As the city of Northampton prepares to enter the bond market to finance its new police station, some cautionary tales seem worthy of consideration. The city plans to sell municipal bonds and pay interest to investors in order to build the station, then pay down the debt by transferring money from its free cash account, evidently on a regular basis, into a capital stabilization fund created by the city council in 2006. Absent money from free cash, the city will likely need to divert some of its tax revenues to pay the debt. After funds are placed into the capital stabilization fund they will be drawn to pay down the debt incurred by the bonds. Presently the $14 million police station will cost about $20 million once the bonds are paid off, or about $1 million per year. While I'm certain that the city will perform due diligence in these transactions, some municipalities have faired poorly in this regard.

Here are links to some NPR podcasts concerning the risks of bonds and how supposedly good investments have gone bad.

Municipalities squeezed in bond market

Wisconsin school investment has worldwide implications

Wisconsin schools shocked by bad investment

Irish bank's rapid global growth bought trouble

Below is data from the state's Department of Local Services concerning Northampton's local receipts and estimtes of receipts from 1985 to 2006. I believe the difference is generally designated as free cash. The fiscal years 1989 and 1999 show a deficit. Will fiscal year 2009 show the same?

From the DLS website:

Unrestricted funds from operations of the previous fiscal year that are certified by the
Director of Accounts as available for appropriation. Remaining funds include unexpended
free cash from the previous year, receipts in excess of estimates shown on the tax
recapitulation sheet, and unspent amounts in budget line-items. Unpaid property taxes
and certain deficits reduce the amount that can be certified as free cash. The calculation
of free cash is based on the balance sheet as of June 30, which is submitted by the
community's auditor, accountant or comptroller.
A community should maintain a free cash balance to provide a hedge against
unforeseen expenditures and to ensure there will be an adequate reserve to prevent
sharp fluctuations in the tax rate. Maintenance of an adequate free cash level is not a
luxury but a necessary component of sound local fiscal management. Credit rating
agencies and other members of the financial community expect municipalities to
maintain free cash reserves and make judgments regarding a community's fiscal

stability, in part, on the basis of free cash.

Free cash is a revenue source which results from the calculation, as of July 1, of a community's remaining, unrestricted funds from operations of the previous fiscal year based on the balance sheet as of June 30. It typically includes actual receipts in excess of revenue estimates and unspent amounts in departmental budget line-items for the year just ending, plus unexpended free cash from the previous year. Free cash is offset by property tax receivables and certain deficits, and as a result, can be a negative number.
Cities and towns generally use free cash to support current year operations or as a revenue source for the ensuing year's budget. However, until a balance sheet for the prior year is submitted by the accountant, auditor or comptroller and free cash is certified by the Director of Accounts, it is not available for use. DOR certification protects communities from relying on free cash that does not materialize due to an inaccurate, unconfirmed local estimate.
DOR recommends that communities understand the role free cash plays in sustaining a strong credit rating and encourages the adoption of policies on its use. Under sound financial policies, a community would strive to generate free cash in an amount equal to 3-to-5 percent of its annual budget. Free cash would not be depleted in any year, so that the following year's calculation would begin with a positive balance. Conservative revenue projections and departmental appropriations would be orchestrated to produce excess income and departmental turn backs. As a non-recurring revenue source, a prudent use of free cash would be to fund one-time expenditures, a capital purpose or to replenish other reserves. If projected as a revenue source to support the ensuing year's operations, the amount used would be restricted to a percentage of total free cash.
However, DOR also recommends that free cash not be available to supplement current year departmental operations. By eliminating the expectation of additional resources later in the fiscal year to back-fill budgets, department heads will produce more accurate and realistic annual appropriation requests.
Under any circumstance, the use of free cash requires an appropriation approved by the city council on recommendation of the mayor, town council or town meeting, but only after it is certified by DOR. The same rules apply to DOR certification of retained earnings which is the enterprise fund equivalent of free cash.

FY Actual Local Receipts Estimated Local Receipts Difference Dif. as % of Est.
1985 5,711,139 4,939,730 771,409 15.62
1986 6,770,109 5,591,596 1,178,513 21.08
1987 6,904,072 5,805,552 1,098,520 18.92
1988 7,699,446 5,913,498 1,785,948 30.20
1989 6,213,225 7,058,535 (845,310) (11.98)
1990 8,138,909 7,078,783 1,060,126 14.98
1991 7,301,735 7,119,456 182,279 2.56
1992 7,410,327 6,995,205 415,122 5.93
1993 7,551,667 6,641,906 909,761 13.70
1994 7,707,568 7,334,830 372,738 5.08
1995 8,630,385 7,419,709 1,210,676 16.32
1996 8,246,904 7,882,918 363,986 4.62
1997 9,111,451 8,339,569 771,882 9.26
1998 10,812,198 9,113,258 1,698,940 18.64
1999 10,557,672 10,788,973 (231,301) (2.14)
2000 12,530,267 11,498,523 1,031,744 8.97
2001 14,099,632 11,990,887 2,108,745 17.59
2002 10,043,644 9,462,754 580,890 6.14
2003 10,532,835 9,382,056 1,150,779 12.27
2004 10,910,543 9,848,222 1,062,321 10.79
2005 11,495,730 9,882,078 1,613,652 16.33
2006 11,889,825 10,962,623 927,202 8.46