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City of Salem, Massachusetts Finance Department 93 Washington Street Salem, MA 01970 Ph. [PHONE REDACTED] ext 210 Fax [PHONE REDACTED] Kimberley L. Driscoll, Mayor Richard Viscay, Finance Director Memo Date: May 9, 2008 To: Kim Driscoll - Mayor Jason Silva – Chief of Staff From: Richard Viscay – Finance Director Re: FY09 Budget – Financial Forecast FY09-FY13 Attached you will find the final five year financial forecast based upon your FY09 recommended budget that will be forwarded to the City Council. I have summarized some of the assumptions used in the forecast for your review and consideration. I believe that all estimated are based upon current conditions and economic factors that affect the City and the Commonwealth. REVENUES: 1. Proposition 2 ½: Proposition 2 ½ allow us to grow the levy limit 2.5% of the previous year’s levy. This is standard and very predictable. 2. New Growth: FY09 figures are based upon information gathered by the City Assessor. FY10 to FY13 growth rate is predicted to increase 3% per year over FY09 estimate 3. Local Receipts: FY10-FY13 currently @ 2.5% increase of FY09 estimates 4. Cherry Sheet Revenue: FY10-FY13 estimated @ 3% increase over FY09 Cherry Sheet 5. School Building Assistance: based upon MSBA schedule 6. Other Financing Sources: Recurring: 2.5% increase on revenue generated from the Witch House, Golf Course, and Harbormaster 7. Other Financing Sources: Non Recurring – no non recurring revenue is budgeted for FY09-FY13. 8. Water and Sewer Enterprise Fund: FY10-FY13 is projecting a 4% increase in revenues due to adjustments that will need to be made to keep up with operating costs and assessments from and SESD. 9. Trash Enterprise Fund: FY10-FY13 is level funded based upon historical data and the concept that the fee will remain @ $20/unit residential and $30/unit commercial. Sec 6 - 1 ---PAGE BREAK--- EXPENDITURES: 1. General Government: FY10-FY13 projected to increase 3% per year 2. Public Safety: FY10-FY13 projected to increase 5% per year 3. Public Works: FY10-FY13 projected to increase 4.25 per year i. The three departments above are based upon level funding of expenses for most of the budget lines and contractual increased that are payable per collective bargaining agreements 4. Human Resources: FY10-FY13 projected to increase 3% per year 5. Cultural/Recreation: FY10-FY13 projected to increase 3% per year Fixed Costs 6. FIXED COSTS a. Health Insurance: FY10-FY13 projected to increase 10% per year b. Salem Retirement: FY10-FY13 projected to increase 5% per year c. Retirement Stabilization: FY10-FY13 projected to increase 5% per year d. CIP fund: FY10-FY13 projected to increase 5% per year e. Non-Contributory Retirees: FY10-FY13 projected to decrease 3% per year based upon the age of those who are eligible (the list shrinks each year) f. All other fixed costs: FY10-FY13 projected to increase 3% per year 7. Education: FY10-FY13 projected to increase 5% per year 8. Water and Sewer Enterprise Fund: varies based upon debt service and projected increases in expense and salary lines 9. Trash Enterprise Fund: FY10-FY13 projected to increase 3% per year 10. Cherry Sheet Assessment: FY10-FY10 projected to increase 4% per year 11. Other Expenditures: Based upon historical data As you know, the five year financial forecast is always evolving once information is updated. We are currently gathering more information on new growth, local receipt year to date reports and other information from State and Federal government. Furthermore, as we get more information on expenses, such as collective bargaining with the Police and School departments, as well as the procurement of health insurance and solid waste collection, we will rework the figures. I expect to update the five year financial forecast in the 2nd quarter of FY09 so that we have a new document that covers FY10-FY14. Once I gather the data and update the figures, we can review the new figures. Sec 6 - 2 ---PAGE BREAK--- Sec 6 - 3 ---PAGE BREAK--- Sec 6 - 4 ---PAGE BREAK--- Financial Reserve Policies Stabilization Fund A stabilization fund is a fund designed to accumulate amounts for capital and other future spending purposes, although it may be appropriated for any lawful purpose (MGL Ch. 40 §5B). Communities may establish one or more stabilization funds for different purposes and may appropriate into them in any year an amount not to exceed ten percent of the prior year’s tax levy. The total of all stabilization fund balances shall not exceed ten percent of the community’s equalized value, and any interest shall be added to and become a part of the funds. A two-thirds vote of the city council is required to establish, amend the purpose of, or appropriate money from the stabilization fund. The City has set a target level for the Stabilization fund of 5% of the City’s current operating budget. The target funding date is projected to occur by fiscal year 2013. The stabilization fund shall be funded by appropriations from free cash, operating budget appropriations when available, and other one time non-recurring revenues that become available for appropriation per M.G.L. 1. Any draw down of the stabilization fund from the prior fiscal year should be allocated from the certified free cash if available. 2. Twenty percent of any free cash available after funding #1 above will be allocated from free cash to the stabilization fund, up to the proposed reserve balance of the stabilization fund of operating budget). The stabilization fund should only be used for the following circumstances: • When net State Aid (receipts less assessments) is reduced by an amount less than the average of the prior two years. • When Local Receipts projected are below a three per cent increase of the prior two year’s actual receipts as reported on page three of the Tax Rate Recapitulation as certified by the Director of the Bureau of Accounts (excluding non-recurring receipts). • When there is a catastrophic or emergency event(s) that cannot be supported by current general fund appropriations. Year to Year Comparison FY 04 FY 05 FY 06 FY 2007 FY 08* Stabilization $1,297,417 $1,021,351 $277,759 $487,980 $646,514 *As of 4/30/08 Stabilization Fund $100,000 $600,000 $1,100,000 $1,600,000 FY04 FY05 FY06 FY07 FY08 Sec 6 - 5 ---PAGE BREAK--- Other Post Employment Benefit (GASB 45) The City is mandated to start accounting for Other Post Employment Benefit (OPEB) in FY 2008 once the actuarial study is complete. 3. Twenty percent of any free cash available after funding #1 above will be allocated from free cash to the OPEB Reserve Fund for the future liability of current worker’s post employment benefits (other than retirement pension). This includes the cost of health, life, and dental benefits. The amount to be funded for GASB 45 is to be determined by an actuarial study that is to be performed by an actuary that the City chooses (perhaps in conjunction with actuarial studies done by the Salem Contributory Retirement System). Capital Improvement Program (CIP) Fund The City uses a capital improvement program (CIP) to supplement the short-term capital needs of the City. 4. Twenty percent of any free cash available after funding #1 above will be allocated from free cash to the Capital Improvement Program (CIP) Fund. See Capital Improvement Plan (Section 9) for more information. Free Cash Free cash is the remaining, unrestricted funds from operations of the previous fiscal year including unexpended free cash from the previous year, actual receipts in excess of revenue estimates shown on the tax rate recapitulation sheet, and unspent amounts in budget line-items. Unpaid property taxes and certain deficits reduce the amount that can be certified as free cash. The calculation of free cash is based on the balance sheet as of June 30, which is submitted by the community's auditor, accountant, or comptroller. Free cash is not available for appropriation until certified by the Massachusetts Director of Accounts. Free cash is the term used for a community’s funds that are available for appropriation. Once free cash is certified, it is available for appropriation by City Council. Free cash may be used for any lawful municipal purpose and provides communities with flexibility to fund additional appropriations after the tax rate has been set. Free cash balances do not necessarily carry forward to the next fiscal year (July 1st); the Director’s certification expires on June 30th at the end of the fiscal year. The City’s policy is to use free cash for reserves, capital, and special uses in accordance with the policies set forth by the Mayor and Finance Director as stated above. Any free cash available after funding the above may be used to augment trust funds related to fringe benefits and un-funded liabilities related to employee benefits, including Health Insurance Trust Fund, Workers' Compensation Fund, Sec 6 - 6 ---PAGE BREAK--- Unemployment Fund, and any health benefits payable through Police and Fire operating budgets (111f settlements). Free Cash available may also be used to augment general fund appropriations for expenses that increased due to extraordinary and/or unforeseen events as detailed by the department head of the affected budget. Year to Year Comparison FY 03 FY 04 FY 05 FY 06 FY 07 Free Cash $3,212,194 $1,867,737 $2,732,090 $538,372 $691,149 *Free cash for FY 2008 TBD Free Cash $0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 FY03 FY04 FY05 FY06 FY 2007 Sec 6 - 7 ---PAGE BREAK--- Sec 6 - 8 ---PAGE BREAK--- Sec 6 - 9 ---PAGE BREAK--- Sec 6 - 10 ---PAGE BREAK--- Sec 6 - 11 ---PAGE BREAK--- Sec 6 - 12 ---PAGE BREAK--- Sec 6 - 13 ---PAGE BREAK--- Sec 6 - 14