State of the Town: Finance
The following is finance board Chairman Liz Mao's prepared remarks for the Representative Town Meeting's annual State of the Town meeting.
Madam Moderator, members of the RTM, town officials, fellow citizens and taxpayers.
Good evening. The Chairman of the Board of Finance has the privilege of addressing the RTM each year in early December. This is the first time I am addressing you in this role, and I would like to begin my remarks tonight by acknowledging the outstanding leadership provided to this board by outgoing Chairman Murry Stegelmann. For the last three years, Murry has led this board with great skill, through the toughest economic times our generation has experienced, all while running his own business.
Murry exemplifies the very best about Darien and its government — volunteers who step forward to contribute their valuable time and talents to making our town the very special home it is to all of us. Thank you, Murry.
I am pleased to report tonight that the Town of Darien’s finances are in excellent shape. We retain our Aaa rating for our bonds and notes. And, there are two over-arching reasons for this strength. Yes, we have been good stewards of our finances, and we put the brakes on capital spending as the fiscal crisis took hold. But equally important, we also were able to work collaboratively, reflecting a sense of trust and respect between the main governing bodies of the town.
I’ll speak more about this specifically in a few minutes, but I must acknowledge upfront that we appreciate the respectful cooperation between the Board of Finance and the Board of Selectman, the Board of Education and this governing body, the RTM. Looking ahead, as we develop our budgets for fiscal year 2012, we will need to draw upon these reserves of good will, as we are facing some steep challenges.
Just yesterday, the headline article in The New York Times warned that the next major fiscal crisis is likely to be centered on states and municipalities, several of which are essentially bankrupt.
Although not specifically mentioned in the New York Times, Connecticut’s finances are in dire shape, with projected budget deficits for next year now estimated at $3.5 billion dollars on an approximately $19 billion dollar budget. This morning, the Darien Patch reported that these deficits could actually be as high as $5 billion dollars.
Like other states, Connecticut has been borrowing from the future to meet its current operating obligations, and the string has now run out. Accordingly, we must assume we will see a significant decrease in the cost sharing dollars we have been receiving from Hartford. Coupled with the end of federal stimulus dollars, future budgets are going to be challenging. We have factored these assumptions into our five-year Plan.
Fiscal year 2010
But before we look to the current year and next year, let’s review a few key points about the fiscal year which ended on June 30, 2010.
As you all know, Darien must balance its budget each year. Our budget for the year was a total of $106.8 million dollars, but an extra $350,000 was appropriated in April to cover expected increased costs in the education budget. With careful management, as mentioned in Kim Westcott’s remarks, the Board of Education ended the year by returning $257,000 unspent. I thank the Board of Finance and the RTM for quickly responding to the Board of Education’s request for the appropriation and the return of unspent dollars by the Board of Education. This could only happen with cooperation and trust between us all.
In the general fund, we ran an operating surplus for 2010. While revenues were lower than estimates, expenditures were under budget by a greater amount. In addition to the return of funds by the Board of Education, the biggest reasons for the surplus are positive results in risk management, debt service, employee benefits, EMS, Public Works, Public Health, and Parks & Rec. Moreover, strong tax collections and stronger than projected town clerk fees, reflecting a nascent real estate recovery, aided from the revenue side.
I specifically mention all the positives because I want to commend the very fine work our town managers have done in keeping a tight grip on expenses. Moreover, our finance director, Kate Buch, worked with the Board of Finance early last winter to jump on the very low interest rates available in the market to refinance $11.5 million in bonds, saving over $1.1 million in net cash flow.
Next, a few words about the current budget year, which began on July 1.
This year’s budget of $109.7 million appears to be on track. However, we are watching a few items carefully. We are experiencing increased legal expenses due to on-going regulatory and litigation issues, and we are concerned about continuing cost pressures on the Board of Education budget. We have already figured that we will not receive full reimbursement of our special education excess costs, but if the state finances deteriorate this budget year even more, our estimates for reimbursement could be too optimistic.
Legal expenses for special education adjudications and settlements continue to rise. Unfortunately, Connecticut is one of only two states in the country where the traditional burden of proof in special education adjudications is reversed. Here, our Board of Education is required to prove that a student’s individual education plan is appropriate and progress is being made, and then affirmatively show why requested services should not be afforded. Growing numbers of children requiring these services adds to the pressure of the budget. I would ask you to call upon our elected state representatives to reverse the standard of proof to give the presumption of appropriateness to our school districts.
Knowing that our budget is tight, representatives from the Board of Finance, Board of Selectmen and Board of Education are working closely through regular meetings to keep track of trends and catch any shortfalls early.
Now, let’s get onto the handout which you have been given tonight — the Board of Finance Five Year Financial Forecast. I would like to refer to it for a few minutes.
The cover page describes many of the overall assumptions.
• First of all, it is a forecast, not a budget.
• Secondly, most of the information in this forecast was provided to us by the Board of Selectmen and the Board of Education. We have made some modifications to the numbers, but the numbers are primarily from those two Boards.
• Third, for those who like the details, there are several more pages which support the handout. I will give copies later to your Finance and Budget Committee — and anyone else who wants to explore the details.
Most important, the Board of Finance does not consider these projections acceptable.
We have made conservative assumptions about revenues and growth in the Grand List.
However, we are fairly confident that the Board of Education expenses will be up considerably due to contractual raises negotiated before the financial crisis and the ever-rising medical costs. We will have an opportunity to negotiate new contracts with teachers next summer, and we will be sending a strong message to the Board of Education that continued personnel expense growth exceeding 3% per year is not sustainable.
Another factor in the projected rise in expenses is the restart of the capital projects put on hold as the fiscal crisis began. On the positive side, interest rates are at record lows and as we go to market to bond these projects in March we expect to lock in rates that will be unusually low.
Most of the basic numbers in the forecast come from the:
• Six-year capital forecasts made by the Boards
• Debt payment schedules.
• Enrollment projections
• Labor union contracts now in effect
• Benefit costs as projected by the vendors based on our latest experience ratings.
The Board of Finance does project such factors as:
• The rate of inflation
• The interest rates which we will pay and earn, and government revenues
• The pension, workers comp, and casualty insurance increases.
However, before we go into any details, let me first say that the Board of Finance has voted to forward these projections to you, but that we find them to be unacceptable in their results.
My first comments are on exhibit B.
As you can see, the Board of Education budget represents approximately 65% of the total budget. Enrollment projections assume relatively flat numbers and as I mentioned before, the largest driver of the increase in budget is personnel costs. Special education costs continue to rise at rates above increases in other costs.
On the Selectmen’s side of the budget, the main driver of budget increases is the return to spending on capital projects. Of these, the police station is the biggest investment, and it is the reason for the big increase in debt service for next year. The five-year plan envisions $28.9 million to be spent on capital projects, and includes the police station, Weed Beach, purchase of 35 Leroy, and the senior center to Town Hall and Board of Education to 35 Leroy project.
All totaled the debt level for the town is projected to rise from $94,325,000 in fiscal year 2012 to $98,837,000 in fiscal year 2013. On the plus side, this is the peak debt level we foresee for the next five years and is still below our $100 million in debt level of 2008. Moreover, two years out, we see a rapid repayment of bonded debt with accelerating declines. We will be working to reassess the amount and timing of needed expenditures on projects to drive down overall debt level and interest costs. This will be difficult as in the five year forecast we have already assumed the postponement of at least a million dollars in capital spending projects.
Exhibit C and mill rate
On Exhibit C, although tax receipts will rise next year, we expect a decline in funds from the State of Connecticut through the Equalized Cost Sharing Grant and the Excess Costs Reimbursement. We also expect the Grand List to remain essentially flat for next year. If these projections are correct, we will need to draw down our Fund Reserves in order to keep tax increases acceptable. However, our fund reserve will remain within our policy range of 8-12% of yearly expenditures. We will stay in this range over the next five years. Maintaining our reserves at suitable levels is critically important not only for emergencies, but also to protect our bond rating.
The overall budget increase for next year (fiscal year 2012) is currently projected at 7.17%, or a 12.58 mill rate, an amount we consider to be unacceptable for Darien taxpayers. At present, the five year plan includes increases in the budget of 5.08 % for 2013, with the following years at 4.40 %, 4.59 % and 3.97 %, respectively.
With deficit pressures growing at the state and federal levels, I fear more unfunded mandates and expenses will be pushed to towns and municipalities. Thus, as intergovernmental transfers decline, we here in Darien will have to do more to live within our own means. This might mean tough decisions about deferring some capital projects and continuing to hold operating costs below what we might want.
In summary, although we see y small signs of the start of a recovery, it is possible that it will be a protracted one. For the sake of those who remain unemployed or underemployed, or have seen their net worth plummet, or can’t sell their house, each of us in elected office needs to be diligent in trying to deliver the services of government in the most cost effective way in the upcoming year
However, I am also reminded daily what a privilege it is to live in the town of Darien. We have excellent schools, music, arts and theater programs, as well as great athletic programs. We have a vibrant downtown. We have an untold number of volunteers and non-profit organizations. We are a caring community. And we have an inheritance, passed on to us by prior town governments, of living within our means, being fiscally prudent, striving to keep a reasonable mill rate, and not employing financial gimmicks to hide problems.
I would like to thank all the members of the Board of Finance this year for their time and effort, especially outgoing Chairman Murry Stegelmann; Martha Banks, Vice Chairman; Jon Zagrodzky, the Board’s new Clerk; Lori Bora; Gwen Mogenson; and, Joe Duwan.