By Kevin McNabola
Orange Board of Finance
Kevin McNabola
If you are a mayor or first selectmen in Connecticut you better be dialed into the current state of the US economy and the inflationary factors that will play a major role in defining this year’s budgetary process.
There is a lot of volatility within economic markets, with the 10-year Treasury yield now over 5 percent for the first time since 2007. There are a lot of city and town CEOs around Connecticut considering holding off on any future bond issuance for capital projects so as not to increase their debt service for the upcoming year.
There are several key drivers that will certainly contribute to increased budgetary pressure. The cost of diesel, gasoline, heating oil and electricity all up well over 20 percent in the last year. Other major cost drivers include salaries/wages, with increases for city employees in the 3 to 3.5 percent range in Connecticut. Healthcare and pension benefits are up on average around 10 percent statewide. Salaries and benefits account for 70 percent of most municipal budgets.
The budget processes for state and local governments are one of the largest commitments each year for those organizations. That’s why town and department leaders need to establish goals and objectives to drive a citywide strategic growth plan. Each municipality should also have a defined financial plan that outlines and includes certain essential policies:
Reserve and fund balance policy: The ability to maintain healthy reserves is essential to long term fiscal stability. Moodys and S&P ratings agencies recommend a benchmark of 15 to 18 percent of the total budget, providing a buffer for economic downturns and emergencies.
Revenue policy: Cities and towns rely on a mix of revenues, including state aid, fees and investment income. Property taxes on real estate and motor vehicles account for 60 percent to 90 percent of revenues.
Structurally balanced budget: A sustainable budget aligns ongoing revenues with ongoing expenditures. Reserves can provide short-term balance; however, relying on them in the long term is frowned upon by the ratings agencies. Clear policies should define and reinforce the importance of maintaining the structural balance of a budget.
Debt service policy: The policy regarding debt should establish parameters and guidance for a municipality to ensure that borrowing and repayment of debt be met for capital requirements and are carried out with timely repayment of long-term principal and interest. The ratings agencies recommend debt not exceed 8 to 9 percent of the total operating budget.
A 5-year capital improvement plan: The capital improvement plan should align with the city’s or town’s strategic growth plan. Long-term planning is critical to ensure that cities and towns can responsibly operate and maintain infrastructure. A solid plan accounts for the short-term upfront capital cost along with the long-term cost of debt service.
Long-term strategic planning is a growth plan formulated by city leaders within the municipality and works best when both parties have a seat at the table. By promoting a culture of shared responsibility, resources are managed collectively and departments are engaged in the process. These principles strengthen decision making, promote transparency and ensure that resources are used wisely with the result of having a city or town that is prepared to meet the needs of the future.
Orange has adopted some elements of strategic planning by recently engaging an architect to conduct a building assessment of all the elementary schools to determine which schools need future capital investment. The Amity school district is also taking a similar approach, looking to do a $39.3 million bond issuance for school renovations and upgrades sometime in the summer or fall of 2027.
Orange has one of the lowest debt service burdens, currently at 3 percent of the total operating budget. It is low because over the past decade Orange has paid for capital infrastructure on a pay-as-you-go basis, using money from the capital fund rather than issuing bonds. This has saved millions of dollars on interest. The last time Orange issued bonds was back in 2021, when interest rates were at 1.25 percent.
Interest rates are much higher today, and there will likely be a rate hike by the Federal Reserve in December as well as more expected in 2027. Inflation will remain high for the foreseeable future. Orange is unlikely to issue bonds anytime soon.
The number one factor for this year’s budget will be affordability. All indications point to the fact that taxpayers are stretched thin. A true indication of that is what just happened in Woodbridge, with the residents voting 2-1 against constructing a new school in a referendum.
As the Board of Finance moves forward with budget deliberations, we certainly understand the challenging economic environment ahead and all the drivers that are putting pressure on budgets. However, as a board we have a fiduciary responsibility to balance priorities and mitigate the impact on taxpayers.
Kevin McNabola is the chief financial officer for the city of Meriden and a member of the Orange Board of Finance.