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APPROPRIATION COMMITTEE REPORT, NOVEMBER 17, 2008 STM
<br /> A ro riated Final Assessment Chan e
<br />Water $4,623,873 $4,565,881 $(57,992)
<br />Sewer $5,941,401 $5,855,209 $(86,192)
<br />Adjustments to Reserve Funds
<br />Under the state statute governing enterprise funds, G.L. c. 44, § 53F1/2, accumulated surpluses resulting
<br />from the operations of an enterprise fund, referred to as retained earnings or the reserve fund, may be used
<br />either "for capital expenditures of the enterprise, subject to appropriation, or to reduce user charges."
<br />Deficits must be funded with existing reserves or, in the absence of such reserves, made up in the following
<br />year's rates.
<br />At last year's rate-setting, in the fall of 2007, the Board of Selectmen adopted a recommendation of the
<br />Town Manager neither to increase nor decrease the water and sewer rates for FY2008. At that time, it was
<br />anticipated that re-adopting the existing rates would have the following effect on cash reserves, which then
<br />stood at about $2.5 million and $2.1 million respectively, all else being equal: (1) lower the water fund
<br />cash reserves by $362,750; and (2) increase the sewer reserves by $187,000. Accordingly, last year's
<br />Special Town Meeting was asked to, and did, appropriate $362,750 from the Water Enterprise Fund's
<br />reserves to cover the projected deficit. In fact, however, the results of operations in FY2008 proved to be
<br />significantly better than anticipated. The water fund generated a surplus of approximately $450,000 and
<br />the sewer fund generated a surplus of nearly $750,000. One would have expected the certified cash
<br />reserves as of 6/30/08 to have increased accordingly but, for reasons not yet fully understood, the water
<br />fund reserves increased by a much smaller amount to just over $2.5 million, while the sewer fund reserves
<br />increased to approximately $2.7 million. (See table below.)
<br />At this fall's water and sewer rate-setting, the Town Manager advised the Board of Selectmen that
<br />projected costs for the water and sewer funds were up by 10% and 3.3% respectively due, primarily, to
<br />increases in MWRA charges and increases in debt service costs attributable to the Water and Sewer
<br />Enterprise Funds' share (17°Io and 7% respectively) of the debt service costs for the construction of the new
<br />DPW facility. To meet these costs, the Town Manager recommended, and the Board of Selectmen
<br />adopted: (1) a 9.5°Io increase in water rates, projecting a draw of $463,050 on water fund reserves to
<br />mitigate the rate increase; and (2) a 0% increase in sewer rates, projecting that no change in the rates would
<br />generate a small surplus of about $40,000.
<br />Data provided to the Board of Selectmen in connection with this year's rate-setting shows that the Town's
<br />ability to forecast water and sewer usage, and thereby to anticipate revenues and reserve levels, continues
<br />to be substantially better than in the past. Indeed, the use of a rolling average of the previous three years of
<br />consumption data would have predicted with considerable accuracy the actual usage and financial results
<br />experienced in FY2008. The Town has not yet adopted such rolling averages in the rate-setting process,
<br />instead continuing to employ a more conservative set of consumption estimates first adopted three years
<br />ago. These earlier consumption assumptions have consistently underestimated usage and revenue, and
<br />have resulted in steadily increasing reserve balances. (See table below.) The Committee recommends use
<br />of the rolling averages at next year's rate-setting, at which point the Town will have available four years of
<br />reliable consumption data across a range of climatic conditions.
<br />In order to reconcile the FY2009 enterprise fund appropriations for tax-rate-setting purposes, and to
<br />promote transparency in the setting of the Water and Sewer Enterprise Fund budgets, the Special Town
<br />Meeting will be asked to appropriate $463,050 from the Water Enterprise Fund's certified retained
<br />earnings. In effect, this action would ratify the action already taken by the Board of Selectmen during the
<br />FY2009 rate-setting process to draw on projected reserves in order to mitigate the increase in the FY2009
<br />water rates. It should be noted, however, that actual results have consistently proved to be much better than
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