“Free Cash”

I’ve heard Medford has $34M in Free Cash.  Why can’t we use that instead of raising taxes? That’s a fair question.

Think of a city like a household

When you run a household, you have income and expenses.  When you make a budget, you look at your income, and you try to make your total budget add up to less than your total income, right?  

In your household, you probably also have a savings account.  It’s good to have one, for one-time or unexpected expenses.  Your kid might need braces; your roof might need repair; you might need to get a new car.

Cities also need savings accounts, for similar reasons. At some point we’ll need a new fire station, and a new high school, or there might be a pandemic and our schools’ HVAC systems all need to be replaced immediately.  

The short answer to why we shouldn’t use Free Cash for normal budgeted items is that Free Cash is savings.  We need it to fix things that are getting older (like buildings or fire trucks) or in case some unexpected emergency happens.

What is Free Cash?

Every year, the city makes a budget. Then throughout the year, we spend money.  If we spend less than we budgeted, the amount left over is called Free Cash.  Dumb name – it’s not free, and it’s not cash.  But that’s what it’s called. So if we budget $180M and we then spend $172M, we have $8M in Free Cash.

What’s important to understand is that every city is strongly encouraged to have Free Cash every year.  Cities must spend less than their budget – if they spend more than their budget, their bond rating goes down.  A bond rating is like a credit rating, and if your bond rating goes down, then it costs you an arm and a leg in interest and fees to borrow money.  Spending more than you budgeted is a big no-no, and a sign that your city is being poorly run. So yay for Medford that recently we have Free Cash every year – this has raised our bond rating up to a AA+ rating over the last few years.

The Division of Local Services is a state body that helps cities and towns be financially responsible.  It recommends that cities and towns have between three and five percent of their total budget in Free Cash every year to maintain a good bond rating.  In Medford, that is between $5M and $9M each year.

Our $34M in certified Free Cash is primarily because we had $9M in FY 2023 due to remaining ARPA/Covid grant funds, $9M in 2022 because of unfilled city positions and legal funds not spent (both of these years are within the recommended 3-5% of our budget).  Before about 2019 or so, we had less than half of the recommended minimum of 3% of our budget in Free Cash.  As you can see in this chart, before about 2012 we had almost no Free Cash each year – we were financially mismanaged.

Medford Free Cash History

What does the state recommend we do with Free Cash?

The Division of Local Services recommends that municipalities create what are called “Stabilization Funds.”  Think of Free Cash as cash that you stash under your mattress.  Not great.  Stabilization Funds are like bank accounts.  Almost every city and town in MA has at least one Stabilization Fund – out of 351, we were one of only five that didn’t have any.  Free Cash can go into a Stabilization Fund after it has been certified.  

Medford had no stabilization funds until 2024.  Our city was financially mismanaged for a long time, and we are only now catching up. What’s important to remember is that you should not use your savings (either Free Cash or Stabilization Funds) for normal operating expenses – if you do, you won’t have savings for those bigger projects that will come up.  The Division of Local Services says, “Free cash should be restricted to paying one-time expenditures, funding capital projects, or replenishing other reserves…. [It] recommends that communities adopt a Free Cash policy that avoids supplementing current year departmental operations.”

We only just this year created a General Stabilization Fund and a Capital Stabilization Fund.  

• The Capital Stabilization Fund can only be used for capital projects – things like buildings, fire trucks, and parks. 

• The General Stabilization Fund can be used for other projects. 

If we do not have enough savings (Free Cash or Stabilization Funds), then we have to borrow money for any expense we need outside of the operating budget, like fire trucks, repairing buildings, or unexpected items.  As with a household, it’s a lot more expensive to borrow money (put something you can’t afford on a credit card) than it is to pay for things with savings.  You can listen to this episode of my podcast to understand how expensive it is when cities in MA borrow money.

How much should we have in Stabilization Funds?

The Division of Local Services recommends that municipalities have as a goal five to seven percent of the current operating budget in their General Stabilization Fund. For Medford, five to seven percent of the FY25 budget would be between $9 and $13 million.  So let’s say we put $12M into that fund.  

Because our city has been financially mismanaged through chronic under-funding for decades, we have more than the usual capital needs. Our roads are in serious disrepair, our buildings are in need of repair, our fire truck fleet is past its usual lifetime, and all of these are happening at the same time.  So we need money for capital projects immediately, which is why we also created a Capital Stabilization Fund.  This fund will also need to maintain a balance, let’s say $5-$10M.  So around $20M should live in these three savings accounts, between Free Cash and our General and Capital Stabilization Funds.

I have to talk about our roads because they’re such a perfect example of financial mismanagement through chronic under-funding.  We had a roads assessment done in 2021.  They graded every road in Medford on a scale of 1-5 – but I like to use A, B, C, D, and F like grades in school.  By 2021, a full 49% of our roads got a D or F grade.  

The reason letting your roads degrade so much is financially irresponsible is because it costs at least thirty times more to repair an F-grade road than it does to repair a B-grade road. It costs twice as much to repair an F-grade road as it costs to repair a D-grade road. Chronic mismanagement by underfunding our roads has led to us having a backlog of repairs of $67.5M.  If, by underfunding now, we allow any roads to move from C to D or D to F, we only increase this backlog.  We must spend enough to keep the backlog from growing.  That means spending at least $6M/year for the next five years.  And if we want a smaller yearly roads budget, we should be spending $9.5M/year for the next five years.

What other known projects will we use our Stabilization Funds for? 

In addition to our $67M of “road debt,” Medford has a Capital Improvement Plan.  It’s a comprehensive document detailing over $79M in needs from 123 projects across the city – and that’s just what’s needed in the next five years or so.

When you look at our known expenses, and understand that recommended best practice is for our city to maintain at least $9M in the General Stabilization Fund and money in both the Capital Stabilization Fund and Free Cash, it’s clear what choices we should make if we’re going to be financially responsible.  

We should continue to create a budget that we know we won’t exceed.  At the end of the fiscal year, we should have between 3% and 5% of the total budget unspent. Those funds can move into our Stabilization Funds where we can spend them to properly take care of our city.

We should also encourage “new growth” through more commercial growth and new housing.  We already are – the last 3 years have seen Medford’s highest new growth in the past two decades.  We will continue to encourage new growth. But unfortunately this is a slow process and it can’t fix our budget shortfall.

Because of the rising cost of schools, insurance, pensions, inflation affecting every department, and other uncontrollable costs, we need to increase our annual budget – and that means voting yes on the overrides and the debt exclusion.