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HomeMy WebLinkAbout2022-09-29 FY2024 Budget Summit I - Fiscal Guidelines-min Budget Summit I Select Board, School Committee, Appropriation Committee Capital Expenditures Committee September 29, 2022 The remote participation Budget Summit I meeting was called to order by Select Board Chair Jill Hai at 7:02 p.m. on Thursday, September 29, 2022 via hybrid meeting services. 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. Cuthbertson, Chair; Ms. Jay; Ms. Lenihan; Ms. Sawhney, Vice Chair; Mr. Bokun; Dr. Hackett, Superintendent of Schools; and Mr. Coelho, Assistant Superintendent for Finance and Operations. Present for the Appropriation Committee (AC): Mr. Padaki, Vice Chair; Mr. Ahuja; Mr. Bartenstein; Mr. Levine; Mr. Michelson, Mr. Osborne; Ms. Yan. Present for the Capital Expenditures Committee (CEC): Mr. Lamb, Chair; Mr. Kanter, Vice Chair and Clerk; Mr. Cole; Ms. Rhodes; Ms. Beebee; Mr. Boudett \[8:11pm\]. Also present: Ms. Kosnoff, Assistant Town Manager for Finance; Ms. Lebrecque, 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 Ms. Jay noted that she recuses herself from all discussions relating to the high school project. 1. FY2024 Budget Summit I - Fiscal Guidelines  Fiscal Indicators Ms. Kosnoff stated that there are 16 fiscal indicators being examined: Revenues, State Aid, Revenues Related to Economic Growth, Property Tax Revenues, Uncollected Property Taxes, Expenditures per Department, Retirement Participants, Employee Benefits, Personnel Costs, Pension Liability, OPEB Liability, Debt Service, Projected Exempt Debt Service, Long-Term Debt, Reserves and Fund Balance and School Enrollment. Ms. Kosnoff explained that revenues in actual dollars are continuing to trend in the right direction and are still growing fairly steadily. However, when the inflation rate is applied, this is stagnating the Town’s revenues. Inflation is having a negative impact on revenue growth, or the total net operating revenues. A decrease in net operating revenue and constant dollars is considered a warning indicator. This indicator was rated between favorable and marginal. Regarding State Aid, Ms. Kosnoff explained that this is the second largest category of revenue each year, with the Town seeing $16.4M in State Aid for FY22. In order to protect itself, the Town has a contingency plan for reductions in State Aid. Since 2006, the Town has been funding reserves capable of offsetting cyclical downturns in State Aid and Local Receipts. This indicator is rated as marginal. She noted that for FY23, the State had a huge surplus. A good amount of that surplus will be returned to taxpayers. The Governor also signed a bill to increase the projected State Aid of $30/student to $60/student. This will be reflected in the FY23 revenue. In terms of Revenues Related to Economic Growth, all categories of the Town's levy growth are growing. This indicator is favored between favorable and marginal. Ms. Kosnoff explained that, regarding Property Taxes, the Town continues to have strong new growth. It also continues to collect an extremely high percentage of outstanding taxes, with current data showing a 99%+ range on property tax collections. Regarding Expenditures per Department, the volatility of this item is a bit unsettling. It is rated as marginal. Increasing operating expenditures can indicate that the cost of providing services is exceeding the Town's ability to pay. Increasing expenditures may also indicate that the demographics of the Town are changing, requiring increased spending in related services. The significant decrease in FY2022 is driven by the change in constant dollars, which signifies an increase in inflation. For the Personnel Costs indicator, Ms. Kosnoff explained that this item has remained very flat, meaning that personnel expenses are not growing at a different rate than inflation. For the most part, this means that personnel costs are not becoming disproportionate to the rest of the expenses in the budget. This item is considered favorable. Regarding Employee benefits, this item is also considered favorable. She noted that several of the Town’s collective bargaining contracts have either expired or will expire this year. There is likely to be pressure when renegotiating those contracts, given the current inflation rate. Retirement participants is noted as a marginal indicator. If the number of active participants and retirees continues to increase, this could place pressure on the health insurance budget. The Pension Liability trend is noted to be unfavorable. This is not a good trend and will need to be addressed. Both the increase in liability and the drop-off in the percent funded, are due to the most recent actuarial valuation. OPEB Liability is also listed as unfavorable. Since 2011, Lexington has made consistent contributions towards its Other Post-Employment Benefits (OPEB) liability, primarily consisting of retiree healthcare premiums. In long-term financial planning, the Town begins funding this obligation more aggressively once the pension obligation has been fully funded. Ms. Kosnoff noted that the Debt Service indicator is listed as favorable. Debt payments are projected to increase; however, the impact on the taxpayer is reduced as a result of the approval of debt service mitigation by Town Meeting. Debt service exceeding 10% of operating revenues is a warning indicator. The Town is currently under 7%. Regarding Exempt Debt Service, this is an item which will need to be updated and have a funding plan outlined at a future summit meeting. It is currently listed as marginal/favorable. Long-term Debt is considered to be a favorable indicator. The Town does not want to see its debt exceed 10% of its assessed valuation. Currently the Town’s rating for this is under 2%. For the Reserves and Fund Balance indicator is listed as marginal/favorable. The Government Finance Officers Association (GFOA) recommends an undesignated fund balance of 2 months of operating revenues (16.67%). The Town’s assets for this fund have been steady, but it has not been contributing to them. These have only been growing through interest earnings. Finally, the School Enrollment indicator, shows that, after years of steady enrollment, Lexington Public Schools experienced marked increases from 2010-2017, only to taper off in 2018 and 2019. The declines in 2020 to 2022 are outliers due to the pandemic and are trending back up. Increases in enrollment translate into a need for additional teachers and support staff, as well as additional classrooms and expanded school buildings. The Town has taken steps to plan for sudden or unexpected growth by building up fiscal reserves. This item is listed as marginal/favorable. Mr. Michelson (AC) noted that the Bedford Street Motel will be redeveloped into a Life Sciences Complex. He suggested presenting an estimated comparison of the property tax and personal property tax in hotel/motel tax that was generated prior to the redevelopment and after the post-redevelopment. In response to a question from Mr. Padaki (AC), Ms. Kosnoff stated that it is unclear how much of the fluctuation in total operating expenditures was due to supply chain issues. This likely hit capital projects harder than operating expenditures. The Boards thanked the team and staff for putting together a comprehensive report.  FY2022 Year-End Operating Results Ms. Kosnoff noted that FY22 ended on June 30, 2022 and the books were just recently officially closed. The numbers being reported are still considered preliminary at this time. Regarding revenues, property taxes were fairly high, and State Aid was received over the projected amount. For Other Excise tax, almost 175% was collected of what was projected. The Departmental School item came in at almost $1M over projected, entirely due to Medicaid reimbursements. In the Miscellaneous Non-recurring Revenue category, the Town saw energy rebates through its energy improvements. The Town spent 96.27% of the encumbered FY22 budget. Free cash is estimated to come in around $12.8M. In response to a question from Mr. Michelson (AC), Ms. Kosnoff explained that a high percentage of the $4.3M in unused funds for shared expenses came from health benefits. These were assumed a bit high and came in well under that. In terms of new levy growth for FY23, Ms. Kosnoff explained that $2.75M has been assumed for the budget. However, currently this is tracking at approximately $6M. This is a permanent part of the tax levy and will be helpful when building next year’s budget. Of this new levy growth, the $2.2M from residential growth has remained steady and consistent. The industrial and commercial growth is approximately $2.22M, with $1.2M of that related to the project at 1050 Waltham Street. Personal property growth is estimated at $1.8M, with almost $1.1M of this related to Takeda. In response to a question from Mr. Pato (SB) regarding if the personal property growth from Takeda is a recharacterization of existing property or acquisition of new personal property, Ms. Kosnoff explained that it is likely a bit of both. Mr. Michelson (AC) noted that within the next five years, $1.1M of this taxable value will fall upon the residents of the Town, as opposed to being personal property or staying within commercial growth. In response to a question from Mr. Kanter (CEC) regarding if the personal property amount has residential growth as available current cash, Ms. Kosnoff stated that this will be taxable in FY23 and something that the Town will be looking to appropriate at fall Town Meeting.  FY2024 Fiscal Guideline Considerations Ms. Kosnoff explained that, regarding pension, the Lexington Retirement Fund is for all Town employees, and all non-teaching school employees. All of the teachers in the Lexington School System are part of the Mass Teachers Retirement System and not the Town's pension system. All other administrative and support staff are part of the pension funds. OPEB, Other Post Employment Benefits, apply to anyone who retires from the Town to allow them to receive health benefits through the Town's plan, with the Town continuing to pay for a percentage of those costs. There is a large liability for the Town from these two items. Liability has been steadily growing for the retirement fund, partially because the Town continues to add staff. Some of the volatility in the percent funded is caused by new actuaries during new evaluations. A full actuarial valuation is done every two years for both the pension and the OPEB. Fortunately, pension assets are also continuing to increase. The funded ratio in Lexington is 76.6%. One of the big factors which impacted the percent funding was that the Retirement Board elected to drop the discount rate for the pension fund. This amount is reflective of what the investment returns are estimated to be. This amount was previously at 7.5% and, in the FY21 valuation, the Board elected to drop it to 7.25%. PERAC, the oversight agency for the retirement fund, has indicated that 7.5% is not within its acceptable assumptions anymore. The group is looking to drop the rate of return, as they do not believe it to be realistic in the long-term. Lexington is in line with many surrounding communities, which have also dropped this rate. The Retirement Board is likely to consider dropping this amount again at some point in the future. Ms. Kosnoff explained that the Town is required by the year 2024 to fully fund its pension. PERAC requires to Town to submit a funding schedule each year, showing how it will get to the fully funded percentage. For FY23, as part of the operating budget, the Town appropriated $8.25M to its pension fund. For FY24, this amount will be increased to $9M. Every two years, the Retirement Board receives a new valuation and updates this funding schedule. It is estimated that this fund should be fully funded somewhere in FY30, with the current funding schedule. At that time, the Town would have approximately $9M-$10M in the budget that would no longer need to go toward the pension fund. She does not believe that the Town should drag out this funding schedule as bond rating agencies do not look favorably on this. She is concerned that liability for this item will continue to increase and believes it will be important to fully fund this item as soon as possible. Staff will likely work with the actuary to create some additional, alternate funding schedules. In response to a question from Mr. Kanter (CEC) regarding how the actuary was chosen, Ms. Kosnoff explained that the Retirement Board issued a request for proposals. It reviewed a number of evaluation criteria. There were several respondents to the RFP, and this was the one selected. Mr. Kanter stated that he has some concern that the Town has not been increasing the yearly contribution to achieve the freedom of these funds. He is happy to hear that there will be further consideration of this item. Ms. Kosnoff noted that the same actuary is currently being used for the OPEB valuation. It is likely a longer-term RFP for the OPEB valuation will be sought in the future. For FY21, there was a large increase in the total liability of the OPEB Fund, and a decrease in the percentage funded. The Board elected to take a much more aggressive approach to the discount rate and went straight from 7.5% down to 6.75%. She does not believe that there will be further jumps in the discount rate on this particular fund. The liability of this fund has also significantly increased. The Town has accumulated a lot in investment earnings for this fund, particularly $4.8M of investment earnings in FY21. However, FY22 saw a loss for earnings in that fund. The projected balance of this fund for FY23 is $25M. Part of this fund has been funded from the tax levy, but another portion has been funded through the Health Claims Trust Fund. The Health Claims Trust Fund is almost depleted at this point, as there is only $230,000 left in it for FY24. Once it is closed, if the Town wants to continue to maintain funding this item at $1.8M each year, the balance will have to come from the tax levy. There is a potential to use some of the new growth funding from Takeda to cover this item.  Update on Federal Grant Funds (FEMA, CARES & ARPA) Ms. Kosnoff explained that the Town's direct allocation from the Cares Act, through the State, was $2.979M. The Town spent 98.7% of the allocation and had to turn back approximately $30,000. The Town also submitted $632,000 of FEMA applications. This was done through six separate applications. Four of them have been, approved and paid. Two applications are pending, with one having been approved, and awaiting funding. One final item is waiting for approval: this deals with the school's pooled testing expenses. She does not anticipate an issue with approval of this final item. The Town spent $3.57M on health and public safety items related to the pandemic. Regarding ARPA funds, Ms. Kosnoff explained that the State dispersed $9.9M to the Town through the Coronavirus Local Fiscal Recovery Fund (CLFRF). These funds have to be committed by the end of calendar year 2024. This means that there needs to be a contract and project in the works. The Town then has an additional two years to finish the project and pay the final bills. Some of this funding has been allocated toward economic development and vitality, DPW projects, and the participatory budget pilot program. This leads to approximately $3.5M of projects funded thus far. This is approximately one third of the total funding available through ARPA for the Town. She explained that when the federal government originally issued these funds, there were strict criteria as to what they could be used for. Since then, the federal government has said that any municipality receiving an allocation of less than $10M, could count the entire allocation as lost revenue. Since then, the federal government has actually encouraged any community with an allocation of $10M or less, to automatically count the entire amount of the allocation as lost revenue. Once allocated, his funding can still be spent on any of the eligible categories. Some of the other categories that can be used for funding are to provide premium pay to essential workers, and investing in water, sewer, and broadband infrastructure. She noted that ARPA funds cannot be used to make a direct allocation into the pension fund. The funds also cannot be placed into a Trust Fund or General Stabilization or Specified Stabilization Fund. It also cannot be used to reduce the tax rate, for legal issues, or for debt service. Ms. Kosnoff explained that ARPA funds are considered a federal grant and federal grants do not need to go to Town Meeting. These funds are released at the discretion of the Select Board. The Select Board has been reviewing all of the requests for ARPA funds that have come through Town staff and they are the ones that ultimately make the decision to approve a recommended project. ARPA funds are meant to support immediate economic stabilization. These could also be allocated to aid disadvantaged communities. She would not recommend using these funds to hire new permanent staff or implement ongoing programs.  Special Town Meeting 2022-3 Articles Ms. Axtell reviewed the proposed Special Town Meeting 2022-3 Articles. In response to a question from Mr. Kanter (CEC), Ms. Axtell stated that she believes motions for individual items will likely be drafted within the next couple of weeks. Ms. Hai (SB) noted that Special Town Meeting 2022-3 will be opened on November 1, 2022 and that November 2 and 3, 2022 will be held as possible additional dates.  Establish Date: FY2024 Budget Summit II Ms. Kosnoff explained that Budget Summit II is proposed for October 27, 2022. Budget summit III is proposed for November 16, 2022. The Select Board budget hearings are proposed for November 30, 2022, December 1, 2022 and December 6, 2022. The planned White Book Summit is on January 19, 2023. DOCUMENTS: Financial Indicators Presentation - FY2024, FY2024 Summit I Presentation, STM 2022- 3Article list ADJOURN Upon a motion duly made and seconded, the Select Board voted 5-0 by roll call to adjourn the meeting at 9:04 p.m. The other committees followed suit. A true record; Attest: Kristan Patenaude Recording Secretary