Piggy Bank Busting

Posted July 06, 2010, at 5:03 p.m.

As municipalities around the state finish their budgets, the question of how much they should set aside in surplus divides officials. It is wise to be wary of breaking open the piggy bank to keep property taxes low, but if the recession is at or past its nadir, the time could be right to give property owners a break.

Bangor’s City Council recently voted 5-4 to defeat a motion to apply $360,000 in surplus — technically called the undesignated fund balance — toward the 2010-2011 spending plan. That move would have held the city’s mill rate steady at $19.05. Instead, councilors approved a budget that raises the mill rate by 11 cents; on a house valued at $200,000, the property tax bill will increase by about $30.

In Belfast, the City Council went the other way, recommending taking $620,000 from surplus, and keeping the mill rate at $18.10. Dexter’s council also voted to tap its surplus accounts, applying $150,000 toward the 2010-2011 budget, allowing the mill rate to remain at or close to $14.50.

In Calais, City Manager Diane Barnes does not apply surplus funds to the budget, but sometimes uses them for large, one-time purchases, or to make advance payments on debt.

There is no right or wrong answer in such matters, but there are some principles to guide the decision- making. Bangor’s city charter stipulates that the surplus be 7.5 percent to 10 percent of the total budget. But with half of Maine’s municipalities having no charter, the decision is left to resident councils and boards of selectmen, relying on the professional recommendations of their managers and treasurers.

The argument in favor of maintaining a healthy surplus is that it eliminates the need to borrow money while the municipality waits for property tax revenues to come in. By using the surplus to pay the bills, the town or city saves money by not having to pay interest on a loan. Another argument in support of carrying the surplus is that the funds are typically invested, and so create interest income for the municipality. Also, the surplus helps the municipality dig out from an unexpected problem — say, the need to repair a washed-out road or remove asbestos from a building. And a smaller surplus may hurt a town’s or city’s ability to get favorable interest rates on bonds.

But how much surplus is too much? If a municipality is carrying 20 percent of its annual budget in undesignated reserves, it would seem that property tax payers are being overcharged.

The Government Finance Officers Association, a resource for local and state governments, recommends that towns and cities adopt policies governing surpluses. It also recommends that governments, “at a minimum … maintain unrestricted fund balance in their general fund of no less than two months of regular general fund operating revenues.”

There is reason for caution about future state cuts to revenue sharing and education funding, as well as pessimism about the strength of the economic recovery, to hold sway in city and town halls.

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