FY20 Financial Management
Our financial operations are governed by some important statues and ordinances. In addition to those, we use well-established policies and internal controls to guide us. The tools we use help us maximize revenue, protect assets, track spending, and evaluate infrastructure needs. Read more about the tools we use in the sections below.
STRATEGIC FINANCIAL MANAGEMENTSTRATEGIC 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.
FINANCIAL MANAGEMENT PROGRAMS
The Citywide Analytics team and the Budget Office drive our performance management efforts. Performance measures exist to ensure that we deliver services effectively and efficiently. These tools help us identify pain points, and develop immediate and long-term improvements to create lasting change in the City.
Our efforts are summarized in CityScore. CityScore was designed to inform the Mayor, City managers, and the public about the quality of life and the performance of City government. It aggregates key performance metrics into one number.
An Energy Management Unit develops design standards and implements measures to create energy efficiencies in our new construction and capital improvement projects.
In fiscal 2019, we began implementing improvements to save on utility costs for our facilities. The improvements happened under an initiative entitled “Renew Boston Trust.” Renew Boston Trust is not a trust in the traditional sense, but a program to bundle municipal utility cost savings projects. Read more about Renew Boston Trust here.
We engage in independent operational reviews and other efficiency-improving planning efforts. We use these measures to address areas needing renewed attention.
FUND STRUCTURE AND USES
The accounts of the City are organized on a fund basis. Each fund is considered a separate accounting entity and complies with finance-related legal requirements. The City’s funds are divided into three categories: Governmental Funds, Proprietary Funds, and Fiduciary Funds.PROPRIETARY FUNDS
Proprietary Funds are used to show activities that operate more like those of commercial enterprises.
- Internal Service Fund: accounts for the City’s self-insurance for health benefits.
Fiduciary funds account for resources held for the benefit of third parties and are not available to support the City’s own programs, including:
- Pension Trust Fund
- Other Post-Employment Benefits (OPEB) Liability Trust Fund
- Private Purpose Trust Funds.
- General Fund: accounts for all revenues, expenditures, and other financial resources, except those required to be accounted for in other funds. The only fund for which a budget is adopted.
- Special Revenue Fund: accounts for proceeds legally restricted for specific purposes.
- Capital Projects Fund: accounts for financial resources mainly from the issuance of bonds and used for acquisition or construction of major capital facilities.
- All non-major governmental funds in an “Other” category.
FINANCIAL POLICES, PROCEDURES, AND CONTROLSFINANCIAL POLICES, PROCEDURES, AND CONTROLS
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.