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APPROPRIATION COMMITTEE-2.020 ATM 25 March 2020 Before FY2006,as this Committee has noted in previous reports,capital expenditures for water distribution and related improvements were funded by a combination of enterprise fund cash capital,which was raised in the rates, and borrowing. Subsequently, there was a transition to funding these ongoing improvements exclusively with debt. While that change mitigated rate increases early on, it effectively pushed much of the burden of the program off to future ratepayers, steadily increasing the annual debt service costs of the Water Enterprise Fund,both in dollar and percentage terms. The proposal now to transition from exclusive debt funding back to cash capital will, conversely, increase the burden on current ratepayers, at least in the short run. This is because, until that transition has been completed,the rates will have to support not only continuing and increasing debt service for past expendi- tures,but also the cash capital portion of current expenditures. Because the level of annual expenditures for the capital maintenance program recently doubled,the debt service component of the rates will continue to grow,gradually tapering off over the next eleven years as borrowing for that program is reduced. See Brown Book,p. XI-8 (table of projected debt service for the water enterprise fund). The table in the Brown Book on p. V-27 projects an 8.17%increase in rates for FY2021.We estimate that approximately 2%of this increase is attributable to the new$200,000 in FY2021 cash capital financing. For the next fiscal year, FY2022, water enterprise debt service is projected to increase by approximately $600,000 (some of which is attributable to other projects).' See Brown Book, p. XI-8. This debt service increase, if all authorized debt is issued,would add about 5%to any FY2022 budget increase. The appro- priation of an additional$200,000 in cash capital in FY2022,as planned,would add another 1.5%or so for a total increment to the rate increase otherwise required of approximately 6.5%. Thereafter,the impact on the rates of the increased annual maintenance expenditures and the transition to cash capital should diminish. Since the portion of the maintenance program funded by borrowing will stead- ily be reduced over the next eleven years, debt service increases for that program should begin to level off and eventually drop. The transition to cash capital, until it is completed, would continue to add each year an increment of $200,000 to the budget, but the percentage impact of that increase on the rates would gradually decline as the total budget grows(unless the annual expenditure level and cash capital component is increased, see Brown Book, p. XI-21). Once the transition has been completed,the continuous funding requirements of the water system maintenance program should be stable,with no impact on rate increases. Committee Recommendation Cognizant of these rate pressures,the Committee recommends approval of both the appropriation amount and the funding method requested in this article.Although the recent doubling of the level of annual mainte- nance and upgrade expenditures was unanticipated,the need for it is well-documented. The changeover to cash capital funding is desirable as it will more transparently and directly reflect the true current cost of system upgrades and maintenance when rates are set, as well as saving interest costs. Finally, the plan to phase the changeover in over an eleven-year period is a reasonable way to avoid the "sticker shock"of the changeover which, if done all at once,would add a one-time increment to the rates of about 20%. The Committee recommends approval by a vote of(8-0). ' In particular,a significant part of the FY2022 projected debt service increase presumably results from the appropri- ation at last year's annual town meeting of$2,740,000 in debt for the water enterprise fund's share of the$5,940,000 automated meter reading project. See FY2020 Brown Book,p.XI-13. 35