The Commonwealth of Massachusetts’ Dept. of Revenue, Division of Local Services publishes all sorts of advice for towns on how to do things, and this was an article from its latest newsletter, on the amounts of reserves a town should have. DLS says reserves should be 5-7%, and I recall Mike Sullivan saying the rating agencies (such as Moody’s) saying they wanted us to have 10%. Our free cash has been about 2-3%, and I do not know what stabilization funds they would include.
City and Town Editorial Board
Is there a best practice target a community should have for the amount in a stabilization fund?
At DLS, we have historically recommended that cities and towns set aside a combined free cash and stabilization fund balance of between five to seven percent of the total annual budget. However, we recognize that current economic circumstances, financial management constraints and political obstacles can make building and retaining reserve levels within this range unrealistic.
Even so, municipal rating agencies in recent years have advocated for reserve levels closer to ten percent in order to provide adequate resources during times of fiscal stress and to generally mitigate risks. Using the state-wide average as a benchmark, communities across Massachusetts have averaged almost six percent in combined reserves over the last ten years, and just over 6.7 percent in FY2012.
Dollar amounts also come into play when a municipality commits to increasing its reserves. Reaching and sustaining a five to seven percent reserve balance may involve setting aside additional millions of dollars. This may not be a realistic goal. Decision makers must then carefully consider whether the potential need for reserves can be satisfied by a healthy dollar balance, which may not necessarily meet percentage targets.
In any case, we encourage cities and town to adopt formal policies that define adequate reserve levels based on a community’s particular needs and circumstances. For more information on stabilization funds, free cash and other municipal finance topics, visit our best practices webpage. Also, many municipalities post reserve policies that can provide useful guidance.