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APPROPRIATION COMMITTEE REPORT TO THE MARCH 2013 ATM
<br /> It should be noted that this year's increase in Lexington's MWRA water assessment of 8.2% is considera-
<br /> bly higher than the MWRA-wide average increase of just 3%. This discrepancy is largely attributable to a
<br /> major spike in the consumption of water by the Town of Bedford during the late summer and early fall of
<br /> 2012 as part of a remedial pipe flushing program to remove contamination in certain parts of its water
<br /> system. As a consequence of that event, Lexington's consumption of MWRA water increased in CY2012
<br /> by 4.6%, compared with an MWRA-wide increase in water use of less than 1%. Now that the problem in
<br /> Bedford has been resolved, it can be anticipated that Lexington's MWRA water share will drop back to
<br /> normal and thus fall, relative to other MWRA communities, in CY2013. This should result in a lower-
<br /> than-average water assessment increase next year (for FY2015). In the meantime, additional revenue that
<br /> the Town of Lexington earned from the Town of Bedford in 2012 due to the flushing program was ex-
<br /> cluded from consideration in setting the FY2013 water rates, and thus should add to the water fund's re-
<br /> tained earnings to help mitigate this year's water rate increase. (See discussion below of the use of re-
<br /> tained earnings to mitigate FY2014 rates.)
<br /> Direct Town Costs. In addition to the MWRA assessments, the expenses of the Water and Wastewater
<br /> Fund budgets include direct costs incurred by the Town, primarily for: (1) the wages and salaries of the
<br /> employees in the DPW's Water and Sewer Divisions, (2) the expenses of the water and sewer mainte-
<br /> nance activities and equipment, and (3) debt service on prior borrowings for water and sewer enterprise
<br /> capital improvements. All of these direct costs are increasing at moderate levels or decreasing (see Brown
<br /> Book, pp. V-25, V-27) with the exception of sewer fund debt service costs which continue to grow at a
<br /> comparatively high rate (18.3%).
<br /> As this Committee has noted in past reports, the growth of debt service costs is a predictable consequence
<br /> of a transition made six or seven years ago from an earlier practice of funding ongoing capital improve-
<br /> ments and repairs to the water and wastewater infrastructure with a combination of debt and cash capital
<br /> to a practice of funding them primarily with debt. See the discussion of Articles 11 (Water Capital) and
<br /> 12 (Sewer Capital) and accompanying tables. While debt financing helps to spread the costs of projects
<br /> over their useful life, the immediate effect of the change was a temporary lowering of current-year capital
<br /> costs. As interest payments and principal repayments come due on the higher levels of debt incurred, the
<br /> annual capital costs of the enterprise funds that must be captured in the water and sewer rates are gradual-
<br /> ly growing back to their original levels. In addition, the Water and Sewer Enterprise Funds' debt service
<br /> burden has been increased by their assumption of responsibility for approximately 25% of the debt ser-
<br /> vice costs for the construction of the new DPW facility (17% and 7% respectively,based on their usage of
<br /> that building).
<br /> This year, as will be addressed in the discussion of Articles 11 and 12, it is proposed to finance $750,000
<br /> of a total $1,095,500 in water system capital improvements, and $200,000 of a total $1,445,500 in sewer
<br /> improvements, from retained earnings. The Committee applauds this proposal as it will both bring the
<br /> level of retained earnings down to more reasonable levels and mitigate future increases in debt service
<br /> costs, thus providing long-term as opposed to mere temporary, short-term rate relief.
<br /> Indirect Town Costs. The Water and Sewer Enterprise Fund budgets also include indirect costs for ser-
<br /> vices provided by other Town departments to support water and sewer operations, such as insurance costs
<br /> (health and liability), retirement funding, engineering costs, and the cost of services provided by the
<br /> Comptroller, the Management Information Systems (MIS) Department, and the Revenue Department. In
<br /> 2006, Town staff conducted an analysis of indirect charges and concluded that they were higher than
<br /> could be justified. To address this issue without causing undue disruption to the Town Budget, the level
<br /> of indirect costs charged to the water and sewer funds was gradually phased down, from FY2008 through
<br /> FY2012, at the rate of about 3-5% per year. This year, following the performance of an updated indirect
<br /> cost analysis, the indirect costs charged to the water fund will be increased by approximately $150,000
<br /> from $665,848 to $818,689, or about 23%; and the indirect costs charged to the sewer fund will be de-
<br /> 2 Lexington re-sells MWRA water to the Town of Bedford on a pass-through,wholesale basis.
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