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MEMORANDUM: Financial Goal Setting
Thursday, November 16, 2006
         MEMORANDUM


TO:                     Town Council

FROM:              Richard J. White, Town Manager

DATE:              Thursday, November 16, 2006

SUBJECT:        Financial Goal Setting

Attached are two spread sheets.  The first spreadsheet shows incremental revenue growth for the general fund for Fiscal Year 2008.  The enterprise accounts have been excluded as they are fee for service operations and as such the users bear the full cost of the service. If demand is not there the service is not provided.  Consequently, the focus of the budget planning process will be on programs funded by the general fund.  

Recreation and Rink enterprise funds are doing well financially with healthy reserves building up.  Recreation is a peculiar business enterprise.  The number of programs you can offer is directly connected to the level of staff support available to plan, organize and supervise recreation programs.  Sean would like to expand his offerings at the rink and elsewhere to the community in Fiscal 2008.  He cannot effectively do this without adding staff. You will see evidence of this during the budget process.  The water and sewer rate study is underway.  We expect it to be complete well before the beginning of the first quarter of the calendar year.  Well ahead of any budget deadline.  We may want to tap into some of this revenue to support Public Works long term with these enterprise funds.  Highways, Parks and sometimes Cemeteries support these operations. It’s too early now, but something we should keep on our radar screen.


Incremental revenue growth from Fiscal Year 2007 to 2008 is expected to be just short of $1.2 million or 3.15%.  The estimates are fairly firm and unless there is some unexpected and unforeseen developments not expected to change.  This 3.13% growth in revenue is evidence that actions taken last year to stabilize and make more predictable Winthrop’s annual incremental revenue have worked.  The Council deserves great credit for their leadership in that regard. Here are the pieces that make up this increase:

Property Taxes
The Property tax levy will increase by $799,821 or 4.3 %. Property taxes increase in three ways.  There is the allowable Proposition 2 1/2 increase, new property growth and Proposition Override revenue either for a debt exclusion or general override. Property tax revenue in Fiscal Year 2008 is expected to grow by 4.32%.  Proposition 2 ½ growth will increase by 439,983 or 3.38%. The increase over and above the 2 ½ % limit is a result of larger than anticipated new growth revenue in FY 2007. This revenue will show in local receipts in the formal budget submission.  It is easier for this purpose to show the revenue this way for now. We will sort all of this out when we set a tax rate. Anticipated new growth for FY 2008 is expected to increase by 280% or $308,000.  The revenue estimate is made by keeping to our original policy on estimating new growth by taking the rolling average of the last five years of $110,00 in new growth and combining it with the anticipated revenue to be received as some of the Atlantis Marina property comes on line valued as a condominium. Finally, increasing debt payments for the debt exclusion passed in 1999 will increase by $11,839.

State Aid
      
The State of Massachusetts husbands most tax resources and have limited a municipality’s    ability to raise revenue except for user fees and the real estate tax.  It plays the role of resource provider in sharing some proceeds of the income, sales, capital gains and other statewide taxes it levies.  Periodically the State has had some revenue shortages and has had difficulties being balanced in funding state program needs while meeting its obligation to share its resources with its local governments.  Winthrop has been severely impacted in the past by reductions in local aid from the State.  This year was an election year and the issue of local aid was front and center as a campaign issue.  Based on this Michael and I believe for now it is reasonable to predict a 2 ½% or $256,053 increase. We will of course monitor this issue the closer we get to the budget deadline.  This is our most vulnerable estimate and the one most likely to change.

Local Receipts

Local receipt revenue comes from basic every governmental day fees and motor vehicular excise taxes, licenses and permits, investment income, fines, and other departmental fees. Last year the Council adopted a policy of having local receipt estimates for the planned for fiscal year being 95% of what was collected during the last completed fiscal year. 95% of what was collected in FY 2006 was just a shade over $3.2 million. The additional revenue includes the fee increases in building and parking fees from 2007.

Other Revenues   

Other revenues are a loose collection of special revenues not traditionally referred to as local receipts and not part of the enterprise fund revenue.  In Winthrop, these revenue sources come from free cash, overlay surplus, Massport in lieu of taxes agreements, MWRA mitigation agreements, sale of cemetery lots and indirect charge backs from the general fund departments for services provided to enterprise operations.

1.  Free Cash
The certified balance for FY 2007 is in excess of $2,034,000.  We have made a great recovery and are well on our way to meeting our goal of accumulating 5% of the tax levy. We propose level funding this allocation funding recurring operations.  The Council may decide it wants to dip into free cash slightly to continue a much-needed capital program such as sidewalk replacement.  We no longer use free cash to any real degree to fund recurring expenditures and it is my hope the Council will reaffirm its policies in that regard so as to avoid any fluctuations in revenue streams.
2.  Overlay Surplus
Last year we encouraged the Assessors to release as much overlay as they could because of restricted revenue.  Unfortunately, this practice cannot be sustained.  The current estimate shows a decrease of $179,946 in overlay revenue.  The Assessors have released all unencumbered overlay for FY 2003 and 2004.
3.  Massport
The former Board of Selectmen signed a long term in lieu of tax agreement with Massport that supplies a steady and predictable revenue stream to Winthrop.  There is no inflation calculator in the agreement thus no increase.  Inflation was considered as a factor in the total settling the agreement.
4.  MWRA
The MWRA in a mitigation agreement pays for projected pubic safety service impact as a result of having the MWRA facility on Deer Island.  The agreement has an escalator. This year the MWRA payment increase by 2 ½%.
5.  Cemetery Lots
A portion of the sale of lots account revenue supports operations.  Projects anticipate a 2 ½% or $750 increase.
6.   Indirect Charge Backs
General government operations such as the accountant, Treasurer/Collector, Town Manager and other departments support enterprise efforts.  Costs for that support is raised through the fees charged for various enterprise fund operations. It is anticipated that those cost will increase by 3% or $7,800.



The second spreadsheet is a five-year forecast that Michael and I will speak to at your meeting on Tuesday evening.  It is important to keep in mind moving forward that forecasts are nothing but a snapshot of what things could be like in the future.  It is illustrative.  The most critical issues governing a forecast is the assumption made.  Change an assumption and you alter a forecasted outcome.  Consequently, we have been modest in our assumptions.  I will try to identify what those assumptions are and then later inventory some of the factors/issues/challenges that lie ahead that could impact this forecast.  Used as a planning tool, mixing and matching numbers with assumptions, it is a helpful tool.  It is also a good predictor of what could happen from 30,000 feet.  However, you will be sorely disappointed if you take this to Foxwoods with you and use it for anything other than scrap paper.

a.  Assumptions

1.      Revenue
Tax levy estimates include a 2-½ % increase plus an accommodation for new growth from Atlantis until 2011 when we revert to the 5-year rolling average as per the Council’s policies.  In addition, State aid is estimated to increase  2 ½%, local receipts by 1%, free cash and Massport constant and MWRA increasing at 2.5% and cemetery at 3% per year.
2.        Expenditures
65 to 85% of budgets are wages.  After a 4% increase in wages for FY 08 all wage forecast increases are projected to be 2 ½%.  We have used a 15% factor for employee benefits in FY 2008 and 8% every year thereafter.  Other expenses increase at approximately 2-½%.

b.  Out look

Bottom line the Town has faced worst budget scenarios than what is offered in the forecast assuming the assumptions ring true.  Although not inconsequential, the deficits shown in all five years are not unmanageable.  It clearly demonstrates however the importance of having in place sound fiscal policies and having the discipline to adhere to them. There really is not a lot more to offer than this.  The fun is in dealing with the outside factors that are either unique to Winthrop or those with a State and national flair and preparing yourself to deal with them.


FACTORS/ISSUES/CHALLENGES

1.  Education

Winthrop’s school system has taken a budget licking over the years.  Curriculum coordination is impossible because there is no staff to provide the service.  Accountability, teacher evaluation and performance review for teachers is left to the School Principal or the Superintendent because there are no curriculum coordinators.  In an environment where we encourage our students to commit themselves to learning through continuous improvement, we do not have consistent investment in professional development, a uniformed, standard curriculum nor the resources to properly evaluate teacher performance. Materials budgets have been striped and the schools do not have enough resources to fund a regular textbook replacement program.  Winthrop needs to think seriously about what type of Educational product it wants to offer the community.  It must also decide if it wants to continue to see the loss in students in the system and consequently families with school aged children in Winthrop.  Is Winthrop a safer, most prosperous place if it is more populated with families with school-aged children?  MCAS scores are becoming a factor in real estate purchase.  Are you concerned about your real estate investment?  Should you be?

2.  Wage policy

It appears that circumstances have caused Winthrop to look at wage strategy after all of the other budget issues are addressed. A wage policy combined with good fiscal policies will help to insure that Winthrop can provide a better and more consistent product.  Going a few years without providing wage increases for all of the employees has resulted in what could be best described as make up contracts with richer settlements than other communities.  Although it is great that Winthrop has recognized a need to be fair and make up for past inequities, fitting these settlements in with limited revenue growth creates other challenges for the community.

3.  Health Insurance

The Town has a fairly troubled claims history.  Consequently, health insurance premiums are   much higher here than most comparable communities.  Preliminary budget estimates have the health insurance budget increasing by 15% in 2008. The Town cannot sustain these increases over the long term.  A fairly low cost program is offered and although the Town pays 70% of the premium many communities offer more of a selection and for the HMO category a lower percentage pay.  Recruiting competitively requires that the Town offer competitive benefits.  We are on the edge.  We are too small to self-insure and a long ways from correcting our high claims history.  The State may offer some relief by offering participation in their program with many offering with a much smaller premium.  Coalition bargaining is the price you pay for the privilege.

4.  Energy prices

Driving to Winthrop and peeking at the pump prices at the gas station along the way is like getting a weekly pork belly and corn crop commodity price quote every week.  We have lived a lifetime with fairly steady and predictable energy prices.  I am not sure there is a guarantee of this happening in the future.  Our building, equipment and other facilities are not cutting edge energy efficient machines. There will be a cost.

5.  Infrastructure
   
Years of lack of investment and neglect have put the Town in a tough position. Buildings, streets, water and sewer systems and equipment all are in need of major upgrade. There is no fit in the revenue stream for what needs to be done, but the needs are acute (see attachment).  The Town has some opportunity to use its borrowing capacity to solve some of these issues, but it needs to be careful and prudent in its approach and must use proceeds from the sale of the Darymple school to soften any one year’s impact of new debt.  Taking the money from Darymple and spending it directly on a capital need responds to one small capital challenge. Using it to buffer impact in any one year to strategically protect on going operational services will go a lot longer to meeting the capital investment challenge we face.

6.  State Aid
  
     The State appears to be more concerned with local government financing lately.  The politics of the gubernatorial election helped.  Unfortunately, The Governor and the Legislature move from the election to the reality of balancing a budget.  Historically Winthrop has suffered when the State has had budget balancing difficulties. This is no mechanism to prevent that from happening again.  This is why exceeding the free cash target is a good thing.

7.  Supplies and materials

Most Town budgets have been stripped of the necessary supplies and materials that help them do their job.  You have heard me talk about DPW, but the same is true with police, fire and general government.  There is no cruiser replacement program, gun and body armor, hoses, nozzles, HZMAT equipment and supplies, gravel, patch, sand, seed, loam……the list goes on.  We need to take each and develop a strategy to build those budgets back up over time.

8.  Staff support and professional development
The world is changing and technology plays a bigger role in making a business operation more effective. This evolution will continue.  Maintaining technology and replacing it requires staff and a budget to maintain and replace it.  Communities, the size of Winthrop, have staff who support planning, conservation and personnel activities.  The community pays a price for not having staff support for these functions. Creating a growing, adaptable and progressive organization requires an ability to evaluate, engineer, analyze, plan, recommend and implement change.  There are key people in the organization capable of doing this, but they also have 100’s of other responsibilities and some of them are line responsibilities.  The pace of progress depends on having in house research, analytical and evaluation resources in the organization.  Current staffing levels may place a governor on some of the progress the Council would like to see happen.  In addition, we need to make a better investment in the training of our employees.  The rule, the law, the environment as well as demand for what we do all change over time.  We need to think about establishing funds for professional development or ratchet down our performance expectations.

9.  Public Safety

One of the most glaring issues of concern for the community, staff and Council is Public Safety.  The community is changing. We need to strengthen our partnerships with the Schools and CASA to begin to provide a sense in the community that Winthrop is a safe place to live, to grow and raise a family.  Winthrop is fortunate that it has received a grant from Homeland Security to install a joint dispatch console and equipment at the police station.  The funds will become available at the end of the year and we should consider hiring 4 to 5 civilian dispatchers in time for its installation.  This will put one more officer out on the street in the Police Department and make available an additional firefighter available for active service.  Both Police and Fire Stations are worthy of investment.



 



 
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