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APPROPRIATION COMMITTEE 2 " REPORT, April 21, 2007, TO 2007 ATM FY 2008 The Town Manager and staff led the development of the FY2008 recommended budget by first estimating, from the best available information, the amount of revenue that could be expected in FY2008, taking into account the allowable 2.5% increase in the tax levy, State aid, local receipts and available funds (principally Free Cash). The next step was to estimate the required expenditures in FY2008 for shared expenses, including debt service, health benefits and capital. A total was then calculated for the FY2008 shared expenses and the amounts appropriated in FY2007 for the educational and municipal operations. The amount by which the projected FY2008 revenue exceeded this total, considered to be "new revenue," was allocated between the school and municipal budgets on a 72/28 percentage basis the same proportion as the final FY2007 school and municipal budgets. Although this allocation was, in principle, merely a starting point for further discussions, there was no strong feeling in the major boards and finance committees that it should be changed. Thus, it established the amount of expenditures that could be supported in the school and municipal budgets without, for example, fee increases or an operating override. The School Committee has, in fact, approved some changes in fees for FY2008 (some of which depend on the outcome of a June 2007 override referendum). As noted in the previous section, the revenue model contemplates the use of $1,887,347 of Free Cash for FY2008 operating expenses, the use of $655,000 of Free Cash for capital expenditures, and the transfer of $1,000,000 to the Stabilization Fund. The use of Free Cash is summarized in Table 2 above. The School Committee has requested that an additional amount be appropriated for school operations in order to maintain services and to restore some important previously lost positions. The additional amount will be contingent upon approval in a Proposition 2 /z override referendum to be called by the Selectmen upon favorable action by Town Meeting. The amount of the proposed override is about $3.9M and will be split between the school budget line item (I 100) and the health insurance line item (2130). The Selectmen and Town Manager do not plan to seek additional funds for municipal operations through an override this year. There have been several late- breaking developments in the budget process, one of which involves State aid. The Town Manager, in the Brown Book, assumed a net increase of only about $20K in State aid from FY2007 to FY2008. In early April 2007, the Massachusetts House and Senate approved a joint resolution in favor of changes in Chapter 70 that would increase aid for education to Lexington beyond the increase assumed in the Town Manager's March 23 budget by about $640K. At a joint meeting on April 12, 2007, the Board of Selectmen, School Committee, and this Committee approved the allocation of this State aid increase to the school operating budget so as to decrease the amount that will be at risk in the June override referendum. The Town and School Administrations continue to work on revising the structure of the annual budgets. The use of revolving funds is increasing and will hopefully lead to greater transparency in a number of areas. Some of the details on the revolving funds may be found in our discussion of Article 25 in our first report, and further details will be provided in our upcoming report on the school operating budget. If the anticipated operating override for the school operating budget in June does not succeed, there will be layoffs of about 40 school employees. Since a laid -off employee is entitled to receive unemployment compensation from the Town while she /he is looking for a new job, the Town needs to be prepared to bear the potential costs of unemployment compensation. The maximum cost in FY2008, which would be borne in the highly unlikely case that none of the laid -off employees is reemployed, is close to $700K. The unemployment compensation line (line 2140) has been increased to about $375K from a much lower amount to cover the reasonably likely costs in the event that the override fails. This Committee has, in collaboration with Town staff, worked on making projections in order to gain some insight on future fiscal years (see Appendix B). The projections quantify, according to a set of assumptions, the anticipated growth of expenses relative to revenues. We believe that we have made reasonable assumptions, and therefore are obligated to consider seriously the implications of the projections. They indicate that it is reasonably likely that maintenance of the FY2008 level of services in Page 7 of 24