What is a Structural Deficit?

Budget shortfalls and overrides have been going on all around Massachusetts for the last couple of years. We, here in Sudbury, had our own override for the schools last year. With massive overrides proposed in Acton and Westford this year, and with budget shortfalls happening in Brookline, Newton, and other towns, are we looking at another override in the near future here in Sudbury?

After being told numerous times at Town Meeting that we wouldn't have enough money in the coming years, I decided to make a series of blog posts to discuss the state of the budget here in Sudbury. It's a complex issue with many pushes and pulls and levers to adjust. There will be jargon tossed around in the discussions. This series of posts hopes to demystify the municipal budgeting process, explain the jargon, and help present information.

Let's start off with a term that has become commonplace - Structural Deficit. In the simplest of terms, a structural deficit is basically promising something that you can't afford. Say you have a household budget which allocates your income into your various expenses - housing, transportation, food, clothing, recreation, and retirement savings. You've worked it out so that your expenses are around 85% of your income, so that you have some buffer in the case of emergencies.

Now, one day, after a weeklong stretch of nonstop rain, you see a listing for an amazing beach condo in South Carolina. In a moment of weakness, you sign on the dotted line and take out a 20 year mortgage for this amazing new vacation home.

You've just created a structural deficit. Your expenses are going to exceed your income.

Now you have some choices.

1) Cut your expenses elsewhere. You've signed a legal agreement to pay the mortgage, so you have to pay that. You can look to reduce your other expenses like perhaps recreation or retirement savings. Or you can look to reduce the "buffer" that you had for emergencies.

or

2) Find more income. Have people in your household find a way to contribute more.

How does this example relate to municipal finance?

The town has expenses like salaries, maintenance costs, etc. And if you're lucky (we are), your town also bulids in a buffer. In the case of Sudbury, the buffer is about 4-5%. Additionally, we have many buckets of "savings" totaling easily over $10 million. Now, what if the town negotiates with a union and promises more than they budget allows? (This is similar to signing the mortgage on the vacation home.) Now a structural deficit has been created. What are the options?

1 ) Cut expenses. This could mean laying off staff. Or could also mean reducing the "buffer" and rethinking our "savings" plan.

or

2) Find more income. This would happen in the form of an override, where the town asks you to vote on raising your taxes to cover the structural deficit.

Do we in the community have a voice? Sort of. We have elected boards who make these decisions. All union contracts need to be approved by an elected board. For school unions (teachers, aides, nurses, and custodians) the School Committee approves contracts. For all other town unions, the Select Board approves union contracts. So any decisions about creating a structural deficit due to union contracts are decided by your elected representatives.

Most of the town union contracts are expiring at the end of June 2024. So, negotiations have started and votes will start happening. And the school contracts are expiring at the end of June 2025.