April 22, 2003

City to sit on $2.4 million savings

By JILL ANDERSON

Staff writer

NEWBURYPORT -- The dismal forecast for the city's budget for the next fiscal year may have some city departments looking to the city's so-called "free cash" account to save their budget.

Even though Newburyport has $2.4 million in free cash, city officials don't necessarily plan on using that money to make up for operating costs or department cuts. "Free cash" is a term for unspent money left over from prior years -- in effect, savings -- that the city can spend or save as it wishes.

"Free cash is a one-time amount of money and that free cash can disappear just as quickly as it appears," said Mayor Alan Lavender. "Just because you have free cash doesn't mean you go out and spend it; that's not financially prudent."

During the next few months, city departments could ask for part of that $2.4 million to help their budgets. Under Lavender's instructions, city departments are preparing for a 10 percent cut.

Among area towns, Newburyport is one of only two with a significant sum in free cash. The other is West Newbury, which the state certified as having more than $1 million. Most other towns in the region have no free cash at all.

So far, only the Newburyport School Committee has expressed interest in using free cash to possibly fund half the charter school reimbursement cost of $650,000 or upgrade the Bresnahan Elementary School for $800,000.

"I think the issue here is that the city has a set of financial resources," said School Committee Vice Chairman Bill Heenehan. "We as a city and various parts of city need to make decisions about whether to use those or some of the funds to carry through our difficult times."

Lavender said he doesn't have any plans for the $2.4 million in free cash.

"I suppose it would be possible," Lavender said about covering charter school reimbursement costs. "But, would it be prudent? Probably not. It's not a prudent thing to cover operating expenses."

"The general policy is that 5 percent (of the city's budget) should be maintained," said City Auditor Bill Squillace, referring to the amount of free cash the city aims to have. "It's not bad to use some, but it's good to maintain a healthy balance. When you're running a $40 or $50 million operation, you can't run without a reserve to fall back on."

Every year the amount of free cash can change.

Squillace said a city earns free cash when departments expend less than their budgets and at the same time, the city receives higher tax revenue than predicted, creating a surplus.

The state's Department of Revenue balances the two figures and reveals the amount to the city in the fall. But, there's only a limited time that a city can use that money.

Squillace said the city has until June 30 to allocate the $2.4 million in this year's free cash account. "You cannot spend free cash after June 30," Squillace said. "The DOR recertifies that number and verifies what the position is. There's a lot going on and you don't know until you do calculations."

When a city department wants to use free cash, the request for appropriation begins with the mayor, who makes a recommendation to the City Council.

Lavender said the City Council can approve, cut or eliminate the amount he suggests, but can never increase it.

Councilor-at-Large John Pramberg said he doesn't want to see the city use any more of the remaining $2.4 million in free cash this year.

Pramberg said the city has already reached the 5 percent mark they aim to have this year.

"I wouldn't be in favor of looking at anything in this year's budget," Pramberg said.

In a supplemental budget for the current fiscal year, which ends June 30, the city's free cash amount dropped from $3.4 million to $2.4 million after approval to spend $900,000 in free cash to purchase a new fire truck and two trucks for the Department of Public Works.

Councilor-at-Large Audrey McCarthy and Ward 3 Councilor Karen Kelley seem open to using free cash for capital expenses.

"My feeling, in general, is that it should not be used," McCarthy said. "That account still serves a purpose if it's not used; it can improve the city's financial status and bonding rate."

But, McCarthy said she sees free cash like a "rainy day" fund and that it's "raining" in the city right now.

McCarthy said ideally she'd like free cash to be used for capital expenses versus operating expenses. "I'm not opposed to using it, but it's a bad economy and the infrastructure is bad. Maybe now's the time, but we'd have to be very careful and use it in a reserved manner," McCarthy said.

Kelley said she'd also consider using free cash for a one-time expense like purchasing the temporary classrooms for the Bresnahan School. But, she's wary of using the money for operating expenses out of fear that it would tie up the city's free cash in the future.

"We'd be committing to something we don't know we'll be able to fund," she said.

She's also concerned that the city could need free cash to make up for any shortfalls in this year's budget," Kelley said.

Pramberg admits that he isn't opposed to using free cash and that he would consider using next year's installment of free cash for the Bresnahan School upgrades.

However, nothing guarantees the city that $2.4 million will be the next year's free cash installment.

Squillace said if a city doesn't collect all the taxes it's supposed to or expenditures are more than anticipated, the city could have a negative free cash.

"People hear free cash and it's not an accurate statement; it's not free," Squillace said. "The money's available after you pay all the bills and liability is taken care of."