Apr. 24—OLD LYME — Are residents being overtaxed?
It's a question looming over an estimated $13.1 million in savings that the town has been steadily accruing over the past several years. It now amounts to 32.8% of the town's total operating budget.
A comfortable undesignated fund balance — or rainy day fund — helps towns secure higher bond ratings, which translates to favorable interest rates on bonding projects. It's also an important source of funding in case of emergencies. Bond agencies recommend municipalities keep at least two months of annual operating expenses in the fund, which in Old Lyme's case is $6.8 million.
But critics argue towns are collecting too much in taxes if they have that much in surplus.
Local officials justifying the substantial rainy day fund in past years have pointed to the threat of a literal storm: a hurricane that could potentially wipe out a significant portion of the town's tax base built upon expensive beachfront homes.
Others, like Board of Finance Chairman Bennett J. Bernblum, cite a more metaphorical storm in the form of bond payments that will come due once the $58 million schools renovation gets underway on four of the Lyme-Old Lyme school district's five buildings.
Bernblum said there's not much argument that the amount of money being stockpiled in savings is high.
"Some people are saying 'yeah, it's too high.' Other people are saying 'yeah, but it's good for a rainy day,'" he said. "And our rainy day has arrived."
He estimated the town's share of the regional school district project to be around $29.4 million, which would be paid, plus interest, over the life of the bonds. The impact won't be felt in the upcoming budget year that starts July 1, but will likely hit the following year with an initial payment that could rise to $3 million.
Having enough money in reserve when the bond payments come due means some of the savings can be used to reduce tax bills for residents who otherwise would be facing a big increase.
"Whether the amount we've retained was the right judgment call or whether it was too generous, we're very lucky to have it now with the increased tax burden coming down the road," he said.
Bernblum doesn't subscribe to the idea that a potential storm is reason enough to maintain the rainy day fund at such a high level. For him, the certainty of needing the money to mitigate the cost of immediate projects outweighs "the possibility of needing it tomorrow."
In the absence of immediate needs, he said the question of overtaxation will need to be revisited.
"I think there should be a discussion regarding whether the fund balance is too high and whether we should use it to mitigate or reduce current tax needs," he said. "And I think the answer probably would be yes: It is too high, and we should bring it down."
The town received its last credit rating in 2009 before borrowing money for the town hall renovation project. Standard and Poor's at the time gave it the second highest bond rating of AA+.
Preparing for storm damage
Resident Howard Margules, a retired financial services executive and active town volunteer, wondered if there aren't other ways to address the risk of storm damage rather than relying on the rainy day fund.
He suggested alternative approaches to planning for future emergencies, such as specialized insurance coverage, a designated coastal resiliency fund or regional efforts to share resources through the Lower Connecticut River Valley Council of Governments.
"You would think the other shoreline communities have the same potential risks we do," he said. "No one else is really maintaining a surplus at this level."
Finance directors from area towns reported undesignated fund balances as of June 30 of last year ranging from 14.89% in East Lyme to 35% in Lyme. Old Saybrook came in at 17%, Groton at 21.24%, Stonington at 24.98% and Waterford at 25%.
"You have to ask the question: Is this overtaxing? And I can't definitively say either way, it's just that relative to other towns we've always been substantially higher," Margules said.
To bond or not to bond
Residents will have the chance to consider the implications of bonding versus using the rainy day fund in the coming weeks. That's because the Board of Selectmen and Board of Finance on Tuesday voted to ask taxpayers to consider borrowing money to pay for the Lymes' Senior Center renovation.
The project has already been approved by voters. The question now is how to pay for it.
The town is responsible for about $4.1 million of the $6.1 million project. The rest will be reimbursed by the town of Lyme and covered by state grants.
A town meeting on April 30 will adjourn to a May 7 referendum vote.
Bernblum said officials chose not to take the money out of the undesignated fund balance because they want to keep funds available "to mitigate tax increases in future years" while still maintaining a healthy savings.
When the impact of the bond payments first hits in the 2025-26 budget year, Bernblum said projections for possible scenarios shows a bond paid back over 20 years with an interest rate of 3.45% would cost $334,550, including principal and interest payments. The interest rate would decline with each passing year.
The referendum vote in Old Lyme to approve the project last June included a caveat that no debt would be issued as a result of the project.
"We wanted to undo that and make it clear that bonding was a permissible way to finance it," he said.
Tim Griswold, first selectman at the time of last year's vote, had expressed a preference for using the rainy day fund or getting a bank loan.
But on Wednesday, he said he's come around to the idea of borrowing the money on the municipal bond market because the tax-exempt interest rates are advantageous.
He said the town also stands to earn more money in interest on its substantial savings than it would spend on bond interest, at least for now. He said if the Federal Reserve System changes that dynamic by lowering interest rates, the town could consider paying off the project out of the surplus.
"It might be a good move initially to use borrowed funds," he said.
Griswold, too, acknowledged the need for more discussion going forward on the desired amount of the undesignated fund balance — whether that's 20%, 25% or 30% — and how to keep it there.
"I think everybody would agree it's high," he said.
Old Lyme's rainy day fund through the years
These numbers, provided by the Board of Finance, show Old Lyme's undesignated fund balance as a percentage of the operating budget.
2017: 24.8%
2018: 24.2%
2019: 25.0%
2020: 22.2%
2021: 24.6%
2022: 30.3%
2023: 32.8% (estimated)
e.regan@theday.com
Editor's note: This article was updated to correct the estimated amount to be borrowed for Old Lyme's share of the school renovation project.
