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1. What is free cash and how is it generated?

A community’s free cash is the amount of unrestricted funds available from the previous
fiscal year’s general fund operations that can be appropriated upon certification by the
Director of Accounts. Free cash is certified based upon the June 30 balance sheet submitted
by the town accountant/city auditor. The treasurer must also submit the Quarterly
Reconciliation of Treasurer’s cash report, which reconciles with the balance of the
accountant, for free cash to be certified.

Free cash is generated when the actual operations of the fiscal year compare favorably with
the budget. Simply put, it results when revenue collections are greater than estimated
receipts, and expenditures and encumbrances (committed funds not yet expended) are less
than appropriations. It is reduced by illegal deficits, overdrawn grant accounts and deficits in
other funds.

2. How do we improve a free cash or reserves position?

A community may improve its free cash and financial reserves through prudent financial
planning and development of sound financial policies. The community could also establish
policies to build its free cash balance such as conservatively estimating local receipts and
aggressively pursuing the collection of receivables. Since free cash is an available fund that
might not be generated in the next fiscal year, it is usually not used to fund recurring
operating expenses.

A formal reserve policy will allow the community to establish a practice of appropriating
money to legal reserves for future needs. Appropriations to reserves should be considered
annually as a part of the budget process and appropriations from reserves should be made for
unanticipated or capital costs, not regular operating expenses.

3. When can we appropriate free cash?

Free cash must be certified by the Director of Accounts as of July 1 of each fiscal year upon
submission of a community's balance sheet, and cannot be appropriated until certified. Once
free cash is certified, it is available for appropriation by the town meeting or city council. It
may be used for any legal purpose. However, depleting free cash to balance annual operating
budgets may lead to tighter financial times. Free cash provides communities with a certain flexibility in that it is the major source of funding for any supplemental appropriations after the annual budget has been adopted and the tax rate has been set.

4. What should a capital improvement plan include?

A capital improvement plan (CIP) should include a multi-year capital plan and annual capital
budget for all community departments. These documents should: (1) prioritize the various
proposed capital projects; (2) estimate project costs; and (3) list the proposed method of
payment (current revenue, debt or debt excluded from the limits of Proposition 21Ž2) for each
project. Regardless of funding ability, annual presentation of a capital budget to the
legislative body has merit. It serves to inform citizens of the community's capital needs and
makes them aware of essential projects that may be deferred due to financial constraints.

5. Why would we want an enterprise fund?

Enterprise accounting enables a community to operate a self-supported service and
demonstrate to the public the true cost of providing a utility, health care, recreational or
transportation services the service. Enterprise accounting allows a community to recover all
direct (salaries, expenses, debt and capital) and indirect (insurance, fringe benefits, and
support of other departments) costs. Enterprise accounting will also enable the community to
legally retain a fund balance surplus from year to year, the use of which will be restricted to
current operating or future capital/debt costs of the service.
A community may choose to adopt an enterprise fund for two main reasons. One reason is
that the community wants to demonstrate to the public which portion of the total costs of a
service is recovered through user charges versus the tax levy.