Cheshire Budgets: Operating and Capital
Impact of the Pool
During any discussion of town finances including the current pool debate there is often confusion among residents over the terms Operating Budget and Capital Budget. This paper will try to explain how these budgets inter-relate. Hang in there……it is not exciting stuff but the details are important!
The Operating Budget
An annual Operating Budget is required by the Town Charter. It must be presented to the Council by the Town Manager by March 10 of each year. This document is extremely detailed and must show by department and category where the revenue will come from (taxes, grants, state aid) and where the money will be spent. The Operating Budget is made up of several major sections (dollar amounts shown are for recently adopted FY11budget):
General Government ($24.6M) - Town Hall Administration, Fire, Police, Library, Park and Rec, etc.
Education ($60.4M) - a lump sum amount given to the BOE to spend as they see fit. The Council has no control over the details of the actual spending.
Capital Non-Recurring ($1.1M) - a “pay-as-you-go” account to pay for relatively small capital items and projects that we don’t want to borrow money for and are too big to put in individual departments’ budgets. This keeps our long term indebtedness down and saves on interest costs. (See Debt Service below)
Debt Service ($9.3M) – the annual payment on the town’s outstanding debt. It is the sum of all previous bond issues (borrowing) made by the town, some going back as many as twenty years ago. Of all the items in the Operating Budget, this item MUST be paid in full each year.
Contingency ($125,000) - small contingency to balance potential shortfalls/unforeseen expenses during the coming year.
At the end of each Fiscal Year (which get their names from the end date of the 12 month period, hence new budget starting July 1, 2010 is called FY11 Budget) if the town has a surplus in its Operating Budget it goes into the Town’s Fund Balance (aka Rainy Day Fund, Savings Account or, inappropriately, “Slush Fund”) ) It is extremely important to keep a healthy Fund Balance since the people who give the town its financial rating (Moody’s, Fitch) and the people who buy our bonds view this fund as a cushion against potential default on the bonds. Due to sound management practices over many years Cheshire is viewed very favorably by the bond community. The very successful June, 2010 refinancing of some of our bonds (which saved us over $350,000 in interest costs) is a good example of why you don’t play games with your Fund Balance account for short term benefit!
The Capital Expenditure Budget and Capital Expenditure Plan (CEP)
These budgets are also required by the Charter and are put together in July and August of each year. They are usually treated as one document during Council deliberations.
The Capital Expenditure Plan is a five year overview of anticipated capital projects, their estimated cost and the source of revenue to pay for the projects. Technically, a capital project or item is something with a useful life of over 5 years and a cost of over $110,000. This planning process allows the Council and the administration to examine proposed projects, separate wants from needs, prioritize them over five years and set a plan for funding them. Projects placed in Year 1 of the five year Expenditure Plan become the Capital Budget for the coming year. Large items (over $350,000) go to referendum; smaller items simply pass as part of the adoption of the Capital Budget which is usually done by the end of August. Items in years 2 to 5 in the Plan may or may not get done in the future years as specified since there may have to be some re-prioritizing during the next capital budget cycle in the following year. While some projects are “wants” (and some simply drop out of the Plan for lack of support) other projects are “must haves” such as the pending upgrade to the wastewater treatment plant.
But this planning process is extremely important and has a direct impact on future Operating Budgets. During the Capital Budget deliberations, Council members must be cognizant of how borrowing (issuing bonds) for projects will impact the Debt Service line down the road. It is easy to have a disconnect here since the time delay between approving a project, getting it passed at referendum, designing it and then building it can last for several years. Costs change, interest rates change and if you are not careful you can quickly take on more debt than you realize. Several years down the road a future Council is then faced with debt service costs that must be paid even if it means shortchanging other items in the annual Operating Budget.
Since the completion of projects run on different timelines, the town must issue General Obligation Bonds to provide the appropriate cash flow. The town usually tries to issue bonds every other year and to time these sales when it is most advantageous for the town. The proceeds can be used for a variety of capital projects. For example, in February, 2005, Cheshire borrowed $5.4 million with the money being designated for projects like the CHS roof, new sidewalks, a new boiler for Dodd, a new fire truck, capping the old landfill and twenty two other projects large and small. Payments on this debt issue will continue until 2025 and portions of the payments will appear in every annual Operating Budget until this bond issue is paid off. (An interesting side story is that in the fall of 2008 the town was ready to sell another bond issue but held off since the bond market had virtually dried up. We were not placed in a cash squeeze because we had the flexibility of using some of our Fund Balance cash for short term project needs until the market changed, another reason to keep your “savings account” in order!)
Cheshire had a significant growth in infrastructure during the 1980’s and 1990’s. Most municipal buildings including the Town Hall, Police Department, Senior Center, Fire Stations, Library and most schools were either completely rebuilt, expanded or renovated. Roads and bridges were rebuilt and Cheshire distinguished itself by preserving more acres of open space than any other town in the state. As a result, our Debt Service as a percentage of the Operating Budget grew to 13%, too high to be sustained. Over the past 10 years, the Council and the administration has worked together to start paying off more debt than we add and used the fall in interest rates to refinance old bonds with new, lower interest borrowing. (Most recent action was June 2010)
As a result we are in the enviable position of being on a path to decreasing Debt Service line items in future Operating Budgets. The projected Debt Service payments in future budgets look like this (Source:Town of Cheshire FY 11 Budget):
| Total Existing | |
| & Projected | |
| FISCAL | General Fund |
| YEAR | Debt Service |
| 2011 | 9,655,027 |
| 2012 | 9,517,552 |
| 2013 | 8,784,569 |
| 2014 | 8,763,227 |
| 2015 | 8,586,314 |
| 2016 | 7,899,579 |
| 2017 | 7,513,794 |
| 2018 | 7,235,456 |
| 2019 | 7,521,592 |
| 2020 | 7,292,858 |
Barring any major additions, the Debt Service line in the Operating Budget would fall from $9.65 million to $7.29 million by 2020.
But it is not quite that simple. The last major facility in town to receive a rehab is the waste water treatment plant. While this facility was expanded in the early 1990’s, the original components date back to the start of the sewer system in the 1960’s. This upgrade was originally estimated to be approximately $35 million. Recent action has reduced this somewhat but using the original conservative figure of $35 million the projected Debt Service looks like this: (Source: Town Finance Department)
| Total Existing | |||
| & Projected | ADD WPCA | Total with | |
| FISCAL | General Fund | UPGRADE | WPCA Upgrade |
| YEAR | Debt Service | CWF FUNDING | |
| 2011 | 9,655,027 | - | 9,655,027 |
| 2012 | 9,517,552 | 435,000 | 9,952,552 |
| 2013 | 8,784,569 | 90,204 | 8,874,773 |
| 2014 | 8,763,227 | 90,204 | 8,853,431 |
| 2015 | 8,586,314 | 90,204 | 8,676,518 |
| 2016 | 7,899,579 | 3,170,984 | 11,070,563 |
| 2017 | 7,513,794 | 1,774,163 | 9,287,957 |
| 2018 | 7,235,456 | 1,774,163 | 9,009,619 |
| 2019 | 7,521,592 | 1,774,163 | 9,295,755 |
| 2020 | 7,292,858 | 1,774,163 | 9,067,021 |
What about the pool?
Let’s add that and see what happens:
| Total Existing | |||||
| & Projected | ADD POOL | ADD WPCA | GENERAL | CHANGE FROM | |
| FISCAL | General Fund | ENCLOSURE | UPGRADE | FUND DEBT | PREVIOUS |
| YEAR | Debt Service | $7.068 MILLION | CWF FUNDING | GRAND TOTAL | YEAR |
| 2011 | 9,655,027 | 164,920 | - | 9,819,947 | |
| 2012 | 9,517,552 | 654,720 | 435,000 | 10,607,272 | 787,325 |
| 2013 | 8,784,569 | 639,840 | 90,204 | 9,514,613 | (1,092,659) |
| 2014 | 8,763,227 | 624,960 | 90,204 | 9,478,391 | (36,222) |
| 2015 | 8,586,314 | 610,080 | 90,204 | 9,286,598 | (191,793) |
| 2016 | 7,899,579 | 595,200 | 3,170,984 | 11,665,763 | 2,379,166 |
| 2017 | 7,513,794 | 580,320 | 1,774,163 | 9,868,277 | (1,797,487) |
| 2018 | 7,235,456 | 565,440 | 1,774,163 | 9,575,059 | (293,217) |
| 2019 | 7,521,592 | 550,560 | 1,774,163 | 9,846,315 | 271,255 |
| 2020 | 7,292,858 | 535,680 | 1,774,163 | 9,602,701 | (243,614) |
As you can see from the right column, these two projects would cause substantial increases and decreases in the Debt Service line in future Operating Budgets. In order to mitigate future fluctuations in the Debt Service line (which can cause lots of budget preparation problems each year!), the Council has set aside $4.4 million in a Debt Service Reserve. Most of this money came from the rebate of CRRA money with other funds coming from refinancing of old debt and closing out old projects that came in under budget. While the actual allocation of this Reserve money would be made on an annual basis during the preparation of the Operating Budget, an example of what could happen follows:
| Total Existing | $ 4,415,000 | ||||||
| & Projected | ADD POOL | ADD WPCA | GENERAL | CHANGE FROM | AVAILABLE | Net change | |
| FISCAL | General Fund | ENCLOSURE | UPGRADE | FUND DEBT | PREVIOUS | DEBT SERVICE | in Debt Service line |
| YEAR | Debt Service | $7.068 MILLION | CWF FUNDING | GRAND TOTAL | YEAR | RESERVE | In Operating Budget |
| “Potential” Annual CONTRIBUTION | |||||||
| TO DEBT SERVICE | |||||||
| 2011 | 9,655,027 | 164,920 | - | 9,819,947 | |||
| 2012 | 9,517,552 | 654,720 | 435,000 | 10,607,272 | 787,325 | 1,000,000 | (212,675) |
| 2013 | 8,784,569 | 639,840 | 90,204 | 9,514,613 | (1,092,659) | - | (1,092,659) |
| 2014 | 8,763,227 | 624,960 | 90,204 | 9,478,391 | (36,222) | 170,000 | (206,222) |
| 2015 | 8,586,314 | 610,080 | 90,204 | 9,286,598 | (191,793) | 10,000 | (201,793) |
| 2016 | 7,899,579 | 595,200 | 3,170,984 | 11,665,763 | 2,379,166 | 2,580,000 | (200,834) |
| 2017 | 7,513,794 | 580,320 | 1,774,163 | 9,868,277 | (1,797,487) | - | (1,797,487) |
| 2018 | 7,235,456 | 565,440 | 1,774,163 | 9,575,059 | (293,217) | - | (293,217) |
| 2019 | 7,521,592 | 550,560 | 1,774,163 | 9,846,315 | 271,255 | 500,000 | (228,745) |
| 2020 | 7,292,858 | 535,680 | 1,774,163 | 9,602,701 | (243,614) | (243,614) |
Remember that these figures will change as future projects are added and deleted, interest rates change, etc. But from long range planning perspective, it appears that the town’s capital debt structure and thoughtful use of the debt reserve can support existing planned projects, the waste water treatment plant upgrade and the pool and still have the debt service line go down year over year for the next ten years..
A few other items to consider:
- Our recent bond refunding was priced at 2.54% (the interest rate we must pay on the bonds) While new debt issued for the pool would most likely not attract such a good interest rate, it is likely that the rate would be less than the 4% used in the projections above and in other discussions concerning the pool.
- The permanent pool fix is still going to cost lots of money. These illustrations are not designed to make the project look like it is “free”. Far from it. The intent is to show how capital spending and operating spending intersect and give a clearer picture of just were we stand financially as a community.
- The first year (FY12) of large pool debt service is $654,000. The total town budget will likely be around $97,000,000. To put it all in perspective, the pool debt service would be .6% (that’s 6/10ths of 1%!) of the town’s total annual Operating Budget. When the positive impact of the additional operating expense savings are figured in, the pool fix looks like the logical…. and affordable…..way to go.
