voters to say, increase my taxes for this project. Okay? Other places want it all within the levy. Other places will do a mix. What we started to do toward the end of my time in Brookline, because there was a huge increase in enrollment in the schools, there were a number of school projects that had to be undertaken. And there was no way we could fit it within our capital budget, even though it was a pretty robust capital budget. You know, these school projects are really, really expensive. So we made a determination that we'll keep our polic, but for any school project, over whatever the dollar amount might have been, you got to ask for debt exclusion. Different ways that you can pull it all together. But bottom line is you should have a capital plan that lists all the projects, prioritizes it, and puts them in by fiscal year, so that each year you know what you need to be doing. And the priorities might change year by year- you might have got a grant for something, then you can shift priorities. But if you have a nice annual plan that you update, you should be in good shape. But then part of that is how do I pay for that project. So if you have a policy that says X percent is going to go to capital, then you should be able to pay for most of your capital projects without going to the voters for a debt exclusion, because of a simple concept. And if I had a graph, you know, you should have a run off of debt. Because if you're doing it, right, you're taking on some capital projects and start paying back debt service, that's, depending on how you structure your debt, that's going to come off. Right? Eventually, at some point that project the debt and interest costs go away. Now you've got capacity to bring on more capital. You should be looking at what capacity you have to bring on new capital. If you don't, then again, you're going to the voters for a debt exclusion. So there's no perfect answer as to what a community should do. It's going to depend on the complexity of the community, the size of the community, what's your tax base look like? You know, again, if you've had a lot of new growth in your community recently, I won't name the community but we actually suggest they do something like this, as that new growth comes on, just don't even think of that money for operating just earmark that for capital going forward. And that community now has been able to undertake two school projects. So it does take some discipline and you know, a lot of hard discussions locally, both publicly and privately. But you need to have a financing plan that matches your capital plan, or vice versa, however you want to look at it. And if debt exclusion is a part of that, then fine. And then the last part, you asked about free cash earlier, and stabilization funds. Well, those are additional financing sources for capital projects. Normally, for smaller, you know, if you've got a library roof job that's got to get done, well, maybe you can use free cash, if that's within your capital policies. Or if I've got an HVAC system in a school, I can use a stabilization fund that we've been putting money into, you know, you can appropriate out of that. So you should have a mix of debt finance, and pay as you go finance, and then outside sources like grants, gifts, donations, those types of things, which might be more meaningful in the library setting than in another part municipal government. So that large mouthful being said, what rating agencies look at are- again, I'm oversimplifying it, but- the financial metrics of the community, socioeconomics of the community, and the management capacity and capabilities of the community. And I want to say over the last 15, 20 years or so they've put a lot more emphasis on the last one, which gets- management- which gets into policies. Rating agencies will ask you, do you have a set of formal financial policies? Do you have a capital improvement plan? Do you do long range revenue expenditure forecasting? If you say yes to all of those, you'll score higher on that management index. So if a community is looking to upgrade their bond rating, that's an easy way to do it. If you don't have policies, if you don't do forecasting, which is really easy with excel in Massachusetts. And if you don't have a capital plan, you can put those things together. We could even provide some assistance, and the rating agencies will look favorably upon that. But there are the other two pieces, you know, the financial metrics of your community, what's your overall reserve situation look like? You know, what's your stabilization fund balance? What you have in the so called rainy day fund? They look far more favorably upon communities that have high levels of reserves and low levels of reserves. Right? That's like your personal budget, you're in better shape if you've got money put away for when it starts to rain, right? And then there's a socio-economic piece. You can have a gateway community that has high percentages of low income residents than a sleepy suburb. And the rating agencies take that all into account because they look at the ability to pay back the debt that's issued. Again, I'm oversimplifying, but those are kind of the big three things that they'll be looking at, and there's a bunch within each of those. So anytime you go to borrow money, if you do it the traditional way, general obligation bonds, you need to work with your financial advisor and your bond counsel, they put together something called an official statement. And then the rating agencies, you have a call with them. And they'll ask you a whole bunch of questions. And then they'll spit out a rating. Triple A is the highest rating. So if you're a community kind of trying to improve your rating, I already talked about that. But if you're a community that say has done those things, got robust policies, you've got a good capital plan and everything, but your socio-economics don't quite work and the rating agency's eyes. Well, you can take advantage of a program- and believe me a lot of the gateway cities do- it's called a qualified bond. I think it's chapter 40A in Mass. General Law where you get the advantage of the state's bond rating, because instead of you the municipality, paying the bondholders back, the state actually takes the money out of your local aid, and the state treasurer and distributes it directly to the bond holder. So they make you a principal and interest payment for you. So in the eyes of the bond holder, it's a lot more secure, less risk for me, because the state's going to intercept the money from the local government and give it to me. So because of that, there's less risk, you get the state's bond rating, so you save on interest costs. And again, we have all that information on our website, qualified bond, and you can see how it works. I believe we have information of who takes advantage of it. Basically, if you have a bond rating less than the state's, you should be thinking about the qualified bond program. Talk to your financial advisor, talk to bond counsel, they can walk through that with you. We also have a program, and it's not so much for large scale capital projects, but it's called the statehouse notes program. You have long term debt, you have short term debt called notes. So if you're issuing notes, like you might do a bond anticipation note, which is say it's a one year note prior to you fully financing through a general obligation bond, because you're just doing it for cash flow purpose., You can take advantage of this state house notes program. We run it through DLS. I know for a fact there's information on our website, it's really a no cost alternative to a traditional note. We work with communities to issue 1000s of them during the course of the year. It can be for, like I said, bridge funding type approach for a capital project, or it can be because you're having a cash flow needs, or you're getting a grant, but you need to start the project now, so you need the cash. It's called a grant anticipation note. You can do all those types of things. So there are a couple of state programs that if you're not familiar with talk to your FA (financial advisor), reach out to us, and we can give you that type of information. Hopefully, I covered everything you asked,  and it makes somewhat sense.

Andrea Bunker

45:46

I definitely understand way more than I did at the beginning of this, so yes. And I think oftentimes, what we see is we see the appropriation of money for a capital project, short term bonding while the project is going on, and then the permanent bond at the conclusion of the project. Is that typical?

Sean Cronin

46:07

Yes.

Lauren Stara

46:08

Is that grant anticipation note for only one year? Or can it be for five years or something like that?

Sean Cronin

46:16

I'll give you a bad answer: it depends. Is it a state grant, is it a federal grant, what are the rules around the grant?

Lauren Stara

46:21

One of our grants.

Sean Cronin

46:24

Oh, your grants? Well, first of all, all this depends on a community's cash flow, right? Because admittedly, in Brookline, we didn't issue many notes, because we had a good cash position. Once we got the appropriation or the bond authorization at town meeting to fund the next fiscal year, we'd actually start the project before we borrowed any money, because we had the cash to pay that expense. Not all communities have that luxury. That's when you start thinking about bond anticipation notes or grant anticipation. So if you've given an award to a community, you know, I remember this for the main library in Brookline, we had that grant, we had general obligation bond, and the library raised a bunch of money. So there were three primary funding sources for that project. I'm pretty sure we would have issued a short term note. I don't know if it was technically against the grant or the general obligation bond. But your community needs to look at their cash flow, work with their project manager, look at the bell curve of when the cash needs to go out the door. And if your cash flow can't support that, then you issue a bond, even if you can do it against the grant, you don't pay for the full project, right? So the community needs to get a bond for their share so they can issue a note against that. But FAs can walk a community through that. The bottom line is if you need that bridge financing, so to speak, before you permanently finance, if that's what those notes are for. And now, that's pretty typical in the school project, too, because,  like a library, might take a couple fiscal years to get the project complete. So you know, your hardcore finance folks would say, "Well, I'm not gonna pay for that now. Because that's money in my bank account that's not getting any interest on it. So I can make more on that than what the interest is on the note, I'm going to issue that note, pay for that." And then no matter how you do it, at the end of the day, you need to issue that general obligation bond. Then your debt service kicks in. And if you did it without a debt exclusion, you got to pay for it out of your general revenue stream. If you did a debt exclusion, so going back to the homeowner, that's when you're gonna see a taxable spike up, because of the principal and interest is now on the books for the full project, which can be significant. And that tax rate is going to be a lot higher than it would have been the year before, meaning your tax bill, unless your value went way down, which I doubt but, your tax bill would be a lot higher than otherwise. So it's kind of connecting a few dots together.

Lauren Stara

48:49

This is a little bit of a tangent, but we have one project that recently opened where. For our grants we give 20% a year over five fiscal years for the full grant amount. A lot of times projects will spend our grant money first and then dip into their local money. This particular project chose to invest the grant funds and collect interest on it. They used their local money first, and they ended up gaining how much in interest? It was a significant amount.

Andrea Bunker

49:24

So they were also a community where the prior administration did not see a way of doing any capital projects. And they now had an administration that had state level experience, and they took a deep dive into their finances and found a way to do this. And one of the things that's allowed in our program is for our grant funds to put in an interest bearing account and that is something that is allowed. It's not allowed in every grant program, but it is allowed in ours. And they ended up securing an extra $200,000 for their project just by keeping the grant funding in there and paying with municipal funds or short term notes, whatever it might be. That way, they were able to do some upgrades and get back on elements that they they looked at value engineering out originally. So they were able to realize quite a significant amount of money from that particular practice.

Sean Cronin

50:21

That's what I was alluding to. Your real hardcore finance people should have a spreadsheet put together that shows, you know, what can we earn over here versus what's the interest rate on a note? And yeah, it sounds like the math worked out in their favor. And there's nothing wrong with that.

Andrea Bunker

50:36

And does bonding work a lot like when you go for a personal loan, they want to see that you have credit history, and that you have paid that credit off in a timely manner. The more you bond, does your bond rating improved?

Sean Cronin

50:50

No. So the first part of your question is, that's what the bond rating is. So think of the bond rating as Experian. That's what the rating agencies are doing that telling potential bondholders, "You know, this is a triple A rated community, no worries," or "This a single a community, they might have a checkered past." So then the bondholders saying, "Well, okay, then in order to take on that risk, you're going to pay me a lot more in interest." So that's how the ratings work. If you're highly rated, your interest rate's going to be low, because it's lower risk. If you're down at the other end, your interest rate is going to be high because there's a higher risk. But that's exactly what the bond rating agencies do. In theory, that's what they're there for is to explain investors what the risk is. The second part of your question, if you issue more, does your bond rating go up? No, you could actually be downgraded and issue a ton of debt. I think it happened right before I got to Brookline, they lost a triple A rating. And it took a while to get it back. We used to have this debate with a few folks in our Fin Comm annually. But why do you guys stick so hard to triple A bond rating? Why is it so valuable to you? You know, because of your policies, we're not giving enough money to the schools or police. Why is the triple A so valuable. And each year the finance director would go through and provide an analysis to, to look, if we were downgraded, this is what the delta between the rates would be; this is how much it would cost us. That's why it's important, right? If you get downgraded, it takes some time to get back. You could be an annual issuer, you can issue debt every single year. And if nothing changed in your community, then your rating probably isn't going to change. If you were upgraded, it's not because of how much debt you're borrowing, or how many times you're borrowing. Levels of debt is a different conversation. Or something can happen really bad in your community, like you missed a debt payment, you're going to get downgraded or your fund balances, your rainy day fund drops from 10% of the revenue down to a 2% of the revenue over a three year period. Next time you go to issue debt, they're going to see that and they're gonna say what happened, and they could downgrade you. So it's not so much the volume, it's really on an every time you issue basis, what's going on in your community. And there's also disclosure requirements every single year after you issue the debt- post issuance compliance, which is a whole nother thing that a community needs to deal with to make sure that you're compliant. The reason why the rates are so low compared to corporate debt is because it's tax exempt, which is a hugely important thing I should have said at the very beginning of this. Tax exempt debt, state and local debt, the rates are that much lower. And it's because you're issuing for a public good, right? If you were to issue on a taxable basis, it's going to cost you more money, your interest rate is going to be higher, no matter what your bond rating is. So there is a difference between taxable debt and non taxable debt.

Andrea Bunker

53:34

Even though all of this is not rocket science, there is a lot of work that goes into determining whether or not a capital project is viable within a community and how to go about funding that.

Sean Cronin

53:47

Yeah, I, I made a little joke. I said, it isn't rocket science. So the first thing you should be doing is putting a forecast together. In Massachusetts, that's easy, because as I said at the beginning, you don't have income tax, you don't have sales tax. All you have is property tax. And I'm familiar with a couple of other parts of the country where they have those local taxes. You know, if you do a forecast, you're going to put some economic forecasting models together to determine what's my revenue stream going to look like over a multi-year period. In Massachusetts, you know your tax levy can grow at least two and a half percent, you can use an average of what the new growth is, state aid can vary depending upon the economy, and then your local receipts for the most part are flat or grow slightly. So putting a revenue forecast together is pretty easy. On the expenditure side, you do what's called a level services budget. You say if we don't add anything, if we don't subtract anything, what's that cost going forward? Well, the biggest part of that is your collective bargaining agreements, health insurance, pension, what are those things growing, right? So I'm oversimplifying, again, but it's not that complicated to put together a revenue expenditure forecast. That's then when you sit back and say, Can we afford a capital project? And you say, well, what's our revenue growth going to be over a couple year period? Do we have any new development coming online? Oh, we do. That parcel's going to be a hotel. So now we've got property taxes coming from it, we've got lodging tax coming from it. There's a restaurant in there, then we've got meals tax coming. So in year three, our revenue is going to jump. That's when we have the opportunity to issue debt to take on this project. So it takes some time, it takes some effort. But if you have the basic forecast tool together, then you can start thinking about a capital plan that has the financial policies embedded in it. And those two things come together. You forecast your capital plan. And if at the end of the day, the math shows that the only way you can take on a x million dollar library project, without impacting core services is to go for debt exclusion, then that's what the decision makers say. But it should not be done in a vacuum, it should be done with real numbers, some thought. Your finance folks can do this in municipalities, and your FA, your community's financial advisor can also assist a bit because this is how they make their living. You know, they can help communities figure out their ability to take on debt.

Andrea Bunker

56:02

And are you seeing a large impact from the pandemic on the ability to forecast right now? Or has that not been realized yet?

Sean Cronin

56:11

Well, maybe not so much the ability but the accuracy, I think. You know, I've gotten a fair number of phone calls from folks I used to work with in the municipal world, "what would you do for an estimate for this or an estimate for that? And I'm like, I don't know, we're in the middle of a one time a hopefully once in a lifetime pandemic. Meals tax is going to get slaughtered. Lodging tax is going to get crushed. Building permits are probably going to take a hit. Go through your items one by one, and be conservative. If you think they're going to get crushed, and I know some communities did this, reduce lodging by 75%. Was 10 days taken to run some algorithm to figure out what you? No, you know, nobody knows exactly what was going to happen. So I think the accuracy gets challenged in times like this, but the fundamental aspect of it is the same. And I would argue that it's in times like this, that you need it more than ever, to figure out, you know. Put capital aside, just generally speaking, if these revenue streams are dropping, are we going to have to lay people off. Are we going to have to shut a branch library? You know, I've been through those discussions millions of times. That's why the whole forecasting thing is critical. Because I don't know how a community makes sound decisions without having an understanding of what a decision means not just in that year, but you know, in the couple years going out. And we have all these tools on our website. We actually have an Excel version of a forecast. Again, it's not going to work for everybody, but you can pull it down, you can play around with it, or you can, you know, develop your own based upon that. So take advantage of those types of things that we have.

Andrea Bunker

57:43

And I know at the state level, the fact that we did have such a robust stabilization fund really helped us within this past year, because we were hit so hard at the beginning of the pandemic when other states were not. I think probably at the local level, it's just as important to have that amount of funding available to cover these difficult times.

Sean Cronin

58:06

Yeah, I mean, the governor publishes budget two weeks ago, right? Yeah. And local aid grew, unrestricted government aid grew by 3.6%, I think, and chapter 70 grew by almost north of $200 million, I think. There was a commitment during the good times to put money aside for the bad times. Right? And that's what every public entity, whatever level of government you're at, that's what you should be planning for in the good years. And it's tough, because there's some, you all know, there's so many demands in local government, they'll say, "Why are you putting money aside? Why can't we do this now? And why can't we do that now." And you say, "because it's going to change at some point." And they look at you like you like fine or whatever, you know, Doomsday, and then lo and behold, that happens. And you've got the ability to avoid layoffs, to increase local aid, that type of stuff. So yeah, it's critical. And I know other states, I think who were in the same financial situation, were able to do similar things. And municipalities, I don't have any had data on this, but I know that stabilization funds were tapped, free cash was used. I don't think so much for operating purposes, but I think to pay for something that might have been within the levy, so to speak, you know, on a one time basis, so that money was freed up so you didn't have to lay people off. You know local finance of people getting pretty creative with rethinking their original budget plans and stuff like that. But yeah, your point is spot on.

Lauren Stara

59:31

Can I just clarify something for those of us who are not financial wizards, like yourself? So the rainy day fund and the stabilization fund are the same thing. Correct? Those are synonyms?

Sean Cronin

59:46

Well, short answer is yes. But for municipalities, they can create what's called a special purpose stabilization fund. They're both still called stabilization funds, but the general stabilization fund in theory is there for general operating purposes. While a special purpose stabilization fund is for the purpose for which it was created. A good number of places have created capital stabilization funds. And what they do is, each year, they put some money, whether it's from free cash, or just a line item into the stabilization fund to help support capital. And that's an approach, again, like I should have mentioned earlier, that's an approach that we've seen some communities really starting to think about capital, take that approach. So they'll stop building up capacity by putting money into a stabilization fund, and then be able to pay for that project out of the money that they had put aside and that fund earns interest as well. Some smaller towns do that for, say, a fire truck, or you know, a ladder can be a million dollar purchase. The community might do that once every 25 years. So they'll put money into a special purpose fund. And then when it comes time, they'll pay for it in cash.

Lauren Stara

1:00:53

And that kind of gets into my second question, which was you talked about free cash earlier, but a municipality can put that money into the stabilization fund or rainy day fund and save it for multiple years?

Sean Cronin

1:01:08

With a vote of town meeting or city council? Yes.

Andrea Bunker

1:01:12

Is there anything else related to capital projects, or library building projects and taxes or local finances that you think our listeners should know?

Sean Cronin

1:01:22

I would summarize it by saying, communities should not be afraid of debt. You can do powerful things with a well structured debt management plan. So that's number one. People shouldn't just freak out because they hear debt. There's a reason why you can issue debt. Right? Secondly, planning is critical. I really don't know how a community can make decisions without having long range planning tools in place. You know, third, yeah, we have the confines of two and a half. But when you kind of step back a bit, and you look  at it, you do have the ability to increase your property tax levy above two and a half- overrides and debt exclusions are one. The other one is new growth. And that means economic development. So going back to my second point of long term planning communities, and again, I know for bedroom type communities, small communities this is probably not applicable, but you should have an economic development plan. You should have long range planning about how are we going to build that commercial sector or business community in this town, because what that ends up doing is growing your tax base, which either or both helps the residential tax bill or increases your tax levy. That's another part that communities need to think about is looking at economic development planning because of prop two and a half. And I guess the last point would be, well, I sort of joke, it's not rocket science, there are some complexities. And that's why there are financial advisors out there and bond councils who work every day with communities. So for communities going through this, maybe for the first time, or for the first time with a new town manager and selectboard. Because it's been 15 years since they didn't anything, just pick up the phone, call your FA, call your bond counsel, they'll give you everything you need to do to go through the town meeting process. Or if it's a vote, you know, a ballot question, they'll help you with that. Our materials online help you with that. I know that can look like a massive undertaking to learn it all. But your FAs, they're all good. They all know what they're doing. This is what they do for a living, And some really good bond councils in the state as well. So take advantage of that stuff. And don't feel as though you need to create everything from scratch. My experiences is there's nothing wrong with stealing good from others in this space, because somebody's already done it.

Andrea Bunker

1:03:31

Well, you know, we're from libraries, so we're all about borrowing. We cannot thank you enough for this primer on local taxes. And I know that this episode is way more Massachusetts focused than some of our other ones. And we do have national and international listeners. But we hope that you're able to take something away from this, too. We will put up links to your website within the summary and the transcript of this episode. So you can click there and get to all of these resources and tools through the division of local services. And Sean, thank you so much for your time. This has been extraordinarily helpful to us and we hope to our listeners, too.

Sean Cronin

1:04:14

My pleasure and if there are follow up questions, let me know and I can either answer or provide links to materials etc. So just let me know. My pleasure. 

Andrea Bunker

1:04:23

Thank you so much. Again, we would like to thank Sean Cronin and Dan Bertrand from the DLS for helping us with this informative episode. On our next episode of building literac, we return to the realm of advocacy and talk communications and marketing with MBLC's own communications team Celeste Bruno and Matthew Perry. Thank you for joining us. Send any questions or suggestions for future episodes our way at [email protected] As always, until next time!

Helpful Links from DLS:

Municipal Finance Training and Resource Center:
https://www.mass.gov/resource/municipal-finance-training-and-resource-center
 

Municipal Finance Training and Resource Center – Capital Planning, Forecasting:
https://www.mass.gov/info-details/municipal-financial-management-training-and-resources#capital-planning-
 

Municipal Finance Training and Resource Center – Debt and Borrowing: https://www.mass.gov/info-details/municipal-debt-and-borrowing-training-and-resources
 

Municipal Finance Trend Dashboard:
https://www.mass.gov/service-details/municipal-finance-trend-dashboard

Municipal Finance Snapshot Dashboard:
https://www.mass.gov/news/dls-introduces-new-municipal-finance-snapshot-dashboard

State House Notes and Other Borrowing Guidelines:
https://www.mass.gov/service-details/state-house-note-program-and-other-borrowing-guidelines