Capital reserve fund basics

One member, and perhaps more, of the Milford Advisory Town Budget Committee, is concerned that voters will have a hard time understanding the concept of capital reserve funds, something new to the town last year.

So, said Peg Seward, who has been around long enough to know how Milford folks react to things, she’d like to see something in writing to explain the funds for voters.

That’s certainly not a bad idea except. …

It really, really shouldn’t be necessary, should it? Here is, we think, a cogent, yet brief, basic definition of a capital reserve fund:

It’s a savings account.

Just like the one you (might still) have at a local bank. You put money into the account to save for something you want to buy later. When you have enough money to buy it, you buy it.

A town does the same thing with capital reserve funds. Many towns use them; Lyndeborough has for years, and they seem to work well.

The accepted alternative to capital reserve funds is bonding, and that is what Milford has historically used. A town issues bonds, people buy them, the town gets the money it needs right away for, say, a new fire station, and eventually pays off the bonds. That works very well when the money is needed quickly. Of course, the town has to pay interest.

A town could just raise property taxes enough in one tax year to get the money it needs, but that doesn’t go over well with taxpayers who get clobbered.

That is where capital reserve funds come in. Let’s take Amherst as an example for this year:

The town wants to renovate its police station, and the estimated cost is $600,000. Rather than bond it, rather than ask voters to approve the cost all at once, selectmen will ask them to set aside, this year, $200,000 in a capital reserve fund toward the cost of the renovation.

Assuming it is approved – we think it should be – then voters will undoubtedly be asked for the same amount next year.

Then, in year three, voters will be asked to raise and appropriate another $200,000 to renovate the police station and asked to withdraw $400,000 from a capital reserve fund established for that purpuse.

Voila! Amherst will have its $600,000 and voters will have been hit for the cost in intervals, not in one shot.

Really, it’s simple, isn’t it?

That said, Peg Seward is someone whose ideas we do not take lightly, and if she thinks something needs to be put into print, and perhaps mailed to Milford voters, well, we would be loathe to disagree with her.