The budget model adopted by town boards based on recommendations by an “informal working group” organized by Selectman Bill Johnson calls for boards to not only build a balanced budget for fiscal 2012, but also to project budget requirements for the next five years. This is another tool in the town’s arsenal in its ongoing battle to maintain a balanced budget in the face of a structural deficit.
The Press sat down last week with Town Administrator Tim Bragan and Finance Director Lorraine Leonard to understand the impact of this change to the budgeting process.
Bragan said that the five-year projections will help the town “smooth expense lines.” He added, “That doesn’t mean we’ll never have to have an override,” pointing out that calculations for the years following fiscal 2012 predict what are referred to as structural deficits.
Leonard explained that, by way of a five-year plan, a department can project out savings realized from actions taken in the current year. As an example, she cited a scenario in which a department predicts installation of a boiler one year and realizes energy savings over the next two years as a result. Being able to predict similar large expenses or savings allows for freeing up of funds for use by other departments, she said, smoothing the impact of structural deficit.
What is structural deficit?
Structural deficits result from town expenses (schools, health insurance, retirement benefits, labor costs, maintenance, etc.) growing faster than anticipated revenues, which, because of Proposition 2½ restrictions on the amount of revenue the town can raise, accrue at approximately $200,000 to $250,000 per year, or “approximately 1 percent of the town’s budget,” according to Bragan.
To offset this deficit, the town must either raise additional revenue, reduce spending, or both. In the past, the town has raised revenue by means of overrides or creative solutions such as the Devens school contracts; spending reductions have come by means of program changes in health care and retirement benefits, or cuts in staff or services. These measures are not “structural,” however, because they cannot be sustained year-to-year, and the town is required to find new revenue sources or ways to cut spending each year in order to reach a level budget.
Challenges to a balanced budget
The projected budget for fiscal 2012 is balanced because of measures taken during recent budget cycles and is level funded with level service. With a level-funded budget, the base budget amount is approximately the same as in the prior year; level service allows for a “4 percent increase for personnel changes and 1 percent increase for expenses,” according to Leonard. (The budget proposed for fiscal 2011 at this time last year was level funded but not with level service; town departments were instructed to absorb any increases in personnel and expenses.)
In his instructions to town departments this year, Bragan warns that the current balanced budget model could be in jeopardy due to Questions 1 and 3 on this year’s state election ballot, which propose, respectively, elimination of the state liquor tax and a cut in the state’s sales tax from 6.25 percent to 3 percent. If either or both of these measures pass, the amount of tax revenue available from the state as local aid would diminish, and the town’s budget would have to be reduced. Budget assumptions would have to be revisited and funding and service levels adjusted.
Bragan said that, although “the Fincom owns the gathering of information,” and owns the balancing of the coming fiscal year’s budget and the gathering of five-year planning data, the planning process “is owned by everybody. It has to be a collaborative effort or it won’t work.”
