FY20 Financial Management

Strong financial management is the foundation of City operations. Our practices provide a structure we use to protect the present, meet commitments, and plan for the future.

The Mayor directs the City’s financial operations and serves as the City's Chief Executive Officer. He supervises and controls the City’s cabinet officers, departments, boards, and commissions. Boston's cabinet form of government moves mayoral priorities and daily business practices forward.

The departments in the Administration & Finance Cabinet support fiscal discipline. The departments in this cabinet include:

• The Treasury Department
• Auditing Department
• Assessing Department
• Office of Budget Management
• Purchasing Department
• Office of Human Resources
• Office of Labor Relations

Our budget supports City Services as guided by mayoral priorities. Maintaining this goal within a balanced budget requires careful planning and constant scrutiny. A balanced budget is one where revenues equal expenditures, and is a requirement for all Massachusetts cities and towns. To meet this requirement, we use internal controls to prepare for unexpected revenue or expense challenges. These controls include managing discretionary spending and employee headcount, among other things.

The Massachusetts Department of Revenue approves property tax rates during the tax certification process. The process, governed under Massachusetts General Laws (MGL) Ch.59, S.23, ensures a balanced budget and a tax levy within the limits set by Proposition 2 ½.

Over 80% of recurring general fund revenue comes from property tax and state aid. The continued net decrease in state aid, our second largest single source of revenue, highlights the risk of relying on any one source of revenue. To protect and grow our revenue base, we expand current revenue sources and pursue diversified revenue sources.

The City develops a financial forecast as part of its yearly budget process using a multi-year planning horizon. This process gives us insight into policy decisions that we may need to make to maintain balance and time to make any adjustments.

City employees take part in a contributory defined benefit retirement system. The system is managed by the Boston Retirement System (BRS), of which the City is the largest member. The BRS provides pension benefits to retired employees under a state contributory retirement statute. A five-member Retirement Board administers the statue. The five members are:

• the City Auditor, who serves ex-officio
• two individuals elected by members of the system;
• an individual chosen by the Mayor;
• and an individual chosen by the other four members or appointed by the Mayor if a selection is not agreed upon within 30 days of a vacancy.

Every two years, a full valuation is done to determine the system’s unfunded liability and annual funding requirement. The BRS hires an investment manager to oversee the fund managers of all (non-teacher) pension assets

Employees earn post-employment healthcare and life insurance benefits over their years of active service. They can use the benefits during retirement. The City, including the Boston Public Health Commission (BPHC), has an unfunded liability for these benefits of $2.3 billion as of the most recent independent actuarial valuation on June 30, 2015. Changes to retiree health benefits, the amount of the City’s annual contribution, and the discount rate used are all factors that can affect the liability.

We maintain adequate levels of fund balance to reduce current and future risk. Budgetary fund balance is the amount of reserves available for the City to appropriate. The Massachusetts Department of Revenue certifies the amount of budgetary fund balance we have. We only consider spending our fund balance to cover certain fixed costs and extraordinary and one-time events.  Some fixed costs that may be covered by a fund balance include pensions, OPEB. Extraordinary and one-time events that may use fund balances are determined by the City Auditor.

We have policies* that govern how we can invest. Limits are placed on the City’s investments and operational practices to make sure decisions are sound, timely, and safe. We limit our investments to repurchase agreements, money markets, and certificates of deposit collateralized by U.S. Government obligations and held with a third party.

*Defined in Ch.643 of the Acts of 1983 (“The City of Boston Bond and Minibond Procedure Act”), Ch.107 of the Acts of 1991, and MGL Ch.44 of the General Law

Debt issuance is evaluated for its effect on both statutory debt capacity and cash flow. We use conservative debt policies which include:

• rapid repayment of debt, where at least 40% of debt is repaid within 5 years and 70% in 10 years,  and
• a 7% ceiling on debt service as a percentage of our general fund expenditures.

The City imposes a 20% ceiling on variable debt and has no variable debt outstanding. We use lease purchase financing to upgrade and replace front line equipment with a three-to-seven year useful life.

Our capital planning is aligned with our annual operating budget cycle. This pairing allows us to regularly reassess capital needs, clarify projects, and update our rolling five-year plan. We prioritize our capital requests and take into account project budgets and timing so that we can divide funds responsibly.

We primarily fund our capital plan through the issuance of general obligation bonds. The size of our bond issue is consistent with our financial management policies debt level and debt service.

The Uniform Procurement Act (the UPA), or MGL Ch.30B, creates uniform procedures for contracting services and supplies. Our contracting procedures conform to UPA requirements. Our eProcurement system supports these efforts.

Tight central spending controls give us the flexibility we need to adjust to fiscal changes and trends as needed. We monitor spending on a monthly basis and project our year-end position using actual information. Combined with conservative revenue estimates, we maintain a solid financial position.

The City's Chief Financial Officer, Human Resources Director, and Budget Director sit on the Position Review Committee. The committee is instrumental in maximizing resources. In a city where employees and employee benefits make up for over 75% of the total appropriation, position management is necessary.

Our risk management strategy uses internal claims management, department accountability, and a structured self-insurance program. With these tools, we try to reduce the cost of third party liabilities, worker injuries, healthcare, and property damage. MGL Ch.258 caps legal liabilities and Corporation Counsel defends us in lawsuits that happen in the normal course of operations.

A self-insurance program budgets for predictable levels of risk-related costs through the general fund. This does not include self-insured healthcare costs financed through trust funds established under MGL Ch.32b S.3A. We also carry a catastrophic property insurance polity and maintain a reserve for large unexpected losses.

Per law, we maintain a reserve fund equal to 2 ½%  of the preceding year’s appropriations for all City departments (excluding the School Department). The reserve may be used for extraordinary and unexpected costs after June 1 in any fiscal year if the Mayor and the City Council approve. To date, we have not used this reserve.

We regularly receive unqualified opinions on the audit of our Basic Financial Statements and the Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association for our Comprehensive Annual Financial Report. Additionally, independent auditors give us an annual management letter with comments and recommendations for our internal financial controls.

We use the Boston Administrative Information System or BAIS, to manage our financial and human resources. The system supports our monitoring and reporting requirements while improving operational efficiency.