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Southington plans on using reserve funds for projects

Municipal reserves

Wallingford: $24.8 million

Southington: $18 million

Meriden: $17 million

Cheshire: $9.44 million

Whether to spend or save budget surpluses is being hotly debated in Connecticut municipalities as leaders try to balance saving money for emergencies, spending on projects, or tax relief.

In his proposed budget for the next fiscal year, Southington Town Manager Garry Brumback has proposed spending $4.27 million from the town’s reserves on capital projects. Road improvements and vehicle purchases have been postponed in prior years, Brumback said, and paying in cash from the reserves avoids bonding expenses.

He also sees little need for the town to accumulate large reserves. Southington’s Board of Finance sets the reserve floor at 10 percent of annual operating expenses, which equals nearly $14 million. The town now has about $18 million in reserves.

Brumback said town government isn’t looking to accumulate a “profit” from yearly taxes. If there are consistently surpluses, he said, taxes should be lowered.

“I don’t think we’re in the business of having an extraordinary savings account,” Brumback said. “The taxpayers gave us this money to use.”

Southington has an AA+ rating with Standard & Poor’s, the second highest issued by the rating agency. Brumback said the town doesn’t have the money to pursue the highest rating, AAA, since it would require hiring people to dedicate to the effort. He said the town hasn’t had problems raising money and got a 3.17 percent interest rate at a $20 million bond sale last month.

Having a large reserve fund isn’t as important to rating agencies as consistency and adherence to internal policies.

“The number isn’t the driver,” Brumback said. “They want to see good management.”

John Barry, a Southington town councilor, said he’s concerned about spending from the rainy day fund in part because the reserve helps maintain the town’s bond rating. Barry said he’s also worried an emergency might occur after some reserves are spent.

Reserve funds can help a town’s bond rating, giving it lower interest rates and better access to credit. But how much reserve is needed to maintain a good credit rating is contested in some towns.

Credit ratings are signal to investors and a high rating represents confidence that a business or municipality will repay its debts.

Of the three major rating agencies, only one, Moody’s, has rated Meriden, Wallingford, Southington and Cheshire. Wallingford has the highest Moody’s rating, Aaa, and Meriden has the lowest, A3.

Standard & Poor’s gave Wallingford and Southington the same grade, and gave Meriden a slightly lower grade.

Fitch Ratings gave Cheshire an AAA rating and Meriden an AA-.

David Jacobson, a spokesman for Moody’s, said finances are about a third of a town or city’s rating. That includes cash reserves but also financial trends, ability to adjust to changing circumstances, and potential for future instability.

“There are lots of different variables that go into our ratings,” Jacobson said. “There are no ‘red lines’ or prescriptive number that connotes rating movement up or down in any category.”

Wallingford Mayor William W. Dickinson Jr. feels it is important for rating agencies that towns maintain a reserve fund.

“They expect to see effort to maintain that,” he said.

Wallingford has a $24.8 million reserve fund. That’s the highest of the four towns, exceeding Meriden’s $17 million reserve.

Vincent Testa, a Wallingford town councilor, said deciding how much money should be held in reserve is difficult and subjective.

“It’s based on personal feelings,” he said.

“I can’t say if we have too much,” Testa said. “But I’ll say this: I think we’d be in equally good shape if we had a little less.”

Town leaders have to be careful about spending reserves, though. Testa said fund balances would be quickly depleted if used frequently in operating budgets.

Cheshire has a $9.44 million reserve fund but Town Manager Michael Milone plans to spend about $1 million of that to offset increased taxes due to property revaluation. The town has a written policy governing the use of reserve funds, Milone said, created six years ago. There’s often disagreement among councilors about when and how to spend surpluses.

“For that reason, so we don’t have this debate every year,” Milone said, explaining the policy.

Tax relief and debt avoidance are among the reasons for spending reserves listed in the policy. Only money above 8 to 9 percent of the operating expenses may be spent, Milone said. (203)317-2230 Twitter: @JBuchananRJ

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