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HomeMy WebLinkAbout2021-10-14 FY2023 Budget Summit I-min Budget Summit I Select Board, School Committee, Appropriation Committee Capital Expenditures Committee October 14, 2021 The remote participation Budget Summit I meeting was called to order by Select Board Chair Jill Hai at 7:02 p.m. on Thursday, October 14, 2021. Present for the Select Board (SB): Ms. Hai, Chair; Mr. Lucente, Vice Chair; Mr. Pato; Ms. Barry; and Mr. Sandeen as well as Mr. Malloy, Town Manager; Ms. Axtell, Deputy Town Manager; Ms. Katzenback, Executive Clerk. Present for the School Committee (SC): Ms. Lenihan, Chair; Ms. Jay; Ms. Sawhney; Mr. Bokun; Ms. Cuthbertson; Dr. Hackett, Superintendent of Schools; and Mr. Coelho, Assistant Superintendent for Finance and Operations. Present for the Appropriation Committee (AC): Mr. Parker, Chair; Mr. Padaki; Ms. Yan; Mr. Bartenstein; Ms. Muckenhaupt; Mr. Levine; Mr. Ahuja. Present for the Capital Expenditures Committee (CEC): Mr. Lamb, Chair; Mr. Kanter, Vice Chair and Clerk; Mr. Smith; Ms. Beebee; Mr. Cole. Also present: Ms. Kosnoff, Assistant Town Manager for Finance; Ms. Hewitt, Town Budget Officer Ms. Hai stated that the meeting was being conducted via Zoom as posted, with the agenda on the Town’s website. Public comments were not taken during the meeting. ITEMS FOR INDIVIDUAL CONSIDERATION 1. FY2023 Budget Summit I In preparing for the FY2023 budget, Ms. Kosnoff reviewed the previous years’ trends and highlighted budget drivers.  Review of Financial Indicators Revenues have bounced back by 2.17% this year and are now considered to be in the “favorable” category, whereas last year they were deemed “marginal” due to uncertainties caused by the pandemic. While 2.17% is not a huge increase, Ms. Kosnoff said the trajectory is going in the right direction and there is nothing to indicate a backslide. State Aid is marked as “marginal”. Several years ago, there was extraordinary growth in the category as Lexington’s State Aid was increased to meet a State formula. Now the target level this has been achieved, State Aid has resumed previous proportions, meaning that per pupil increases are likely to be small once again going forward. Ms. Kosnoff sounded a note of caution, reflected in the “marginal” designation, because the overall budget is growing faster than the State Aid contribution. 1 Revenues Related to Economic Growth category is labeled “marginal/favorable”. Although Local Receipts (specifically excise taxes and building permits) did not take as hard a hit as first feared, this category is considered “marginal/favorable” because it remains to be seen if applications for pandemic- related compensation through State and Federal governments will be approved. Ms. Kosnoff noted that funds from commercial development are expected to be allocated by Special Town Meeting into a Capital Stabilization Fund to mitigate the anticipated tax burden of projects on the horizon, such as the Police HQ and Lexington High School construction projects. This topic was discussed more fully at the Summit meeting on September 22, 2021. Expenditures Per Department have also been marked “marginal” although Ms. Kosnoff noted one of the major reasons the category seems to have jumped is effect of the cutbacks made during the pandemic budget cycles. Nonetheless, department spending bears watching as the future remains unknowable and construction costs for Capital projects have risen, either due to the pandemic or to other supply chain influences. Personnel Costs have been labeled “marginal/favorable”. Ms. Kosnoff reported that increases in staffing and labor costs, coupled with conservative trends in actuarial assumptions, are driving up the Town’s unfunded pension liability. Future cost of living increases or a decrease in the assumed discount rate will further impact the pension funding schedule. The Town has also been adding to personnel consistently and Ms. Kosnoff cautioned that too much growth in this area is unsustainable. Employee Benefits and Retirement Benefits have been marked “marginal”. See Personnel Costs above. Pension Liability is also related to the above categories and in this case has been marked “unfavorable”. Ms. Kosnoff explained that Lexington has a new actuary who has a different way of assessing the situation plus the Town is also in the process of conducting its regular, bi-annual re-evaluation. The Retirement Board is now reviewing assumptions about the pension fund and the funding schedule and its findings will be reviewed the RB’s meeting in November 2021. Additionally, during a January 2020 valuation, significant changes in assumptions increased unfunded liability and, therefore, decreased the percentage of funded obligations. One option to mitigate the situation would be to make a larger-than- usual contribution to the Pension Fund, Ms. Kosnoff said. Ms. Kosnoff said that the Other Post- Employment Benefits (OPEB) category ranking—"favorable” at this juncture—inspires debate each time the indicators are calculated. There is substantial unfunded liability but the “due date’” for full funding is far enough off in the future that there is time to improve the rate of progress. Projected Exempt Debt Service has been marked “favorable/marginal” because Exempt Debt has peaked and, although not declining, it will at least level off. Use of the Capital Stabilization Fund is expected to help cushion the impact of new the Capital projects on the horizon. All other categories on the dashboard received a “favorable” rating: Property Tax Revenue; Uncollected Property Taxes; Long-Term Debt; Reserves and Fund Balance; Use of Capital Stabilization Fund. However, it was further noted that Lexington had the 5th largest average residential tax bill statewide in 2021, and the 3rd largest within 10 comparable communities. 2 Mr. Cole (CEC) asked if Ms. Kosnoff could ascertain whether inflation is accounted for in the rate of return for Pension Liability. He also asked what initiatives/programs had been deferred in 2021 to make Expenses rise by only 1.1%. Ms. Kosnoff said public events and meetings with associated costs had not taken place and some contractual services were not rendered due to pandemic slowdowns and shut downs. Mr. Malloy said he would look more fully into this and circle back with more info. Ms. Jay (SC) asked what caused the drop in Revenue in FY2019. Ms. Kosnoff explained that FY2019 was a slower year for building permits and that State Aid had also reached its peak and started to decline. Mr. Pataki (AP) asked if the constant dollar benchmark is being changed from year to year and also how the Town would address anticipated inflationary trends. Ms. Kosnoff said that the constant dollar benchmark does change and that a plan to address inflation has not yet been devised, although Reserve Funds could be tapped for extraordinary problems. Mr. Parker (AP) said it is not entirely accurate to call the Exempt Debt a favorable trend since more Capital projects requiring Debt Exclusion votes will increase this debt burden. Ms. Kosnoff agreed but noted the one positive thing about the Police HQ delay is that the Exempt Debt service for the project will come online after the peak has subsided to a degree. Ms. Sawhney (SC) asked how to interpret personnel costs as a percentage of the budget and if there is a desirable range for these expenses. Ms. Kosnoff said the key concern is not to let personnel costs and post-employment costs crowd out other Operating Budget needs. Mr. Sandeen (SB) said he believes the estimate of $350M for the Lexington High project needs to be adjusted upwards, given the general rise in construction costs. Similarly, he believes the Massachusetts School Building Authority (MSBA) contribution percentage may need to be revised to something more along the lines of what was received for the Hastings Elementary School.  School Enrollment Projections and FY2023 Budget Drivers Dr. Hackett presented School enrollment figures and budget drivers, saying that a number of the pandemic-related strategies are no longer needed now that school has returned to something more like pre-COVID times. The School’s FY2022 Operating Budget was $123,376,980 which included $500,000 from the Special Education Stabilization Fund. COVID relief funding totaling $1.727M is anticipated. Upcoming union contract negotiations create an element of the unknown in addition to the usual variables such as Special Education costs for out of district placements; transportation; Chapter 70 impacts; inflationary costs due to supply chain disruption; residual effects from the pandemic; and final enrollment numbers. The preliminary Pre-K to Grade 12 enrollment count stands at 6,821 as of October 1, 2021, which represents an overall decline of 80 students from the prior year. Dr. Hackett noted that the greatest decline –83 students—was at the elementary level. She noted it appears that a greater number of families have opted for homeschooling and for private or parochial school attendance; decreases in public school enrollment are being seen across the region, as well as nationally. 3 In the Special Education out of district placement category, Dr. Hackett reported that in some cases Lexington has been obligated to pay tuition even though students opted not to attend, perhaps due to feeling unsafe in an in-person school environment. Looking ahead, Dr. Hackett projected that budget increases would be requested in the low 4 % range per year through FY2027. Mr. Cole (CEC) recommended that the LPS’s updated enrollment projections be published along with each school’s capacity estimate. This is expected to help the citizens see that the work over the last several years has alleviated overcrowding at all the elementary schools, the middle school are perhaps still near capacity, and the high school is overcrowded. Dr. Hackett agreed, adding that enrollment capacity at the high school stands at 1,850 but the most recent enrollment numbers are 2,200. She noted that enrollment versus capacity is close for all the Middle schools although there is more flexibility at Diamond Middle School than Clarke Middle School. Mr. Kanter (CEC) recalled that $500,000 from the Special Education Stabilization Fund was to be repaid by the Schools at some point. Ms. Kosnoff confirmed this, explaining that at the end of the year, if the funds are not needed for out of district placement tuition, they would be returned to the Fund and not become part of the Schools’ baseline budget. Dr. Hackett reported that there is an overall need for remediation due to pandemic-related stresses and learning gaps due and added that the Schools are closely monitoring the need for intervention and social/emotional supports. Ms. Hai (SB) asked for an overview of what the various COVID funding programs for schools. Dr. Hackett reported that the first 2 tranches of funding were for direct needs such as masks, hand sanitizer, pool testing, and substitute teachers. The third tranche of funding is to be applied to learning loss needs and there is more flexible use for these funds. Funding spans multiple years.  Preliminary FY2021 Revenue Estimates and Revenue Allocation Model Ms. Kosnoff said that spending trends will be included in the next Summit presentation and that tonight’s numbers will also be updated at that time. When the Revenue Allocation Model is built, Ms. Kosnoff said that it relays on historic three-year and five-year trends as well as Finance Department judgement calls. Ms. Kosnoff noted that the current approach to constructing the model is consistent with past years. The revised Revenue Projection for FY2022 is $25,502,000. For FY2023, the projected Revenue is $258,123,000 which is an additional $7.63M or 3%. Ms. Kosnoff called out two sources of Revenue that she said had been estimated very conservatively, given the unknowns of the pandemic: hotel/motel taxes were calculated at 50% of pre-pandemic levels and restaurant receipts were calculated at 75%. It was further noted that one hotel may come offline entirely. However, one source of Revenue was increased: Building permits. Normally, these are estimated very conservatively but they have consistently outperformed budget expectations. Revenue Set Asides for FY2023 equal $18,161,131 with $3,654,307 coming from the Tax Levy and $14,625,000 coming from Free Cash. Ms. Kosnoff noted that Free Cash has not yet been certified by the 4 Department of Revenue. The amount will change, but not drastically. $1.1M in Free Cash will be allocated to OPEB There is an unallocated amount of $500,000. The Cash Capital line item remains at $4.9M, which the same as FY2022. A placeholding amount to be allocated to Cash Capital is now $5,244,748. Ms. Kosnoff noted the Retirement Board is not in favor of allocating the entire $5M to the Pension Fund; instead, the Retirement Board hopes for an increase of $500,000-$600,000 annually. The Revenue Allocation model shows another $700,000 in Free Cash will be transitioned out of the Operating Budget, a process that was initiated a two years ago. Ms. Kosnoff noted that in past years, the amount has been applied to Cash Capital to reduce future borrowing costs. The remaining $1.5M of Free Cash that continues to support the Operating Budget will be withdrawn incrementally over the next three to four years. A Municipal/School allocation split of the additional $6.4M in anticipated FY2023 Revenue (after the Shared Expenses are taken into account) would result in a 3.9% increase in each budget, or an additional $4.794M for the School budget and an additional $1.687M for the Municipal budget. Ms. Kosnoff noted a new line item on the Revenue Allocation model called “Remove One-time Funding Due to Pandemic”. On the Municipal side, $278,000 was transferred to cover FY2022 COVID -related shortfalls in the Recreation Revolving Fund. Similarly, as mentioned earlier, the Schools received $500,000 from the Special Education Stabilization Fund to be used in case of need, although that amount has so far has not been expended. This new line item, Ms. Kosnoff said, is intended to zero out the amounts from the two Operating Budgets so the funds are not added to the baseline budgets. Ms. Kosnoff stated the Town has paid down the principal for Land Acquisitions. Comparing the Schools’ current request for a 4.19% increase over FY2022, Ms. Kosnoff noted that the Revenue Allocation model’s 3.9% increase indicates a shortfall of about $880,000. Although the budget process is at this point preliminary, Ms. Kosnoff reported that the Municipal side believes it can stay within its 3.9% allocation. She believes that as budget projections are refined, gaps will begin to close. Mr. Kanter (CEC) said that he believes that some of the about $2M in the OPEB Fund allocation could be used, instead, to fund toward the Pension Fund shortfall from 100% funded. Mr. Levine (AP), Mr. Parker (AP) and Mr. Pato (SB) expressed concern about making a decision this evening, given that the numbers are preliminary and the pros and cons of choosing one landing spot for the funds versus another are not clear. Mr. Levine (AC) said one argument in favor of putting the funds into the Pension Fund is that is invested in an Equity account which would grow over time, whereas the Capital Stabilization Fund does not have this advantage. However, since the Pension funding goal posts keep moving, Mr. Levine see it is a gamble to expect to accomplish full funding by 2028, which is potentially the time Cash Capital will be needed to offset borrowing for the high school project. Mr. Lucente (SB) asked Ms. Kosnoff to check to see why the split in the Revenue Allocation model for FY2023 is different from previous years. Ms. Kosnoff asked the meeting participants, as individuals or by committee/board to send feedback to her regarding how they would prefer to deploy the $5M now earmarked for the Capital Stabilization Fund. 5  Confirm Date: FY2023 Budget Summit II Ms. Hai (SB) confirmed that the next Budget Summit will be held on Thursday, December 2, 2021 at 7:00 p.m. by remote participation via zoom. ACTIONS: Ms. Kosnoff to ask if inflation is accounted for actuarially in the rate of return. Mr. Malloy to look closely into why expenses increased only 1.1% in 2021. Ms. Kosnoff to check to see why the Revenue allocation model split changed from previous years. Boards/Committees to contact Ms. Kosnoff re: how to use the $5M currently earmarked for Capital Stabilization. DOCUMENTS: FY2023 Fiscal Indicators; FY2023 Enrollment Projections and Budget Drivers; Summit Presentation—Preliminary Revenue & Rev Allocation ADJOURN Upon a motion duly made and seconded, the Select Board voted 5-0 by roll call to adjourn the meeting at 9:17 p.m. The other committees followed suit. A true record; Attest: Kim Siebert Recording Secretary 6