Town of Winchester. Melvin A. Kleckner, Town Manager. February 15, 2009

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1 Town of Winchester Melvin A. Kleckner, Town Manager Town Manager s Office 71 Mt. Vernon Street Winchester, MA Phone: Fax: townmanager@winchester.us February 15, 2009 The Honorable Finance Committee and Board of Selectmen Town of Winchester Town Hall 71 Mount Vernon Street Winchester, Massachusetts Dear Committee and Board Members: In accordance with the provisions of the Home Rule Charter of the Town of Winchester, it is my privilege to submit for your consideration a Budget for Fiscal Year (FY) 2010, commencing on July 1, This document also includes a three-year financial plan for Fiscal Years Although there are great uncertainties during this period of economic crisis, a multi-year plan is critically important to help the Town plan and evaluate budgetary decisions. Projections and recommendations for a balanced budget within this three year timeframe are included within this document, along with a narrative discussing the major issues and assumptions associated with the plan. Summary: The FY 2010 Budget totals $81,675,127, exclusive of enterprise, grant and other special funds. This represents an increase of 2.33% over FY This budget increase is overstated due to the cost of new debt service issued on capital projects authorized last fall. Since the costs of this new debt are covered through existing capital reserves, the true operating budget increase for FY 2010 is only 1%. The deep economic recession that the nation is experiencing has impacted the Town significantly. All variable revenue sources are projected to be lower in Fiscal Year 2010, especially those revenues that are tied directly to economic performance. Motor Vehicle Excise Taxes, New Growth Taxes, Local Fees and Investment Income are all projected to drop in FY In addition, financial aid provided by the Commonwealth of Massachusetts will drop in FY 2010 for the first time in several years. On the other hand, economic forces are helping the Town control fixed costs. In particular, the rates for energy are substantially lower than last year, and many other costs to provide goods and services remain relatively flat. Contractual obligations for employee compensation will expire in the current fiscal year, and it is expected that growth in this area will be extremely modest consistent with market conditions. If not for the continual and substantial increase in student enrollment in the public schools, a 1% increase in the overall Budget for Fiscal Year 2010 would be sustainable. Unfortunately the level of

2 page 2 spending allocated to the School Department within the constraints of the FY 2010 Budget will not be sufficient to maintain the same level of services in the face of a projected increase in enrollment of 122 students. The understanding of these impacts and efforts to address them within a rapidly changing fiscal environment is the challenge of this year s budget process. Please see the Process section below for a more detailed discussion of this challenge. Highlights of the FY 2010 Budget include; An overall increase of 2.33%, excluding enterprise and special funds Control of increases in fixed costs, especially energy and employee compensation Level or reduced funding for municipal programs and services Increase of 2.5% in funding for public education Maintenance of adequate reserve balances pending additional developments Allocation of funding to meet capital planning commitment The Process: The budget process this year has been unique. Earlier in the year, the Town s focus was on the long term financing of its capital needs. Concluding at the Town Meeting in November, the Town adopted a long term capital plan that was the result of many months of discussion and detailed analysis. An intensive review and prioritization of capital projects was completed, and dozens of financial models were identified to finance these needs. While it was accepted that the Town would eventually require additional tax support, the plan that was adopted represented a significant achievement and a financial roadmap for the next several years. Shortly after the capital planning process concluded, the nation s credit and banking system went into crisis and it became clear that the country was mired in a deep and sustained economic recession. The Board of Selectmen, Town Manager and Comptroller focused its efforts on carefully reviewing budgetary performance for FY 2009 and making plans to avoid a year-end deficit. During this time, the Governor implemented a series of budget reductions for state government, eventually involving the cutback of the Town s financial aid. Fortunately, the better than expected level of this reduction, combined with actions to limit budgetary expenditures, prepared the Town to meet this crisis. We expect that the Town will not experience a year-end deficit in FY 2009, thus avoiding the need to appropriate valuable reserves. The effort to evaluate budget performance and identify budget reductions for FY 2009 was integrated into the budget planning for FY Continual review of monthly revenue targets for FY 2009 has made FY 2010 revenue projections more precise. When department heads were asked to identify budget reductions for FY 2009, they were instructed that reductions should be sustained and included in FY 2010 if necessary. On December 9, I reviewed with the Board of Selectmen an initial budget projection for FY On January 12, the Board of Selectmen convened a Budget Forum that brought together the Finance Committee and School Committee. In addition to reviewing an updated budget projection, the group heard a detailed presentation from the School Committee and School Superintendent on budgetary needs and issues for FY The Finance Committee produced a useful multi-year analysis that helped identify the longer term impacts of the Town s budget and evaluate the possible use of additional reserves for the operating budget during this period of

3 page 3 crisis. This topic has been the focus of the Board of Selectmen s policy discussion to date and will likely continue in the weeks leading up to the Town Meeting this spring. A number of factors remain unresolved as of this date and make the FY 2010 budget process unique. They include, but are not limited to, the extent of additional reductions in financial aid that the Governor and/or Legislature may enact, the impacts to the Town s budget from the economic stimulus bill being finalized by Congress and the outcome of collective bargaining with the Town s unions. It is likely that I will submit an amended FY 2010 Budget recommendations as these issues become clearer and as the Board of Selectmen and Finance Committee continue its policy discussions. A more detailed review of the budget is included in the sections that follow. Revenues: Overall revenues are projected to increase by $1,862,036 or 2.33% over FY Local Receipts 6% State Aid 10% Reserves and Other 5% Taxes 79% Taxes- Under Proposition 2½, the Town s property tax levy is permitted to increase by 2.5% over the prior year, plus the taxable value of new construction. Debt service that has been previously approved by the voters is also added to the tax levy. In FY 2010, the general increase in the tax levy is $1,403,461. I have projected an additional $450,000 in taxes generated through new construction (New Growth). This amount is lower than in prior years due to the state of the economy. Three major development projects are not ready for FY 2010, but will eventually generate significant sums of New Growth and become part of the tax levy going forward. They are the projects at Pansy Patch, Wright-Locke Farm and Winchester Hospital. There are four capital projects whose debt service has been authorized by the voters to be excluded from the limitations of Proposition 2½; the McCall School, the Lincoln School, Immediate Building Repairs and the acquisition of Wright-Locke Farm. It is expected that the Wright-Locke Farm debt will be substantially retired early in FY 2010 once a portion of the property is sold to the designated developer. Due to this fact, and based on extraordinarily low interest rates, the cost of this debt is substantially lower in FY The tax impact of the McCall School project will be greater in FY 2010 due to an adjustment on the amount of state

4 page 4 reimbursement. For the last several years, the Town has received an annual payment of $1,038,000 based on an initial estimate of the debt service. An audit for this project revealed some ineligible project costs as well as lower interest charges than initially projected. As a result, the state has adjusted the allowed costs and has recalculated the payment going forward in order to catch up on the extra costs already paid to the Town. The annual state payment going forward on this project will be $704,503. Finally, the Town has adopted provisions of state law that allocates water and sewer debt to the tax levy to facilitate federal tax deductibility by eligible citizens of the Town. In FY 2009, this amount is $3,516,962, most of which is Winchester s share of debt in the Massachusetts Water Resources Authority. The Town is authorized to levy taxes on the value of motor vehicles registered in the Town. Based upon a state mandated rate of $25 per $1,000 of value, the projection of Motor Vehicle Excise taxes in FY 2010 is largely dependent upon the age of motor vehicles. With a reduction in automobile sales in 2008, I have reduced the projection of this revenue to $2.5 million. % Taxes FY 2009 FY 2010 Change FY 2011 FY 2012 Tax Levy 54,468,893 56,454, % 58,327,065 60,292,617 Tax Override 0 0 0% 0 1,200,000 New Growth 582, , % 495, ,000 Chapter 110 Exclusion 3,285,379 3,516, % 3,516,962 3,516,962 McCall School Exclusion 431, , % 726, ,712 Lincoln School Exclusion 425, , % 416, ,667 Immediate Repairs Exclusion 111, , % 108, ,543 Hamilton Farm Exclusion 767,789 77, % 77,823 77,823 Motor Excise 2,708,000 2,500, % 2,562,500 2,626,563 Total Taxes 62,781,149 64,251, % 66,231,272 69,559,886 State Aid- Financial aid from the Commonwealth of Massachusetts is provided through three main programs; Chapter 70, Lottery and Additional Assistance. In FY 2010, the Governor has proposed to consolidate the Lottery and Additional Assistance categories. FY 2010 represents the first year in several that the Town s overall aid will decrease. I have projected a reduction of 7.5% in State Aid, not including the reduction in state reimbursement for the McCall School project (see discussion in Taxes above). The reduction in State Aid is based upon the Governor s proposed budget (House 1). The Governor has proposed reducing aid through the Lottery/Additional Assistance category, leaving the Chapter 70 allocation level. This formula tends to favor a community like Winchester, whose Chapter 70 represents over 70% of its total aid. Still, a $566,000 reduction in State Aid is very difficult, especially when the Town has experienced healthy increases in aid as part of a state program to more equitably allocate education funds to high enrollment growth communities. The chart below depicts the substantial decrease in the rate of growth in Winchester s State Aid experienced in FY 2010.

5 page 5 State Aid FY change in percentage increase 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% % % % FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY09 Fiscal Year The Governor has proposed to offset the reduction in State Aid through the distribution of new revenues from a 1% increase in the Hotel and Meals taxes. I have not projected any of this income at this time due to the speculative nature of the proposal. % State Aid FY 2009 FY 2010 Change FY 2011 FY 2012 Chapter 70 5,209,589 5,209, % 5,339,829 5,606,820 Lottery/Addt l. Assistance 1,841,479 1,315, % 1,315,761 1,315,761 Other 293, , % 255, ,069 School Building Assistance 1,038, , % 704, ,503 Total State Aid 8,383,082 7,484, % 7,615,162 7,882,153 Local Receipts- Local Receipts represent a comprehensive category of revenue from locally generated fees and other income. Some of the more prominent sources include Building Permit Fees, Ambulance Fees, Cemetery Fees and Investment Income. Due to the effects of the economy, I have projected an overall reduction in Local Receipts of $272,117, or 5.46%. % Local Receipts FY 2009 FY 2010 Change FY 2011 FY 2012 Penalties & Interest 375, , % 375, ,375 Fees 688, , % 650, ,250 Solid Waste Fees 1,325,000 1,300, % 1,300,000 1,332,500 Rentals 30,000 25, % 25,000 25,625 Cemetery 265, , % 238, ,463 Other Departmental 100,000 90, % 90,000 92,250 Licenses & Permits 977, , % 900, ,500 Special Assessments 55,000 50, % 50,000 51,250 Fines & Forfeits 60,000 54, % 54,000 55,350 Investment Income 600, , % 540, ,500 Misc. 511, , % 492, ,376 Total Local Receipts 4,986,693 4,714, % 4,714,574 4,832,438

6 page 6 Reserves and Other Sources- This category of revenue includes both operating and capital reserves. The Town routinely allocates a portion of its operating reserves to meet current budget demands. The unreserved fund balance, referred to in Massachusetts as Free Cash, represents the Town s major operating reserve. At the end of FY 2008, the Town had a certified Free Cash amount of $5,835,669. Reserves provide an important cushion for unforeseen events or emergencies and are an essential component of good financial management as measured by bond rating agencies. Ideally, the use of reserves for operating purposes should be limited to an amount that can be replenished in subsequent years. Use of reserves to offset operating expenses is deemed acceptable by bond rating agencies if it is integrated within a longer-term framework and is a part of a formal policy. It is the Town s established policy and practice to retain at least 5% of its general fund in operating reserves and no less than 10% of its general fund in overall reserves. At this time, I am recommending the use of the $1,552,363 in FY 2010 from Free Cash- the same level that was used in FY The use of operating reserves has been the subject of much discussion among the Board of Selectmen and Finance Committee. In general, I support the use of more Free Cash than normal to offset the impact of an economic downturn. The Town has done a good job in strengthening its reserve position over the last few years, and it is unreasonable to ignore it while the Town s normal revenue growth is limited by the current economic conditions. However, I am persuaded that there are too many uncertainties at the present time to make a determination for additional use of Free Cash. It is my hope to make a more specific proposal on the additional use of Free Cash as the FY 2010 budget process unfolds. The Town has established capital reserve funds that are dedicated sources of revenue for major capital needs. Portions of the balances in the Building Stabilization Fund and the Capital Stabilization Fund are used as revenue each year to support debt service on approved projects. In FY 2010, debt service from these sources will increase dramatically as a result of bond authorizations last fall for major capital projects including interior renovation of the Public Safety Building, improvements to the Stormwater Drainage system, renovation of the DPW Facility, restoration of the Transfer Station and renovation of the Manchester Field facility. $6.5 million will be borrowed this spring to meet the financing needs of these projects and to take advantage of historically low interest rates. % Reserves and Other FY 2009 FY 2010 Change FY 2011 FY 2012 Free Cash 1,552,363 1,552, % 2,038,733 1,529,333 Stabilization Fund - Capital 44, , % 308, ,899 Stabilization Fund - Buildings 1,800,606 3,098, % 3,098,206 3,098,206 Overlay Surplus 75,000 75, % 0 0 Parking Meter Fund 70,000 70, % 70,000 70,000 Cemetery Trust Fund 120, , % 120, ,000 Total Reserves and Other 3,662,167 5,224, % 5,635,838 5,126,438

7 page 7 Expenditures: Recommended expenditures for FY 2010 are $1,862,036 or 2.33% over FY The following sections of this Report detail the expenditure recommendations for each department or category of Town government. Capital and Other 6% Municipal 23% Undistributed 32% Education 39% Municipal Departments- This category of expenditures has remained essentially flat from FY As part of the FY 2010 Budget Exercise, department heads were instructed to identify reductions of 5% from FY 2009 budget levels. These reductions would result in a loss of staffing, programs and services for each major department. Fortunately, increases in costs for most departments are modest in FY 2010, and in many cases departments have enjoyed cost reductions. As a result, departments were able to absorb cost increases and retain most staffing and services. However, I have not allocated funding for any enhancements in any departments. Most notably, I have been unable to recommend funding to fully increase the Town Planner position to full-time status. In addition, I have left unfilled a vacancy of Police Officer in order to absorb increased costs in the Police Department, including the replacement of the School Resource Officer position previously funded by a grant. Please find below a list of other issues relating to specific departments that represent significant changes from FY 2009; Town Manager s Office- Funding for a project management contract to facilitate private development projects was approved last fall for FY Continued funding is recommended for FY Town Clerk s Office- FY 2010 represents an ebb in the election cycle (only one scheduled election), saving funding in temporary staffing and services. Conservation- I am seeking use of the separate Wetlands Protection Fund to meet the annual non-salary expenses of the Conservation Commission. Library- I am recommending the minimum funding necessary to retain certification from the Massachusetts Board of Library Commissioners. Public Works- Costs for the disposal of solid waste have reduced based upon a new multi-year contract consistent with the economic market.

8 page 8 Snow and Ice- While winter weather conditions are highly variable in New England, the Town has routinely over-expended its budget (see chart below). I have increased this budget to $400,000 in FY 2010 to more realistically fund this emergency function. Snow and Ice Expenditures 600, , ,000 0 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 Appropriation 219, , , , , ,684 Total Expenditure 250, , , , , ,000 Please note that I have allocated a sum of money for a Wage Reserve in FY The bulk of this amount is reserved to meet the cumulative costs of retroactive wage increases for the Firefighter s union- the remaining municipal union without a contract since FY A modest sum has been allocated to fund wage increases for municipal personnel in FY % Municipal Departments FY 2009 FY 2010 Change FY 2011 FY 2012 Town Manager 559, , % 562, ,051 Finance Committee 6,000 6, % 6,060 6,121 Comptroller 280, , % 286, ,067 Assessors 248, , % 248, ,329 Treasurer/Collector 238, , % 239, ,428 Planning and Community Dev. 619, , % 619, ,191 Planning Board 67,605 67, % 68,281 68,964 Town Clerk 321, , % 284, ,963 Postage/Office Paper 95,000 95, % 95,950 96,910 Library 1,588,778 1,565, % 1,580,650 1,596,457 Archives 3,600 3, % 3,636 3,672 Health 171, , % 173, ,136 Council on Aging 222, , % 231, ,362 Veterans Services 26,051 19, % 19,545 19,740 Police 3,972,320 4,015, % 4,055,228 4,095,780 Fire 3,661,850 3,678, % 3,715,510 3,752,665 Sealer of Weights and Measures 8,658 8, % 8,563 8,648 Department of Public Works 5,809,109 5,647, % 5,704,108 5,761,149 Municipal Wage Reserve 13, ,000 NA 505,000 1,022,625 Total Municipal Departments 17,915,448 17,975, % 18,407,608 19,104,259

9 page 9 Education- The FY 2010 allocation to the Education budget represents an increase of $805,000 from the prior year, or 2.50%. This amount is inclusive of a reserve for contractual wage increases that may be negotiated for teaching and other school personnel. It also assumes a 2.5% increase in the Town s assessment to the Northeast Metro Technical High School. My allocation to the School Budget reflects a bottom line approach based upon the availability of funds balanced with the overall needs as documented by the budget request submitted by the School Superintendent and School Committee. My recommendation acknowledges that the independently elected School Committee has sole discretion to expend within their budget and, as a result, does not make specific expenditure recommendations. My recommendation for the local school budget is $1 million less than the 5.74% budget request submitted by the School Committee. I recognize that my recommended funding level is inadequate, especially given the impact of increasing enrollment in the school system. During the next several weeks, it is expected that the School Department will make progress with collective bargaining and learn more about the financial effects of its annual transition in personnel. Meanwhile, it is possible that the federal economic stimulus legislation will provide direct financial benefits to local education budgets. As these issues become clearer, and as the Board of Selectmen and Finance Committee debate the merits of the use of additional reserves, I hope to be in a position to recommend additional funding for the School Budget. However, please note that the Town must be careful to allocate costs to cover benefit increases for any additional staff. For a more detailed discussion of the School Budget, please refer to the School Department s narrative in the Education section. Education FY 2009 FY 2010 % Change FY 2011 FY 2012 School Budget 32,119,877 32,922, % 34,239,789 35,951,778 Vocational School Assessment 80,123 82, % 84,179 86,284 Total Education 32,200,000 33,005, % 34,323,968 36,038,062 Undistributed- This category includes a number of expense categories that are not allocated to either the either Municipal or School budget. This includes significant cost centers including Debt Service, Energy, Employee Health Insurance and Pension Funding. One of the most significant and positive changes in this year s Budget is the reduction in energy costs. The budget for Energy is projected to drop by $667,089 or 22%. This results from a number of factors, including a dramatic reduction in global prices for fuel. The Town participates in a collaborative purchasing group with several other cities and towns. Responding to a steady reduction in fuel prices, the collaborative secured a fixed price much earlier than usual. The new contract will result in a 52% reduction in the price for gasoline, 46% for diesel fuel and 48% for heating oil. The Town also procured a new natural gas contract effective July 1, This contract fixed prices at 22% less than FY The Town also benefits from a long-term electricity contract that has consistently outperformed the market. More importantly, the Town s focus on energy conservation and efficiency is paying off with a sustained reduction in consumption. Much credit goes to the Board of Selectmen for their persistent leadership, to the

10 page 10 citizen Energy Management Committee for their creativity and knowledge and to Department of Public Works staff, from management to building custodians, for their attention to detail. The Town continues to benefit from its decision last year to consolidate health insurance carriers and to competitively market its coverage. I have included a 6% increase in premium rates for FY The Town s current plan design is relatively rich however, and has resulted in additional enrollment from eligible employees, especially during this economy when other employers are reducing coverage or increasing costs. This has increased the overall cost of the budget by 9%. The Town is actively engaged with its employees over opportunities for further savings by implementing plan design changes, including the modification of deductibles and co-payments. Since plan design changes require approval from each employee union, we are experimenting with a cooperative bargaining approach to facilitate consensus. Meanwhile, we are exploring all possible options, including enrollment in the Commonwealth s Group Insurance Commission (GIC). While a 6% increase in premiums is better than average, an overall increase in health insurance costs of $724,377 in FY 2010 is very difficult to absorb given the 1% general revenue growth. I am committed to working with our employee organizations to reduce this budget for FY As mentioned in the discussion of Reserves above, the Town will be issuing about $6.5 million in new debt for capital projects authorized in the fall of This cost tends to inflate the growth of this expenditure category and the overall budget since most of this debt will be funded from dedicated capital reserves. Other Undistributed accounts worth mentioning include; Legal- The Town is continually involved in complex and costly transactions that require legal review or representation. More often than not, the Legal Budget requires a supplemental transfer from the Reserve Fund. I have proposed an increase of $25,000 in FY 2010 in recognition of this. Workers Compensation/Indemnification- The Town is self-insured for its risk against worker injuries. This program has been the subject of administrative review by the Town Counsel and Town Comptroller this past year. A new company has been retained to manage the claims and a review of funding levels has been initiated. The program currently has adequate reserves and the claims experience in FY 2009 should allow the Town to reduce the budgeted expenditures. I have proposed a reduction of $108,306. Unemployment Compensation- Similar to Workers Compensation, the Town pays the claims that it incurs for employees who have been laid off or otherwise terminate their employment. This account varies greatly from year to year. In FY 2009, the $75,000 appropriation should be sufficient. Given the uncertainties of the Budget and the general economic conditions however, I recommend that this budget be increased by $10,000.

11 page 11 Reserve Fund- The Reserve Fund is the only mechanism to cover unexpected or emergency conditions that arise in the Budget. As the Town s budget gets tighter and there is greater uncertainty resulting from the economy, it is likely that the Town will rely more upon the Reserve Fund. I have proposed an increase of $25,000 in FY 2010, for a total Reserve Fund of $400,000. Undistributed FY 2009 FY 2010 % Change FY 2011 FY 2012 Energy 3,020,000 2,352, % 2,423,498 2,496,203 Audit 75,000 75, % 76,875 78,797 Legal 325, , % 358, ,719 Information Technology 386, , % 395, ,731 Debt Service 8,771,389 9,749, % 9,664,811 9,589,811 Tax Abatement Interest 25,200 25, % 26,476 27,138 Contributory Retirement 2,970,076 3,056, % 3,193,953 3,353,650 Workers Comp/Indemnification 408, , % 307, ,188 Unemployment 75,000 85, % 87,125 89,303 Health Insurance 7,800,000 8,524, % 8,950,596 9,398,126 Medicare Tax/FICA Tax 550, , % 563, ,844 Non Contributory 62,000 62, % 62,000 62,000 Reserve Fund 375, , % 410, ,250 General Insurance 328, , % 336, ,605 Total Undistributed 25,171,252 26,244, % 26,857,369 27,526,364 Capital/Other- This category of expenses includes the capital budget and other related activities. Several expenses that are automatically raised without appropriation are included within this category, including the Overlay, State Aid (Cherry Sheet) Offsets and State Charges (primarily the MBTA Assessment). The annual allocation from the tax levy to the Building and Capital Stabilization Funds represents over two-thirds of this category of expenses. The capital plan adopted by Town Meeting in the fall of 2008 was aggressive in that it did not rely upon any new dedicated taxes in the short term. Instead, the Board of Selectmen committed to a plan that increases funding from general revenues to support the capital financing model. The FY 2010 Budget recommends the allocation of $336,886 in general revenue to fund the capital plan in accordance with this commitment.

12 page 12 Finally, I have not recommended continued funding at this time to the Town s Retiree Healthcare Liability Trust Fund. This Fund was established to offset the anticipated costs of healthcare for retired employees in connection with a new Governmental Accounting Standards Board (GASB) statement requiring municipal governments to disclose the extent of postemployment benefit liability in their financial statements. The Town has contracted with an actuarial consultant to issue the required report. Last year s allocation of $75,000 was a token amount designed primarily to inform the community of this new issue. In the future, the Town will need to identify a source of funds to meet a long term actuarial schedule to address this liability. Capital/Other FY 2009 FY 2010 % Change FY 2011 FY 2012 Environmental Remediation 70,000 70, % 71,750 73,544 Capital - General Revenue 200, , % 210, ,378 Capital Cemetery 60,000 25, % 25,000 25,000 Charges & Assessments 456, , % 469, ,895 Overlay Account 404, , % 358, ,719 Capital Stabilization Fund 927, , % 974, ,091 Buildings Stabilization Fund 2,145,433 2,199, % 2,254,046 2,310,397 Special Articles 15,000 15, % 15,759 16,153 Cherry Sheet Offsets 47,544 45, % 46,180 47,335 Capital Reserve 125, , % 182, ,720 GASB 45 Fund 75, % 0 0 Total Capital/Other 4,526,390 4,450, % 4,607,901 4,732,231 A Three-Year Plan: This document continues the effort to produce a three year balanced budget proposal. The revenue projections and expenditure recommendations necessary to achieve a balanced budget through FY 2012 are included in the tables above and on the separate revenue and expenditure spreadsheets. The plan assumes use of an additional $500,000 in Free Cash (for a total of $2 million) in FY 2011 to accommodate a 3% growth in expenditures. In FY 2012, the use of Free Cash is back to $1.5 million, but a general tax override of $1.2 million would be necessary to achieve a 4% expenditure growth rate. Listed below are some major assumptions and issues associated with revenues and expenditures in FY 2011 and FY Revenues: New Growth reflects an assumption that major development projects, including Winchester Hospital, the Pansy Patch and Wright-Locke Farm will come on line slowly, and that the economy will continue to restrain development. New Growth is projected to increase by 10% and 20% for FY 2011 and FY 2012 respectively. All offsetting items including debt exclusions, Chapter 110, etc. have been held constant for ease in budgeting. Motor vehicle excise taxes will rebound slowly at the rate of 2.5% per year.

13 page 13 Chapter 70 state aid will increase modestly at the rate of 2.5% and 5% in FY 2011 and FY 2012 respectively. All other aid will remain constant. Use of Free Cash is increased for FY 2011 with the goal of limiting the need for a tax override to $1.2 million in FY Expenditures: Municipal departments grow at a rate of 2.4 and 3.8% for FY 2011 and FY 2012, incorporating all step/wage increases and other general expense increases. Education expenses grow at 4.0% in FY 2011 and at 5% in FY 2012 inclusive of prospective wage increases. Energy costs grow at the rate of 3% each year. Employee health insurance grows at the rate of 5% each year. The impact of this plan on the Town s Reserves is a critical factor. In order to retain our premier bond rating, the Town must commit to replenish reserves over the long term. As shown in the table below, the Town s operating reserves will decline from 7.45% to 4.93% of general revenues. Operating Reserve Balances (Projected) FY 2010 FY 2011 FY 2012 Free Cash Beginning Balance 5,835,669 5,033,306 3,744,573 Use for Annual Budget -1,552,363-2,038,733-1,529,333 Annual Increase 750, ,000 1,000,000 Final Free Cash 5,033,306 3,744,573 3,215,240 General Stabilization Fund Beginning Balance 1,034,389 1,055,077 1,076,178 Investment Income 20,688 21,102 21,524 Final General Stabilization Fund 1,055,077 1,076,178 1,097,702 Total Operating Reserves 6,088,383 4,820,751 4,312,942 As a % of Budget 7.45% 5.73% 4.93% Conclusion: The economic recession has profoundly impacted the substance and process of the FY 2010 Budget. The Town typically experiences 4-5% revenue growth per year. In FY 2010, this growth is down to about 1%. The impacts of this reduced growth has been mitigated somewhat by two major factors; 1.) The cost of Energy and many other fixed costs can be reduced or held constant, and 2.) The Town is not contractually obligated to fund increases in employee salaries and wages in FY Still, there is continual pressure on the School Budget to meet the burden of student enrollment and other factors, and the recommended 2.5% increase in FY 2010 is unlikely to meet this need. In addition, the multi-year review of the Budget indicates even more difficult times ahead. Without a substantial rebound of the economy, the Town is surely going to

14 page 14 face major reductions in the quality of service and/or a property tax override. More information is required this year before finalizing the Budget. I look forward to continuing to work with the Board and the Committee throughout the process. I would like to thank the Board of Selectmen and the Finance Committee for their leadership to date in facilitating policy discussions around the FY 2010 budget. I am grateful for the assistance and cooperation of all department heads in preparing their budgets, and for their commitment to the important public services their departments provide. Finally, I would like to thank Mark Twogood, Assistant Town Manager, Brian Keveny, Town Comptroller and Sheila Tracy, Town Treasurer, for their expertise and contributions; Craig Rowe, Information Technology Director, for his efforts in compiling this report; and to the staff of the Town Manager s office for their capable assistance. Sincerely, Melvin A. Kleckner, Town Manager

15 Summary of FY Budget Projection FY 2010 % Increase FY 2011 % Increase FY 2012 % Increase REVENUES Taxes 64,251, % 66,231, % 69,559, % State Aid 7,484, % 7,615, % 7,882, % Local Receipts 4,714, % 4,714, % 4,832, % Reserve/Other 5,224, % 5,635, % 5,126, % TOTAL REVENUES 81,675, % 84,196, % 87,400, % EXPENSES Municipal Departments 17,975, % 18,407, % 19,104, % Education 33,005, % 34,323, % 36,038, % Undistributed 26,244, % 26,857, % 27,526, % Capital and Other 4,450, % 4,607, % 4,732, % TOTAL EXPENSES 81,675, % 84,196, % 87,400, % DIFFERENCE (SHORTFALL) Source: Town Manager 2/13/2009

16 FY Revenue Projection FY 2009 FY 2010 Difference Percent FY 2011 FY 2012 Budgeted Recommended Change Projected Projected Taxes Tax Levy 54,468,893 56,454,454 1,985, % 58,327,065 60,292,617 Tax Override % 0 1,200,000 New Growth 582, , , % 495, ,000 Chapter 110 3,285,379 3,516, , % 3,516,962 3,516,962 McCall School Exclusion 431, , , % 726, ,712 Lincoln School Exclusion 425, ,667-8, % 416, ,667 Immediate Repairs Exclusion 111, ,543-3, % 108, ,543 Hamilton Farm Exclusion 767,789 77, , % 77,823 77,823 Motor Excise 2,708,000 2,500, , % 2,562,500 2,626,563 Total Taxes 62,781,149 64,251,161 1,470, % 66,231,272 69,559,886 State Aid Chapter 70 5,209,589 5,209, % 5,339,829 5,606,820 Lottery/Add'l. Assistance 1,841,479 1,315, , % 1,315,761 1,315,761 Other 293, ,069-38, % 255, ,069 School Building Reimbursement 1,038, , , % 704, ,503 Total State Aid 8,383,082 7,484, , % 7,615,162 7,882,153 Local Receipts Penalties & Interest 375, , % 375, ,375 Fees 688, ,000-38, % 650, ,250 Solid Waste Fees 1,325,000 1,300,000-25, % 1,300,000 1,332,500 Rentals 30,000 25,000-5, % 25,000 25,625 Cemetery 265, ,500-26, % 238, ,463 Other Departmental 100,000 90,000-10, % 90,000 92,250 Licenses & Permits 977, ,000-77, % 900, ,500 Special Assessments 55,000 50,000-5, % 50,000 51,250 Fines & Forfeits 60,000 54,000-6, % 54,000 55,350 Investment Income 600, ,000-60, % 540, ,500 Misc. 511, ,076-19, % 492, ,376 Total Local Receipts 4,986,693 4,714, , % 4,714,574 4,832,438 Reserves and Other Free Cash 1,552,363 1,552, % 2,038,733 1,529,333 Stabilization Fund - Capital 44, , , % 308, ,899 Stabilization Fund - Buildings 1,800,606 3,098,206 1,297, % 3,098,206 3,098,206 Overlay Surplus 75,000 75, % 0 0 Parking Meter Fund 70,000 70, % 70,000 70,000 Cemetery Trust Fund 120, , % 120, ,000 Total Reserves and Other 3,662,167 5,224,468 1,562, % 5,635,838 5,126,438 TOTAL REVENUE 79,813,091 81,675,127 1,862, % 84,196,846 87,400,916 DRAFT Source: Town Manager 2/13/2009

17 FY Expenditure Projection FY 2009 FY 2010 Difference Percent FY 2011 FY 2012 Budgeted Recommended Change Projected Projected Municipal Departments Town Manager 559, ,858-2, % 562, ,051 Finance Committee 6,000 6, % 6,060 6,121 Comptroller 280, ,371 2, % 286, ,067 Assessors 248, ,377-2, % 248, ,329 Treasurer/Collector 238, ,671-2, % 239, ,428 Planning and Community Development 619, ,853-5, % 619, ,191 Planning Board 67,605 67, % 68,281 68,964 Town Clerk 321, ,309-40, % 284, ,963 Postage/Office Paper 95,000 95, % 95,950 96,910 Library 1,588,778 1,565,000-23, % 1,580,650 1,596,457 Archives 3,600 3, % 3,636 3,672 Health 171, , % 173, ,136 Council on Aging 222, ,764 6, % 231, ,362 Veterans Services 26,051 19,351-6, % 19,545 19,740 Police 3,972,320 4,015,077 42, % 4,055,228 4,095,780 Fire 3,661,850 3,678,723 16, % 3,715,510 3,752,665 Sealer of Weights and Measures 8,658 8, % 8,563 8,648 Department of Public Works 5,809,109 5,647, , % 5,704,108 5,761,149 Municipal Wage Reserve 13, , ,399 NA 505,000 1,022,625 Total Municipal Departments 17,915,448 17,975,354 59, % 18,407,608 19,104,259 Education School Budget 32,119,877 32,922, , % 34,239,789 35,951,778 Vocational School Assessment 80,123 82,126 2, % 84,179 86,284 Total Education 32,200,000 33,005, , % 34,323,968 36,038,062 Undistributed Accounts Energy 3,020,000 2,352, , % 2,423,498 2,496,203 Audit 75,000 75, % 76,875 78,797 Legal 325, ,000 25, % 358, ,719 Information Technology 386, , % 395, ,731 Debt Service 8,771,389 9,749, , % 9,664,811 9,589,811 Tax Abatement Interest/Banking Charges 25,200 25, % 26,476 27,138 Contributory Retirement 2,970,076 3,056,414 86, % 3,193,953 3,353,650 Wrkrs Comp/Indemnification 408, , , % 307, ,188 Unemployment 75,000 85,000 10, % 87,125 89,303 Health Insurance 7,800,000 8,524, , % 8,950,596 9,398,126 Medicare Tax/FICA Tax 550, , % 563, ,844 Non Contributory 62,000 62, % 62,000 62,000 Reserve Fund 375, ,000 25, % 410, ,250 General Insurance 328, , % 336, ,605 Total Undistributed Accounts 25,171,252 26,244,717 1,073, % 26,857,369 27,526,364 Capital/Other Environmental Remediation 70,000 70, % 71,750 73,544 Capital General Fund 200, ,000 5, % 210, ,378 Capital Cemetery 60,000 25,000-35, % 25,000 25,000 Charges & Assessments 456, ,723 1, % 469, ,895 Overlay Account 404, ,000-54, % 358, ,719 Capital Stabilization Fund 927, ,949 23, % 974, ,091 Buildings Stabilization Fund 2,145,433 2,199,069 53, % 2,254,046 2,310,397 Special Articles 15,000 15, % 15,759 16,153 Cherry Sheet Offsets 47,544 45,054-2, % 46,180 47,335 Capital Stabilization Fund Reserve 125, ,886 6, % 182, ,720 GASB 45 Fund 75, , % 0 0 Total Other 4,526,390 4,450,056-76, % 4,607,901 4,732,231 TOTAL EXPENDITURES 79,813,090 81,675,127 1,862, % 84,196,846 87,400,916 Source: Town Manager 2/13/2009