Facing temporary cash shortfalls under new emergency tax-leniency rules and with the fiscal year beginning in July, more municipalities are considering a rarely-used short-term borrowing option.
“We just don’t know where we’re gonna land,” cautioned Deep River First Selectman Angus McDonald. “I’m certainly hopeful that the majority of our revenue will come in as normal, but this is anything, but a normal situation.”
Deep River typically collects about half its tax revenues in July and August. The town also completes the majority of its spending for the year prior to September, McDonald explained.
The town has built its reserve fund over the last four years to about 10 percent of the annual budget, according to McDonald. The town budget anticipates $14.2 million in spending in the upcoming fiscal year.
Deep River is currently considering tax anticipation notes – an uncommon type of bond that allows municipalities to borrow money to cover short-term cash shortages. The notes have to be paid off within the fiscal year, so they can’t be used to cover actual shortfalls in total annual revenues.
It’s usually rare for municipalities to pass tax anticipation notes, said Bruce Chudwick, a Hartford-based municipal finance attorney whose firm has drafted resolutions for Deep River and other towns to authorize the short-term borrowing. But April 1 and April 9 executive orders signed by Gov. Ned Lamont requiring municipal leniency on late payments of local taxes have some towns concerned that they may not have the cash to cover expenses as the new fiscal year begins in July.
Of Chudwick’s clients, the Town of Seymour has also authorized tax anticipation notes, and he said he wouldn’t be surprised to see other towns follow suit.
Earlier in May, the Essex Board of Selectmen approved a $5 million note.
Guilford has also discussed tax anticipation notes as an option, said First Selectman Matt Hoey, but after reviewing the town’s finances decided they would have enough cash on hand to cover the next months.
Guilford offered a full deferment to its taxpayers — one of two possible options required as part of the executive order — but expects on-time payments from those who weren’t negatively impacted by COVID-19, said Hoey. The town also expects timely mortgage escrow accounts payments of about $15-18 million.
Hoey noted that July and August are the months the school district spends the least, and that the town could postpone obligations like pension contributions to later in the year, if it had to.
For now, the tax anticipation notes are a precaution and towns will look at revenues in July and August and decide if they actually need to borrow money.
“It doesn’t increase spending by the town, it doesn’t increase our budget, it simply lets us fulfill our financial obligations that already exist,” McDonald said.
Under the state of emergency, the Board of Selectmen and Board of Finance could approve the measure without a public vote, but McDonald said that the current plan in Deep River is to put the question to a town meeting in the new fiscal year.
If the notes are approved, the town would only use them to solve a cash flow issue, McDonald said.
“I really have no interest in doing that, but at the same time, we need to have the option available,” he said.