2022-03-28-AC-ATM-STM-rptrev - Laserfiche WebLink

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2022 ATM,2022-1 STM APPROPRIATION COXMTTEE 21 MARCH 2022 the increase in the wastewater rate budget, for a combined impact of 1.25%. As the phase-in proceeds,the reduction in debt service will gradually offset the increase in cash capital costs, reducing the impact on annual budget increases and saving interest costs. Water and Wastewater Rate-Setting Issues Because increases to the operating budgets of the water and wastewater enterprises approved at this annual town meeting will ultimately translate into increases to the FY2023 water and wastewater rates when set later in the year, a brief comment on the rate-setting process and the impact of this year's budget is in order. Next fall, the Select Board will conduct rate hearings and set water and wastewater rates for FY2023. Two main components factor into the rates: (1) the approved budget for the fiscal year; and (2) estimates of the amount of water which will be consumed during the fiscal year by Lexington residents at each of the three graduated "tiers"of usage2, as well as by certain other users for which Lexington serves as a conduit, primarily the Town of Bedford, the Bedford VA hospital, and Hanscom Air Force Base/Lincoln Labs. The goal at rate-setting is to establish rates which will generate sufficient revenue, given the anticipated usage, to cover the budget established by Town Meeting for the fiscal year. If projected water usage is unchanged from the prior fiscal year, then the required rate increase for each enterprise should generally match the year-over-year increase in the budget approved by Town Meeting. If anticipated water usage increases from the prior fiscal year, the required rate increase may be lower than the increase in the budget; and if anticipated water usage decreases,the rate increase must be higher since most of the water and wastewater funds' costs are fixed,not variable. By and large, water and wastewater rate increases have been relatively modest for more than a decade. From FY2008 through FY2021, combined rate increases fluctuated between -3.8%and 12.6%for an average annual rate increase of 3.0%. Last year (FY2022), the combined rate increase was 6.1% (which closely mirrored FY2022's budget increase). For FY2023, with a combined budget increase of 2.85%, a significantly lower rate increase than last year can be expected if projected water usage does not change. It should be noted, however,that there has been a recent trend of declining water usage for non-irrigation purposes as plumbing fixtures are modernized and residents pay more attention to water conservation. If that trend continues, a somewhat higher rate increase could be required in FY2023. As noted above, there is substantial volatility in rate increases from year to year as a result of weather-dependent fluctuations in irrigation water usage. One way to reduce that volatility, and to simplify the rate-making process, would be consistently to use a five or ten-year average to project irrigation water usage instead of trying to predict actual usage. Surpluses earned in above-average irrigation years could then be "earmarked" as a sort of "stabilization fund"to offset losses in below-average irrigation years. To minimize the risk of an operating loss, anticipated water usage is estimated conservatively. This means that the water and wastewater funds typically generate revenue in excess of the amount assumed for the budget. The disposition of that surplus revenue, or"retained earnings,"is discussed below. Water and Wastewater Retained Earnings Accumulated surpluses resulting from the operations of an enterprise fund, referred to as "retained earnings", remain with the fund as a reserve, and may be used only for capital expenditures of the enterprise, subject to appropriation, or to reduce user charges. See Appendix B. Deficits must be funded with existing reserves or, in the absence of such reserves, made up in the following year's rates. The Town's policy is to maintain a balance of approximately $1 million of retained earnings in each fund as a buffer against revenue shortfalls resulting from unexpected reductions in usage or unanticipated extraordinary expenditures. Retained earnings in excess of that amount are now typically applied to help fund capital projects in lieu of debt. The table below shows how the balance of retained earnings has been deployed over the past several years and their proposed appropriation at this ATM for FY2023. 2 For the vast majority of Lexington residents who have sewer connections,wastewater charges are billed based on the amount of water consumed by the household,not including irrigation water metered separately. Water used for irrigation is billed at the highest of the three-tiered water rates. 19