Financial Policy Statements Introduction. The Board of Selectmen is the major policy setting board for executive decision making in Town. Over the years various boards of selectmen have set policies regarding Town finances, but this is the first time that a comprehensive articulation of fiscal policy has been adopted and put into use. A comprehensive Financial Policy Statement ought to consider all major areas affecting Town finances including taxation, user fees, legislation affecting Town finances at the state and federal level, grants, annual operating appropriations, financial forecasting, capital expenditure, debt financing, fund balance, compensation and collective bargaining, energy policy, risk management and procurement. The policies should provide guidance for the complex process in which elected officials, the Warrant Committee and Town Meeting play significant roles in determining the Town’s current and future financial condition. Its objectives should be to control the cost of government through the application of best management practices, careful monitoring of “budget busters” and creation of a more efficient organization. 1. Annual Operating Appropriations. Also known as “the budget”, this is ultimately determined by Town Meeting and in some cases the voters of the Town, but the Selectmen also play an important role. Stability is extremely important to any organization. Fluctuation in funding levels from year to year needs to be minimized because it affects the confidence of property owners and financial markets. In addition, Town residents should be able to expect that certain levels of service, except in extraordinary circumstances, are maintained from year to year. Budget Policy Statement: The annual Town budget should reflect an agreed upon level of Town services. When economic conditions require reductions, such reductions should be made in a manner that recognizes the importance of all Town services. 2. Multi-year Budget Forecasts. In FY2006, an ad hoc committee consisting of the Town Administrator, the Town Planner, the Superintendent of Schools and two department heads, with the assistance of the Town Accountant, prepared a five year budget estimate, relying upon departmental estimates of their needs going forward and a five year revenue history. This forecast was updated by the Town Accountant in 2007. Town officials agree that budget forecasting is a useful tool that should be undertaken each year. Because this is a new process for us, we have prepared a policy statement that is partly procedural. Budget Forecasting: Town Departments should submit budgets in a timely fashion according to the schedule in the Town of Milton Bylaws which currently requires submission by December 1st. Individual departmental budget requests should include the amount that will be needed to maintain level service for the next two years. In addition departments should describe the reductions in the level of service that they would incur in the next fiscal year with a level dollar budget. Such budgets and estimates of expected revenue based on a five year history will be used to prepare an updated five year budget forecast of expenditures and revenues in January of each year or as soon thereafter as possible. Preparation of the forecast will be the responsibility of the Board of Selectmen but will be accomplished in a collaborative process with the Town Accountant, the Town Treasurer, the Warrant Committee and other elected and appointed officials and department heads. 3. Capital Appropriations and Debt Service. The Town of Milton bylaws require a capital planning committee be appointed by the Board of Selectmen annually. Members include the Town Accountant, a member of the Board of Selectmen, a member of the School Committee, a member of the Warrant Committee, a member of the Planning Board and two citizen members. The committee believes that timely maintenance of the Town’s capital assets and infrastructure is necessary to prolong the life of these assets and to protect their value. Failure to maintain on an appropriate schedule shortens the useful life of the asset and in the long term leads to higher costs for maintenance and/or premature replacement. In its planning efforts the committee is looking for ways to bundle capital requests from various departments to help leverage the Town’s purchasing strength. The Town has undertaken a $150 million capital investment in its school buildings over eighty percent of which is being paid for by grants from the Commonwealth of Massachusetts. Most of the remaining cost is paid for by borrowing over the levy limit with some additional gifts and some borrowing under the levy limit. Annual expenditure on the debt service for these projects, combined with other smaller capital improvement projects, is a little more than five percent of our operating budget in fiscal year 2007. In addition the Town is about to begin a $12 million library renovation project which will be supported equally by over the levy limit debt, a state grant and private fundraising. Policy on Capital Appropriations and Debt Service: The Town should spend a minimum of five percent of its annual operating budget each year, averaged over a period of ten years, on capital maintenance, replacement and improvements. This expenditure includes the cost of debt service, both under and over the levy limit, for capital improvements. At no time should debt service exceed the maximum allowed by law. This five percent calculation is to be made exclusive of enterprise funds and grants. Funds should be appropriated each year as cash, or towards the payment of principal and interest to fund capital improvements as approved by the Annual Town Meeting. Debt service for capital improvements under the levy limit should remain level from one year to the next, with new debt added only as debt is retired. 4. Reserve Levels. Historically, the Town of Milton has had reserve levels under five percent of total government expenditures. While dramatic change in our reserve levels may not be possible, we do want to achieve stability in our reserve levels and we would like to increase the level of reserves when possible when “one- time” funding becomes available. The Board of Selectmen recognizes that further work must be done to determine a realistic and specific goal for reserve levels to support the annual operating budget, and we intend to continue to work on this issue during FY2008. This work will include considering appropriate goals for the stabilization fund, the capital stabilization fund and undesignated reserves. Reserve Policy: Reserves should not be used without a plan to restore them. When one-time funding becomes available, a primary consideration in deciding how to appropriate the funds should be to increase the Town’s reserves. One-time funding should not be used to support the operating budget. The Town’s reserves should be maintained at a consistent level. Funds maintained by the Town , such as the health insurance trust fund and the Assessors’ Overlay Account, which are not considered reserves, should be monitored to ensure that reserves are adequate but not over-funded. 5. The Reserve Fund. The Reserve Fund is funded by Town Meeting and is to be used for extraordinary and unforeseen financial needs, as required by state law, not for supplementary funding for departments. The Warrant Committee must approve requests for expenditures from the reserve fund. Policy on expenditures from the Reserve Fund: Expenditures from the Reserve Fund must be as defined by state law: for extraordinary and unforeseen purposes. 6. Compensation and Collective Bargaining. Salary and benefits account for the lion’s share of most departmental budgets. Benefits alone accounted for 13.8% of town expenditures in fiscal 2006. The salary line of the Police and Fire is 91.9% of total spending for those two departments. Therefore, how the Town conducts its collective bargaining has serious financial implications. Compensation and Collective Bargaining Policy: The Town will negotiate with employee groups in good faith and strive to create an atmosphere of mutual respect and trust. Management must be cognizant of the financial capacity of the Town when making and/or accepting proposed wage increases and benefit changes. During negotiations and prior to ratification of collective bargaining agreements, the cost and all current and future year impacts of wage and benefit changes should be evaluated and that information should be incorporated into our financial planning process. 7. Energy Policy. The cost and long-term reliability of oil and natural gas has become an issue of national proportion. The Town of Milton is not exempt from the challenges presented. The Milton Energy Task Force noted that the total energy expenditure in the Town for fiscal year 2005 was $1,570,915, or approximately 2.5% of total expenditure. Gasoline, oil, and natural gas prices experienced significant increases over the first half of fiscal year 2006, placing further stress on our budgets. Factors that have mitigated against sudden fluctuations in market prices include cooperative procurement of gasoline and diesel fuel, the practice of entering into long term electric supply agreements at fixed prices, installing energy efficient fixtures, a “green building” approach to some new buildings when cost effective, and building improvements such as new windows. Energy Policy: The Town, through an energy task force, will annually review the cost effectiveness of energy saving strategies and technologies. The Task Force will provide the Board of Selectmen with recommended changes early in the budget process. The Town should take advantage of all available grant programs and work with advocacy groups to promote energy savings. 8. Risk Management. Like any large organization, the Town of Milton experiences exposure to risk. Insurance is one important tool, but not the whole answer. Managing risk also requires being proactive with education and training of employees and officials and active in decision making regarding claims. Risk Management Policy: The Town will annually review its risk management coverage, prevention practices and financial controls and will be proactive in incorporating best practices according to industry standards. 9. Procurement. Several statutes govern the procurement of goods and services including Massachusetts General Laws Chapters 30, Subsection 39M, 30B and 149. These statutes are in place to promote competition, the lowest possible price, and to discourage favoritism. The Town needs to ensure that it has the appropriate legal, financial and administrative systems in place to comply with the law. Within this context, our goal is to obtain the best possible value for the Town while considering our cash flow needs. Procurement Policy: Appropriate management support should be available to ensure that all procurement complies with the law and achieves the best possible value for the Town, taking into account cash flow and overall cost. 10. Legislative Issues affecting the Town’s Financial Position. Net state aid is currently roughly 10 percent of Town revenues. In the era of proposition 2½, the loss of this aid and changes in state assessments have potentially debilitating effects on the Town’s ability to provide services. Federal aid has been absent in recent years, but a policy should be in place to address at least the possibility of this aid. Other legislative initiatives have the potential to affect the Town’s balance sheet as well. Vigilance and advocacy need to be central in our policy. Policy on Legislation Having Financial Impact: The Town will provide financial information each year to its legislative delegation and the public to support the need for state and federal aid and to evaluate the impact of any other legislative initiatives, including unfunded mandates having a financial impact. The Board of Selectmen supports and encourages the Town’s management to actively participate in organizations, such as the Massachusetts Municipal Association, which advocate for the financial support of cities and towns. 11. Grants and Gifts. Grants and gifts are important sources of revenue. Grants and Gifts Policy: The Town’s management shall monitor and periodically review all grant programs that are available to communities. Management will encourage and seek out philanthropy for appropriate purposes, including capital expenses. When gifts are accepted, appropriate records will be maintained to show that the gift has been used for the intended purpose. 12. Revolving Funds. The use of revolving funds has increased. In recent years revolving funds have supplemented some departments’ appropriations by enabling them to apply revenues generated through user fees and other sources to specific expenses. Most revolving funds are approved at the Annual Town Meeting. It is important to review the operation and overall value of our revolving funds in our annual budget process. Risk management procedures must be followed scrupulously with revolving funds, which often involve the collection of large amounts of cash. Revolving Fund Policy: Revolving funds will be reviewed by the Town Accountant and the Warrant Committee annually to ensure that each complies with State law and follows proper accounting controls and that its continuation is appropriate within the context of the whole Town budget. 13. User Fees. The Town relies on many forms of fees. User fees for water, sewer and solid waste generate millions of dollars per year in needed revenues. Annual review of user fees is anticipated in this policy statement and will be conducted by the responsible department each year as part of the budget process. Any increases in rates will be requested along with the appropriate supporting information as part of the department’s budget request. Policy on User Fees: The purpose of user fees is to raise the revenue needed to provide a service. User fees will be evaluated annually in the context of the overall budget. The Town will report the amount, type and proportion that user fees represent of the annual operating budget each year. 14. Taxation. Although the property tax rate is heavily controlled by State statute, there are also decisions and processes in Town government that affect the property tax rate. For example, tax classification, estimation of receipts, the ultimate amount of taxes to be levied within the confines of proposition 2½ and the decision whether to place an override question on the ballot are questions which issues that require the input of many Town officials, both elected and appointed. Local Taxation Policy: As early as possible in the annual budget process the Town’s management will provide information concerning the cost of maintaining level service, anticipated revenues and any discrepancy, in order to foster an open dialogue about solutions including the possibility of spending over or under the levy limit. Management shall provide five year forecasts to inform this discussion. Five year budget forecasts shall be used to anticipate budget shortfalls and develop a strategy for raising revenue, whether through expansion of the tax base, operating or debt exclusion overrides or other means. 15. Regionalization. The Town is one of 351 communities in Massachusetts and is bordered by two cities and three towns. It has many regional affiliations such as Norfolk County, Massachusetts Highway Department District 4, the Metropolitan Area Planning Council and the South Shore Consortium which enable it to save money by combining planning efforts and buying power. Regionalization Policy: The Town shall endeavor to work cooperatively with other communities, whether through formally established links or informal arrangements, to provide services at a reduced cost. The Town will take advantage of all advantageous cooperative purchasing arrangements and look to the creation of new collaborative arrangements to reduce costs.