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APPROPRIATION COMMITTEE-ATM 2018 Appendix A: 3-Year Budget Projection This projection is offered to explore the financial challenges that Lexington will face in the next three years. The projection is also an opportunity to obtain a better qualitative as well as quantitative under- standing of known trends and cost drivers. The creation of a revenue and expense projection differs in both method and purpose from the creation of a balanced budget. In a budget, one plans conservatively to avoid both over-spending and under-funding, either of which could necessitate harsh remedies in the middle of a fiscal year. For this projection, we make rough estimates of future revenues and expenses, regardless of how they might impact the overall fund balance. The resulting figures do not represent actual revenue or spending targets. We assume that modest economic growth continues in FY2020, FY2021, and FY2022. There is some chance that the current period of unusually low inflation will be followed by higher levels of inflation. These considerations suggest some reasons for economic uncertainties in the near future that could impact the accuracy of our projections. We have adopted some key assumptions as the basis for the projection presented herein using limited in- vestigations to establish their plausibility. We note below the most important aspects. Revenue Assumptions • The tax levy is assumed to grow annually by 2.5% of the previous year's base and by an added amount for "new growth". No increases in revenues from Proposition 21/2 operating overrides are in- cluded, since none are currently contemplated during the projection period. • New growth, i.e., the increase in the tax levy from new construction and new personal property, peaked at over $3,500,000 in FY2013 and then dropped about 15% in FY2014. It continued to drop another 4% in FY2015 and again in FY2016, then rose in FY2017 and FY2018 to $3,357,000. This recent history exemplifies the volatility of this factor. In light of this, the model straight-lines new growth using the midpoints of the 10-year(FY2009-2018) and 15-year(FY2004-2018) averages. • State aid is assumed to increase by 1.4% annually. Growth in Chapter 70 aid will continue due to in- creasing school enrollments,but at a lower rate than in the previous few years. • Available Funds are projected at lower levels than recent historical and present levels due to uncer- tainty regarding Free Cash. Available Funds for the previous five fiscal years (2014 through 2018) ranged from a low of$11 million for FY2015 to a high of$15.6 million for FY2016, yet the average of available funds for fiscal years 2005 through 2010 was below $3.3 million. The most volatile, and largest component of Available Funds is Free Cash; monies received but not expended or encum- bered. Free Cash is projected here at $5.7 million for FY2020-2022 with$4 million applied to the op- erating budget and the remaining$1.7 million applied to cash capital. The more stable parts of Available Funds include the Parking Fund and the Cemetery Fund. They are assumed to be $400,000 and $225,000, respectively. Additionally we've included the town manage- ment's recommendation that, for FY2020, FY 2021 and FY2021, $750,000 will be transferred out of the Health Claims Trust Fund for health insurance premiums, thereby freeing up the same amount to fund the Post Employment Insurance Liability(aka OPEB) Trust Fund. • We have illustrated projected transfers from the Capital Stabilization Fund to mitigate within-levy debt service. Our projection currently shows transfers of $2,326,000 in FY2020, $2,121,000 in FY2021, and$1,429,000 in FY2021. Additional appropriations from this fund are anticipated to miti- gate the tax impact from excluded debt service for the school and public safety capital programs. • Revenue offsets include amounts from Cherry Sheet assessments that are assumed to grow by 3.5% annually, amounts for the Assessors' overlay ($750,000 annually in FYs 2021 and 2022; and 56