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APPROPRIATION COMMITTEE REPORT TO THE NOVEMBER 2012 STM Introduction The Appropriation Committee is required to create a report with a review of the budget as adopted by the Board of Selectmen, including an assessment of the budget plan and a projection for future years' revenues and expenses. This report includes the Committee's advice and recommendations regarding all appropriations of Town funds that are anticipated in the Warrant, and other municipal matters that may come before Town Meeting. This report is published and distributed to the members of Town Meeting as a printed document and as an electronic document via the Town website. The Committee also makes presentations during Town Meeting, including recommendations on appropriations and other matters for which the Committee's formal position was pending at the time of publication. Developments Since the April 2012 Annual Town Meetin a�pecial Town Meeting In April 2012, following a successful debt exclusion referendum, a Special Town Meeting held during the Annual Town Meeting appropriated funds for the construction of a new Estabrook Elementary School. As work continued on the design of the building, and as the market for construction materials has changed, the cost estimate for the original design grew. Working with the architects and the MSBA, the School Committee, the Permanent Building Committee, and Town staff have revised the design to reduce the increased expense, but, nonetheless, it appears that an incremental appropriation is necessary and desirable. The Town has roughly $3,900,000 in unallocated funds that can be appropriated at this Special Town Meeting. These funds mainly result from reduced costs for employee health benefits since the Town joined the State's Group Insurance Commission, and from "new growth" for FY2013 above the projection used in building the budget. Three Articles in the Warrant consider appropriations using those funds. Starting next fiscal year, the Town expects a significant increase in annual assessments for the Retirement Fund, as determined by the Town's Retirement Board. The increase is driven by two factors: the final amortization of a decrease in the valuation of assets held in the Town's Retirement Fund that occurred during the 2008 -2009 recession, and the adoption of new actuarial calculations that recognize longer life spans for many retirees. Last year's pension assessment was approximately $4,200,000. If the Town made no changes to its pension funding schedule, this coming year the assessment would be over $7,000,000, and the increase would have a significant impact on the Town's operating budget. Town staff is working with the Retirement Board to develop a new pension funding schedule that would mitigate this impact. In addition, Article 2 includes a request to appropriate some of this year's unallocated funds to reduce the growth of future Retirement Fund assessments. The cost of ongoing construction and renovation of elementary schools in Lexington is being funded with excluded debt, which allows the Town to (temporarily) raise property taxes beyond the caps imposed by Proposition 2 The resulting excluded debt service will result in a noticeable increase in property tax rates for the next three to five years. The appropriation of unallocated funds into a new specialized stabilization fund, which will be proposed under Article 3, would put aside resources that future Town Meetings can use to mitigate property tax increases during that time period. In addition to pension benefits, the Town is required to provide health insurance benefits for retired town employees (these benefits are referred to as Other Post Employment Benefits, or OPEB). This obligation creates a future liability for the Town, but up to now these costs have been covered within the operating budget on a pay -as- you -go basis. There are sound arguments for transitioning to a pre - funded model where the Town would appropriate annually into the Post Employment Insurance Liability (PEIL) Fund monies sufficient, together with anticipated investment returns, to cover the future health benefit costs accrued that year. The Town is considering whether to adopt such a long -term strategy. To fully pre -fund the PEIL Fund would require significant catch -up appropriations over a span of many years (much as the current Retirement Fund has required additional catch -up appropriations to achieve full funding). The appropriation proposed under Article 4 would be a small step in that direction. 4