Council Approves $1.5 Million in Transfer Requests: Stabilization Fund and New Liability Trust Fund Bolstered

January 30, 2014
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The new Everett City Council got down to business Monday night and immediately took up a pair of $773,500 transfer requests from Mayor Carlo DeMaria and the finance department, ultimately voting to approve both.

The votes moved a total of more than $1.5 million into the city’s Stabilization Fund and the recently established Other Post-Employment Benefits (OPEB) Liability Trust Fund.

Both transfers were made from the city’s recently certified free cash account, officially known as the Budgetary Fund Balance.

However, neither vote was unanimous, as Councilor John Hanlon was the lone vote against the transfer to the Stabilzation Fund and was one of three votes against the transfer to the OPEB fund.

Following the meeting Hanlon explained that he wasn’t against either transfer in concept, but would have preferred to see the requests go to the new Council Committee on Ways and Means to allow a full vetting of the reasons for the transfers.

“I’m not against anything,” said Hanlon. “I just wanted to have the reasons for the transfers explained fully in the proper forum.”

The effect of the transfers put aside money into funds designated to protect the city against future financial troubles.

City Auditor Richard Viscay was on hand to explain the two transfer requests. According to Viscay, the request to add $773,500 was based on a policy adopted by the Mayor and City Council last year to take 15-percent of each year’s certified free cash and place it into the Stabilization Fund, so that in future economic downturns the city would not be forced to cut services to residents as a way of balancing the budget.

Money that is placed into the Stabilization Fund can be taken out of the account when it is needed to fund budget priorities or deal with budget deficits, by a simple vote of the City Council.

In fact, the city did take money from the Stabilization Fund just last year, to make up a shortfall that was created when projected state revenues for the school department were higher than the actual state aid that was provided to the schools and according to Viscay Monday night’s transfer into the Stabilization Fund brought that account back up to about $10 million. Viscay said that he would like to grow the Stabilization Fund to approximately $14 million over the next few years.

The second transfer placed an identical 15-percent of the free cash into the newly established OPEB Liability Trust Fund that was created by a vote of the Common Council and Board of Aldermen in December.

The purpose of the new liability trust fund is to help the city show bond rating agencies and the Massachusetts DOR that it is planning for actuarial deficits that have been identified by auditors in city government operations.

Essentially, the cost of city’s healthcare plan and other post-employment benefits for retirees can be forecasted out over the next several decades. Since Everett, like many municipalities appropriates money each year to pay its health care costs, the anticipated costs that can be forecasted due to the structure of employee benefits shows up on the city’s balance sheet as a liability.

It is a liability that the city had not previously made any effort to cover. Like municipal pension liabilities, these deficits compound annually over time unless there is a funding mechanism in place that can help the city meet those costs in future years.

Everett’s unfunded OPEB liability is approximately $159 million. However, once the city begins saving money into the account to deal with that liability, the city will actually get credit for the trust fund and the impact of the actual liability on city finances is mitigated.

With the establishment of the OPEB Liability Trust Fund, the city now has a funding mechanism to show to auditors and reduce the unfunded liability. The $773,500 appropriation to the OPEB Liability Trust Fund is the first deposit into that newly created account.