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APPROPRIATION COMMITTEE-2.020 ATM 25 March 2020 10%increase "placeholders"assumed in the Warrant'; (2)indirect expenses to be charged to the enterprise funds,although appropriated separately under Article 4,have been included for completeness as they must be taken into account when water and wastewater rates are set in the fall; and (3)the charges to the Water and Wastewater Enterprise Funds to help fund liabilities for Other Post-retirement Employment Benefits ("OPEB"), although appropriated separately under Article 17,have also been added for completeness. The principal operating costs of the water and wastewater enterprise funds and issues pertinent to this year's budget are addressed briefly below. Operating Costs NIWRA Assessments.The largest components of both the water and wastewater fund budgets are the assess- ments charged by the Massachusetts Water Resources Authority (MWRA), which now represent approxi- mately 70% of the total budget for each fund. The Town will be assessed a share of the MWRA's total FY2021 water and sewer budgets based on the Town's proportionate usage in the most recent full calendar year, CY2019, relative to other towns in the MWRA community. Based on the MWRA's preliminary as- sessments,Lexington's water assessment for FY2021 will increase by 8.32%and its wastewater assessment by 5.05%, for a combined increase of 6.64%. This percentage increase, higher than it has been in recent years, is the main driver of this year's significant water and wastewater fund budget increases. Direct Town Costs. In addition to the MWRA assessments,the expenses of the water and wastewater fund budgets include direct costs incurred by the Town,primarily for: (1)the wages and salaries of the employees in the DPW's Water and Sewer Divisions, (2)the expenses of water and sewer maintenance activities and equipment,and(3)debt service on prior borrowings for water and sewer capital improvements.These costs are increasing more modestly, consistent with prior years. Indirect Town Costs. The Water and Sewer Enterprise Fund budgets also include indirect costs for services provided by other Town departments to support water and sewer operations, such as insurance costs(health and liability), retirement funding, engineering costs, and the cost of services provided by the Comptroller, the Management Information Systems(MIS)Department,and the Revenue Department.The Town reviews the appropriate level of indirect costs each year and adjusts the charges to the enterprise funds accordingly. Debt Service. Debt service costs represent the payoff of principal and interest on debt incurred for water and sewer fund capital projects in prior years, typically funded by 10-year bonds. Debt service costs are increasing minimally this year for the water fund (.11%) but more substantially for the wastewater fund (8.63%). It should be noted that debt service costs for both funds are projected to increase substantially in FY2022. See Brown Book,pp. XI-8-9 and discussion of Articles 13 and 14 below. Cash Capital. In a break from past practice, it is proposed this year to begin transitioning the funding of recurring, regular capital investments made for the maintenance and upgrade of the Town's water and wastewater systems($2,200,000 annually for the water system and$1,000,000 annually for the wastewater system) from borrowing to cash capital. To minimize the impact of this changeover on rates,the transition would be phased in gradually: in the case of the water fund, at the rate of$200,000 per year for eleven years; and in the case of the wastewater fund, $100,000 per year for ten years. See Brown Book,pp. V-26- 27 and V-30-31. As this Committee has advocated in past reports,the use of cash capital instead of borrowing makes sense in the case of regular, recurring capital investments as it will improve transparency during rate-setting and avoid interest costs. Because debt service for debt incurred in prior years will wind down only gradually, this changeover will result in somewhat higher water and sewer rate increases than would otherwise be required during the early years of the transition. However, as the old debt is retired, debt service costs will ' The preliminary assessments are issued in February.Final MWRA assessments issued in June,typically abit smaller than the preliminary assessments,are used to set water and sewer rates during the Town's annual rate-setting process in the fall. If a special town meeting is held in the fall,appropriations for MWRA expenses are normally adjusted to reflect the final assessments. 18