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APPROPRIATION COMMITTEE - 2017 ATM A Look Forward In many ways, the last eight to ten years have represented a "golden era" for Lexington's finances. In a period of very low inflation, such as we have experienced during almost the entire nine year recovery from the severe recession of 2008, municipalities whose revenue growth is legally constrained by the limits of Proposition 21/2 tend to do well. When that effect is combined with the strong comeback of Lexington's residential housing market, and the steady and continuous replacement of its older housing stock with substantially larger and more expensive homes, resulting in significant additions to new growth and consistent increases in revenue of well over 2.5% annually, the Town has fared even better. Topping that off has been relatively strong commercial new growth, compared with the past, led by Shire Pharmaceutical's major construction and investment in Lexington beginning in 2009. The financial benefits to the Town resulting from Shire's investment alone, which have been ramping up gradually under its 20 -year Tax Increment Financing (TIF) arrangement, have been substantial, generating roughly $2.5 million in added "new growth" tax revenue as we reach the 70% mark, with about another $1 million yet to go. During the period from 1990 -2007, achieving the Town's budget goals required operating overrides approxi- mately once every three to five years. Since 2007, we have been able to balance our budget without a single operating override. Indeed, we have been able to put aside substantial reserves for the future, including: (1) a general stabilization fund, currently holding about $10 million; (2) a PEIL Fund holding about $9 million; (3) a special education reserve fund holding over $1 million; and (4) a Capital Stabilization now holding $24 mil- lion, and proposed to be increased to $28 million in FY2018. According to the latest actuarial valuation of our pension fund, discussed in more detail in connection with Article 30, we are scheduled to retire the Town's unfunded pension liability in FY2024. This would free up a stream of $4 -5 million in recurring revenue we have been devoting for years to unfunded liability amortiza- tion payments. We are also nearing the completion of a long -term program for replacing the Town's aging, unlined water mains, which may lower future infrastructure costs and relieve future pressure on water and sewer rates. However, good times rarely last forever. As the economy reaches full recovery, and interest rates rise, we may enter a period of higher inflation. If this occurs, our operating margins under Proposition 21/2 will be squeezed with higher wage and health benefit costs, as well as higher interest costs for borrowing. Once the Town's unfunded pension liability is fully funded, we will then have to consider a more aggressive program to address the Town's significant unfunded liability for OPEB benefits, which until recently were managed on a pay -as- you-go basis. Most important of all — particularly if the recent trend of unexpectedly large growth in our school enrollment continues — we face daunting future capital investment challenges, as the Capital Expendi- tures Committee has pointed out, to maintain, replace, and in the case of the schools significantly expand, our capital infrastructure. With limited land available for new building and extraordinary inflation in school con- struction costs, this will not be an easy task. On the immediate horizon, we have already made substantial commitments to capital investments which will require taxpayer support if they are to proceed. The current list of items proposed for a debt exclusion refer- endum this fall — including $46 million for the Hastings replacement project net of MSBA reimbursement, $24.4 million for 20 Pelham Road renovations, $20.9 million for fire station reconstruction and swing space, $8 million for acquisition of the Pelham Road property, and $4.4 million for acquisition of the 171/173 Bed- ford Street property — exceeds $100,000,000. Not included on this list are: the Center Streetscape project; a new Visitors' Center; a potential seventh elementary school; or the looming need to renovate /replace Lexing- ton High School, which is already overcrowded. The substantial balance in our Capital Stabilization Fund will certainly help to offset the added costs to taxpayers of these projects, but will not come close to eliminat- ing them. Under these circumstances, the Town's financial future can best be described as "challenging," and hard choices will have to be made. 7