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APPROPRIATION COMMITTEE-2018 ATM new, stand-alone Lexington Children's Place which will not only provide more adequate space for the population it serves but also free up needed elementary classroom space at the Harrington School. It is also driven in part by a need to replace aging and inadequate municipal buildings — including in this budget cycle a new and larger Fire Headquarters—as well other Town infrastructure including recreation- al facilities such as the Center Field track and lights, affordable housing, cemetery facilities, traffic inter- sections, and water,wastewater, and stormwater management systems. In many ways, this period of intense capital investment could not have come at a better time as interest rates have been at historic lows. Moreover, as noted in this Committee's report to last year's Annual Town Meeting,the last eight to ten years has been a"golden era"for Lexington's finances with low infla- tion, an extended period of time with no need for an operating override, and indeed a structural surplus which has allowed us to "bank" funds in what is now a substantial Capital Stabilization Fund. That stabi- lization fund in turn, as noted above, will be available to help offset the "spike" in annual tax increases which the accumulation of pre-existing excluded debt service and the new excluded debt service that will result from the Hastings, Fire Station, and LCP projects —as well as the anticipated police station project —would otherwise create, at least over the next five years from FY2019 through FY2024.2 The successful debt exclusion referendum last December is evidence that Town residents recognize both the need for and value of the infrastructure investments the Town is making. Nevertheless, it is also clear that our infrastructure improvement needs are by no means done, and from the taxpayer's point of view there are countervailing pressures which could lead to challenges ahead. In particular, two phenomena have had a tendency to cause the underlying or "base" tax on the average, unimproved residential home to grow at a rate somewhat faster than the 2.5% assumed in the existing capital planning financial model: first, the so-called "natural shift," which occurs when residential real estate values grow faster than commercial real estate values, as has been occurring in most recent years3; and second, as recently explicated by a Town Meeting Member,the treatment of new personal property as "new growth" without simultaneously deducting from the tax base the depreciated personal property be- ing replaced, has a tendency de facto to shift much or all of the burden of the personal property "new growth" increment from personal property taxpayers to residential and commercial real estate taxpayers, perhaps adding an additional half percentage point to the base tax increase. There is nothing immediate that can be done to change these phenomena (other than, as discussed below, working to modify zoning regulations and take other steps to reinvigorate the commercial tax base). However, as long as they con- tinue, they should be recognized in the Town's capital planning financial model when projecting the net effect of future excluded debt service increases, after offset from Capital Stabilization Fund mitigation, on the annual growth of residential tax bills. For the homeowner, of course, the fact that residential valuations are growing significantly faster than commercial valuations (and faster than residential valuations in other communities with lesser buyer de- mand), though it results in annual base tax increases greater than 2.5%, is not all bad. The extraordinary 2 The Capital Stabilization Fund will not,however, last forever and with indications that an era of higher inflation may be in the wings as the nation moves toward a full-employment economy, it may become more difficult to replenish it. Closer to home, significant increases in public building construction costs, suggest that cost pressures may become an issue of increasing concern. For example, according to the FY2018 tax classification packet, at the maximum allowed 1.75 shift factor, an unimproved single-family dwelling of average assessed valuation would experience a tax increase over FY2017 of 3.59% whereas a typical large office building would experience a decrease of 2.58%. According to that same report, the portion of the total tax levy borne by the residential sector has increased from a low of 67%in 1990 to approximately 80%today. 7