On December 4th, the Board of Selectmen held a Tax Rate Hearing to set the Tax Rate for FY18. After that meeting, the Tax Recap paperwork was submitted to the State (Department of Revenue--Division of Local Services) for Tax Rate approved. In the process of submitting our Tax Recap, the State returned the paperwork to the Town citing the concern that the Sewer Enterprise Fund would not be able to generate enough revenues to support the FY18 budget, and therefore the State would not approve the Tax Rate until the Sewer Enterprise issue was resolved. The State's concern was based on the fact that the FY17 actuals for revenue were dramatically lower than what we budgeted to collect for FY18.
In early November, the Water/Sewer Commissioners voted to increase both water and sewer rates for FY18 (the last three quarters for billing). Our current analysis shows that even with the sewer rate increases, and even if we were to increase the rates further, there are still not sufficient expected revenues to cover the budgeted FY18 expenses. Enterprise budgets are required to be self-sustaining and they are unlike general fund budgets because they are expense driven. When creating an enterprise budget, we calculate the expenses to operate the service and then we determine if we need to make modifications in fees so that the revenues cover the expenses. The in-depth analysis of the Sewer Enterprise Fund shows that there were more culprits in play than merely user fee revenues.
When we conducted a in-depth analysis of the sewer budget last week, we determined that it had been past practice going back to FY06, to budget user fee revenues at the total amount billed and not conservatively at the percentage that we usually collect. This resulted in a reasonable expectation from FY17 to FY18 that the user fees could be increased with a rate increase in order to cover expenses. Unfortunately, since the FY17 numbers were not realistic, the FY18 numbers for user fees and not feasible and the revenues will need to be funded another way for FY18.
One long-term un-remedied problem that was a major contributing factor to the balance being unsustainable was the Sewer Betterment. Years ago, we took on a 20 year debt for sewer improvements with a final debt payment in FY19. To offset the debt, sewer users were assessed a capital improvement fee (betterment) for the project. The payments for the betterment came earlier on and FY17-FY19 we are left with minimal payments being owed ($30k) and the same amount of debt ($250k) being due. While we have found documentation that this was a known problem that was anticipated to implode around 2014, with the change of our entire financial team in FY17/FY18, it did not become evident that this problem had come to fruition until a complete analysis was done when we were contacted by the DOR last week.
If errors in the sewer enterprise fund revenue projections are not rectified, DOR will not approve the Town’s FY18 Tax Rate. This will force the Town to issue preliminary 3rd and 4th quarter tax bills which will not be due until May 2018. This would create a budgetary crisis requiring large amounts of short-term borrowing, an additional expense of around $10k for the borrowing, and cause major impacts to Town Services.
To account for the gap in revenues required to balance the Sewer Enterprise Budget, it is the Finance Department's recommendation that Town Meeting transfer an amount from the General Fund’s Operating Stabilization (current balance at $497,589) to the Sewer Enterprise Account. This would be a one-time transfer and would not have any impact on the Town's tax rate. A plan of corrective action for FY19’s Sewer Enterprise Budget is being explored and the shortfall is anticipated to rectify itself by FY20, when the Sewer Debt is paid off. It is conceivable that the funds could be returned to the General Fund could be paid back for this loan in future years from the Sewer Enterprise funds if there is improvement in the financial state of those funds.
The Selectmen approved a Special Town Meeting warrant to address the Sewer budget on December 4th at their regular meeting. the Town Meeting is set for Tuesday, December 19th at 7pm because that is the earliest date that we could call a Special Town Meeting (14 days from approval) and it is the latest week in December that we can submit our paperwork to DOR and still receive approval in time to get our bills to our software company in time to mail out bills before 12/31. The location chosen was Town Hall, as our usual location of Oakmount was not available due to holiday concerts.
The Article for the upcoming Town Meeting is as follows (available as signed on the top of the homepage):
To see if the Town will vote to transfer from Operating Stabilization the sum of $171,000 to the Sewer Enterprise Funds to offset receipts, or act in relation thereto. (Requested by the Town Administrator)
Explanation: In the process of submitting annual state paperwork tax recap, the state returned the documentation to the Town concerned that the Sewer Enterprise would not be able to generate the revenues as forecast based on FY17 actuals. With the 12% sewer rate increase beginning 2nd quarter in FY18, there is still not sufficient revenues anticipated to cover FY18 expenses. A transfer from this account will allow the sewer enterprise fund to balance, the Town to set the tax rate, and Town services to continue without disruption. Transferring from emergency reserves would have no impact on the tax rate. It is possible that the funds could be returned in future years from the Sewer Enterprise funds if there is improvement in the financial state of the enterprise fund. A plan of corrective action for FY19 will be worked on in the days ahead. The Operating Stabilization fund has a current balance of $497,589.72.
The Selectmen approved this Article on Monday, December 4th. The Advisory Board will meet to discuss this Article on Monday, December 11th and the Water/Sewer Commissioners will meet as a board to discuss this Article on Tuesday, December 12th.
Additional supporting information and analyses will be posted to the website when completed over the next week or so. If there are any questions, please reach out to our office.
-Heather Budrewicz, Town Administrator