The Undesignated Fund Balance or UFB is an important measure of the financial health of a municipality. By that measure, the Town's financial health could be better. There is no immediate crisis, although taxpayers could feel the pinch. It is good that the UFB is on the agenda for the Selectboard's meeting on December 19.
The Undesignated Fund Balance is an amount the Selectboard holds in reserve to cover cash flow needs and emergency expenses.* See What’s an "Undesignated Fund Balance"?. The Town Manager, in July, expressed a preference for about two months of budget expenses in that fund, or nearly 17% of the annual budget. That is about $768,000.
At present, the UFB is short that by about $100,000. It gets worse. As indicated in the draft summary below, the 2018 Tax Offset earmark against the UFB reduce the balance to $403,775. That $403,775 is less than 10% of the annual budget, which means the UFB is UNDERfunded as it is below the minimum set by Selectboard Financial Policy No. 2.
The Selectboard approved the tax offset payment in July 2018 without even acknowledging the existence of Financial Policy No. 2. Why no mention of the policy? I don't know.
Selectboard packet 12/12/2018
Note, however, the offset from the UFB as of 6/30/2018, which totals $316,607**. That amount is for budget shortfall at the end of FYE 2018. Most of that deficit relates, I suspect, to unreimbursed road repairs from the July 1, 2017 Storm Event.
Using the UFB to pay for road repairs puts a substantial dent in the Undesignated Fund Balance. Perhaps, the Selectboard should reconsider that use. Voters gave the Town authority to borrow money to pay for the road repairs. Borrowing the cash for road repairs would put the Undesignated Fund Balance at around $700,000 rather than $403,775, by my back of the envelope calculations.
To get on my transparency soap box, I don't recall the borrowing option being considered by the Selectboard. There are apparently two pots of money to pay for road repairs - borrowed cash or the UFB. Perhaps the Selectboard should discuss both options. A healthy Undesignated Fund Balance may worth the interest expense. I don't know.
Finally, an underfunded UFB has property tax consequences. In the past, the Selectboard has limited the bite of any tax rate increase by using excess cash in Undesignated Fund Balance (UFB) to 'buy down' the tax rate. See What’s an "Undesignated Fund Balance"?
. That option is not available with an underfunded Undesignated Fund Balance. See Budget Issues: How Big A Tax Increase?
* Selectboard Financial Policy No. 2, which is about the Undesignated Fund Balance, describes its purposes as follows:
1.1.1 To fund operations by providing sufficient working capital for adequate cash flow, tax rate stabilization and as protection against uncollected taxes, economic downturns, or shortfalls of revenues, imposition of additional costs by other governmental agencies including courts, errors in financial forecasting, natural disasters and cutbacks in distributions from the state government.
1.1.2 To reduce the cost of long-term borrowing by maintaining an appropriate level of undesignated general fund balance, which is reviewed as part of the evaluation of a municipality's creditworthiness by bond-rating agencies.
** The draft shortfall is $316,607, as of 6/30/2018, the end of the fiscal year. In July 2017, the Selectboard authorized a tax stabilization payment of $307,090