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APPROPRIATION COMMITTEE 2 " REPORT, April 21, 2007, TO 2007 ATM Introduction This is our second written report to the 2007 Annual Town meeting. In the interest of brevity, we will, in general, not repeat material from the first report. This and our other reports will be available on -line at http://www.lexingtontliu The topics covered in this report include our recommendations on most elements of the Operating Budget (Article 21) and on Articles 37 41 and 43 44. A third report, to be issued early next week, will address our recommendations on the Department of Public Works (DPW) Facility project (Article 36). A fourth and final report, to be issued later next week, will address the School Department operating budget and related Shared Expenses for health benefits (Article 21, lines 1100 and 2130) and Article 42. This report is organized as follows. We begin in this Introduction with an overview of recent financial developments, the status of the Town's financial reserves, the proposed FY2008 budget, and the financial outlook for FY2009 and beyond. We then provide updates on our positions and information since our first report. Next we provide our analysis and recommendations on individual articles. Finally, we present in two appendices information on the expected impact of an operating override on tax bills in FY2008 (Appendix A) and projections of the Town's finances in future years (Appendix B). Developments from the 2006 Annual Town Meeting Until Now Four override questions were put to the voters in June, 2006. Questions I and 2, which sought additional funds for the operation of the Lexington Public Schools, were not approved. Question 3, which sought increased funds for salaries and expenses for municipal and school facilities maintenance, was approved. Question 4, which sought additional funds for the municipal operations budget, was also approved. The outcome of this referendum has had major effects on the budgets that have been developed for FY2008. Two Special Town Meetings were convened last fall. At the first (Special Town Meeting No. 1, convened on November 29, 2006), a number of financial actions were taken, including: appropriations to augment the FY2007 school budget to cover new and unexpected special education (SPED) costs; adjustments to the Water and Sewer Enterprise Funds budgets; appropriations from the Community Preservation Act (CPA) Fund for three historical preservation projects; appropriation of funds received from Brookhaven for use by LexHAB; and a small supplemental appropriation for the Senior Service Program. In addition, that Special Town Meeting gave its preliminary approval for the consolidation of school and municipal facilities maintenance programs into a joint facilities department. Details may be found in our "Report to the 2006 Special Town Meeting #I" at the above web site. Of the General Fund appropriations made at Special Town Meeting No. 1, the only one of real significance was that required to cover the increase in SPED cost; the others were either housekeeping actions or small in magnitude. The supplemental school appropriation of $824K was covered for the most part by an increase in Chapter 70 State Aid, which came in significantly above the amount that had been projected during the 2006 budget process. The balance of the supplemental school appropriation was covered by new tax -levy growth in excess of that projected in March 2006. Thanks to these late- breaking additional revenues, it was not necessary to appropriate any Free Cash at Special Town Meeting No. 1. The second Special Town Meeting (Special Town Meeting No. 2) —convened right after the first, but with debate held on December 2, 2006 —considered an appropriation for the construction of a new Department of Public Works (DPW) facility. Rather than appropriate the complete funds necessary for the construction of the facility, then estimated to be about $30.5 million, that Special Town Meeting made a more limited appropriation of $1.6 million to fund the design process through 50% completion of the construction drawings. The objective was to allow further analysis of the building needs and possible Page 4 of 24