Free cash is an “other available fund” revenue source that may be appropriated after certification for any legal purpose by the legislative body of a city or town. In a city this requires the recommendation of the mayor and city council approval, or a vote of the town council. In a town, this requires approval by a vote of town meeting. It is calculated by the Division of Local Services (DLS) Bureau of Accounts (BOA) after June 30, the end of the fiscal year, based on information submitted by a municipality.
Free cash is created (or reduced) by any variances to budgeted revenues and expenditures, including local estimated receipts, such as motor vehicle excise tax, meals and rooms excise tax, and licenses and permits as well as real and personal property taxes. Certified free cash will also include amounts certified but unexpended from the prior year. Free cash is reduced by deficits existing in other funds, such as capital project deficits, or grant account deficits. It may also be reduced by reconciling variances in cash and receivables.
Free cash is not available for use until after the accountant, auditor, or comptroller submits a June 30 balance sheet and other supporting documents to BOA and the Director of Accounts certifies the free cash. Cities and towns should be conservative in budgeting amounts not yet certified, as only an amount not to exceed the Director’s certification may be appropriated for use.
As a nonrecurring revenue source, free cash should be restricted to paying one-time expenditures, funding capital projects, or replenishing other reserves. We do not recommend that free cash be budgeted for ongoing operational purposes.
DLS recommends that communities adopt robust free cash policies that address uses of free cash, including what percentage of free cash should be carried forward to the next annual certification, budgeting for the creation of free cash using conservative revenue and expenditure estimates, annual pay-go capital project uses, and reserve funding policies.
Further, DLS recommends that communities understand the role free cash plays in sustaining a strong credit rating and strive to generate free cash in an amount equal to five to seven percent of its annual budget.
The same rules apply to the DLS certification of retained earnings, which is the enterprise fund equivalent of free cash.
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| Date published: | November 24, 2025 |
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| Last updated: | March 3, 2026 |