More on Surpluses

So far on the Blog we have looked at two different points of view on what to do with surplus money. The first was for the town to keep the money and use it for longer term projects, and the second was to return the money to tax payers. In the past, the Ashland Board of Selectman has done both. Last year the Board encumbered "surplus" money to be spent on projects this year. But, the town has returned "surplus" money by reducing taxes in the following years:

• 2001 - $575,000
• 2002 - $200,000
• 2004 - $300,000
• 2005 - $450,000
• 2007 - $70,530

There was justification for doing both. But, how do we decide which is the best choice? We might begin by considering what we mean by the term "surplus" and then looking at what the Select Board can do with surplus money. This discussion might help us consider possible ways to balance short-term and long-term needs.

According to the New Hampshire Department of Revenue Adminstration (DRA) a “surplus” is properly called an "unreserved fund balance." That is, the money has not been put in a capital reserve account or encumbered. There is no correlation between the balance in the town’s checking account and the amount of “surplus,” however. We have a surplus if we have more actual revenue than we estimated, or if we spent less than we estimated.

In the budgeting process, we look at both the normal operating expenses of the town as well as the long term expenses such as road repair, the repair and upgrading of facilities, and equipment replacement. Each department has a budget for its normal operating expenses. The Board can move money during the year to cover expenses as long as they do not exceed the total budget. For example, it can take money originally budgeted for the Public Works Department and give it to the Police Department as a long as they do not exceed the total budget. (There are procedures for overspending in emergency situations.) This allows the Board to make adjustments between what was estimated in the budget process and what the departments actually needed to spend.

The town can also budget for longer term projects and expenses by creating capital reserve accounts for specific purposes like repairing roads. Unlike the money we budget for yearly operating expenses that must be spent during the fiscal year, these funds can be saved for a period of years and then spent on specific projects. Money can also be put aside through special warrant articles and under other conditions. (See RSA 32:7)

Money that is not spent during the fiscal year is said to lapse. This money must go back into the general fund and be reallocated, or as in the case above, be encumbered for specific legal obligations in the next fiscal year.

Given the above discussion, we might more accurately define "surplus" as the amount of money we have left after we subtract our short-term and long-term financial obligations from our revenues.

How would this work? For the sake or argument, let's say the town has $200,000 left at the end of this fiscal year. Does it have a surplus and if so, how much? The answer according to our definition is yes, but only if we have planned for all of our long term obligations. If we have estimated that we will need to spend $200,000 for road repairs during the next five years and we now have $50,000 in a capital reserve fund, we will still need to save $150,000 over a five year period. We should put away $30,000 per year into the special reserve account to cover the cost of the repairs, leaving an actual surplus of $170,000 not $200,000. We could return $170,000 to tax payers and still be in a good position to meet our obligations. (Note: $170,000 would reduce the tax rate by about $0.68. If you paid $1,000 in taxes last year, you would pay $932 this year.)

The actual process of budgeting and spending is much more complex. There are many medium and long term projects that we need to accomplish, and there is only so much much money. The Budget Committee and the town must consider all of the short-term and long term obligations and prioritize them in developing developing a budget.

In an ideal situation, real surplus money - money that is left after we have made provisions for all of our longer term expenses - should be returned to tax payers. The DRA, I believe, says that approximately 10% should be placed in an emergency fund and the rest returned to taxpayers. The town, however, should have a carefully prepared plan for long-term capital expenses so that they can determine when we have a real surplus.

In our current situation, when many people in the town are experiencing financial hardship due economic conditions, and the town has not put away or been able to enough money to deal with all of the long-term expenses, the town has to make difficult decisions about budgeting and spending. The Budget Committee is taking a very close look at the department budgets this year in an effort to begin to put the town on a more solid financial footing. We can help by learning more about the budget process, and attending and participating in meetings so that we can make more informed decisions about the budget and spending.