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HomeMy WebLinkAbout2024-06-05 Finance Committee Minutes ANNUAL FINANCE COMMITTEE REPORT TO VOTERS �v M. i i �r`d� i' l �rr ►i .��;7K ,�C rrn�i�rn �' � s :;c�1. EXECUTIVE SCARY The North Andover Finance Committee, constituted as required by Massachusetts law and the North Andover Home Rule Charter, consists of a diverse group of citizens appointed by the Town Moderator to learn about, explain, and make recommendations on all aspects of municipal finance on behalf of the Town's residents. Over the past year, this Committee held numerous meetings with the Town Manager, Finance Director, members of the Board of Selectmen, School Committee, School Administration and heads of key departments.We have also been active contributors in the Selectmen's appointed committee on Other Post- Employment Benefits (OPEB),which is focused on addressing the Town's $110M long-term liability. The 2019 Finance Committee Warrant Report provides further detail regarding the Town of North Andover's proposed FY20 budget. Our observations highlight some of the more important areas of the budget and the Finance Committees' views. ® The proposed FY20 budget for all town & school services and facilities totals $103.4M, which is an increase of 4.3% over the approved FY19 budget. The breakdown of funding for the general fund budget includes: • Property Taxes of$77.1M(75% of total funding) ® Local Receipts excluding free cash(excise taxes, fees, and others)of$10.9M • State Aid of$11.6M ® Other sources (mainly free cash)of$3.8M The breakdown of spending of the general fiend budget for FY20 includes- ® Municipal Services(General,Police, Fire, etc.) of$23AM(+2.8%to FY19). See II ® Shared Expenses (Employee Benefits, Reserves such as Stabilization.Funds, OPEB Trust, etc., and Insurance of$22.OM(+12.7%to FY19). See H, IV, V ® School Department including regional schools of$51 AM (+4.0%to FY19). See III ® Debt Services for Capital Improvement Projects of$5.5M(+2.6%to FY19). See VI ® Other(Overlay and State Assessment) of$1.1M. ® The proposed FY20 Revenue Budget for Water,Sewer and Stevens Estate operations totals$11.9M and exceeds Spending Budget of$1 L I M generating a profit of$0.8M. See VII 17 The Finance Committee agrees that the Town has developed a sound budget for FY20 based on conservative revenue projections that are judiciously allocated in support of our community goals. This Committee also recognizes mid and long-terra funding challenges in two major areas. The first challenge will be addressing the necessary improvements to school facilities,specifically the North Andover Middle School.The second long-term challenge is regarding the funding of employee retirement and health care obligations, whose growth rate is three times that of the Town's historical annual revenue growth. These challenges may require a large allocation of capital from state funding and/or increased revenue or debt sources in future years. II. MUNICIPAL & SHARED EXPENSE BUDGETS The FY20 North .Andover Town Department and ,Shared Expense budgets represent 22.6% and 21.3%, respectively, of the town operating budget. The proposed Town Department budget of$23AM is projected to grow 2.8% over the prior year. The budgets within this category include General Government, Pubic Safety, Public Works, Health & Human Services, Culture&Recreation, and Support Services. Personnel costs make up the largest component of the Town Department budget. By restructuring the staff and reducing the cost of part time wage employees, the town has kept personnel costs at $15.7M, or 67% of the Department budgets, similar to the prior year. In FY20, North Andover proposes to hire a project manager within the DPW and a training officer for the Fire Department. Total town municipal headcount for FY20 is 211.47 verses 209.67 in FY19,which is relatively unchanged. The proposed Shared Expense budgets (exclusive of Debt see VI) total $22.OM, representing an increase of 12.7% over the prior year budget of$19.6M. Included in this category are payments (transfers) towards stabilization funds,reserves, and capital projects totaling$2.1M, an increase of$1.1M over lFYI9. $750K of the;increase is being used to cover the additional costs of the senior center. Of additional note and as further discussed below, pension costs are expected to increase 9.6% or$498K over FY19 costs, and Group (Health)Insurance costs are growing 7% over FY19 to $12.3M. Ill. SCHOOL DEPARTMENT BUDGET The North Andover School Department FY20 budget represents 49.7% of the total expenses of the town operating budget.The School Department budget was increased by 3.75%from FY19 to FY20,with 2.99% being the cost of level services.The additional.76%budget increase is mainly attributed to costs associated with additional full-time employees (FTEs)to reduce elementary classroom size and to retain positions to support the core teaching and learning mission of North Andover schools. Level services does not include the cost of a first-year Social Emotional Learning (SEL) program at the elementary level, which is being funded as a one-time expense of$120,000 by the municipal budget,and in future years is anticipated to pay for itself. The 3.75% budget increase is in consensus with the Town Manager's recommended budgetary increase for the School Department. Over the last several years the School Committee and Superintendent have formulated a strategy to address the most pressing needs of North Andover's student population.The FY20 budget focuses on critical steps to manage these needs, such as the following: 18 ® Reduce the number of classrooms that exceed School Committee class size recommendations to 11.2%in FY20,which is attained by hiring three full time equivalent elementary teachers. ® Support all schools, and specifically the Anne Bradstreet Early Childhood Center in year two of operations,with needed staffing as seen in the increase of 5.7 FTEs from FY19 to FY20. ® Continue to implement more consistent and rigorous curriculum initiatives with the use of the Curriculum fund. The Curriculum fund is comprised of Medicaid reimbursements that are used for curriculum and professional development. Given the recent success of this fund, in FY19 the School Department requested the spending cap be increased from $250,000 to $400,000 and in FY20 the School Department is again requesting the spending cap be increased from $400,000 to $500,000. Looking forward, we recognize that the School Committee must continue to focus on new initiatives in each budget cycle to achieve their long-term strategic goals. We anticipate discussing needs such as the follovring: ® Continue to address elementary school class sizes by hiring additional teachers to reach the School Committee's goal of 7.9% of classrooms over the class size recommendations,which is seen as an "effective 0%" of classrooms over the School Committee's recommended class size. ® The physical constraints and staffing requirements of the North Andover Middle School (HAMS). NAMS classroom sizes are 6.4 students larger than the MA State average, at an average of 24.5 students per classroom. We anticipate the cost of rectifying the physical constraints of NAMS to be a critical topic of discussion in the near term, as it may require additional funding through state aid and/or increased revenue or debt sources. The Finance Committee acknowledges the significant challenges of achieving the School Committee's established goals within an operating budget that must consider both school and municipal needs,especially as North Andover's per pupil expenditures remain well below the Massachusetts district average. North Andover spends $3,849 less per pupil per year than the Massachusetts district average of$15,450 (DESE). This Committee commends the considerable work that has been done thus far by the School Committee and Superintendent, and looks forward to reviewing a multi-year financial plan that supports their outlined strategic goals. IV. RETIREE HEALTH INSURANCE & PENSION COSTS Other Post-Employment Benefits 62PEB2 The costs and future liability of retired North Andover town employees' health insurance premiums are referred to as Other Post-Employment Benefits, or OPEB. The Town currently pays health insurance costs for all employees and retirees through the operating budget each year on a pay-as-you-go basis. Pay-as- you-go adequately covers the current year costs but does not pay down any of the long-term obligation. Town management prudently established an OPEB Trust Fund and OPEB Stabilization Fund in May 2010 and May 2014, respectively and began funding them in 2014 and 2015. Town management's target is to fund 5% of the OPEB unfunded liability and when possible. The trust fund balance is currently projected to be $4.1M by the end of FY20, which is 3.7% of the OPEB liability. Constructive ideas have been formulated to improve the OPEB reserves through disciplined 19 budgeting procedures and calculated but conservative use of free cash, amongst several other proposals subject to review and approval by the Board of Selectmen. We feel that the initiatives taken,if adopted by the Town,will significantly decrease the annual risks of the OPEN responsibilities. Retiree Pension Costs Retiree Pension Costs have been and will likely continue to grow at rates faster than revenue, consuming a larger portion of the available dollars needed to pay for general services and future capital requirements. On average, retirement contributions to the pension fund have grown 8.7% over the past 4 years, 9.6% being projected for FY20. Pension costs are projected to consume 5.5% of the Town's revenue in FY20, which is 25% more than their share of revenue only four years ago. V. RIESERVES Reserve funds are essentially Town"savings accounts"where funds are set aside for unforeseen expenses or for larger planned expenditures such as capital projects. Reserves demonstrate sound fiscal stewardship and are a major factor in the Town receiving a AAA Bond Rating. The Town Stabilization and Capital Stabilization Funds both continue to operate as intended. The Town Stabi L zation Fund balance continues to grow steadily towards its set ceiling amount with no drawdowns necessary over the past year due to the Town's ability to absorb unanticipated expenditures (such as excessive snow and ice removal) by limiting spending. The Capital Stabilization Fund balance continues to show a cyclical pattern of increase and decrease consistent with setting aside funds and then expending them for anticipated projects. The Special Education Stabilization Fund,established to help provide stability in an expense area shown to have high volatility, has a fluctuating balance year to year as Special Education expenditures can be highly unpredictable. This challenge is not unique to North Andover. A transfer from this fund in the amount of$250K for FY19, and replenishing of the fund in the amount of$588K for FY20, allows our Town to respond to volatility without having to cut services. Finally, the OPER Trer"eserve Fund set up to help offset the Town's OPEB liability has made important progress towards its 5%goal as shown by the graph below. OPEB Trust/Reserves Fund Balance $6,000,000 $5,000,000 $4.000,000 $3,000,040 PES Trust Reserves $2,000,000 stated Croat 5%of Liability S3.000,000 $0 2015 2016 2017 2018 2019 2020 (P-D 20 VI. CAPITAL IMPROVEMENT PLAN (CIP) The improvement and maintenance of our Town infrastructure and services requires annual funding as described in the Capital Improvement Plan (CIP). The Finance Committee reviewed the Capital Improvement Plan and recommends the approval of the proposed$5.9M budget for FY20 as presented. The FY20 CIP budget, excluding water, sewer and Stevens Estate operations is $4.7M, of which ® S2.6M or 55% is for regular maintenance and upkeep of our town assets, such as building maintenance, roof replacements for schools, as well as roadway and sidewalk improvements. ® S 1.3M is allocated to the Police and Fire Departments to build a new storage garage at the Police station and replace fire equipment. ® $0.75M is budgeted to cover additional costs related to higher than anticipated construction costs of the Senior Center,whose construction was approved at Town Meeting last year. The FY20 CIP budget for our water, sewer and Stevens Estate operation is S1.2M, which will be 100% funded by retained earnings. Looking forward,the total CIP budget for the next five years(FY20 to FY24), excluding water, sewer and Stevens Estate operations,is 532.6M of which S 13.2M or 40%is allocated to Facilities Master Plan II,with a focus on the renovation and expansion of elementary schools.These renovations will include the Franklin, Atkinson and Kittredge in the years 2021/22, 2023 and 2024, respectively. Additionally, S 19AM of the total five-year budget is allocated to regular maintenance and upkeep of our town assets,and 527.1 million or 83% be bonded, resulting in an increased debt service from 4.7% in 2019 to 5.4% in 2024. This, as a percentage of revenue,will be higher than our target of 5%. Given that the Town's debt ratio is one of the criteria to maintain our coveted AAA bond rating, it is critical to remain below this threshold when approving CIP budgets in 2023 and 2024. VIL ENTERPRISE FUNDS Enteiprise funds by State law are required under Chapter 44 Section 53F1/2 to be self-sustaining,requiring that 1he revenues from the operations are sufficient to fund all direct and indirect expenditures of the fund. Under Town reserve policy, the Enterprise Funds (water, sewer, and the Stevens Estate) must maintain retained earnings equivalent to a minimum of three months of appropriated expenses and requires that retained earnings exceeding four months will be appropriated to offset user fees directly or indirectly through capital fund projects using pay-as-you-go funding. The recommended FY20 Enterprise Fund Budgets reflects an increase of 2% ($9.9M vs. $9.7M)when excluding"Transfers to CIP" of$1.2M. Water Fund FY20 will be the eighth consecutive year without increases in the water rate for North Andover residents. The recommended Water Enterprise Fund budget for FY20 will see an increase of less than 2.0% compared to FY 19 ($4.7M vs. $4.6M)when excluding the"Transfer to CIP" of$775K. The department is expeci cd to continue to maintain a low expense to debt ratio,while conducting significant upgrades to the water treatment plant and distribution infrastructure. Sewer Fund As with the Water Enterprise Fund, we are looking forward to another year of unchanged sewer rates in FY20 for North Andover residents. The recommended Sewer Enterprise Fund budget for FY20 will see a 21 1.80'% increase from FY19 ($4.7M vs $4.6M) when excluding the "Transfer to CIP" of $375K. The majority of the $81K increase is attributable to an increase of$72K, or 3%in the assessment from Greater Lawrence Sanitary District(GLSD),which is a resource shared by 5 communities.We note that there have been increasing discussions at the state level regarding the GLSD discharging overflow into the Merrimack River. We anticipate there may be additional costs in future years to communities such as North Andover that participate in the GLSD. Stevens Estate While the estate is expected to generate its seventh consecutive profitable year, revenue growth has been flat and expenses are estimated to increase 4.5% necessitating a smaller transfer to capital of $50K compared with $120K in FY19. With several million dollars of required maintenance on the estate approaching, the Town issued a request for proposals to find a suitable private or non-profit organization to purchase or enter a long-term lease to operate the estate (excluding the more than 120 acres of Osgood Hill). The Finance committee supports the town evaluating available options for this enterprise. CONCLUSION In summary,the Finance Committee believes the Town of North Andover's FY20 revenue projections and planned operating and capital budget to be sound and recommend approval by the Citizens of North Andover at Town Meeting. We are impressed with the professionalism of the town management team and the passion and dedication of all. We appreciate all who have given generously of their time to respond to information requests and present budget materials. Each Finance Committee meeting provides opportunities for the public to attend and ask questions on all matters relating to Town finances. We encourage all citizens of North Andover to attend. Regards, The North 4ndover Finance Committee Members Tim Tschirhart, Chair Sasha Weinreich, V. Chair Divya Bhatnagar Elizabeth Gerron Thomas Ringler Chris Allen Chuck Trafton Ed MacMillan, 22