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01/23/2020 AC Minutes Minutes Town of Lexington Appropriation Committee (AC) January 23, 2020 Place and Time: Cary Memorial Building, Hudson Room, 7:30 p.m. Members Present: Glenn Parker, Chair; Sanjay Padaki, Vice-Chair; Alan Levine, Secretary; John Bartenstein; Lily Manhua Yan; Eric Michelson; Meg Muckenhoupt; Nick Nichols; Carolyn Kosnoff, Assistant Town Manager, Finance (non-voting, ex officio) Member(s)Absent: None Other Attendees: None The meeting was called to order at 7:36 p.m. Announcements and Liaison Reports There were no announcements or reports. Using Present Value in Budget Analyses Mr. Nichols reviewed material he had prepared to discuss the use of discounting to compare streams of costs and benefits that occur over many years. Recent examples include LED streetlights and automated meter reading, where an upfront capital expenditure yields savings over many years. Similar issues arise in comparing funding a project with cash vs. paying off a bond over time. In such cases, analyses presented to the town often simply add up costs and benefits, implying that it doesn't matter whether a dollar is paid/saved now or in the future. This approach fails to account for inflation or for the return that can be earned on investments. Two important exceptions to this general approach are the actuarial analyses done of funding Other Post Employment Benefits (OPEB) and pensions. In those cases, projected future expenditures are discounted to the present and compared to the current values of the funds in question. Mr. Nichols noted that discounting is a standard tool used to evaluate costs and benefits over time in the federal government and in the private sector. With discounting, the present value of a cost or benefit received in the future is calculated as X/(1+r)n, where X is the future amount, r is the discount rate, and n is the number of years. In the federal government, the Office of Management and Budget sets the discount rate(s)to be used by agencies. In the private sector, the discount rate is often based on the interest rate needed to attract investors or lenders. For the Town, actuarial analyses for OPEB and pensions use an estimated return on investments in the relevant fund (7.5% in the 2018 OPEB analysis) as the discount rate, reflecting the fact that payments to the funds now will grow over time before they are used to pay benefits. At 7.5%, for example, only $485,000 need be put aside now to cover a $1 million obligation in 10 years. One common approach for municipal finances is to set the discount rate equal to the interest rate on bonds. At present, Ms. Kosnoff noted, that is about 3.5%. Ms. Kosnoff and members of the Committee noted that the town generally does not have the option of investing money or can do so only in accounts that lately have earned little, if any, more than inflation. Mr. Nichols noted that to the extent the town is issuing bonds, projects designed to yield future savings should yield at least as much return as the cost of the bonds. The Committee also discussed the fact that most town projects are not designed to save money or that other nonmonetized factors are important. Mr. Nichols agreed that discounting was not universally applicable but that it should be applied where relevant. Even when nonmonetized considerations are 1