Falling interest rates create budget shortfall (4/2/09)

Town struggles with tiny returns on money

April 2, 2009

By Greg Elias

Observer staff

More fallout from the economic crisis: Miniscule interest rates have left a $100,000 hole in Williston’s municipal budget.

The town’s latest monthly financial report shows $33,089 in interest income through the end of February. With two-thirds of the fiscal year complete, the town has collected only 18 percent of the projected amount.

Finance Director Susan Lamb called interest income “dismal” in her financial monthly report. She expects revenue from that source to be under budget by about $100,000. The town projected $184,000 in interest income for the 2008-2009 fiscal year.

Interest rates have been slowly dropping for years, said Town Treasurer Deb Beckett. But when the economic crisis hit last year, interest dropped severely as the Federal Reserve lowered rates to cope with the credit crisis.

“Every time you turn on the TV they are lowering the interest rate,” Beckett said. “It’s a great thing for homebuyers and other kinds of things, but it’s not good for investments.”

The town has roughly $8 million in 43 accounts, Beckett said. They include everything from funds used to pay the day-to-day operating expenses to money set aside to replace sewer pump stations.

By policy, Beckett said she limits risk by depositing money only in federally insured accounts that mature in a year or less.

Those restrictions limit interest potential but ensure the town won’t lose taxpayers’ money and can make withdrawals as needed.

Still, the town had until recently collected a decent return on its money. Beckett said 10 years ago interest rates were 6 percent to 7 percent and just a year ago were running around 3 percent. Now, interest on savings accounts is well under 1 percent.

Beckett said she is constantly checking rates and often shifts money from one bank to another. But she said she uses only healthy financial institutions.

“We do the best we can with the banks, but I’m very limited with where I can put money,” Beckett said.

One of the town’s larger accounts, the conservation fund, illustrates the impact of falling interest rates. Money is periodically allocated to the fund, which allows the town to buy conservation rights for the purpose of preserving open space.

The fund, which now totals more than $500,000, was drawing 3.87 percent interest in January 2008, producing about $1,800 in monthly income, Beckett said. A year later, the fund was drawing 0.25 percent interest, good for only about $120 in monthly income.

The conservation fund money and other accounts have now been put into a CD with a 1.75 percent interest rate.

The interest income calculated by Lamb includes only money in the general fund. Revenue and expenditures not included in the operating budget — impact fees, the conservation fund, water and sewer fees, for example — are excluded from the interest income calculation, Lamb said. But those pots of money are of course also collecting less interest.

Interest income was the worst performing source of revenue for the town. Property taxes, the largest source of revenue, are running ahead of estimates. Sales and rooms and meals taxes are falling somewhat short of expectations, with collections at 54 percent of the amount projected by year’s end.

Town Manager Rick McGuire said the shortfall in interest income will be bridged using the town’s budget reserves. He didn’t expect any immediate effect on town services. But he acknowledged that shrinking reserves could affect the town in future years, especially if the economy continues to falter.

McGuire said he could not have foreseen the financial crisis and the resulting interest rate drop. Work on 2008-2009 budget and revenue estimates began in fall 2007.

“If I had a crystal ball and I could see the future, I certainly wouldn’t have budgeted that amount of money” for interest income, he said. “But I don’t have a crystal ball.”