Cut police patrols, lay off teachers, and slash municipal services past the point of pain.
Or dip into savings and suffer the potential penalty - a lower credit rating and higher interest charges when it comes time to bankroll public projects.
Those are the choices many local leaders face as they struggle to craft municipal spending plans for the upcoming fiscal year. In these tough economic times, even the region's most affluent communities are starting to show signs of the strain, with many now drawing down their reserves to patch roads, pay for schools, and avoid issuing pink slips.
"It's like someone who's in a cash crunch using their savings to make the monthly payment on their car loan," said Belmont Town Administrator Thomas G. Younger. "It may be fine for a few months, but by month 12 there's nothing left in the savings account."
Throughout the Commonwealth, month 12 has long since come and gone. After adjusting for inflation, local aid for the current fiscal year is $621 million short of where it stood six years ago, according to a report by the Massachusetts Municipal Association. In order to balance the books, cities and towns have been left with no choice but to rely more on property tax revenues, slash local services, spend their savings, or juggle some combination of all of those measures.
It's a bit like playing Russian roulette: Cutting services and raising taxes may be bad political moves, while dipping into savings, or so-called free cash, to cover day-to-day expenses may be deleterious to a community's financial health - and, ultimately, a taxpayer's pocketbook.
Independent credit-rating firms like Moody's Investors Service, Fitch Ratings, and Standard & Poor's dislike it when communities transfer hefty sums from their savings accounts to their operating budgets, particularly when they don't have the means to replenish those accounts. Cities and towns that make such transfers without a strong financial plan in place risk having their credit ratings downgraded, a move that can cost taxpayers tens of thousands of dollars over the long term, because the lower a community's credit rating, the more it is charged to borrow money.
"What is the right decision for each community? It's hard to say," said John Murray, the acting town manager in Acton. "But I would rather pull money out of our free cash and take that hit [a downgrade] than pull police and firefighters off the street. If you're not there for a heart attack or fire, it is life-threatening. If I have to weigh significant brain damage vs. a higher interest rate on a bond, I'll stand up and say, 'Give me a higher interest rate.' "
Andover, faced with just such a quandary the last few years, repeatedly opted to use its free cash, which is really neither free nor cash but simply the undesignated fund balance that is left on the books at the end of a fiscal year.
The cost to Andover taxpayers: As much as $75,000, town officials estimate.
In November, Andover issued a $14 million bond to fund various school, sewer, water, and other municipal projects and received an average interest rate of 3.87 percent. Of the town's 13 bond issues with outstanding balances, the issue sold last fall has the fifth-lowest average interest rate - but it could have been even lower, saving taxpayers $65,000 to $75,000 over the next 20 years, had the town been able to hold on to its Aaa credit rating, said Town Manager Reginald "Buzz" S. Stapczynski.
"Unfortunately, the downgrade came as no surprise," he said. "We have been well aware that the town's strong financial position has been in jeopardy in recent years.
"Starting in 2005, Moody's had issued several warnings to the town, and although we tried to be responsive to those warnings by using less free cash for operating expenses and putting $2 million into the town stabilization fund, our efforts were just not enough to maintain the top rating."
Statewide, only 13 of Massachusetts' 351 communities have a triple-A rating, including five in this area - Bedford, Belmont, Concord, Lexington, and Winchester. To maintain that top credit rating, they are expected to save more of their free cash than they spend, a difficult challenge to meet as healthcare and pension costs skyrocket and the economy weakens, triggering a slowdown in development and diminishing voters' willingness to approve overrides of Proposition 2 1/2, the state tax-cap law.
"The pressures are getting worse year by year," said Michael Widmer, president of the Massachusetts Taxpayers Foundation, a business-funded budget watchdog group.
"I think there's a temptation for communities to take steps that undercut their fiscal stability. Political leaders are in office now, the needs are now, and there is a lot of political pressure to find ways to support services now, so it's difficult for many communities to exert fiscal discipline and to use free cash and stabilization funds responsibly, as part of a long-term plan, because the financial strain they are under is not a one-year problem. It's an inexorable, relentless squeeze on cities and towns."
The latest data from the state Department of Revenue show that Massachusetts cities and towns have significantly less free cash today than they did six years ago. Statewide, free cash declined by $247 million, or 43 percent, between fiscal 2002 and fiscal 2007, after adjusting for unusual circumstances in Boston, Cambridge, and Springfield, according to a Municipal Association analysis of the data.
"I don't think Andover will be the last to be downgraded," Murray said. Using free cash to cover operating costs "may not be the wisest financial strategy," he said, but when budgets are lean and expenses are soaring, town managers "have to pull down reserves or raise taxes."
Many communities have used up their excess levy capacity, which allows them to raise property taxes by more than 2.5 percent without an override.
Last fiscal year, two-thirds of the state's cities and towns had excess capacity of less than 1 percent. Five years earlier, 55 percent of communities were in that precarious position.
The increasing pressure on the property tax is yet another sign of the fiscal distress washing over cities and towns, according to the Massachusetts Taxpayers Foundation.
"The fact that cities and towns don't have enough money, that's a structural issue and it needs a structural solution," said Winchester Town Manager Melvin Kleckner, noting that the town already raises property taxes to the levy limit, and yet it is still a challenge to maintain a level-services budget. "A piecemeal approach won't work."
Beacon Hill lawmakers have been slow to embrace often-touted remedies, such as a revised revenue-sharing formula that would allocate more money for local education and municipal aid, or a bill that would close property tax loopholes for telephone and telecommunication companies. In Andover, passage of the telecom bill alone would have translated into an additional $800,000, town officials said.
"In the environment we're in, every dollar counts," said Floyd S. Carmen, the treasurer in Belmont, where taxpayers are enjoying a savings of at least $33,000 in interest charges on the $3.365 million bond the town issued last June because of Belmont's triple-A credit rating.
"That may sound like small potatoes," he said, "but $33,000 keeps the library open on the weekends."
Globe correspondent Adam J.V. Sell contributed to this report. Brenda J. Buote can be reached at bbuote@globe.com.
