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HomeMy WebLinkAbout2019-11-21 Summit II-min Financial Summit II Board of Selectmen, School Committee, Appropriation Committee, Capital Expenditures Committee November 21, 2019 A Financial Summit was held on Thursday, November 21, 2019 at 7:00 p.m. at the Hadley Public Services Building Cafeteria, 201 Bedford Street, Lexington, MA. The purpose of the meeting was to review and discuss FY2021 budget projections. 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. Jay (Chair); Ms. Colburn; Mr. Bokun; Ms. Lenihan; Ms. Sawhney; Dr. Hackett, Superintendent of Schools; Mr. Coelho, Assistant Superintendent for Finance and Operations. Present for the Appropriation Committee (AC) were Mr. Parker, Chair; Mr. Levine; Ms. Muckenhoupt; Mr. Michelson; Ms. Yan; Mr. Bartenstein; and Mr. Nichols. Present for the Capital Expenditures Committee (CEC) were Mr. Lamb, (Chair); Mr. Kanter; Ms. Beebee; Ms. Manz; and Mr. Smith. ITEMS FOR INDIVIDUAL CONSIDERATION 1. FY2021 Revenue Projections and Revenue Allocation—Carolyn Kosnoff, Assistant Town Manager for Finance FY2021 Revenue Projections: Ms. Kosnoff presented Revenue Projections for FY2021, saying that fiscal policy decisions form the reasoning behind these budget assumptions. Highlighting Revenue Projections, Ms. Kosnoff said that the New Growth number has been revised upward to $2.7M from a previous projection of $2.5M. She suspects New Growth will actually be closer to $3M, due to some new, large commercial developments coming online. Showing historic trends, she noted that New Growth has been at least $3M every year but two since FY2011. State Aid, particularly Chapter 70, leveled off after large increases during FY2016-FY2018 which were the result of the State bringing Lexington up to its “foundation budget”. The FY2021 State Aid working number was achieved by taking the FY2020 total and adding $25 per pupil (an increase of 1.2%) to equal $14,616,684. Individual revenues expected under the Local Receipts category either match last year’s receipts or are based on five-year averages, with the exception of those that are market driven, such as Penalties and Interest or Building Permits. Because those can fluctuate, they are calculated 1 conservatively. The $15,000 PILOT payment represents revenue from the renegotiated Brookhaven contract. Available Funds: The category is populated by line items transferred outside of the General Fund. Ms. Kosnoff noted that, due to policy decisions recently made about Free Cash, it is unlikely the trend will continue of seeing $12M+ in that category. The $13M projected for FY2021 has not yet been certified by the Department of Revenue. It should be close to the current projection which Ms. Kosnoff noted is lower than what was projected at Summit I. The previous Capital Stabilization Fund projected use number has been removed. Ms. Kosnoff does not believe funds from the account will be needed in FY2021 to offset Within Levy debt. This could change, depending on upcoming Summit and department budget conversations. FY2021 Gross Revenue funds are projected to be $238, 232, 111. This is a 3.8% increase— or a total of $8M— over FY2020. The Net General Fund Revenues available for appropriation are $224,649,489 or a 3.5% increase over FY2020. FY2021 Revenue Projections and Revenue Allocations: It has been the practice, when building the budget, to use a revenue allocation model which level funds both the Town and School budgets, year over year, and then divides new revenue proportionately between the School and the Town sides (73.7% Schools/26.3% Town). Ms. Kosnoff walked the meeting through changes made to the Revenue and Spending model since Summit I. Shared Expenses— such as Minuteman High School, Employee Benefits, Property Liability and Insurance— were itemized. Ms. Kosnoff has projected a 10% increase due to debt service for the new high school but does not yet have firm numbers. Debt Service is projected to increase 5% for the year but the number could fluctuate depending on Capital Stabilization use. Revenue Set-Asides for Designated Expenses for FY2021:  $200,000 has been set aside for Unanticipated Needs;  The OPEB total amount has been increased to $1,929,721, $50,000 more than in FY2020. $750,000 of the total comes from the Health Claims Trust Fund;  $500,000 in Unallocated Funds. At the last Summit, this line item was $1M. Ms. Kosnoff noted that Unallocated funds “seed” Free Cash for the following year so reducing it means Free Cash will automatically be $500,000 lower.  The $3M going into the Capital Stabilization Fund is consistent with agreement at the last two Summits to increase the amount by $1.5M per year. The source for these funds in FY2021 is split between the Tax Levy ($863,540) and Free Cash ($2,136,460). Ms. Kosnoff said that the point of using Tax Levy funds is to build capacity within the Tax Levy to manage how the cost/debt shock of the new high school is absorbed. Over the next five years, Ms. Kosnoff hopes to add $10M to the Capital Stabilization Fund for this 2 purpose, ideally with the majority coming from the Tax Levy.  The $700,000 being transferred from Free Cash has no current designation but it is consistent with guideline discussions as a Set Aside.  Free Cash is being used to pay down the debt incurred from land purchases ($2.4M) and for the Operating Budget ($2.2M). The land purchase debt will be amortized in FY2022 if paydown continues at the same pace. Ms. Kosnoff noted that before FY2019 and FY2020, both the Town and the Schools were able to leave unspent a significant amount of their allotted available funds. But the FY2021 Revenue Allocation Model shows that even with the proportionate allocations of New Revenue to the Schools ($4.116M), a shortfall of $1,474,378 exists between the Schools’ initial FY2021 budget request ($119,144,583) and what a level budget plus available funds would yield ($117,670,205). Using the proportional split of 73.7% Schools/26.3% Town, the Town’s New Revenue allocation in FY2021 is $1.467M. Both the Schools and the Town will see a 3.6% increase to their FY2020 Operating Budgets in FY2021. Mr. Kanter (CEC) asked if there is any hope the Minuteman School District will charge a fee to out-of-district schools to help offset the debt burden carried by member schools for the new school. Doing so would reduce Lexington’s contribution. Ms. Kosnoff said she has no information about this yet. Mr. Michaelson (AC) reported that out-of-district fees charged this year would be applied to next year’s budget in any case, so there would be no relief to be found here for the FY2021 assessment. Mr. Padaki (AC) asked if the Town is locked into paying off the Land Purchase debt within a five- year timeframe, as is planned. Ms. Kosnoff said the answer is yes and no. There is a limited period of five years when noted can be rolled over. The other option is issuing a bond for the remainder. Ms. Colburn (SC) asked what the differences are between the Set Aside for Unanticipated Current Year Fiscal Needs ($200,000); the Unallocated Funds line item ($500,000); and Appropriation Committee Fund ($900,000). Ms. Kosnoff said the Set Aside is to be used if something important— but ineligible for a Reserve Fund Transfer— comes up before Town Meeting is able to approve the use of certified Free Cash. The Unallocated Funds line item is currently available Free Cash to be used for budget needs outside the Allocation model. Ms. Kosnoff said this money has generally been untouched and it seeds the following year’s Free Cash. The Appropriation Committee Fund is for extraordinary and unexpected situations, such as a natural disaster. It can be released by a vote of the Appropriation Committee and the Board of Selection, outside of Town Meeting. Ms. Colburn (SC) said her research shows that the Set Aside for Roads came from a 2002 override that was intended to last 4 years, not in perpetuity. Ms. Kosnoff said when an override is done, is remains baked into the tax base, different from a debt exclusion that disappears when a debt is amortized. The only way to erase the effects of an override is to have an underride, which 3 Lexington has never done. Mr. Lamb (CEC) said sometime in the last 10 years, the Town recognized the need to increase road funding and the override was a way to catch-up on the work backlog. Not all Operating overrides are funded with Set Asides. Road maintenance is otherwise funded as a Shared Expense. Mr. Kanter (CEC) noted that DPW bandwidth has a bearing on how much road funding gets used every year. Ms. Colburn (SC) said she believes road improvements are important but the figure seems arbitrary and it also feels inappropriate for Municipal expenses to be funded as Set Asides. She asked that this be reconsidered. Mr. Bartenstein (AC) asked how the plan to increase the year-to-year allocation for the Capital Stabilization Fund would be possible if revenue gets tighter and tighter, as it appears will be the case. Ms. Kosnoff agreed the question is important and said the next section of the meeting might begin to formulate an answer Ms. Kosnoff presented a list of suggestions to address the FY2021 shortfall that was created through meetings between the School and Town leadership and Finance staff. Ms. Kosnoff said, in her opinion, some suggestions are ones she is loath to consider, others may be viable ways forward, and some go against recently established financial guidelines. Ms. Kosnoff stressed that many of them would only be short-term fixes:  Reduce amount of set-aside ($3M) to the Capital Stabilization Fund. The purpose of setting aside these funds is to absorb the shock of the cost of a new high school. It is not needed to balance the FY2021 budget or address current needs. This is the one item on the list in which funds from the Tax Levy could be redirected. The rest of the items on the list rely on Free Cash.  Pause on the transition of Free Cash out of the operating budget for one or more years. This suggestion goes against established best practices and Ms. Kosnoff noted that it does not address the fundamental problem of the budgets not fitting within the Tax Levy.  Eliminate set-asides for FY2020 and FY2021. Ms. Kosnoff said, again, that both come from Free Cash and choosing this option would not address the underlying issue. It would also decrease flexibility as the budget process progresses.  Reduce School Department budget to stay within Revenue Allocation. Dr. Hackett will speak to the difficulties with this suggestion; essentially it would mean a reduction of current programs and services.  Consider an operating override. 4  Reduce OPEB Funding.  Reduce the set-aside for pay-down of land purchases and bond the remaining amount. Both Ms. Kosnoff and the Town Manager do not feel this is a good approach because it will negatively affect the Town’s bond rating and the payments in the first years of the loan are high and largely interest-only, resulting in more debt to be serviced. The funding also comes from Free Cash— via the Health Claims Trust Fund— not the Tax Levy, so it does not address the underlying issue. Dr. Hackett, Superintendent of Schools, emphasized that the Lexington community has high expectations of its School system and that she has an obligation to meet those expectations. The budget number of $119,144,583 is a projection, produced early in the budget process, and it is based on enrollment numbers that are subject to change. To open the Schools next year, even with no staff increases, means a $5.6M increase. Anything less would mean some level of service reduction. School staff, by department, have submitted their requests totaling about $3M, over and above the $5.6M level services request. Supplies and things of that nature can be reduced but it would not address the entire $1.4M gap. The full shortfall, if focused on staff alone, represents 26 teaching positions or 53 support positions or some blend of both, which would affect class size. Dr. Hackett said, when the conversations first started about it, the Schools were sincere in their support for putting money aside to offset the tax burden of building a new high school. But now that the budget shortfall makes that plan more challenging, another way should be considered. Her own opinion is that it might be too hard in this moment to address both Municipal best practices and an aggressive agenda around Capital Stabilization. Ms. Kosnoff said that the total Revenue increase this year of 3.6% quite a bit lower than in years past but it is realistic and Lexington is apt to see this level of Revenue increase going forward. There are still a lot of moving pieces on both the Revenue and the Expense sides. However, the presented budget scenario is what a true base budget looks like. Operating Budget increases any higher than 3.6% will not be sustainable without making larger, structural reorganizations. Ms. Jay (SC) said Lexington finds itself in somewhat new territory. Finances have been more favorable in the last few years. Finding efficiencies is something the Schools are willingly do but the pressure to cut services in the short term is more difficult to accept. The short-term solution is perhaps a combination of two or more of the seven suggestions (above) but the goal should be to reach a longer term, sustainable solution. Making rapid changes could have serious implications. Ms. Colburn (SC) noted that beyond community expectations of the Schools, there are non- negotiable legal requirements, mostly contract and having to do with Special Education. Ideally Revenues should match Expenses but the reason they don’t in this instance are the discretionary choices being made with regard to financial policies and practices. She supports exploring suggestion #2 and #3 but does not recommend changing the contribution to the Capital Stabilization Fund because it might jeopardize the high school project. She agreed a balance 5 must be found between making policy changes and meeting Operating Budget needs. Ms. Linehan (SC) said it might be tempting to think that $1.4M, in such a large budget, will be easy to absorb but it would mean staff reductions that will be felt throughout the system. Staff retention affects the future of the system and creates long-term difficulties. Mr. Bokum (SC) said he would hate to see the work done with equity, diversity, and inclusion come to a halt because of budget difficulties. He has faith a solution will found. Ms. Sawhney (SC) asked where the Town will belt-tighten. Mr. Malloy said that there are about $1.4M in requests right now being considered but only $200,000 in available funds. A new Health Department hire is needed to satisfy mandatory inspections and that alone will eat up about a third of the $200,000. Software items that would create efficiencies will not be funded. Ms. Sawhney (SC) said added student activity fees—such as bus fees and sports fees— might be considered to increase revenue but they would result in more inequities between those who can pay and those who cannot. Mr. Lamb (CEC) said the fiscal policies everyone agreed to were designed to strengthen the Town in the long-term and to reduce the burdens of debt. He believes some of the suggested remedies for addressing the shortfall do not make sense. They are not quick fixes, they go against policy, and/or they push the problem down the road. Ms. Beebe (CEC) said that since it appears the shortfall will be a longer-term issue, without changing some fundamentals, is there something the Schools can adjust to help alleviate the pressure? Delaying some of the policy implementations for the long term would be problematic. Dr. Hackett said Special Education is one place she would look for reductions but she needs to conduct deeper research. She will have proposals in the future. She is hopeful the $1.4M gap could be brought down to $700,000 without drastic action. Total enrollment is now higher than ever and the student per capita cost is the lowest it has been in recent history. She asked that a one-year solution be found so there is time to deliberate longer-term remedies. Mr. Smith (CEC) said he suspects the answer might be to slow down adherence to the new policies on order to yield the time to find more permanent solutions. Ms. Manz (CEC) said if the Schools could decrease the gap on its own by half, that would be a substantial step. She finds all of the options to be terrible but she would like to explore what might be the least awful, noting push back from the Town Manager on several. Mr. Malloy said reducing the set aside for the land purchase is a bad idea as it would have a negative effect on other parts of the budget and is only a temporary fix. 6 Mr. Kanter (CEC) does not believe the larger solution can be found in the near term. He asked if the School Committee Special Education Fund can be tapped for one year and suggested that a combination of strategies might tide over the shortfall. Mr. Parker (AC) said the problem of structural deficits is brutal. Most of the solutions discussed tonight are only short-term. A 4.9% rate of growth every year is not sustainable because it is larger than what the Town takes in every year. Mr. Michelson (AC) asked the Schools about four budget areas: Increases due to contractual obligations; projected increase due to enrollment; increase for in-district Special Education; and increase for out-of-district Special Education. Mr. Coelho said the numbers change but the largest drivers of the increases are: Base salaries/contractual obligations (84% of the District budget) are increasing 3.63% over FY2020; Special Education Out of District costs are increasing by 16.92%: Regular transportation and Special Education Out of District transportation are each growing by 16.5%. Enrollment is fairly level at the moment. Mr. Nichols (AC) agreed that a long-term solution needs to be found. Residents care about taxes, not just services. At a time when the general inflation rate is less than 2%, there is a 3% increase in the Operating budget. After inflation, over 10 years, Mr. Nichols said real estate taxes have increased 32%. Ways to economize need to be found. He noted that because benefits were not taken into account in the staff reduction scenarios, fewer actual staff would have to be cut to bridge the shortfall. Mr. Nichols said that even though OPEB is not an immediate bill that has to be paid, putting money into the account provides an 8% return due to the discount rate. Ms. Yan (AC) said, beyond a short-term solution for FY2021, a long-term fix is necessary, such as an increase in the commercial tax base. Mr. Padaki (AC) said he appreciates that budgets cannot be abruptly slashed without pain but a long-term solution needs to be found. In the short-term, some of the proffered suggestions are not feasible. A combination of several, a bit taken from each, might be the best approach. If a bond for the land purchase was done, perhaps it could be paid off earlier than five years. Ms. Kosnoff said that usually a municipal bond cannot be paid off in the first 10 years. Mr. Levine (AC) said it has been at least ten years since the Town has experienced this kind of financial strain. Many of the issues and policies that have been discussed would be worthwhile if there weren’t problems with the Operating budget. Mr. Levine believes that Education and Public Safety are higher priorities than some of the policy initiatives. Once the land purchase is paid for in 2 years, there will be some slack in the Operating budget. In the meantime, he recommends eliminating the Unallocated Fund line item and pausing for two years the transition of Free Cash out of the Operating budget. After those two years, there can be a reconsideration of how to address any budget strain. It would be alright with him if some of liberated funds went to Municipal needs even though most would go to the Schools. Mr. Levine would reduce the OPEB funding, leaving in the $750,000 but reducing the $1.2M in additional funding so that the 7 reduced amount can go into Cash Capital. He is comfortable devoting some of the Appropriation Committee Reserve Fund toward the cause and he suggested the Schools might belt-tighten about $300,000-$400,000. He would like a close analysis done of the sources of the high Free Cash totals. Ms. Muckenhoupt (AC) said the benefits for future projects and future students’ needs should to be weighed against the losses of current programs for current students. Mr. Bartenstein (AC) said the Town is moving from a “golden era” of surpluses into a more challenging landscape. He does not believe it will be possible to keep adding another $1.5M every year to the Capital Stabilization Fund. With the high school project looming ahead, he believes there needs to be a lot of re-thinking. Ms. Hai (BOS) confirmed with Ms. Kosnoff that decisions being made now will decrease Free Cash in the future. Ms. Hai said she is uncomfortable using one-time funds to support on-going costs in the Operating Budget, saying it is bad practice. Ms. Hai is also uncomfortable making some of the proposed large- scale changes without knowing exactly how much funding needs to be found and what School programs and services would be affected if it isn’t found. Mr. Pato (BOS) agreed that the point of the financial policies is to make Lexington stronger in the future. This year may be tight but it will only be harder next year and the year after. In order to make enough room for the magnitude of the new high school project, the Town will need to be on “austerity budgets” from now until then. Ms. Barry (BOS) asked Mr. Malloy to describe what it would mean to the Town side if the best practice policies were not followed, such as a change to the bond rating triggered by lowered OPEB contributions. Mr. Malloy said if nothing was done to soften the full blow of the high school debt exclusion, there would probably be a property tax increase of 10-15%. For a million-dollar home, that represents $1,000-$1,500. Using Free Cash to subsidize payment of overhead in the Operating Budget is also only sustainable for a period of time and is not something that should be relied upon. In the recent past, Free Cash was closer to $8M than $13M which, if relied upon for Operating, would represent a $5M shortfall. The Appropriation Committee Reserve Fund could be reduced but that decrease would also decrease the next year’s Free Cash by the same amount. Not having seen an itemization of the School budget or the fixed costs, he can not judge whether there is room for efficiencies. He believes reducing the OPEB contribution or bonding the remaining land purchase debt is only postponing the pain. Mr. Malloy said that a Bond Rating agency would be concerned if the Town used and ever- increasing amount of Free Cash to balance the budget. Every demotion in bond rating costs a town money over the life of their loans. All contracts— other than Public Works— have been settled and the Library contract comes up for negotiation in 2021. Ms. Barry said the Board of Selectmen instruct the Town departments to construct their budgets without factoring in an override. Dealing with the structural deficit will be difficult but it needs 8 to be carefully looked at. The Selectmen hear from residents all the time that property taxes in Lexington are too high. The taxpayers need to be confident that the Town is financially responsible. Mr. Sandeen (BOS) said the new high school needs to happen so creating a buffer for taxpayers by increasing the Capital Stabilization Fund is important to continue as a policy and practice. Mr. Lucente (BOS) said he needs to understand more clearly the Schools’ fixed costs and what the level of need is. Everyone wants the new high school project to go forward when it comes before Town Meeting and the voters. Ms. Kosnoff said that the Town and Schools need time to work together to come up with a resolution. 2. FY2021 Debt Service Projections This item was tabled for future presentation 3. Confirm date for Summit III: Ms. Kosnoff stated Summit III is scheduled to be held on Thursday, December 19, 2019 in the Hadley Public Services Building Cafeteria, 201 Bedford Street. ADJOURN Upon motion duly made and seconded, the Board of Selectmen voted 5–0 at 9:20 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 9