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APPROPRIATION COMMITTEE REPORT TO 2008 ATM —March 19, 2008 Introduction In this Introduction, we give an overview of financial developments since the 2007 Annual Town Meeting, the proposed FY2009 budget, the current status of the Town's financial reserves, and the financial outlook for FY2010 and beyond. In the following sections, we provide our analysis and recommendations on individual articles. Finally, the Appendix presents our projections of the Town's finances in future years. The "Report of the Town Manager" in the FY2009 Brown Book (see link in the Preface) is useful to read before this Introduction. Developments since adoption of the FY2008 budget The approval of both the operating override to cover increased school expenses and the debt exclusion for the new DPW facility last June set the stage for a fiscal year that has, perhaps, presented lesser financial difficulties than those we have faced in many recent years. The success of the override allowed the schools to avoid severe personnel and program cuts; indeed, a number of people had to be hired following the successful approval and this proved to be difficult to accomplish satisfactorily so late in the hiring season. After the success of the debt exclusion for the new DPW facility, a bid was accepted at a favorable price. The DPW vacated the old facility around the end of October. It was demolished over the next few months, and construction of the new facility is under way. The approval of the override and the debt exclusion has created surpluses in the unemployment compensation and debt services parts of the budget. These funds will not need to be used for their stated purposes in FY2008, because the success of the override precluded a number of layoffs and the debt exclusion covers the debt service on funds previously appropriated and borrowed for DPW facility planning and design work. At the Special Town Meeting in October 2007, the Town Meeting approved a Tax Increment Financing (TIF) agreement with Shire HGT, a division of a pharmaceutical company. Shire recently announced that it is proceeding with its proposed development in Lexington since it has received assurances that it can count on State legislation that will allow Shire to receive certain State incentives. The Special Town Meeting also made minor revenue and expense adjustments to the FY2008 operating budget, made minor adjustments to the water and sewer enterprise fund budgets, and approved a resolution in regard to legislation enabling the formation of new municipal electric utilities. Please see the Appropriation Committee report to the Special Town Meeting for further details (this report and others are available at http:// ci. lexington. ma .us /townmeeting /townmeeting.htm or http: / /www.lexingtontmma.orR - click on "Documents "). In the fall, the State certified Lexington's Free Cash at the healthy amount of $4,861,516. There was no need to use any of this Free Cash at the fall Special Town Meeting, e.g., to cover a deficit from FY 2007 snow and ice removal expenses, for unpaid bills for which no funds were encumbered, or, indeed, for any FY 2008 deficits. New growth for FY2008 was certified at $2,485,650; the appropriated FY2008 budget assumed it would be $1,600,000. The Lexington Public Schools ended FY2007 with a surplus of $464,049. While this surplus only came after and is smaller than the sum of the supplementary appropriations at both the fall 2006 Special Town Meeting No. 1 and at the spring 2007 Annual Town Meeting, it is nevertheless a positive development. There were also surpluses in Shared Expenses ($885,137) and the municipal part of the budget ($617,456). These surpluses became part of the current certified Free Cash balance. In contrast to the last few years, the School Superintendent and Assistant Superintendent for Business and Finance are not projecting that any supplementary appropriations will be needed this spring. Rather, they are confidently projecting that the Lexington Public Schools will finish the year with a sizable surplus. In January, the best estimate projected a surplus of as much as $1.7M though it was noted that five or six months is ample time for costs to unexpectedly increase, e.g., if additional students need out -of- district Page 7 of 50