Official ‘Nervous’ About Depleting Borough Reserve Fund To Lower Taxes

By John Voket

A suggestion to use half of a reserve fund to substantially reduce taxation in Newtown’s “town-within-a-town” was met with some resistance by the local borough’s top elected official during a crowded meeting at Town Hall South Tuesday evening.

The plan was tendered by residents John Klopfenstein and Nick Schmidt, who represented himself as a “spokesperson for a group of people” who proposed drawing down the amount in reserve between $108,000 and $110,000 to reduce the borough tax rate — an additional tax paid by residents in the centrally established district in Newtown’s center — from 0.61 mills to 0.30 mills.

Mr Schmidt said he spent an entire day recently at the state Office of Policy and Management (OPM) reviewing financial records of the boroughs of Danielson, Fenwick, Jewett City, Litchfield, and Stonington. He said when averaging four years of those boroughs’ reserve funds compared to the Borough of Newtown, “clearly Newtown stands out above the pack,” saying locally, it appears that more than an entire extra year’s budget is currently held in reserve.

Mr Schmidt also presented a running total of the Newtown borough’s reserve fund balances going back to 2002. He said that in each of the last three years, more than the total of a full year’s budget was kept in reserve, versus a history of the borough maintaining reserve balances as low as just 3.7 months in 2004, to 9.6 month’s worth of reserves in 2006.

The borough resident said that by applying the suggested, and uncharacteristically high, amount from the reserve fund to offset an increase in taxation was warranted.

“Halve the mill rate,” Mr Schmidt said. “It would help in a very tight economy, and I’m sure it would be very much appreciated [by borough taxpayers].”

He said using his formula would still leave the borough with about 7.5 months worth of “cash on hand,” in reserve if needed.

Borough Warden James Gaston responded, extending his appreciation for all the legwork Mr Schmidt did at the OPM office in Hartford, but he was afraid the information that was gleaned and presented compared to Newtown’s was flawed because he was using inaccurate data from his own borough’s budget and financial reports.

Historically Low Taxation

Mr Gaston, who also serves as the vice chair of Newtown’s Board of Finance, first stated that in his review of financials going back “more than 20 years,” borough taxpayers have enjoyed the lowest taxation rates during the past two years.

“This year’s mill rate of 0.58 percent was the lowest mill rate in the last 20 years and the previous year’s mill rate of 0.61 was the second lowest,” Mr Gaston said. “And next year, I’m going to propose we return to a 0.61 mill rate.”

Mr Gaston then pointed out that Mr Schmidt presented comparison figures of “cash on hand” in reserve for the current year’s budget at $309,091. But the borough warden contended that the figure was incorrect, because it counted reserve funds that were specially designated by their grantors for specific capital improvements, and were not discretionary.

He said when all the specifically designated reserve funds were taken from the equation, the borough was left with about $190,000 or about 10–11 months of the borough’s $200,000 annual budget in reserve. Mr Gaston furthermore said that he was going to propose drawing $25,000 from that reserve to keep 2020–2011 taxation to the same amount borough residents paid in 2008.

He said, however, that “taking out that $25,000 makes me very nervous,” because the borough’s CPA and auditors suggest that reserves should be kept at about the equivalent of one year’s budget.

“This is our emergency fund,” Mr Gaston said, adding that since municipal bonding for projects typically does not ever exceed half of a community’s annual budget, if a bond was required, the borough would only have a maximum of about $100,000 in leverage to borrow.

In justifying the reserve, Mr Gaston stated an example of how quickly that cash on hand might be depleted, saying that if the Ku Klux Klan requested and was denied a permit to hold a demonstration on Main Street, the legal expenses that would be required to defend an anticipated appeal could easily top $100,000.

Mr Schmidt replied that in his review of the other Connecticut boroughs, he did not note any such extreme level of expenditures.

Nonetheless, Mr Gaston said that once the designated reserves were taken off the table, and the nominal draw down of relief he was planning to propose was factored into the upcoming mill rate, he was confident borough taxpayers would be able to see a close comparison to the level of spending and reserves to other comparable Connecticut boroughs.

Other Borough’s Tax Rates

Speaking to The Newtown Bee before the Tuesday meeting, Litchfield’s borough warden Lee Losee said that community keeps $50,000 in reserve for an average $200,000 budget. He said in Litchfield, approximately 10 percent of the borough’s tax base is commercial, and that the current tax rate is 1.3 mills.

Mr Losee said in preparing for the next fiscal year, it was his hope to keep the increase in taxation flat.

Stonington borough warden Donald Maranell and his administrative aid Barbara Perry told The Bee their community draws about 20 percent of its taxation from a thriving commercial base. And while Stonington, with an average borough budget of about $960,000, keeps only $25,000 in its emergency contingency fund, it also maintains numerous special funds for designated projects.

The warden said Stonington also received subsidies from the Town of Stonington for certain municipal services provided and paid for by the borough, primarily for highway department work. He added that borough taxpayers are also paying off a $2 million bond from 2007 that was used to construct a new central volunteer fire headquarters.

Mr Maranell said that he expected that his borough’s current 1.85 mill rate would increase to about 1.9 in the coming fiscal year.

When asked about the ratio of keeping a full year’s budget amount in reserve, Newtown’s borough CPA Glenn Nanavaty said that while there was no textbook reference for the fund balance amount, he has always used a “rule of thumb” reference point based on his experience.

“Larger governments have used 10–25 percent of budget as a measure, while smaller governments have used amounts in excess of 25 percent because of the nature of contingent items like uncollected property taxes, litigation, etc that may arise and can easily be larger than 10–25 percent of a $200,000 total budget [as in the Borough’s case],” Mr Nanavaty wrote in an email response to The Bee’s queries. “Some of the smaller government clients have accumulated fund balance to cover plans for long-term projects (self financed) that they will not put in the annual budgets and ask taxpayers to fund in any single year.”

According to state records, Connecticut’s last borough was incorporated in 1915, and there are less than a dozen of these governments left in the state including the one occupying a roughly two-square-mile jurisdiction encompassing most of Newtown center.

The Borough of Newtown operates with its own limited governmental staff that includes its warden or municipal leader, a Board of Burgesses, a clerk, an assessor, tax collector, building inspector, engineer, attorney, auditor, Historic Commission, tree warden, Zoning Commission and Board of Appeals, as well as a zoning enforcement officer.

While many daily operations within the borough depend on town agencies and employees like planning, probate, health, and police services for example, the borough still reaches into the pockets of its residents who pay annual borough taxes and fees to help sustain its independent operations. These charges are assessed in addition to any other taxes and fees payable to the town.