Free cash is one of the more confusing terms in municipal finance.
To many people, it sounds like savings. To others, it sounds like leftover tax revenue. When a free cash figure is discussed publicly, it often raises immediate questions about whether taxes were set too high or spending was too low.
In practice, free cash is neither of those things.
In Massachusetts, free cash is a specific accounting measure calculated at the end of the fiscal year and certified by the state. It reflects the difference between what was projected and what actually occurred, after all known obligations are accounted for. Until that certification happens, free cash cannot be used for any purpose.
Free cash typically comes from small differences that add up over the course of a year. Revenues may come in slightly higher than expected. Expenses may be lower due to timing, vacancies, or conservative budgeting. Prior year items may resolve more favorably than anticipated. None of this is unusual, and none of it implies that something went wrong.
What matters is when free cash is calculated.
It is measured only after the books are closed and reviewed. Its purpose is to confirm that the municipality finished the year in balance and met its financial obligations. In that sense, free cash is more of a checkpoint than a resource.
This is where a common question comes up.
People often ask whether free cash can be used to reduce their tax bill or issued back as a refund. The answer is no. Free cash cannot be returned directly to taxpayers, and it cannot retroactively change what someone already paid.
In some cases, free cash may be used to help offset a future tax levy, but that decision requires a public vote and careful consideration. Because free cash is a one-time measure, using it to lower taxes on an ongoing basis can create gaps in future years if the underlying conditions do not repeat.
This is why free cash is not the same as available cash.
A household with extra money at the end of the year can decide how to use it immediately. A municipality cannot. Even after free cash is certified, its use is limited by law and local approval. Many communities are cautious about relying on it for recurring expenses, precisely because it is not guaranteed to be there year after year.
Free cash is most often used for non-recurring purposes. It may support capital projects, strengthen stabilization reserves, or provide a buffer against uncertainty. Those uses align with the role free cash is meant to play.
Timing adds to the confusion.
Free cash reflects the prior fiscal year, but it becomes available partway through the current one. That lag can make it feel disconnected from current conditions. A strong free cash certification does not guarantee the current year will be smooth, just as a weaker one does not necessarily signal immediate trouble.
It is a backward-looking measure, not a forecast.
The reason free cash exists is stability. It provides confirmation that assumptions held, that obligations were met, and that the municipality managed uncertainty responsibly. It also offers limited flexibility when unexpected needs arise.
Seen in that light, free cash is not evidence of excess. It is evidence of discipline.
The more important question is not whether free cash exists, but how it is understood. Without context, it can invite suspicion. With context, it becomes one of the clearer signals of a municipality’s overall financial health.
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David D. Sullivan IV writes about municipal finance, governance, and civic systems. GovNerd reflects practitioner experience explaining how local government works in practice.