2006-03-15 Ad Hoc Financial Policy Review Committee Report

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TOWN OF LEXINGTON Ad Hoc Financial Policy Committee REPORT TO BOARD OF SELECTMEN FOREWORD The Selectmen's charge to the Committee (See Exhibit A.) seeks recommendations that will improve the Town's fiscal policies. To develop a context for its recommendations, the Committee first reviewed the fiscal realities of the recent past and evaluated current financial policies. We believe the Town: ^ Is not investing enough each year to maintain its fixed asset base. The Town's "cash capital" policy is subject to political will. Funding capital reinvestment has been a lower priority than sustaining Town services. The cash available for capital investment has been used consistently to balance the operating budget, resulting in deferred maintenance, while forcing the Town to rely on within-levy debt to renew and replace fixed assets. ^ Has seen the costs of Town services grow faster each year than the growth in property tax receipts. Proposition 21/2 limits annual growth in the tax levy to 2.5%, plus new growth in the Town's tax base. ^ Has demonstrated its willingness to sustain services and finance major capital projects by passing both operating and debt exclusion overrides of Proposition 21/2. ^ Has not set aside reserves to buffer the impact of declines in state aid and local receipts during economic downturns. Since they reflect the general business cycle, these two key revenue sources are the Town's most volatile. ^ Does not have adequate mechanisms to respond to fluctuations in volatile expenses other than the Appropriation Committee's historically modest Reserve Fund and supplemental appropriations from "Free Cash." ^ Relies on Free Cash as its primary reserve, although calculating Free Cash requires evaluating several items on the Town's June 30 balance sheet, and the amount is neither confirmed nor available for appropriation until the late fall, after it is certified by the State's Department of Revenue. ^ Does not have adequate reserves to absorb the financial consequences of certain major claims and liabilities, such as multiple workers' compensation claims or extraordinary medical expenses. ^ Does not yet know the magnitude of the liability for retiree health benefits nor does the Town have a plan to fund this liability. ^ Has a Aaa debt rating, but no stated policies articulating target levels for within-levy or outside-the-levy borrowing, for annual debt service for within-levy debt, or for long-term versus short-term debt. ^ Does not engage in long-term financial planning or modeling, yet such an exercise would identify the most significant budget drivers and focus efforts to contain costs andlor generate additional revenue. Ad Hoc Financial Policy Committee Page 1 of 18 March 15, 2006