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APPROPRIATION COMMIT fEE REPORT-NOVEMBER 2005 We have modified our projections of revenue and expenses for the next three fiscal years to include the above changes. Please see Appendix A for details. In general, the unanticipated increase of about $2.4M in free cash and the more than $1M increase in the FY 2006 revenue estimates leave the Town in a stronger financial position than was anticipated last spring even if the appropriations under Articles 4 and 5 are approved(barring major changes). Although the Town is now in a stronger financial position than it was in last spring, the general financial outlook of the Town remains one of insufficient resources. Lexington is still faced with an uphill struggle to maintain adequate services in the long run, as health care expenses and wages increase faster than the available revenue. This will be further exacerbated if Proposition 2 1/2 overrides are defeated. With regard to the school budgets for Fiscal Years 2005 and 2006, we were both surprised and dismayed to not only learn that the FY 2005 school expenses exceeded the appropriation but also that the FY 2006 expenses were underestimated last spring. Given the tight fiscal situation of the Town, it is imperative that the causes of the overruns and the reasons for the underestimates be diagnosed and that changes in reporting and/or other procedures and in supervision of staff to avoid such problems in the future be implemented. Indeed, Superintendent Ash and the School Committee have moved promptly and vigorously to address these problems, both in the actions they have already taken since the problems were recognized, and in the undertakings they have made about remedial actions and procedures they will implement in the coming months. The Appropriation Committee has not conducted an independent investigation and so will not comment in detail on the causes or remedies. We will note, however, that there is potential for further expense increases in the school budget beyond the control of the school administration from increases in the number of students who require special education (SPED) services, from increases in the kinds of SPED services required by our students, and from increases in energy costs beyond what is currently projected. The Committee gratefully acknowledges the invaluable support provided to us by Michael Young, Lexington's Budget Officer. Article Analysis and Recommendations Article 4: Unpaid Bills Funds Funding Committee Requested Source Recommends $528,177 Free Cash Approval (9-0) The Town, as represented by the Lexington Public Schools, has received bills from a number of vendors for services received by the Schools during Fiscal Year 2005. These vendors have not been and cannot be paid unless this article is approved since the full amount appropriated for the school operating expenses in Fiscal Year 2005 has already been expended and no funds from that appropriation were encumbered to pay these bills. The Town has both a moral and legal obligation to pay. It should be noted that the unpaid bills do not necessarily correspond to the line items that went over budget. We understand that the FY 2005 school budget overrun is attributable in part to the payment for expenses incurred in FY 2004 with FY 2005 funds. Among the other more obvious effects, such a practice makes it harder to determine which lines of the school budget were underfunded in FY 2005. We strongly endorse the decisions of the School Committee and Administration to not repeat this practice. Page 4 of 11