Rainy day fund for $2,000,000 or bond insurance for $5,500?
I just watched a few minutes of the candidates forum discussion on the rainy day fund. It was interesting... though a bit troubling to hear Council members seeming to say everything is hunky dory with the rainy day fund... without ever seeing a cost/benefit analysis.
As a CPA, it makes no sense to me why such an analysis has not been produced. Regardless, it hasn't happened and clearly won't happen without a change in Council composition... despite there having been bipartisan support for the measure when I first suggested it... back in April or May.
Anyway, for those who have followed my quest for a cost/benefit analysis of the rainy day fund, I recently came across a small bit of information that I found quite interesting...
But first some history... here's an unedited excerpt from an email sent from Town Hall to the Council on December 6, 2006 regarding Moody's rating upgrade of the Town of Cheshire...
Moodys Investors Service notified me about one hour ago that they have upgraded our credit from "Aa3" to"Aa2". This is a significent development for the Town as we haven't had a credit upgrade from them in about 13 years and have been working on this upgrade for the past 5 years. It places us in a very high grade among municipalities and will result in a lower interest cost on future bond sales. There are many other positive benefits to this which I will explain later as I will provide more info over the next few days once I receive their report..
As you can see, early on... the rating upgrade was directly and primarily, though not exclusively, tied to "lower interest cost on future bond sales." Which led me to my next question...
Q. Is an 8% rainy day fund necessary for the town to issue "triple A" bonds?
A. No. You can buy "bond insurance."
And while bond insurance was, to the best of my knowledge, never mentioned as an alternative to collecting $2,000,000 in additional taxes (plus another $80,000-90,000 annually), I did ask the next obvious question...
Q. Does the Town buy "bond insurance?"
A. Yes. The town (and apparently all municipalities) buy bond insurance so that municipal bonds are virtually always rated AAA.
And this led to the next obvious questions...
Q. How much did the bond insurance cost to increase the bond rating (as compared to the town rating) from AA to AAA for last December's issuance?
A. $14,500
and
Q. Could the town have purchased bond insurance to increase last December's bond rating from A to AAA? And if so, how much would it have cost?
A. Yes. An additional $5,500 or $20,000 total.
So... to recap... (and seriously... please correct any flaws you see in my logic...)
The town increased the rainy day fund from 5% to 8%, at a cost of $2,000,000 to the taxpayers. And the alternative would have been a cost of $5,500 to the tax payers?
hmmm...
lemme think about this one...
$2,000,000 or $5,500 to get that vaunted triple A rating...
hmmm...
yeah... I guess collecting $2,000,000 in taxes makes more sense.
Tim White, CPA
Town Council, Budget Committee
p.s. There's a touch of sarcasm here. And on a different note, I'm not expecting to spend much time on the blog for the next week... but do check in to see what others are saying!
11 comments:
well. apart from Wall Street we need to maintain a nest egg for whne Hartford inevitably realizes they they've made spending promises the state economy won;t let them honor and shorts towns on the grants they were promised.
Which is why reliance on state aid for "property tax relief"is a fool's game
I'm not saying 5% or 8% or 10% is correct. I'm saying that the taxpayers deserve a cost/benefit analysis... as well as a list of options to achieve a goal... in this case, the goal being a AA (was A) rating.
I'm skeptical of the motives of the council majority and TM in all this.
Did they just use "bond rating improvement" as an excuse to raise an additional $2 Million in taxes, so they can dip into the built-up rainy day fund for future spending? This seems like a backdoor tax and spend scheme.
What other explanation is there for their raising $2 Million more in taxes, when they could have simply bought $5500 more insurance?
Tim,
You've been a great watch dog for the town and the taxpayers. Some concers, like the one you raise here, are just plain common sense.
Even though my husband and I are Democrats, you've earned our votes. Good luck next week!
Thanks, Tim, for explaining the rainy day fund and the cost of insurance of $5500. It's clear to me that buying the insurance would have been a better idea. The current democratic council should have been asking the same questions you have asked. I hope voters realize this come election day.
Looks like they anticipate infrastructure costs to support W/S, Paul Bowman, and Doug Calcagni's North End sprawl.
One of the candidates mentioned that although a large rainy day fund may save 1/16 % on borrowing cost the flip side is that in an arbitration hearing with teacher or other unions, arbitrators may look at the large rainy day fund and think Cheshire is a rich town, so they can afford giving the unions what they ask for. And, as a result it could cost far more than we save on borrowing costs.
Let's pay off some debt and get this down to 4%. Paying off debt also helps our bond ratings.
Let's be a poor town and watch our costs closer.
It's not only this years surplus but the year before and the year before that. From where I sit no tax increases were needed. Someone has some explaining to do. Nov. 6th would be a good day for that. Get out and vote.
I hope the Town manager will explain his logic along with Return on Investment for this decision. Like all issues there are two sides and now we have two sides. An explanation on TV during a Town Council meeting would be the appropriate forum.
Saving $5,500 is only one aspect of why a strong fund balance is good. We are not spending or wasting this money we are putting away to avoid future tax increases and to fully fund things such as heart and hypertension. In good times prudent leaders plan for not so good times and this is what has been done. The money is not being tossed away remember Tim you voted for the budget. Also I come from the construction industry if you think, "performance contracting" to finance a permanent structure for the pool is a possibility I have a bridge in Brooklyn for sale. Great in concept but not at all practical in the real world. Like Rodney Dangerfield said to the college professor do you live in fantasyland
The issue of a new firetruck should be explored to be paid for out of the rainy day fund. It would be cheaper in the long run; 20years; than to ask our kids to pay for it as a bond issue.
A performance contract can be done for the pool and structure, you just have to have the right partners to put the package together. Not a problem.
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