Appropriation Committee AdHocFiscalTaskForce-AppendixD-RPT

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Appendix D: Appropriations Committee 3 -Year Budget Projection — FY 2011 to FY 21013 In recent years a projection of Town revenues and expenses for the next few fiscal years has been included as an appendix in the report of this committee to the annual town meeting. A projection can help us understand the challenges that Lexington will face if, e.g., revenues do not grow as fast as the expenses for "same service" budgets. The projections are also an opportunity to obtain a better quantitative understanding of known trends and cost drivers. For most of those exercises, we showed the results of calculations based on a single set assumption that we tried to define in the narrative or elsewhere. Last year we also provided an accessory table to provide information on the effects of changes to a small number of selected line items. We emphasize that the process of making revenue an d expense projections differs in an essential manner from trying to build budgets that must be balanced. In the latter process, one errs on the side of caution to help avoid ending up in a deficit at the end of a fiscal year, or even worse, having to lay off employees in the middle of a fiscal year. In the projection process, one simply makes best guesses about future revenue and expense changes regardless of whether they lead to surpluses or deficits. In no case are these assumptions meant to represent targets or goals. They also do not account for the adoption of new programs or the ending of old programs. While the process of defining our baseline set of assumptions always involves judgment, this year we find that the current global financial crisis and major recession has made it much more difficult. Indeed, we don't know how deep the recession will be, how long it will last, how fast the recovery will be, what its effects on state and town revenues will be, what interest rates will be and how they will change, how the prices of goods and services will change, how the depressed job.market will affect wages and salaries, etc. It should therefore be no surprise that in this environment we have had trouble not only agreeing with each other on a baseline set of assumptions, but even in coming to individual opinions on what might be reasonable guesses. While the rational response to such a situation might be to give up, instead we present here the results of an exercise that gives some idea of the uncertainties. Thus, two scenarios are presented that show how two sets of reasonable people arrive at different projections and how small differences in assumptions can change the bottom line. Scenario 1 is a just a bit more optimistic than Scenario 2. The key assumptions for each of the two scenarios are given in Table A -1 in terms of either dollar values for the line items or percentage increases from the previous fiscal year. Dollar values that correspond to these percentages may be found in Tables A -2 and A -3 where the projection results are given (except for health insurance for which we give both percentage increases and dollar amounts in Table A -1). We have only done rather limited investigations to establish the plausibility of the assumptions in Table A- 1, but the fact that two independent groups (both were within the A. C.) came up with similar values tends to justify them as best guesses. Clearly, these assumptions are uncertain and do not cover the full range of uncertainty in each area. Since they are formulated to reflect a range of probable cases, these two scenarios should not be seen as a best case /worst case dichotomy. In regard to the revenue assumptions listed in Table A -1, the amounts assumed for new growth in Scenario 1 start with the amount assumed for the FY2010 recommended budget, i.e., $1,900K, while the amounts assumed for new growth in Scenario 2 start with a five -year average of $1,997K. For both scenarios, we then add in the amounts, net of the tax, increment financing (TIF) agreement, anticipated from the development of buildings at Lexington Technology Park for Shire Pharmaceuticals. Both scenarios assume that there will be additional reductions in State aid and local receipts beyond those assumed in the recommended FY2010 budget, although by different amounts. The two scenarios assume identical Page 53 of 59