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Peter’s Take: Allocating Arlington’s Close-Out Surplus Funds

Peter RousselotPeter’s Take is a weekly opinion column. The views and opinions expressed in this column are those of the author and do not necessarily reflect the views of ARLnow.com.

Last year, responding to years of community pressure, the county government finally adopted a new review process in which the County Manager’s close-out surplus recommendations were first proposed in October, but not voted upon until November.

I strongly recommended last fall that almost all of last year’s $17.8 million close-out surplus be kept in reserve until the FY 2018 budget was approved.

Despite support from Board member John Vihstadt for such a reserve, the Board voted last fall to spend most of the surplus. When it came time to approve the FY 2018 budget this spring, the Board approved a tax rate increase of 1.5 cents, estimated to produce $11.1 million.

Discussion

Arlington should follow certain principles to guide its decisions in allocating any close-out surplus.

  1. A fair and reasonable percentage (i.e., a percentage higher than 0 percent) of any close-out surplus always should be allocated to moderate the tax rate and/or reduce bonded indebtedness

Adopting this principle would mean only that a fair and reasonable percentage of any FY 2017 close-out surplus would be earmarked for property tax rate moderation in calendar-year 2018. Adopting this principle would not necessarily mean that the calendar-year 2018 property tax rate would fall, rise or remain the same.

What is “fair and reasonable”? That should depend upon the close-out surplus amount in any given year and careful consideration of public input. But the fair and reasonable percentage should be multiplied against the entire surplus, and set aside for consideration next year before any final decisions are made regarding how to allocate any remaining surplus.

Similarly, we should consider using some percentage of any close-out surplus for early debt retirement when that makes financial sense. Retiring debt early will help free up more bond capacity in addition to reducing interest expense.

  1. The remainder of any close-out surplus (after setting aside a percentage for tax rate moderation and any debt reduction) should next be considered to address any emergency that requires funding before final adoption of the FY 2019 operating budget

An “emergency” expenditure is one that simply cannot be deferred until the FY 2019 operating budget is approved in April 2018. Reasons for not waiting until April 2018 might include the complete loss of a current vital opportunity or the strong likelihood of sharply escalating costs to meet a core government function.

However, before using surplus close-out funds, the county should first determine whether it already has an appropriate reserve fund set aside which it could tap to cover the emergency.

  1. All other proposed uses of any close-out surplus automatically should be deferred, and the remaining funds’ allocation should be decided in conjunction with the FY2019 budget process

Close-out surpluses are one-time funds rather than ongoing revenue. They exist solely because the County collected more tax revenue than required to meet its budgeted commitments. Therefore, these funds should be used for nonrecurring expenditures (e.g., replacing a bridge, acquiring land).

Conclusion

In its final FY 2018 budget guidance adopted this spring, the County Board directed the Manager “to provide an option for County Board consideration that would direct all carryover funds to consideration in the FY 2019 budget process, except for what the Manager deems to be emergency or unanticipated needs that, in his best judgment, require immediate allocation or appropriation.”

At a minimum, the Board should adopt that option this fall.

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