The Town Administrator’s Fiscal Plan

Town Administrator David Colton has proposed a five year fiscal plan for the Town. I’ve been asked by a number of readers to explain it. I apologize in advance for the length of this post, but I see no other way to give a good explanation.

A presentation of it can be viewed here:

http://www.townofmilton.org/Public_Documents/MiltonMA_BComm/06%2001-27%20Strategic%20Fiscal%20Plan.pdf

At last year’s Annual Town Meeting a citizen’s article called for the establishment of a long range planning committee for the town, similar to the School’s Long Range Planning Committee. Perceived deficiencies in the article lead to it being voted down, but sentiment about the need for more planning was widespread. Now, as we approach another Town Meeting, David Colton has developed a thoughtful plan which at least addresses fiscal issues on a comprehensive basis over a five year period.

The proposal deals with the following:

a) the looming substantial deficit in the fiscal 2007 budget

b) a persistent lack of funding for capital improvements

c) insufficient reserve levels

d) an increasingly divisive annual budgeting process

e) over reliance on Prop 2 ½ override votes

It contains three key recommendations.

1. Pass a significantly large override this year.

2. Implement a five year expenditure plan which grows more slowly than revenues.

3. Utilize declining debt service payments to fund capital expenditures.

Significant Override

Initial projections show about a $3.5 million gap between the budgets submitted by the various departments and anticipated revenues. The budget requests represent attempts to recover some of the losses caused by cuts in recent years. It’s been five years since we had an operating override. Even in good economic times Milton has needed periodic overrides of Proposition 2 ½ because we have a structural fiscal deficit—our revenues grow at about 1-1.5% less per year than the cost of level service funding. The last 5 years have not been good economic times. The recession caused deep cuts in revenue, primarily in the form of state aid.

We’ve made it through this period largely by cuts in staffing. The increase in trash sticker fees last year has been the only revenue enhancement action taken in the five year period. So we have fewer Teachers, Policeman, Firefighters, Library Staff and Public Works employees. We’re no longer replacing Police cruisers on a prudent basis. Student athletes must pay onerous fees to play sports, with many of limited means simply not playing. And of course we have not been able to make any progress on our capital needs, having established a Capital Stabilization Fund in 2004 to which we’ve been unable to add any money other than the $10,000 which established it.

To balance this year’s budget by once again cutting staff from an already deficient workforce level would have a significant impact on town services across the board. The effects on our Schools and Public Safety would be especially pronounced. Using a combination of cuts and a smaller override would put us in the position of asking the taxpayers to pay more while we still make very noticeable cuts in the services they will receive. Our past overrides have always been less than was actually needed. This simply recognized the difficulty in convincing the community to raise taxes. This results, however, in less than true level service funding, and hastens the time when another override is necessary. A significant override in the neighborhood of $3.5 million permits us to establish a service level equivalent to what we had before the economic downturn. Equally important, it creates a significantly elevated spending floor, a necessary precondition, together with the other two recommendations, to forging a future less reliant on overrides, and with adequate reserves and investment in capital needs.

Five Year Expenditure Plan

Working with all town department heads, and assuming a successful override this year as discussed, Mr. Colton has developed a five year expenditure plan. Although unforeseen circumstances could change the allocations, the plan calls for an agreed adherence to a bottom line which essentially maintains something close to level service budgets for the five years. Any new initiatives would require additional, new funding.

The key aspect of this recommendation is a growth rate less than the expected growth in revenues. Over the five years expenditures would grow at about 6% less than revenues. This produces surpluses beginning in FY 2008 and growing to over $3 million in FY 2011. These surpluses allow us to:

a) stop using free cash for operational budgets. Free cash is essentially the unspent portion of budgets at the end of fiscal years. All towns have free cash. Many have much more than we have. Fiscally strong communities consider this one time money, and allocate it to reserves. We’ve had to use it in our annual budgets because we are starved for revenue. Using the surpluses Colton’s plan produces, we can start allocating our free cash to reserves beginning in FY 2008. By 2011 reserves will increase by over $3.6 million.

b) create excess levy capacity. What in God’s name is that? It’s pretty simple, actually. Proposition 2 ½ places a cap on the total amount of taxes that a community can raise through the property tax. That cap is called the levy limit. Communities tax property owners an amount up to the levy limit. That’s called the tax levy. Most communities need to tax up to the levy limit, which means their tax levy is equal to their levy limit. Some lucky communities can get by taxing citizens at less than what Proposition 2 ½ allows. The difference between the levy limit and what is actually taxed by the tax levy is excess levy capacity. The city of Cambridge has $65 million in excess levy capacity. Our neighbor Quincy has $6.5 million in excess levy capacity.

The surpluses produced by a sizeable override this year, coupled with fiscal constraint over five years, allows us to begin levying taxes below what the natural levy limit would be beginning in FY 2008. Over time this builds up to a fairly large amount of potential revenue which can be tapped by the town should it so choose. Since this revenue represents unused revenue within the levy limit, it can be tapped for use without a Proposition 2 ½ override. Using any of it would raise taxes of course, but only to the extent that permissible tax increases from prior years had not been levied.

Excess levy capacity gives the town flexibility in budgetary matters and reduces the frequency of Proposition 2 ½ overrides.

Use Declining Debt Service

Milton currently spends about $4.6 million on debt service. A portion of that pays for “over the levy limit debt.” This debt payment is funded by revenue from a prior Proposition 2 ½ override and when the debt is paid off, the revenue stream ceases. Another portion of our debt payments is for “under the levy limit debt.” This is debt we pay for out of our annual operating revenue.

The Colton proposal calls for taking advantage of a declining debt service over the next five years. It suggests that rather than allowing the moneys used to pay debt service to simply go back into the revenue stream for allocation, it be earmarked for the Capital Stabilization Fund. Projections indicate $1 million available for allocation from this fund by 2011.

Recap

A significant override this year allows us to establish a reasonable level of service and, when combined with budgetary restrain over the next five years, creates surpluses. These surpluses enable us to re-direct Free Cash to reserves and to develop an excess levy capacity which reduces the need for Proposition 2 ½ overrides. Earmarking “under the levy limit debt” payments freed up due to declining debt to the Capital Stabilization Fund gives us the funds needed to begin tackling a $23 million backlog of capital needs.

All in all, I think David Colton deserves a great deal of credit for this plan. I do have a concern that the revenue projections may be a bit optimistic. But that shouldn’t affect the basic soundness of the plan. We now need to see whether the Selectmen, Warrant Committee and School Committee will support it and take it to Town Meeting. The override on which this all hinges is sizeable and would increase taxes substantially. The challenge is to find a way to communicate the substantial benefits to all Town Meeting members, and to the voters.