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HomeMy WebLinkAbout2019-10-30 Summit I-min Financial Summit Meeting I Board of Selectmen, School Committee, Appropriation Committee and Capital Expenditures Committee October 30, 2019 A Financial Summit meeting was held on Wednesday, October 30, 2019 at 7:01 p.m. at the Hadley Public Services Building Cafeteria, 201 Bedford Street, Lexington, MA. Present for the Board of Selectmen (BOS) were Mr. Lucente (Chair); Mr. Pato; Ms. Barry; Ms. Hai; and Mr. Sandeen. Mr. Malloy, Town Manager; Ms. Axtell, Deputy Town Manager; Ms. Kosnoff, Assistant Town Manager for Finance; Ms. Hewitt; Budget Officer; and Ms. Katzenback, Executive Clerk. Present for the School Committee (SC) were Ms. Colburn, Vice Chair (late arrival); Mr. Bokun; Ms. Lenihan; Ms. Sawhney; Dr. Hackett, Superintendent of Schools; and Mr. Coelho, Assistant Superintendent of Schools for Finance and Operations. Present for the Appropriation Committee (AC) were Mr. Parker, Chair, Mr. Bartenstein; Mr. Levine; Mr. Michelson; Mr. Padaki; Ms. Yan; and Mr. Nichols. Present for the Capital Expenditures Committee (CEC) were Mr. Lamb, (Chair) Mr. Kanter, (Vice Chair); Mr. Cole; Ms. Beebee; Ms. Manz; and Mr. Smith (late arrival). ITEMS FOR INDIVIDUAL CONSIDERATION 1. Procedure for Meeting Minutes A draft of the minutes will be circulated to all committees for comment/amendments before approval. Because this is a working meeting, no public comments will be taken. 2. Review of Financial Indicators—Carolyn Kosnoff, Assistant Town Manager for Finance Using a series of recognized metrics from professional organizations, including the International City/County Management Association (ICMA), the Government Finance Officers’ Association (GFOA), Moody’s Investor’s Service; and data from the Town of Lexington, the Massachusetts Department of Revenue, the Massachusetts Department of Elementary and Secondary Education, and the U.S. Census Bureau, Town staff compiled 14 indicators/guidelines— including historical trends— to evaluate the Town’s fiscal health. Overall, Lexington’s financial condition is sound. Ms. Kosnoff highlighted these points: • Lexington has positive revenue growth, stable labor costs as a percentage of total operating costs, and healthy levels of pension funding and reserves. • The Town’s financial condition is satisfactory in the areas of expenditure growth and revenues related to economic growth. • Health Insurance spending as a percentage of employee wages has dropped more than 6.5% (from 26.9% in FY2012 to 20.2% in FY2019), largely as a result of savings the Town was able to realize 1 due to joining the Commonwealth’s Group Insurance Commission (GIC) in FY2013. Some challenges facing the Town include: • The primary challenge continues to be funding critically needed capital projects. Growth in within-levy debt service, exempt debt service, and projected exempt debt service are beginning to place pressure on operating budgets. • An increasing school-aged population is placing growing pressure on the school budget and the Town’s personnel and benefits costs. • Growth in the average residential tax bill is a concern. In 2019, Lexington had the 7th highest average residential tax bill statewide, and the 4th highest within 10 comparable communities. For context, Lexington has the 13th highest average home value statewide, but is ranked 220th when looking at taxes as percent of assessed value (1.41%). However, the data nonetheless suggests that the Town’s financial condition is strong and that Lexington will maintain its Aaa credit rating. Ms. Kosnoff highlighted several of the fourteen Financial Indicators, proving status reports: Indicator 1: Revenues. Marginal. This is a downgrade from a “favorable” rating in past years. Overall, FY2019 revenues (tax levy, State aid, local receipts) increased .69% over FY2018 which, although still an increase, is less than the increase in each of the last 10 years. More importantly, total revenue, in terms of constant dollars, “decreased pretty significantly,” Ms. Kosnoff said. This could be a one-year anomaly or an indication of inflation. Indicator 3: Revenues Related to Economic Growth: Favorable. This revenue has dropped off but there is still vitality in the category due to New Growth and Fees & Permits due to expansions in the corporate sector. A significant drop-off of revenues from these sources would put pressure on the Operating budget. Prudent preparation for potential future recessions recommends maintaining healthy Reserve accounts. Indicator 6: Expenditures Per Department: Favorable. The FY2019 change over FY2018 was 2.3%. This is the lowest increase in department expenditures since FY2014. It should be noted, however, that increased Operating expenditures may indicate that the cost of providing services is exceeding the Town's ability to pay. Increases may also indicate that the Town’s demographics are changing, which may require increased spending in related services. Indicator 7: Personnel Costs: Favorable. There is not a lot of change in this category but because a number of employment contract settlements were recently achieved, they did not affect the FY2019 budget. Thus, the category bears watching closely for the next year or two. Wages and benefits as a percentage of total expenditures have remained relatively constant, a positive indication that the Town is not sacrificing capital and maintenance in order to fund personnel. In FY2019, total Wage and Benefits costs as a percentage of Operating was 76.2%, slightly less than in each of the previous nine years. Indicator 10a: Pension Liability: Favorable. As of January 1, 2019, the actuarial valuation of assets of the Lexington Retirement System was $169.6 million and the System was 88.2% funded. At the current level of annual appropriation, Lexington is projected to fully fund its pension system in 2 2024, at which time funds formerly dedicated to pension liability can be re-deployed to other needs, such as OPEB and Capital. Ms. Kosnoff noted that, as in FY2012, the Retirement Board is now considering a change in how the Rate of Return is calculated. If this were to happen, Lexington would have to decide either to increase its yearly appropriations to stay on course or extend out the end date for full funding past 2024. Indicator 10b: OPEB Liability: Marginal. This is an upgrade from “unfavorable” in years past. The working plan is to begin funding the obligation more aggressively starting in FY2024 when the pension obligation has been fully funded. Indicator 11: Debt Service: Marginal. The bond agencies consider debt service of 10% of Operating or more a warning sign; Lexington is fairly far from that threshold but debt service, due to Capital investment, is increasing at a significant rate and that is expected to continue over the next 3-5 years. Total debt service per household has increase 63.9 % over the last ten years. The impact on the taxpayer, however, has been mitigated thanks Town Meeting approval of debt service relief via Capital Stabilization fund. Indicator13a: Use of Capital Stabilization Fund: Favorable. The mitigation will reduce the annual impact on Lexington taxpayers. Ms. Kosnoff’s calculations did not include the projected impacts of a new high school. Indicator 14a: School Enrollment: Marginal/Favorable. After years of consistent increase in school-age population, Lexington has recently experienced a leveling off/decline, which may— or may not—be a long-term trend. Mr. Kanter (CEC) asked if there are any appropriated or borrowed funds that could be rescinded or returned. Mr. Kosnoff replied that there are some funds but they are not a material amount. They will be taken up at Annual Town Meeting. Mr. Padaki (AC) asked if the total debt service per household figures had been factored for inflation. Ms. Kosnoff replied that inflation adjustments were not included. 3. FY2021-2025 School Operating Budget and Enrollment Projections—Dr. Julie Hackett, Superintendent of Schools Dr. Hackett provided a high-level overview of the Schools’ evolving goals, objectives, enrollment trends, Master Planning/projects, and a conservative projection of numbers and percentages. Three strategic areas of focus for the School Committee with FY2020 budget implications are: Diversity/Equity/Inclusion, budget for an “equity audit” to study items such as disproportionate suspensions for students of color and students with special needs, and disproportionately low numbers of students of color enrolled in Advanced Placement or Honors classes; evaluation of inclusionary practices; professional development to meet goals and recruitment/retention of diverse staff. A report is expected in January. Social/Emotional Learning including school safety, a later start time for Lexington High School (LHS), health and wellness of the school community, increased extra- and co-curricular opportunities, and project-based learning. Dr. Hackett noted that a later LHS start could cost 3 between $900,000 and $1.4M, but the Schools are examining how to mitigate/minimize this cost by consolidating bus routes, etc. Dr. Hackett also noted that participation in extra- and co-curricular activities is closely tied to student inclusion/emotional well-being; as the school population increases, these activities must also expand or risk leaving out an increasing number of students. th Visioning/Planning, particularly Capital Master Planning and pre-kindergarten through 12 grade (PK–12) Strategic Planning including submission of the LHS Statement of Interest letter to the Massachusetts School Building Authority (MSBA) Enrollment trends show a general increase in student numbers. The only level in which students are seen to leave the system is during high school years. Projections for the elementary level enrollment have been a bit high but generally accurate. The biggest pressure point for high school enrollment is anticipated in 2024 when the current lower schools’ large cohorts arrive at LHS. At that point, school enrollment will increase from 7,200 to about 7,300 students, putting pressure on an already crowded facility. School Budget Assumptions: Salaries and Wages:  A level-services budget will be constructed that asks for no program improvements;  A 2.5% increase will be included on top of the base budget for step increases; although $750,000 in salary costs is avoided every year due to staff turnover;  Funding to settle contracts is assumed FY2021 - FY2025;  Additional staff will be included commensurate with enrollment increases FY20-FY25;  Additional staff-related costs inclusive of benefits, Workers’ Compensation & Medicare will be included. Assumptions: Expenses/Non-salary:  Program budget per pupil rates will be increased Consumer Price Index (CPI) value of 2.2% in FY2022 and by 2.40% in FY2022 - FY 2025; applied against preliminary projected enrollment levels. All other expenses will be a will also be indexed by the same percentage increase.  Special Education Out-of-District Tuition and Transportation lines projected based on program trends. Approximately 81% to 85% of total expense line increases each year are driven by these budget lines (FY21 - FY25) Dr. Hackett noted that, taking all of the above into account, an FY2021 budget increase of 4.9% is expected over FY2020. In the ensuing five years, lower increases are projected, but these projections could change if enrollments exceed estimates. The Enrollment Advisory Group has been reconvened and it is taking a close look at the factors that affect enrollment. Mr. Kanter (CEC) asked whether any improvements have been achieved in how behavioral issues are handled for minority versus white students. Dr. Hackett reported that progress has been made — such as a decrease in the disproportionate number of suspensions— but more work needs to be done, even though there are relatively few disciplinary actions in Lexington overall. Opening up lines of communication has been beneficial. Dr. Hackett noted that the problem exists in every aspect of life in the U.S., not just within the realm of education. Mr. Michelson (AC) asked if turn-backs are reflected in the LPS five-year projections. Mr. Coelho 4 said they are not but he can provide them. Dr. Hackett reported that about $1M was turned back at the end of the year and another $1.7M the year before. Mr. Levine said that turn-backs don’t affect the percentage increases as much as might be imagined. 4. FY2021-2025 Preliminary Budget Overview—Carolyn Kosnoff Ms. Kosnoff noted that the FY2021 numbers and out-year projections are very preliminary and based on generalized assumptions. The numbers will continue to be refined and will be firmer at the next budget Summit in November. Ms. Kosnoff provided a few highlights: Revenue:  The Property Tax Levy number assumes the 2.5% levy increase allowed by State Law and $2.5M in New Growth. This is consistent with projections made in prior years, even though actual New Growth is often higher. Ms. Kosnoff cautioned that growth cannot be counted upon to remain consistently high. Overall, the projected percentage change in the Property Tax Levy is 3.9% higher than in FY20.  State Aid assumes FY2020 Chapter 70 aid increasing at $25 per pupil Minimum Aid in FY2021-25.  Local Receipts assumes modest growth in local receipts based on historical averages.  Free Cash has not yet been certified but is projected to be $14,522,669. After certification, it will be available for use in the FY2021 budget. A good portion of the total is from an over- budgeted amount for Health Care costs. Additionally, there were more department turn- backs than anticipated. This high level of turn-back is not expected as budgets are tighten in the next few years so Free Cash is likely to decrease. Expenses:  Projected wages for School and Municipal employees are based on known contractual and step increases.  Projections are based on level-services budget calculations.  Lexington’s contribution toward Minuteman High School is projected to increase by 10% because the debt service for the new school construction is coming on line. It is unknown at this point whether out-of-district tuition from non-member towns will offset in-district costs. Shared Expenses:  Within levy debt service is projected to grow by 5% annually. Amounts above that will be mitigated by use of the Capital Stabilization Fund.  Free Cash can be used to pay down short-term notes issued to pay for the land purchases at 173 Bedford St. and Pelham Rd. This debt is projected to be amortized in FY2022, providing some leeway in the FY2023 budget. 5  Continue funding OPEB - increasing by $50,000 per year. If the discount rate is changed by the State Retirement Board, the Town will re-evaluate how to pay down its obligation.  Medicare, health, and dental insurance are projected to increase by 5% in FY2021. Life insurance is level funded. Using current calculations for revenues and expenses, the available FY2021 budget balance is ($1.957M). Refinements will be made as more information becomes available. Ms. Kosnoff led the group through FY2021 Set-Aside categories and amounts, which she said are based on policy decisions, and the FY2021 Revenue Allocation model. An allocated amount of $1M is set aside for unforeseen contingencies. If it is not used, the number falls to Free Cash as the end of the fiscal year. Mr. Kanter (CEC) asked if there had been any discussion about using the Appropriation Committee’s $900,000 Reserve Fund for any purpose. Ms. Kosnoff said the preference is maintain these funds for emergencies that might occur, saying it has been minimally used over the las few years. This fund can be allocated by Appropriation Committee and Board of Selectmen approval without going through Town Meeting. Mr. Kanter (CEC) asked if the debt service allocation would remain at 5%. Ms. Kosnoff said this was still under discussion and would depend on how the rest of the budget shakes out. 5. Review of Preliminary Revenue Allocation Model Ms. Kosnoff said these numbers also would be firmer by the next Summit in November. Projected total Revenue in FY2021 is $241.792M. The School ($113.544M) and Municipal ($40.272M) budget numbers use FY2020 figures as a level services starting point; then Shared Expenses and Set-Asides are taken into consideration to build the coming year’s budget. New anticipated Revenue of $5.099M will be shared proportionately between the School and Municipal budgets, meaning that $3.759 would go to the School side and $1.34M would go to the Municipal side. Any program improvements, including salary increases, will need to be absorbed by this New Revenue. Ms. Kosnoff emphasized that the New Revenue figure is quite a bit lower than in years past and creates a tighter budget landscape. Dr. Hackett said that the preliminary School budget she presented earlier projected a 4.9% budget increase over FY2020. Given the additional New Revenue funds available, the Schools would not be able to carry forward the FY2021 budget as proposed. Potentially, this would mean not only no program improvements but also loss of staff. She asked, as budgets going forward get tighter, if it is Mr. Kosnoff’s strategy not to have department turn-backs. Ms. Kosnoff said it was not a question of strategy but an acknowledgement that as budgets get tighter, there is less likelihood of having unused funds to turn back. Mr. Malloy said that he, the Superintendent, and the Town and School business managers would meet to discuss this issue. Mr. Levine (AC) believes the philosophy of how to use Free Cash should be revisited. 6 Mr. Kanter (CEC) said the Town should wean itself from using Free Cash in the ways it has been. 6. Establish Date: Summit II Ms. Kosnoff said the next Financial Summit is scheduled for Thursday, November 21, 2019 at 7:00 p.m. probably in the cafeteria of the Samuel Hadley Public Services Building, 201 Bedford Street. Upon motion duly made and seconded, the Board of Selectmen voted 5–0 at 8:46 p.m. to adjourn. The School Committee, Capital Expenditures Committee, and Appropriation Committee followed suit. A true record; Attest: Kim Katzenback Executive Clerk Kim Siebert Recording Secretary 7