New Tool For Strategic Financial Planning

‘Impressive’ To S&P, Local Officials

By John Voket

Before the first entry was ever made on it, a financial planning document created by Finance Director Robert Tait was being hailed by a number of elected officials as one of the reasons why the bond rating agency Standard & Poor’s expressed a positive outlook for Newtown, and suggested to a bonding consultant the municipality may poised to receive the agency’s top bond rating.

That document is among several reasons why taxpayers will receive more than a half-million dollars in additional, unanticipated relief in the 2011-12 budget.

Last week officials learned that the latest refinancing of Newtown’s municipal bonds netted $572,000 in additional interest savings, from which $532,000 will be applied to offset projected debt service in next year’s budget. This news was especially welcome since initial anticipated refunding savings was only expected to generate between $250,000 and $300,000 in savings.

Mr Tait said the town’s mission to reduce — and by the end of next year eliminate — tapping the town’s general fund balance to reduce tax increases was another point of interest, not only to the S&P representatives who most recently assessed Newtown’s creditworthiness, but even to front-line investors who were poised to participate in that latest bond refunding.

The finance director told selectmen he was working late the evening before the latest refunding when he received a phone call from a Chicago-based debt finance company representative who was looking at bidding on Newtown’s bonds.

“Despite all the information on record, he asked about how the town was reducing its dependence on the fund balance,” Mr Tait told the Board of Selectmen September 20. Plummeting interest rates were another reason why the town benefited to the extent it did on the refunding, Mr Tait explained.

“I wasn’t going to do it,” Mr Tait said about the latest refinancing. “But interest rates got so low we were able.”

Mr Tait said at this point, he believes every possible avenue for refinancing to maximize bond interest savings has been exhausted. Nonetheless, he said the total savings netted over the three most recent refunding exercises exceeds $2 million.

The finance director added that while the 20-year average interest in the latest refunding is 2.75 percent, the first-year investors will only receive 0.25 percent interest.

A week earlier, Mrs Llodra told the Board of Finance that the aforementioned planning document, presented for the first time by Mr Tait during the S&P visit prior to the successful refunding, appeared to inspire an “aha moment” for the bond agency representatives.

Joint Meeting Planned

The first selectman said the financial forecasting document was cited by the S&P committee as “an impressive strategy,” and she believes it had a positive impact on how the agency promoted Newtown’s future rating outlook. The document also has equally important value internally.

“This becomes what I believe is the underpinning of a strategic plan, which offers us the flexibility for swift course correction,” Mrs Llodra told The Bee in a follow-up interview this week. “It’s an important tool.”

She said she is planning to either request a joint meeting, or individual meetings with the finance board, Legislative Council, and Board of Education to discuss and hear a presentation on how Mr Tait’s financial modeling tool will work in short- and long-term budget planning.

“We will build a body of assumptions and use this tool to determine if those assumptions are correct,” Mrs Llodra said. Mr Tait said, for example, that at least internally he could plug in contractually negotiated increases, along with additional expected future increases to get a clearer picture of how it will correlate to the tax burden five years out or beyond.

“That way we can better meet or mitigate those costs through strategic planning,” Mrs Llodra said. “Through this mathematical modeling, we can establish reliable cost parameters and propel ourselves into the future.”

The first selectman reiterated that because this will remain an “in-house document,” and the assumptions will be generated from established economic forecasts provided either by state and federal sources, or authorities working with and providing data through the town’s bond consultant, the information will be targeted specifically to current trends and local outcomes.

And since the data is all available in real time, and at no added cost to taxpayers, Mrs Llodra said it will permit Mr Tait to constantly hone and update figures to provide advanced warnings and allow for “course correction at any time.”

Tax Burden Outlook

In demonstrating how the budgeting tool, crafted in Microsoft Excel, will work practically, Mr Tait plugged in several hypothetical numbers on various budget lines. The software then automatically filtered and calculated how those demonstration figures would influence the bottom of the spreadsheet to provide mill rate and tax increase projections going out as many as 15 years.

Anticipating critics who might dismiss the effectiveness of this new practice because it is based on projections and assumptions through provided economic forecasts, Mr Tait explained that indeed, long-term projections might “course correct” numerous times before they will be required for actual budgeting and capital planning.

But as each component of data becomes more reliable, or by one to two years out, virtually certain, the modeling tool should project with extreme reliability so both local officials and taxpayers can plan. And in the event the modeling forecasts an unacceptable spike in the tax burden or mill rate two or more years out, Mr Tait said officials can begin looking at revenue side assumptions and strategically manipulate things like anticipated tax revenues and the grand list data to affect the final numbers.

Mrs Llodra concluded that utilizing such planning tactics helps focus elected officials to “best determine the right work to do, without passing unreasonable burdens onto the taxpayers going forward.”

And given the fact that representatives from Standard & Poor’s reacted to the proposed use of such a financial forecasting tool with such enthusiasm, Mrs Llodra said it is evidence of the extreme value Mr Tait brings to the taxpayers, while providing evidence that Newtown is “way ahead of the pack” of Connecticut municipalities in terms of strategic financial planning.