January 4, 2014
Free Cash isn’t Free – Tregor and Reserves

The City of Boston maintains a variety of reserves and accounts that are required either by general accounting practices or by laws of the Commonwealth of Massachusetts.

The most important of these reserves is what is known as “Free Cash” – though it is neither free, nor cash.  Free Cash represents the total amount of the City’s reserves that are available for appropriation.  Free Cash must be certified by the Massachusetts Department of Revenue prior to appropriation, as the DOR provides the definitive amount of reserves that are available to be spent.  At any given time, the City may not appropriate (or spend) more than is certified by the DOR.

Typically, the City requests that DOR certify Free Cash in the winter if the City is seeking to appropriate a portion in the following fiscal year’s budget.  Because Free Cash is not a recurring source of revenue, it should never be used to support recurring expenses.  However, in times of fiscal decline or economic distress, a prudent level of Free Cash may be appropriated as the City adjusts to lower levels of recurring revenue.  Since Fiscal Year 2010 (the first budget adopted after the onset of the Great Recession), the City has appropriated Free Cash in all but one year.

While the DOR-certified Free Cash reserve is the most important reserve for budgeting purposes, there are many other reserves that the City must or should set aside for future expenses or as a result of State law.  Some of the most important and well-known reserves are:

  • Tregor Reserve.  This reserve, established in Massachusetts General Law, requires that the City reserve not less than 2 ½ % of the preceding year’s appropriation.  In FY14 that amounts to approximately $29 million
  • Overlay reserve.  State law requires that the City base its budget on the assumption that 100% of property taxes will be collected each fiscal year.  Of course, this does not happen in reality – many taxpayers are delinquent or legally dispute their assessments through the abatement process.  Thus, the City sets aside a prudent overlay reserve to accommodate both delinquencies and abatements.
  • Reserves for commitments for goods and services.  At the conclusion of the fiscal year, many vendors have not yet billed for goods or services that have been received by the City in that year.  Thus, the City must reserve for the payment of those yet-to-come bills so that the cost may be assigned to the year in which it was incurred.
  • Risk Retention Reserve.  The City maintains a combination of commercial insurance and risk reserves to ensure that resources are available in the event of large-scale loss of City-owned property – such as major storm damage or fire damage.  While insurance is an annual operating expense, reserves may be carried over fiscal years to be spent when a large-scale loss occurs.
  • Collective Bargaining Reserve.  In years when the City has expired labor union contracts, the City centrally reserves for the anticipated salary increases.  If the contracts are not renegotiated by the conclusion of that fiscal year, the reserve is maintained in that fiscal year until such time as the contract is settled.  At that time, the portion of the agreement that applies to each of the prior fiscal years is paid out of that reserve.

After all of these reserves, and other minor ones, are taken into consideration, the resulting calculation of Free Cash ensures that resources are available to pay out all of these obligations.