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APPROPRIATION COMMITTEE REPORT TO NOVEMBER 2011 STM ing the elimination of infiltration and inflow (I/I) into the sewer system.3 The proposed adjustments to debt service, which were taken into account this fall in setting the FY12 water and sewer rates, are as fol- lows: FY12 Debt Service Costs Original Budget Amended Budget Change Water $1,202,906 $1,258,968 $56,062 Sewer $683,223 $879,713 $196,490 3. Appropriation of Additional Retained Earnings. Continuing a practice that has now been followed for several years, a portion of the certified retained earnings in both the water and sewer enterprise funds — $450,000 from the water fund and$300,000 from the sewer fund—was appropriated at the 2011 Annual Town Meeting to provide "rate relief," i.e., to lower the increase in the FY12 water and sewer rates that would otherwise be required to cover anticipated increases in operating and capital costs. At this fall's rate-setting, faced with an unexpectedly large proposed rate increase, the Board of Select- men voted to mitigate that increase by applying an additional$200,000 of retained earnings from the wa- ter enterprise fund, above and beyond the amounts already appropriated at the Annual Town Meeting, bringing the total retained earnings draw to $650,000 from the water fund and $300,000 from the sewer fund. This had the effect of lowering the necessary water rate increase from 7.3% to 3.9% and the com- bined water and sewer rate increase from 12.8% to 11.8%. Town Meeting is now asked to appropriate the additional retained earnings required to implement that decision. Given a recent history of relatively modest water and sewer rate increases, the much larger increase this year received some publicity and may have come as a surprise to some. We provide below a brief expla- nation of why this year's water and sewer rate increase was unexpectedly large. As reflected in the table below, increases in water and sewer rates have been extremely modest in recent years — until this year averaging only about 1.5% per year, well below the annual increases in MWRA assessments and Town operating costs,which together have averaged about 4%per year. Combined Water/Sewer Cost and Rate Increases FY07 FY08 FY09 FY10 FY11 FY12 MWRA Cost 7.0% 0.9% 6.9% 3.0% 3.9% 6.3% Town Cost 10.3% -6.7% 5.7% 2.9% 1.9% 4.7% Total Cost 8.1% -1.63% 6.5% 2.9% 3.3% 5.8% Rates 6.6% 0.0% 2.9% -3.8% 1.7% 11.8% Several factors have combined to keep the rate increases low during this time period: (1) the gradual elim- ination of PILOT payments to the general fund(begun in FY07 and completed in FY10); (2) the gradual reduction of indirect costs paid to the general fund to more closely reflect the enterprise funds' usage of Town services (begun in FY07 and to be completed in FY12); (3) the shift of capital expenditures from largely cash capital to largely borrowing, which has had the effect of temporarily reducing capital costs; (4) earlier reliance on a conservative set of usage assumptions resulting in the receipt of higher-than- projected revenue, boosting the funds' retained earnings; and (5) the initiation of a practice beginning in s Debt service attributable to the same MWRA loan,in the amount of approximately$140,000,was also omitted from the FY11 budget and in FY11 rate-setting. This cost was effectively covered by the sewer enterprise fund's retained earnings during FY11,even though not appropriated,and the retained earnings balance in the sewer fund as of the end of FY11 (see Table below)is net of that amount. Page 13