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APPROPRIATION COMMITTEE-2.020 ATM 25 March 2020 moderate and eventually the overall costs of the annual capital investment program will be lower as interest costs are eliminated. For a more detailed treatment of the impact of the changeover,see discussion of Arti- cles 13 (Water System Improvements) and 14 (Wastewater System Improvements)below. Rate-Setting Issues Because changes in the operating budgets of the water and wastewater enterprises approved at the annual town meeting ultimately translate into changes in the water and wastewater rates when set later in the year, a brief comment on those rates and the impact of this year's budget is in order. By and large, rate increases have been relatively modest for more than a decade. From FY2006 through FY2020, they fluctuated between -1.9% and 6.6% for an average annual rate increase of 2.7%. However, with a combined water and wastewater increase in the FY2021 budget of 7.05%(compared with a combined increase last year of just 2.93%) and the introduction of cash capital and other looming pressures on the rates, rate increases are likely to be higher for FY2021 and years beyond, at least for some period of time. One of those other factors is an apparent new trend of declining usage as plumbing fixtures are modernized to waste less water and residents pay more attention to water conservation. Since most of the water and wastewater funds' costs are fixed, not variable, the "sale" of fewer units of water necessarily results in a higher per-unit cost. Largely for this reason, at the rate-setting for FY2020 last fall, water and wastewater rates had to be increased on a combined basis of 7.3%even though the combined water and sewer budgets increased by only 2.93%. If the trend of decreasing usage continues,this year's combined budget increase of 7.05% could translate into an FY2021 water and wastewater increase next fall that is even higher. The "silver lining"in this cloud, of course, is that residents whose usage reflects the town-wide decline will see their bills increase less than the rates. Another factor putting pressure on the rates going forward, as discussed under Articles 13 and 14 below,is a projected increase in debt service over the next few years resulting,in the case of the water fund,from an increase last year in the annual capital maintenance program investment from $1,000,000 to $2,200,000; and in the case of both the water and wastewater funds,the extraordinary appropriation last year of nearly $5 million in debt(split equally between the two funds)for the automated meter reading project. An unknown is whether and how much MWRA assessments will increase in future years. If Lexington's share of the overall MWRA usage continues to increase in future years, as it did this year relative to other communities (Lexington had a combined assessment increase of 6.6%compared with a 3.6%increase sys- tem-wide), this could be yet another factor imposing upward pressure on rates. On the other hand, an ex- tended period of drought, by increasing irrigation usage and water fund revenue, could help to offset a required water rate increase (at least for those Lexington residents who do not use extensive irrigation). Retained Earnings As discussed in Appendix B,the State statute governing enterprise funds,G.L. c. 44, § 53F'/2, requires that accumulated surpluses resulting from the operations of an enterprise fund, referred to as retained earnings, remain with the fund as a reserve, and that they be used only for capital expenditures of the enterprise, subject to appropriation,or to reduce user charges. Deficits must be funded with existing reserves or,in the absence of such reserves,made up in the following year's rates. The Town's policy is to maintain a balance of approximately$1 million of retained earnings in each fund as a buffer against revenue shortfalls resulting from unexpected reductions in usage or an unanticipated need for extraordinary expenditures. The table below shows how the balance of retained earnings has been deployed over the past several years and their proposed appropriation at this ATM for FY2021. 19