The URL can be used to link to this page

Home My WebLink About2006-04-02-AC-rpt APPROPRIATION COMMITTEE REPORT—APRIL 2006 Extract of Appendix C from DRAFT #08 3 Apr 2006 Appendix C: Financial Forecasts with Reserves Projections for FY2007–FY2008 INTRODUCTION This appendix provides: A) A description of the imbalance between revenue and expenditure increases in FY2007 and a projection of this “gap” for FY2008. B) A projection of the Town’s financial condition in terms of Reserves from June 2006 through June 2008 and two scenarios for utilizing operating overrides to close the gap in FY2007 and FY2008 while preserving reserve levels; C) A discussion of some of the issues surrounding Scenarios 1 & 2; and D) Other possible strategies for addressing the revenue/expenditure gap. Accompanying exhibits include: C-1: FY2007 – FY2008 Projections, which presents the proposed FY2007 budget and Appropriation Committee projections for FY2008 C-2: FY2008 Projected Reserve Balance – Scenarios 1 & 2 C-3: Town Manager’s February 9, 2006 Reserves Analysis A) The gap between revenue and expenditure increases: We continue to experience a number of expenditure drivers which exceed typical annual growth in revenues. These include the following level service growth factors, as estimated by the Appropriation Committee: School cost of living and step increases: 4.5% (less approximately $650K salary differential)  Municipal cost of living and step increases: 4%  Municipal expenses: 5% (6-year trend plus recent steep increases in energy costs)  School expenses: 6.5% (6-year trend plus recent steep increases in energy costs)  Medical & Dental increase: 14% (estimated for increases in cost of coverage per insured  individual) Other drivers include increases in under-funded State-mandated education expenses, like SPED  More detailed discussion of the FY2007 increases appear earlier in this report in the discussion of the operating budget in Article 17. Meanwhile, revenue growth (without a Proposition 2-1/2 override) in FY2007, which is typical of recent years, is limited to: Proposition 2 ½: 2.5% of the tax base excluding exempt debt ($2.2467M in FY2007)  Page 1 APPROPRIATION COMMITTEE REPORT—APRIL 2006 Extract of Appendix C from DRAFT #08 3 Apr 2006 Tax growth from new/improved real estate and personal property – (projected to be $1.675M in  FY2007) Local receipts: growth of 5.3% projected for FY2007 (This reflects a trend towards some modest  economic recovery.) State Aid: growth of 3.16% projected for FY2007 (State Aid still falls well below pre-2003  levels.) Together, this adds up to an annual imbalance between available revenues and expenses for level service which must be addressed by raising revenue, reducing expenses through new efficiencies, cutting programs, or drawing on reserves (or some combination of these). The proposed FY2007 budget is predicated upon a $5,041,751 operating override (Line 4 of Exhibit C-1) in order to close the gap between revenues and level service expenses AND provide funding for a limited number of service restorations and improvements. Regardless of the outcome of that override and the resulting service level, we anticipate annual revenue/expense gaps for the foreseeable future simply to maintain services at FY2007 levels (as determined by the voters in the June 2006 override) without diminishing reserves beyond present levels. We have estimated this gap for FY2008 at $2.79M, shown on line 41 of Exhibit C-1. This figure is net of a $1.9M appropriation of free cash in FY2008 and is discussed in more detail in the next section. B) Preserving reserves and services - two scenarios: As described earlier in this report, the Town has made progress towards improving its Reserves position. The Selectmen’s ad hoc Fiscal Policy Committee has just released a report outlining a series of reserve policies and targets, which, if implemented, will require an even greater accumulation of reserves than we have at present. Therefore, the Appropriation Committee believes that our planning for FY2007 and at a minimum FY2008 should, , preserve current reserve levels as the Selectmen and appropriate boards and committees review the ad hoc committee’s recommendations and develop an implementation plan. We describe here two scenarios for addressing the FY2007 and FY2008 shortfalls while preserving, but not building, reserve levels. In February, the Town Manager provided a Reserves Analysis to the Budget Collaboration Group, which is reproduced for reference here as Exhibit C-3. Reserves are estimated for the end of each fiscal year and are equal to the sum of free cash and the stabilization fund. (The Appropriation Committee has excluded the reserve fund balance from Reserve totals since the monies appropriated to this account are typically spent in full each year.) On June 30, 2006, Reserves are projected to total $5.57M ($5,719,611-$150,000 reserve fund balance), and on June 30, 2007, are projected to total $6.22M ($6,524,611 - $300,000). Referring now to Exhibit C-2: Line 1: The $5.57M projected reserve total as of June 30, 2006 represents our “starting reserves balance” as we analyze and present two scenarios for addressing the “gap” in FY2007 and in FY2008. Line 2: The $6.22M projected reserve total as of June 30, 2007 (one year later) from Exhibit C-3. Line 3: The Town Manager’s projections assume $750K of expense reversions and revenue receipts above estimates when the books are closed on FY2006. This line shows the additive affect of an additional $250K of reversions and/or excess receipts (in the nominal case), $0 addition (in the pessimistic case), and $500K (in the optimistic case). For the closeout of FY2007, we propose no additions to the Town Manager’s projection of $1M in expense reversions and/or excess receipts. Line 4: Similarly, we are projecting the nominal case of $1M in reversions and/or excess receipts at the close of FY2008. Page 2 APPROPRIATION COMMITTEE REPORT—APRIL 2006 Extract of Appendix C from DRAFT #08 3 Apr 2006 Line 5: This is the total of Lines 2, 3, and 4 and represents a preliminary projection of our reserve balance on June 30, 2008. Line 6: If we only achieve the minimum goal of preserving reserve levels at the June 30, 2006 level of $5.57M, we have $1.9M of free cash available for appropriation (in the nominal case). This represents the difference between Line 5 and Line 1. If this free cash is used, the nominal reserve balance reverts to $5.57M (Line 7). Line 8: Scenario 1 assumes a combination of (a) utilizing $1.90M in free cash in FY2008 and (b) seeking annual overrides for both FY2007 and FY2008. The nominal size of an operating override in June 2007 required to balance the FY2008 budget is $2.793M. This assumes that all questions on the prior year’s (FY2007) June 2006 override pass; however, the impact on the FY2008 gap of failure of some or all of the June 2006 override questions is nominal (on the order of $20K - $50K per $1M of override lost) IF one assumes that we will preserve level service in FY2008 at whatever level the voters choose for Any plan to restore or introduce items in the FY2008 budget which were lost in the June FY2007. 2006 override will increase the size of the gap for FY2008. Line 9: Scenario 2 assumes, instead of annual overrides, that we address the gap by (a) utilizing $1.90M in free cash in FY2008 and (b) adding an additional $1.38M stabilization fund question to the upcoming June 2006 operating override. If this question were to pass, it would allow us to accumulate in FY2007 and FY2008 a total of $2.79M in a stabilization fund which could be drawn down in FY2008 to help balance that year’s budget. Just as in Scenario 1 above, this assumes that all questions on the June 2006 override pass. If any portion of that override for FY2007 fails, any plan to restore or introduce items in the FY2008 budget which were lost in FY2007 will increase the gap for FY2008. Line 10: Both scenarios will leave overall reserve levels intact at the $5.57M maintenance goal, but will achieve no progress towards increasing reserves. Line 11: This shows the impact of rejecting both Scenarios 1 & 2 and instead further drawing down reserves to close the FY2008 gap of $2.79M. The nominal result is a reserves balance as of June 30, 2008 of $2.78M. This would require not only using all available free cash, but appropriating from the stabilization fund, as well. C) Questions to consider with each scenario: This list is by no means exhaustive, but is meant to spur discussion: Is one approach more straightforward, or “transparent,” than the other?  What sort of promises are we making to voters? Can we keep them?  What happens in the event that one or more of the other override questions fails? How does this  impact plans to come back the following year (or not) for an override? What do we do in the event of significant deviations from projections?  Which of the two scenarios offers more service/staffing stability?  What amount of free cash can reasonably be considered to be recurring in subsequent years? The  Town Manager’s projections suggest approximately $1M; therefore what adjustments should be made to mitigate the impact of using $1.9M to balance the FY2008 budget? Instead of simply preserving reserve levels, should we be aggressively building reserves further?  What is the right balance among preserving services, maintaining reserves, and stabilizing taxes? Page 3 APPROPRIATION COMMITTEE REPORT—APRIL 2006 Extract of Appendix C from DRAFT #08 3 Apr 2006 D) Other options i.e. thinking outside the current “box”: There is little opportunity at this point to make structural changes that will have a significant impact on the FY2007 budget. But what opportunities should we consider pursuing for FY2008 and beyond? Here are a few to consider: Examine the total compensation package provided to employees relative to peer towns  Examine class size and course load throughout the school system relative to peer towns  Lobby at the state and national level to obtain more funding for education mandates  Lobby the governor and state legislature to restore State Aid to pre-2003 levels.  Pursue energy conservation measures to reduce energy costs  Examine potentially redundant services (East Lexington Library, etc.)  Explore additional fee opportunities  Page 4 APPROPRIATION COMMITTEE REPORT—APRIL 2006 Extract of Appendix C from DRAFT #08 3 Apr 2006 C-1: FY2007 - FY2008 Projections (Maintaining Reserves at $5.57M as of 6/30/08) FY 2006FY 2007FY 2008 Revenue Summary RestatedProjectedProjected Tax Levy 1Property Tax Levy $ 85,867,574 $ 89,868,589$ 98,832,056 2Allowable 2 1/2% inc.$ 2,146,689 $ 2,246,715$ 2,470,801 3New Tax Levy Growth$ 1,854,326 $ 1,675,000$ 1,746,871 4Voter Approved Override$ -$ 5,041,752$ - 5Tax levy limit$ 89,868,589 $ 98,832,056$ 103,049,728 6Exempt Debt$ 4,943,313 $ 5,554,651$ 4,187,638 7sub-total Tax Levy$ 94,811,902 $ 104,386,707$ 107,237,366 8State Aid $ 8,603,524 $ 8,875,774$ 8,875,774 9Local Receipts $ 9,674,610 $ 10,187,644$ 10,076,914 10Available Funds $ 1,382,484 $ 4,746,000$ 2,395,000 11Revenue Offsets$ (3,145,438)$ (2,919,019) $ (2,908,673) Total General Fund$ 111,327,082$ 125,277,105 $ 125,676,381 12 Other Revenues 13Revolving Funds$ 612,869$ 630,073$ 633,115 14Grants$ 168,873$ 173,390$ 190,923 $ 15,594,776 15Enterprise Funds (Direct)$ 13,322,541 $ 14,476,523 16Enterprise Funds (Indirect)$ 1,789,913 $ 1,827,313$ 1,947,068 17sub-total Other Revenues$ 15,894,196$ 17,107,299$ 18,365,882 Total Revenues$ 127,221,278$ 142,384,404 $ 144,042,262 18 Expense Summary FY 2006FY 2007FY 2008 RestatedRecommendedProjected Education 19Lex. Pub Schools Compensation$ 47,242,262 $ 51,061,471$ 52,709,237 20Lex. Pub Schools Expenses$ 12,786,324 $ 14,379,307$ 15,313,962 $ 68,023,199 21sub-total Lex. Pub. Schools$ 60,028,586$ 65,440,778 22Minuteman Reg. School 3$ 830,667$ 1,082,250$ 1,114,718 $ 66,523,028$ 69,137,917 23sub-total Education$ 60,859,253 Municipal 24Municipal Compensation$ 15,518,028 $ 16,692,925$ 17,360,642 25Municipal Expenses$ 7,439,617 $ 8,377,161$ 8,796,019 $ 25,070,086$ 26,156,661 26sub-total Municipal $ 22,957,645 Shared Expenses 27Benefits & Insurance$ 19,128,260 $ 22,374,981$ 25,801,598 28Debt (within-levy)$ 3,490,750 $ 3,720,061$ 3,941,333 29Reserve Fund$ 150,000$ 400,000$ 400,000 $ 22,769,010$ 26,495,042$ 30,142,931 30sub-total Shared Expenses 31Revolving Funds$ 612,869$ 630,073$ 630,073 Capital & Reserves 32Cash Capital (inc of roads+150K in OR)$ 1,153,000 $ 985,000$ 1,485,000 33Other Stabilization Fund deposits$ 603,647$ 2,650,000 $ 1,756,647$ 3,635,000$ 1,485,000 34sub-total Capital & Reserves 35Enterprise Funds$ 13,322,541$ 14,476,524$ 15,594,776 Exempt Debt 36Municipal$ 771,013$ 1,219,388$ 1,186,263 37School$ 4,172,300 $ 4,335,263$ 3,001,375 38sub-total Exempt Debt$ 4,943,313$ 5,554,651$ 4,187,638 39unidentified expense reductions$ (500,000) Total Expenses$ 127,221,278 $ 142,384,404$ 146,834,996 40 41Balance (Gap)$ -$ 0$ (2,792,733) Page 5 APPROPRIATION COMMITTEE REPORT—APRIL 2006 Extract of Appendix C from DRAFT #08 3 Apr 2006 C-2: FY2008 Projected Reserves Balance - Scenarios 1 & 2 Reserves ($Millions)OptimisticNominalPessimistic 1Town Manager's estimate June 2006 (less AC reserve fund)5.5705.5705.570 2Town Manager's estimate June 2007 (less AC reserve fund)6.2226.2226.222 Expense reversions, excess receipts 3June 30, 2007 increase (beyond T. Mgr's projections)0.5000.2500.000 4June 30 2008 increase (extrapolating T. Mgr's projections)1.2501.0000.750 5Preliminary projected June 2008 balance (sum of Lines 2, 3, 4)7.9727.4726.972 (assuming no unpaid bills, other crises) 6Available for appropriation for FY2008 (Line 5 - Line 1)1.902 (nominal case) 7Projected June 2008 balance (Line 5 - Line 6)5.570 (nominal case) 8Scenario 1: June '07 override needed to achieve level 2.793 service in FY08 and maintain $5.57M reserve balance (nominal case) 9Scenario 2: June '06 Override addition for stabilization1.379 needed to avoid a June '07 override and still achieve level service in FY08 while maintaining $5.57M reserve (nominal case) 10Projected June 2008 balance (all cases)6.0705.5705.070 11Projected June 2008 balance if no override in June '07 3.282.7772.277 and no stabilization override addition in June '06 (Line 10 - "the gap" shown on Line 8) Page 6 APPROPRIATION COMMITTEE REPORT—APRIL 2006 Extract of Appendix C from DRAFT #08 3 Apr 2006 C-3: Town Manager’s February 9, 2006 Reserves Analysis Town of Lexington FY 2007 Budget Development Reserves Analysis The following attempts to review & show the changes in reserves and contingency accounts over a three year period - FY 2005-FY 2007. CategoryAmount as of 6/30/2005Amount as of 6/30/2006Amount as of 6/30/2007 Stabilization Fund Start$ 111,142Start$ 918,464Start$ 1,522,111 Add$ 807,322Add$ 603,647(New)Add$ 2,000,000(From FC) Finish$ 918,464Finish$ 1,522,111 Add$ 650,000(New) Finish$ 4,172,111 Free Cash Start$ 2,323,201Start$ 2,173,201Start$ 4,047,500 (Change in FC) 1 Subtract$ (150,000)Add$ 3,236,764Subtract$ (2,000,000) (to SF) Finish$ 2,173,201Subtract $ (962,465) (Fall TM Supp.)Subtract$ (2,000,000) (for Operating) Subtract $ (150,000) (Spr.TM Supp. - Est.)Add$ 950,000(NESWC) Subtract $ (250,000) (NSTAR/Fiske)Add$ 250,000(NSTAR/Fiske) Finish$ 4,047,500Add$ 750,000(Est. Turnbacks & Revenues) Finish$ 1,997,500 Oper. Contingencies Reserve Fund$ 300,000$ 150,000$ 300,000 Unisured Liabilities$ -$ - $ 35,000 2 Workers Compensation $ -$ - $ 20,000 $ 300,000$ 150,000$ 355,000 Totals$ 3,391,665$ 5,719,611$ 6,524,611 Notes 1 Of this amount, $1,852,214 from one-time investment proceeds from secondary school projects. 2 Anticipated balance left in Continuing Balance Account, to be created. Page 7