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APPROPRIATION COMMITTEE—2020 ATM 25 March 2020
<br /> Retained Earnings:Appropriations and Year-End Balances
<br /> Fiscal Year FY2016 FY2017 FY2018 I FY2019 I FY2020 FY2021
<br /> Water
<br /> Starting Balance ' $2,119,458 $1,786,659 $1,800,533 $531,683 $1,612,998 $1,346,448
<br /> Approp. for Rate Relief 2 — — — — — —
<br /> Bedford, Burlington Mitig 3 $275,000 $131,000 $190,900
<br /> Approp. for Capital 4 $1,015,500 $620,500 $1,095,000 $105,0001 $775,0001 $130,000
<br /> Projected End Balance 5 $903,958 $1,035,159 $514,633 $426,863 $837,998 $1,216,448
<br /> Wastewater
<br /> Starting Balance ' $2,027,941 $1,032,942 $2,270,848 $576,523 $1,521,373 $998,736
<br /> Approp. for Rate Relief 2 — — — — — —
<br /> Approp. for Capital 4 $1,390,500 $177,500 $1,290,000 — $700,000 —
<br /> Projected End Balance 5 $637,441 $855,422 $980,848 $576,523 $821,373 $998,736
<br /> I Certified retained earnings as of the end of the prior fiscal year(as of 6/30/2019 for this year's ATM).The anomalous figures for
<br /> 2018 resulted from an under-certification of retained earnings at the end of FY2017 that was made up the following year.
<br /> 2 Appropriations from retained earnings to subsidize the next fiscal year's operating budget.
<br /> 3 Several years ago,Lexington supplied unusually large quantities of water to Bedford as Bedford worked to correct issues with its
<br /> alternative supplies.The retained earnings resulting from these extraordinary sales were"earmarked"and applied to mitigate the
<br /> rate impact in subsequent years.
<br /> 4 Proposed appropriations for capital projects for the next fiscal year(FY2021 at this ATM).
<br /> 5 Note that appropriations from retained earnings at the annual town meeting must be deducted as a liability from the projected
<br /> retained earnings to be certified as of the end of the current fiscal year,even though the funds will not be applied until the following
<br /> fiscal year. The projection of anticipated retained earnings assumes break-even operational results during the current fiscal year.
<br /> A higher(lower)starting balance available for appropriation the following year indicates that the current year's operating results
<br /> were higher(lower)than were projected at rate-setting,resulting in an operating surplus(deficit).
<br /> From roughly 2009 to 2014,accumulated retained earnings in excess of the desired buffer("excess retained
<br /> earnings") were appropriated on a regular basis to mitigate water and sewer rate increases. This practice
<br /> was discontinued, however, as it simply pushed required rate increases down the road a year. Since that
<br /> time, as shown in the table above and consistent with recommendations made by this Committee, excess
<br /> retained earnings have been used primarily to offset the need for borrowing for capital investments of the
<br /> enterprises, thereby lowering debt service costs and required future rate increases over a more extended
<br /> period of time, as well as saving interest cost.
<br /> Particularly where applied to regular, recurring capital investments,this use of retained earnings is similar
<br /> to the now-proposed use of cash capital; however, being deployed a year in arrears, it leaves a substantial
<br /> amount of funds idle for a year; and not being part of the annual operating budget, its use to fund regular
<br /> capital investment needs is less transparent during the rate-setting process. Ideally, rates would be set such
<br /> that the water and sewer funds are on a break-even basis and do not generate substantial retained earnings
<br /> in excess of the targeted reserves; however, given the difficulty of predicting usage and the need for con-
<br /> servatism in setting the rates, surpluses can be expected to continue. The best use of the extra funds is for
<br /> non-recurring expenses or capital projects, such as the $500,000 in retained earnings appropriated last year
<br /> from each of the water and sewer funds toward the automated meter reading project.
<br /> Consistent with this observation, a limited amount of retained earnings is proposed for appropriation from
<br /> the water fund at this annual town meeting to fund, or help fund, two smaller capital projects: $55,000 to
<br /> replace a 6"trash pump,see Brown Book,p.XI-6;and a contribution of$75,000 to the hydrant replacement
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