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HomeMy WebLinkAbout2020-01-23-AC-min 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 01/23/2020 AC Minutes important(e.g., sustainability decisions) discounting is a useful tool to evaluate monetized costs and benefits, which may show that the project is worth doing even without the other factors or at least to narrow down how important those factors would have to be to justify the project. Mr. Nichols presented a handout with two examples from the past two town meetings. In the fall, the Town voted to approve the replacement of existing streetlights with LED lights, which entailed initial capital costs and savings in electricity and maintenance costs over the 20-year life of the lights. The analysis showed that the present value of the savings was far larger than the cost at any reasonable discount rate. He noted, however, that the proposed budget for FY2021 shows much smaller savings, although that reflects conservative budgeting in the face of uncertainty about a new technology. He suggested it would be important in the future to see how the actual savings compare to those estimated, both for this project and others. The second example was automated meter reading from the spring 2019 ATM. In that case, the monetized benefits do not appear to justify the project at any discount rate (even zero), but there are potentially significant nonmonetized benefits. However, the analysis narrows the decision, showing how large those nonmonetized benefits would have to be to justify the project. Mr. Nichols recommended that discounting be discussed in the Committee's report and applied to projects analyzed in the report where appropriate. The need to move on to other issues precluded Committee discussion of these recommendations. 2020 ATM Financial Articles and Report Planning Mr. Parker reviewed his preliminary article assignments for this Committee's report to the ATM and made adjustments based on the discussion. This included making assignments for the Community Preservation Committee projects. It was agreed that, for capital projects that will also be reviewed by the Capital Expenditures Committee, there needs to be more discussion in the report if an article is not supported unanimously than if there is unanimous support. The Committee also discussed how the report should address projections of future revenues and expenditures. Members agreed that the Committee's past practice of preparing independent projections makes little sense now that Town staff do five-year projections. The Committee could review and comment on the staff s work. Ms. Kosnoff agreed to share an electronic copy of the Town's five-year plan with Mr. Michelson and Mr. Nichols, who will review it and suggest how to reflect that review in the Committee's report. Ms. Kosnoff reported that a Community Preservation Act funding request for the Farmview Housing project was pulled, and it is not yet clear where the funding request would be included. Mr. Parker reminded members that a list of items for the consent agenda for the ATM must be prepared. Future Meetings This Committee is scheduled to meet on January 30, February 5, and February 12. Mr. Parker agreed to contact representatives for the following articles to invite them to an AC meeting: • Article to Authorize Special Legislation—Development Surcharge for Community Housing: Matt Daggett • Articles related to the School Department—operating and capital costs: Dr. Julie Hackett. Questions for the School Department should be forwarded to Mr. Levine for him to share with Dr. Hackett in advance. • Articles associated with the Department of Public Works: Dave Pinsonneault 2 01/23/2020 AC Minutes • Articles for Capital Projects: David Kanter Ms. Kosnoff agreed to report on the following in the coming weeks: • The current OPEB evaluation, which should be ready in a few weeks; • The article for Short Term Rental Impact Fee; • The article for the Hosmer House relocation; Ms. Kosnoff noted that the Historic District Commission has agreed that the house does not have to remain on the current site. The plan is to sell the house (probably for a nominal fee)to someone who would agree to move and reuse it. The meeting adjourned at 9:38 p.m. Respectfully submitted, Sara Arnold Approved: January 30, 2020 Exhibits • Agenda, posted by Mr. Parker, Chair • Discounting Notes prepared by Mr. Nichols • Discounting Examples prepared by Mr. Nichols 3