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APPROPRIATION COMMITTEE REPORT TO THE MARCH 2013 ATM
<br /> creased by approximately $165,000 from $623,444 to $456,603, or about 27%. Because the increases and
<br /> decreases are roughly offsetting, the net effect on combined water and sewer rates going forward will be
<br /> minimal.
<br /> Rate-Settin1j, and Reserves
<br /> As discussed in Appendix B, the state statute governing enterprise funds, G.L. c. 44, § 53F/2,requires that
<br /> accumulated surpluses resulting from the operations of an enterprise fund,referred to as retained earnings,
<br /> remain with the fund as a reserve, and that they be used only for capital expenditures of the enterprise,
<br /> subject to appropriation, or to reduce user charges. Deficits must be funded with existing reserves or, in
<br /> the absence of such reserves, made up in the following year's rates.
<br /> During the early 2000s, difficulties in forecasting usage and other accounting issues resulted in rates be-
<br /> ing set at less than adequate levels in several rate years. This, in turn, reduced the retained earnings in the
<br /> Water and Sewer Enterprise Funds to levels of concern. Since 2005, the Town's ability to measure and
<br /> forecast water and sewer usage, and thereby to anticipate revenues and reserve levels, has improved sig-
<br /> nificantly. This has enabled the Town to restore and stabilize the water and sewer enterprise fund reserve
<br /> balances,3 and indeed more recently to draw some of the funds down for rate relief or other purposes, as
<br /> shown in the table below.
<br /> Retained Earnings: Appropriations for Rate Relief and Year-End Balances
<br /> FY08 FY09 FY10 FYll FY12 FY13 FY14
<br /> Water
<br /> Rate Rel.App. 5362,570 5463,046 5525,000 5450,000 5650,000 5350,000 *S300,000
<br /> End Balance 52,537,249 I S2,113,7291 S1,622,0521 S1,952,2531 51,932,000 **S1,032,000
<br /> Sewer
<br /> Rate Rel.App SO SO 5625,000 5400,000 5300,000 5150,000 *S100,000
<br /> End Balance 52,763,179 I S1,831,9671 S1,525,6121 S1,168,1901 51,319,000 **S1,019,000
<br /> Combined
<br /> Rate Rel.App. 5362,570 5463,046 I 51,150,000 5850,000 5950,000 5500,000 *S400,000
<br /> End Balance S5,300,4281 S3,945,6961 S3,147,6641 S3,120,4431 53,251,000 **S2,051,000
<br /> *Proposed appropriations from retained earnings to subsidize the FY2014 operating budget.
<br /> **Projected retained earnings at the end of FY2013. The projection assumes:(1) break-even operational results during the cur-
<br /> rent fiscal year; (2) appropriations from retained earnings at this year's Annual Town Meeting for rate relief($300,000 water
<br /> and$100,000 sewer) and capital improvements ($750,000 water and$200,000 sewer); and(3)supplemental water fund revenue
<br /> of$150,000 from the Town of Bedford that was not included in the rate-setting budget. Note that appropriations from retained
<br /> earnings made this spring must be deducted as a liabilio) from the projected retained earnings to be certified as of 613012013
<br /> even though the funds will not be applied until the following fiscal year.
<br /> As can be seen from the chart above, from FY2010 through FY2012 the Town appropriated significant
<br /> amounts of retained earnings at each year's Annual Town Meeting to subsidize the following fiscal year's
<br /> water and sewer budget. Once a practice of making recurring appropriations of retained earnings for rate
<br /> relief is adopted, however, it can be difficult to unwind. Even without any increase in costs, eliminating a
<br /> combined annual subsidy of$1,000,000 from retained earnings of the water and sewer funds in any given
<br /> year would result in a combined rate increase of about 6%. Unless rates are set high enough each year to
<br /> "earn back" the previously appropriated subsidy —a circular exercise that defeats the purpose of the ap-
<br /> s This Committee has previously urged that a policy be adopted defining the appropriate level of retained earnings to
<br /> be maintained for emergency purposes for both funds, and setting forth guidelines for the use of such funds either to
<br /> mitigate future rate increases or to finance capital projects. Although a definitive policy still has not been adopted,
<br /> the Town Manager has recommended maintaining reserves of approximately S 1,000,000 in each of the fund.
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