Budget Reserve Guideline Updates

The Board of Finance is considering changes to its budget reserve guideline, with a vote on the proposal tentatively planned at its February 20 meeting. By publishing this summary, we encourage residents to become familiar with the changes and their motivations, and to provide their input to the Board, either in writing ([email protected]) or in person during the public comment segment at the start of the Board’s upcoming January 17 and February 20 meetings. We also encourage you to review the minutes of the Board’s meetings from October, November, and December 2023 for more details on the discussion that have taken place to date.

Background and Details
The town maintains a reserve fund as part of its overall financial structure. The reserve position has been accumulated from budget surpluses over time. Sometimes referred to as the “Rainy Day Fund”, these reserves are held to be available to cover unplanned expenses or revenue shortfalls. The reserve has also been used from time to time to supplement revenues in developing the following year’s budget to minimize the tax impact when challenging economic circumstances were expected.

This reserve target is also a key component of the town’s financial picture when it is reviewed by bond rating agencies in setting the town’s credit rating. Currently, the town’s bond rating is Aaa/AAA, the highest ratings assigned. Maintaining a high credit rating reduces the cost of borrowing for the town, thereby benefiting the debt service budget and the tax rate. It is also a very important intangible element that people and businesses consider when deciding to live or operate in Ridgefield.

For many years, the Board of Finance has operated under an informal reserve “guideline” during the budget development process, which has called for a target reserve balance of 8%-9% of the following year’s total town budget (including the costs of schools and debt service). In practice, the town’s actual reserve position has been maintained at closer to 10% for the past decade. The reserve position was targeted for around 10.5% in the FY2023-24 budget, but the town actually started the fiscal year with a reserve position of slightly over 12% due to unexpectedly favorable revenues and some net expense savings in FY2022-23.

The proposed new policy, which is presented at the end of this note, would involve two major changes. First, this would be a formally adopted “policy” of the Board of Finance, which is intended as a stronger statement of operating goals than an informal “guideline”. Second, the proposed policy would move the target range from the historical 8%-9% to a higher level of 9%-12%.

The Board of Finance has done extensive research in considering this policy. It found that many comparable towns in the state operate under a formal written reserve policy, rather than just an informal guideline. In these policies, most establish a target reserve level at 10% or more, with many having a range of 10%-15%. The Board also met with the town’s bond advisor (which handles placement details when the town issues bonds). The advisor reported that the national

bond rating agencies (Moody’s and Standard & Poor’s), when evaluating a municipal bond rating, give much stronger credence if the town operates under a formal documented policy compared with an informal guideline. The rating agencies also feel that Ridgefield’s historical guideline target of 8%-9% is low, particularly when compared with other Connecticut towns and with national standards. This could result in a credit rating downgrade in the future if the target is kept at the current level, notwithstanding our actual reserve level results over recent years.

Thus, the Board of Finance feels it is important to move to a formal reserve policy going forward. At the same time, the Board generally feels that the target range needs to be moved somewhat higher than the historical guideline but does not feel the target needs to be raised as high as those used by some other towns, given the strength of Ridgefield’s tax base and the consistency of its historical budget results. Thus, it is considering setting the new target at 9%-12%, with the low end being equal to the top of the prior guideline level, and the upper end of the range being set three percentage (or 1/3) higher.

While the concept of a formal policy is to enforce a standard, the Board of Finance believes there does need to be a process to deviate from the policy in special circumstances. Section 3 of the proposed policy provides that in any given budget year, the Board of Finance can set a target outside the stated range if the deviation is approved by a “supermajority” vote of the Board. In this manner, the Board can react to unusual economic or financial situations when planning the town budget in a given year, but only with a strong consensus view. Any such deviation would apply only to that budget year and would not be a permanent change in the policy.

Proposed Policy Language
Ridgefield Board of Finance
Proposed Reserve Policy – November 2023

  1. For purpose of this policy, “Budget Reserve Ratio” means the ratio of the actual or forecast unassigned fund balance as of June 30, to the total expense budget, including debt service expenses, for the subsequent fiscal year.
  2. In developing the annual fiscal year budget, the Board of Finance shall seek to maintain the Budget Reserve Ratio within a target range of 9% to 12%. The Board shall have full discretion as to where in the range it sets the annual target, based on its views of the Town’s current fiscal circumstances, economic and budget outlook, and other relevant factors, with the goal of “establishing and maintaining the Town in a sound overall financial condition” [Town Charter, Sec 4-14].
  3. In any annual budget cycle, the Board of Finance may choose to set a Budget Reserve Ratio that falls outside of the target range established in paragraph 2, upon approval of 3/4 of the Board members who are present and voting. Such deviation shall apply only to the annual budget under consideration.

NOTE: This description is intended for general informational purposes, to present the scope of and considerations involved in the new reserve policy being proposed. The write-up is not intended to represent the specific views of any individual member of the Board of Finance, and the Board of Finance has not taken any action on the policy at this time.