May 14, 2008

James E. Harrington, Mayor

Members of the City Council
City Hall
Brockton, MA. 02301

Members of the School Committee

Crosby Administration Building
Brockton, MA. 02301
Ladies and Gentlemen:

I am writing to provide commentary on the FY2009 budget recommendation submitted for the City
Council meeting of May 12 by the Mayor. By this letter I also hereby certify, in accordance with
Section 5 of Chapter 324 of the Acts of 1990, that it is my professional opinion, after an evaluation
of all pertinent financial information reasonably available, that the financial resources of the city
are no longer adequate to support the continuous provision of the existing level of municipal
services; the level of services which is being financed by the FY2009 budget represents a
significant reduction from the FY08 level. In addition, even this reduced level of FY2009 is not
sustainable into FY2010 without a significant infusion of new, permanent, discretionary revenues.
This statement would be true even if the city’s voters were to approve a 2½ override to restore
specific services lost to FY2009 budget cuts, because there no longer exists structural budget
balance for municipal finances in Massachusetts.

The adverse budget trends which confront the city primarily consist of the rapid rate of increase in health
insurance funding costs, the pressure to provide labor wage settlements to offset consumer price
inflation, and the continuing failure of the State to provide revenue assistance for the increasing costs of
municipal services, other than the increased aid for classroom education. These trends are compounded
by the relatively fixed nature of the city’s cost structure, making cost management difficult and adequate
revenues crucial. There are other factors at play, but these are the primary culprits which caused the
reduction of services from FY2008 into FY2009 and which also jeopardize the city’s ability to extend
into FY2010 its present level of services.
INTRODUCTION

I am firmly convinced that the source of much of the fiscal distress experienced in the past five years,
not just in Brockton, but in cities and towns across Massachusetts, is traceable to state government, in its
policies and statutes, in the actions or inactions of its executive and legislative branches, and in the
attitudes of its elected officials. Much of what a municipality must do, and how it must do it, is
governed by state statutes and regulations; so too is governed how a municipality can finance the
services it undertakes. For example, government services for public health, public safety and K-12
public education are largely accomplished at the local level, subject to state oversight. Our workforces
 -2-

enjoy collective bargaining rights and civil service protection governed by state laws. The health
insurance benefits we provide to our workers are governed not only by collective bargaining laws and
union contracts, bargained under M.G.L. Ch. 150E, but also by a separate state statute, M.G.L. 32B.
(That statute, incidentally, is far more restrictive of managerial flexibility than is the regulatory
framework for state employees.) The pension and insurance benefits we provide to our retirees are also
covered by state laws. We are obligated to provide transportation to and from schools for certain school
children, including parochial school children. This is true regardless of whether the state chooses to
fund its share of those mandates. How much we spend on classroom instruction, and how we spend it, is
governed largely by the state and is subject to state oversight. How much revenue we can raise locally,
and from what sources and by what means, is regulated by the state. Even state revenue assistance is
significantly restricted on its use, and the trend over the years has been toward increasing restrictions.
Moreover, we have seen over the past several years that the state has largely abandoned its commitment
to assist cities and towns to pay for increasing costs, other than for classroom education. For example,
from FY2008 to FY2009 the State is increasing its revenue assistance restricted to education and public
libraries in Brockton by $6.3 million, or 5.1%. It has increased its unrestricted cherry sheet aid by only
$144 thousand, or one-half of 1%. This, unfortunately, also represents a continuation of a trend of many
years standing. For example, from FY2007 to 2008, that increase was $54 thousand, or two tenths of
1%.

Having failed to provide direct, real revenue assistance for the municipal side of local budgets, the state
has compounded the problem by failing to provide municipalities with the means to solve their revenue
problems on their own. We may levy no taxes other than property taxes and boat and automobile excise
taxes, because the state will not allow it. Our property tax growth is legally constrained in state law by
an inflation index of 2.5% which is unrelated to actual cost inflation trends. Our fees for service are
restricted to cost recovery. Even the governor’s proposal of last year to allow a local option meals tax,
and an expansion of the taxation of telecommunications, worth about $2.0 million to Brockton, made no
progress in the Legislature.

We not only lack revenue flexibility, we also lack flexibility in cost management. Because many of our
costs are fixed in nature, they are not easily reduced without dire service consequences. For example,
more than 80 percent of the city’s spending in the General Fund is for costs which essentially may not be
reduced, such as schools, pensions, debt service, the tax reserve for abatements/exemptions and state and
county charges, and insurance benefits costs for employees and retirees. Of the city-side salary costs,
which represent more than 16 percent of total expenditures, almost three quarters are for public safety
employees. This means that more than 90% of the city’s budget is comprised by costs which are either
difficult to control or which support essential services. The cost structures for other communities may
differ in detail but not in the basic elements, and that is why so many communities in recent years have
been forced to resort to Proposition 2½ voter referenda in order to balance budgets and maintain
services. Through FY2008, Brockton was able to avoid this approach. I believe that this was achieved
in part by better cost containment strategies, but certainly because the city was aggressive and
conservative in accumulating reserves in earlier years. Our cost containment strategies mitigated the size
of the problem, and our reserves then carried us through, but in FY2009 we are forced to make cost
reductions which will affect the important functions of government. To restore these cuts will require
the permission of the voters.
 -3-

GENERAL FUND

The comments above are reinforced by the following tables. A helpful way of examining a large budget,
like that of the City of Brockton, with more than $283.8 million in spending for the General Fund alone,
is to focus on the major categories which have changed from one period to the next, and then to explain
those changes. If the city’s revenues from certain categories decrease, or fixed costs increase, or the city
undertakes new spending initiatives, then the additional financing required must be funded by either
increased revenues from other revenue categories or by decreased spending for other purposes. The
following table portrays these kinds of changes in the General Fund on a “Sources and Uses of
Financing” basis by broad revenue or spending category. These changes are portrayed for the FY2009
proposed budget as compared to the final FY2008 budget which existed at the time that the tax rate was
set.

CHANGES IN GENERAL FUND BUDGET, FY2008 TO FY2009

SOURCES OF FUNDS TO PAY FOR INCREASED SPENDING OR LOSS OF REVENUE

Category $ Value of Change

Increased Tax Levy 3,089,185

Increased Cherry Sheet Chapter 70 6,329,808
Increases (net) from Other Cherry Sheet accounts 122,607
Increase in appropriation of Free Cash 273,869
Increase in appropriation of other Available Funds, 310,123
except Stabilization
Decrease in Appropriation for Personal Services 21,720
Decrease in Appropriations for Purchases of Services 77,047
Decrease in Appropriations to Reserves 42,369
Decrease in Appropriations to Capital and Debt 607,748
Decrease in Non-Net School Appropriation to
Brockton Public Schools 1,800,000

Total Financing Sources $ 12,674,476

 -4-

USES OF FUNDS FOR INCREASED SPENDING, DECREASED REVENUE, AND OTHER

REQUIREMENTS FOR FINANCING IN GENERAL FUND

Category $ Value of Change

Net Increase in Appropriations for Goods,
Because of Increased Liability Insurances $ 319,696
Increase in appropriations for Personal Services Overtime 131,554
Increase in Net School Spending Appropriation to
Brockton School Department 4,957,041
Increase in Appropriation to Southeast Regional Voc. Tech. 168,731
Increased Appropriations to Employee/Retiree Insurances 1,934,807
Increased Medicare Tax Appropriation 180,000
Increase in State/County Assessments and Other Amounts
Raised 322,000
Increase in Pension Appropriations 245,087
Increase in Snow/Ice Removal Appropriation 150,000
Decrease in Local Receipts Estimate 894,470
Decrease in Appropriation from Stabilization 3,109,670
Net Increase for all other increases/decreases 261,420

Total Financing Requirements $12,674,476

These tables show that the city confronted slightly more than $4.0 million in local revenue losses prior to
attempting to finance almost $8.7 million in spending increases, creating almost $12.7 million in
financing needs. Examine the “Uses” table above. A total of about $5.1 million in increased spending,
nearly 60% of the $8.7 million, was directed to Brockton’s Net School Spending accounts, plus
Southeast Regional Vocational High School.

While the mayor increased the Net School Spending appropriation for the Brockton Schools by almost
$5.0 million, or 3.9%, his recommendation cut the School Committee’s Net School Spending request of
$137,005,615 by $4.9 million, or 3.5%. The School Committee’s request was intended to (1) fund from
Chapter 70 $2.2 million in Special Education costs which in FY2008 had been funded instead by special
education “circuit breaker money” from the legislature; (2) to increase personnel services by $5.6
million, or 6%; and (3) to increase Ordinary Maintenance by $2.0 million, or 8.0%. The loss of the
requested funding will affect many school system programs including class size, the K plus kindergarten
program for struggling early learners, and teaching specialists, and will result in layoffs. Even so, the
mayor’s recommended funding level of $132,179,236 exceeds the city’s calculation of its minimum
local contribution to the required “foundation budget” by $3.5 million. However, this occurs only by the
city’s claiming as Net School Spending, on so-called “Schedule 19”, $5.9 million in health insurance
costs for retirees of the school system. In prior years, the city accounted for these costs, but didn’t claim
 -5-

them. If the City Council reduces the mayor’s recommended Net School Spending budget by any
significant amount, a large number of actual layoffs will certainly ensue. To cover this possibility, the
School Committee has prepared RIF notices. However, I strongly urge the City Council to fund the
School Committee’s budget as submitted.

The increase in budget to Southeast Regional Vocation High School of $169 thousand on a percentage
basis approximates the 7 percent increase which the Brockton system requested but did not receive. In
order to reduce this budget, the city and other member communities would need to vote to reject it. If
two-thirds so vote, a new budget would be prepared.

Another $2.4 million of increase budget appropriations was directed to the cost of pension and benefits,
with these costs driven by union contract, or law, or both. This represents a 4.1% increase, a moderation
of the rate of increase of the past several years. This slower rate of increase derives in part from the
city’s strategy of shifting cost sharing to the beneficiaries of the city’s health plans.

For example, in FY1990, the city covered 100% of the cost of HMO coverage, and all but about 7% of
the annual costs of the indemnity plan coverage. We now cover only 75% of the cost of all plans,
including almost all retirees. The city obtained state legislative approval to allow our poorest retirees to
retain their old contribution rates. In the last round of union contract negotiations, we increased the rate
of employees’ health cost contribution to 30% for the indemnity plan, beginning on September 1.

Accomplishing this shift of the burden has been the result of several sets of difficult union negotiations
and three (3) difficult decisions with respect to retirees: first, to require retirees who were eligible to
enroll in Medicare; second, to require all retirees, except for those who are relatively poor, to contribute
the same percent to health premiums as active employees, and finally, last year, the city ceased its
reimbursement of 75% of the cost of Medicare Part B. This last step will save the city more than $1
million in FY2009. In its union negotiations, the city is insisting that the new contracts reflect that there
will be no Medicare B subsidy for future retirees. All unions have so agreed, with the exception of the
police supervisors, and the Brockton Education Association, with whom negotiations for new contracts
have just begun.

Despite the fact that health insurance budget costs have risen so rapidly, in fact, the city’s strategy has
paid off. If the city had not increased the employee/retiree burden, the cost to the taxpayer in FY2009 at
the 1990 arrangement would have been almost $16.8 million higher. In addition, requiring all eligible
retired employees to enroll in Medicare has saved about $3.1 million, net, by shifting about $1,750 per
year per eligible retiree to the federal government. This is a total current annual savings of almost
$20 million, without which the health insurance budget would have been about 45% higher.

The pension budget has received a net increase in appropriation of about $245 thousand. In FY2006 the
city sold a pension obligation bond to finance about $100 million of its $143 million unfunded pension
liability. The projected savings resulted, in the first five (5) years, from a stretching out of the funding
period from 2020 on the old pension funding schedule to 2028 on the bond repayment schedule. After
five (5) years, the city expects to generate additional savings because the cost of the borrowing, at 5.5%,
is less than the anticipated rate of earnings in the pension fund when the cash is invested, at 8%. Over
the life of the bonds, the city is projected to save $24 million in present value dollars, provided that the
invested funds earn 8% per year. (Over the past 20 years, the retirement system’s earnings have
averaged more than 10%). In the meantime, the city’s pension funding status has increased from 62% to
 -6-

almost 90%. The remaining unfunded liability is being eliminated, as it was before, by the year 2020,
not 2028, on an increasing schedule. The city is also required to fund the normal cost (the actuarial
value in present dollars of all future benefits being earned this year by employees). The pension
appropriation for FY2008 consists of the normal cost plus the amortization of the remaining unfunded
liability. The city structured the bond payments in the first five (5) years to be conservative, with no
budgetary savings compared to amortizing the funded liability on the 2028 schedule. As noted, there
were savings compared to the old 2020 amortization schedule. However, after five (5) years, it is
expected that additional savings will occur. At that time, the city will create a reserve fund at 60% of
each year’s savings. At 8% earnings per year, that reserve fund of savings would grow to $25 million.
These projections require both solid earnings of at least 8% per year plus careful management of salaries
so that the growth in covered payroll costs does not exceed 5% per year. The city is accomplishing this
latter objective.

Beginning with the closing of FY2008, the city must take steps regarding another liability, similar to the
pension liability in many ways, but different in critical ways, too. The city provides benefits after
retirement in addition to a pension; these are called “Other Post Employment Benefits”, or OPEB.
OPEB costs mainly consist of retirees’ health insurance benefits. The city currently is paying these costs
each year on a “pay as you go” basis. This cost is rapidly escalating. However, like pension benefits,
OPEB costs can be actuarially estimated into the future, given demographic trends and assumptions.
The resulting summation of all of those future payments can then be discounted on the basis of the time
value of money. As of the close of FY2008, the city must perform this valuation for our OPEB costs,
according to the Government Accounting Standards Board. This is likely to result in a present value
estimate of OPEB benefits of at least $200 million, or even much more. One difficulty in estimating this
number is that the present rate of health insurance inflation is so high. For example, $1,000 of benefits
in 2008 grows to about $7,000 in 2035 at 7% per year inflation, but it grows to almost $35,000 at 13%
inflation per year.

Once the OPEB liability has been costed and disclosed, there will be tremendous pressure from the
capital markets on the city to develop a plan to fund the unfunded liability as well as to begin to reserve
the normal cost (the future liability being earned today). Of course, in the meantime, we’ll have to pay
for the cost of benefits as they come due. Failure to do anything over time will cost more money,
because after 30 years a pay as you go approach will result in a higher total cost than pre-funding some
portion of the liability and investing the proceeds, like the city does with its pension system. In time
failure to develop a plan will result in rating agency downgrading and severely impact our borrowing
costs. Developing a pre-funding plan may require special legislation, and at the present time the city
lacks any assets to provide for future healthcare costs. Our health insurance trust fund only pre-funds
about 18 to 24 months of anticipated claims.

In the context of this requirement, it can be seen that it will be very important to reduce the cost
components of the OPEB liability if we are to reduce its overall size. That is why the city’s decisions
regarding retiree health insurance in the past few years have been so critical to the city’s fiscal health,
both present and future, because we are reducing significant portions of the cost base of our OPEB
liability. The city quite simply is no longer able to afford to pay for promises made in earlier years,
when financial resources were more abundant and the cost of redeeming the promises was much
cheaper. Remember that health insurance costs, even after the steps I’ve described, increased by 70%
since FY2002. If we had operated on the basis of business as usual, the financial impact in job losses
and service reductions would have been devastating. That is also why the city’s decision on the
Medicare B subsidy was so critical.
 -7-

Returning to the “Use of Funds” exhibit, you will see that increases in “Amounts Raised”, primarily the
Overlay and State and County Charges at $0.3 million, were also largely unavoidable for budgeting
purposes. The city will provide more for snow and ice removal ($.15 million) Liability Insurances ($.3
million, net, in “Goods”). The increase in the snow and ice appropriation is a prudent step to budget a
cost which would more closely track recent actual expenditures and mitigate deficit spending during the
fiscal year. Other modest increases in spending, including overtime, total less than $0.4 million.
However, the city’s budget preparation was seriously impacted by lower revenues from local receipts
($.9 million) and no use of the Stabilization Fund, whereas in FY08’s initial budget, $3.1 million was
used.

By refraining from appropriating from the Stabilization fund, the fund’s balance was preserved at about
$2.2 million. The decrease in local receipts estimate of almost $0.9 million is actually net after an
increase of $550 thousand from a new revenue source – Cable Fees – to the mayor’s office. This money
will be used to support the budget of Brockton Community Cable Corp. as well as other cable activities.
Without this new revenue, the Local Receipts Category would have been estimated at $19.5 million, a
decrease of more than $1.4 million, or 6.9%. The major contributors to the decline were licenses and
permits, investment income, and Medicaid reimbursements for school medical services to Medicaid
eligible school children. The first two of these were estimated lower to conservatively reflect the impact
of a weakening economy. The Medicaid reimbursement reduction reflects potential rule changes by the
federal government, which would exclude some currently eligible costs.

Now examine the “Sources” section of the table. Almost one-half of the additional funding was from
Chapter 70 Aid, an increase restricted to use by or for the schools. The property tax increase generated
$3.1 million, with $.5 million of that coming from taxation of new growth. Other categories creating
increased revenues were Free Cash, Other Reserves, including Library at $210 thousand, and Cherry
Sheet Other Than Chapter 70, totaling $0.7 million. Therefore, after $10.1 million in added revenues,
the financing of $12.7 million required deep expenditure reductions totaling $2.6 million. The most
significant was the reduction of $1.8 million to the “Non Net School Spending” account. This will result
in fewer busses, an expansion of the “walk” zone for elementary schools, and many more students who
will not be bussed to school.

The budget for purchases of services was reduced by about $77 thousand net, to $5.1 million ,but this
was after an increase of $550,000 in the mayor’s budget to appropriate the new revenue category from
Comcast, as mentioned above. This appropriation is to support the Brockton Community Cable Corp.
budget as well as other cable related activities. Without the Cable revenue the budget for purchases for
services would have declined to $4.5 million or 12.2%.

The appropriations for capital and debt service were decreased by almost $608 thousand, about one-third
of which is due to capital and more than $400 thousand due to decreased debt service. The FY09 debt
service does not include, yet, any principal repayments for the two new schools. These will be
permanently financed at the end of FY09 with principal repayments beginning in FY10.

The Personal Services budget includes $71,787 in total to fund a recent contract settlement with the
Department Administrators union for the cost of increases for FY08 and FY09, as described in the
mayor’s letter of May 9, 2008. The contact was submitted to City Council on May 6th. The budget also
contains sufficient funding for a one-year settlement with the police supervisors union, based on the
city’s proposal for a settlement pattern similar to the police patrolmen’s union for FY09.
 -8-

The total of appropriations for Personnel Services – Other Than Overtime decreased by almost $22
thousand, but this figure is somewhat misleading. Based on the level services budget requests submitted
by budget managers, which would have funded all positions authorized in FY08 at FY09 salary levels,
the mayor’s budget cut nearly $1.9 million. The mayor’s budget may appear to be essentially level
funded compared to FY08, at FY08 salary levels, but compared to a FY09 level services budget funded
at FY09 salary levels, the cut equals about 3.8%. The following departments suffered net losses of
positions paid in the General Fund, compared to FY08:
Assessor – 1 (attrition)
Auditor – 1 (attrition) .
Data Processing – 2 (attrition)
Finance – 1 (attrition)
Planner – 2 (layoffs)
Treasurer/Tax Collector – 3 – (2 attrition)(1 layoff)
City Clerk - 1 (attrition)
Election Commission – 1 (layoff)
DPW – Highway – 5 (1 - attrition and 4 - transfer to vacant utilities positions, avoiding layoffs)
DPW – Maintenance – 1 (transfer to vacant utilities position, avoiding layoff)
Health – 2 (attrition)
Public Property – 3 (layoffs)
Fire – 8 (attrition)
Traffic Commission – 1 (transfer to vacant police clerk, avoiding layoff)
Council on Aging – 1 (layoff)
Library – 10.5 (attrition and 5 layoffs)
Total 43.5
The following departments maintained budgeted staffing, FY08 to FY09:
Emergency Management
Animal Control
Cemeteries
Law
Personnel (but 1 transferred to funding by health rates rather than General Fund)
Procurement
DPW – Commissioner
Weights and Measures
License
Veterans Services
The following departments gained staffing:
Police - 10 (6 from General Fund, 4 from State Grant)
Sewer – 1 (paid by sewer rates, not General Fund)
Water – 3 (paid by water rates, not General Fund)
Total 14 – but only 6 from General Fund Finances
 -9-

An examination of trends since FY1988 in positions budgeted in the General Fund will provide some
perspective on the consequences of the inadequacy of the present structure of municipal finance to pay
for the services which the public desires. In FY1988, excluding the school system and self-supporting
budgets, (Refuse, Sewer, Water, Park/Golf, and Parking Authority), the city’s budgeted employment was
781.5. In FY1992, which was the year of the drastic budget cuts, that number was 542, a decline of
239.5, or 31%. Among the worst hit, Assessors lost 5, Auditor lost 4, Treasurer/Tax Collector lost 8,
Clerk Clerk/City Council/Elections lost 7, DPW lost 10, Health lost 5, Police lost 67, Fire lost 58,
Cemeteries lost 6, Veterans Services lost 6, and Library lost 17.

From FY1992 to FY1999, budgeted employment was partially restored to 627, a gain of 85 positions,
but still 154.5 short of FY1988. The biggest gainers were Fire (22), Police (33), Public Property (10),
and Health (5). Most departments merely held their own, but some actually suffered further losses
(Auditor – 2, Tax Collector - 2).

By 2003, the number of budgeted positions had increased a bit more and then peaked at 686, still 95.5
positions short of FY1988. FY1999 to FY2003, the major gains were Data Processing (5), Fire (17),
Police (22), and Library (8). A few departments by 2003 had exceeded their FY1988 budgeted staffing
by one or two positions, but most were still well below, including Public Property (13), DPW Highway
(12), Fire (19), Police (21), Library (7.5), Assessor (3), Auditor (6), Treasurer/Collector (8), and
Elections (3).

What should we make of this? Property tax restrictions and lack of state aid for the city-side budget
caused the problem. Why can we claim that the problem was inadequate revenue growth, not excessive
compensation increases granted to employees since 1992? We can make that claim because analysis
supports it. After adjusting personal services increases from FY1992, to FY2009, a seventeen year
period, first, for staffing increases, and second to net out the value of health insurance savings gained by
shifting costs to employees, it would appear that net increases in compensation per employee over 17
years averaged about 3.5% per year, or a little more than 3%, compounded. More currently, budget costs
for personal services for FY2009 have increased by about 13.0% over FY2003, a six year period, a total
of $5.9 million. During that time the city obtained the agreement of the employees to increase their
share of health costs from 20 percent to 25 percent, and 30 percent for Master Medical, which saved
more than $2.7 million, offsetting nearly 50% of the payroll increases. In the latest round, the city is
obtaining the agreement by each union to the elimination of the subsidy of Medicare Part B for future
retirees. The city has been cautious in its collective bargaining settlements. Accordingly, I do not
believe that the city’s problem in providing staffing for desired services may be fairly attributed to gains
by the employees in compensation.

What are the city’s options to avoid the service consequences of these budget reductions? In
Massachusetts, after raising fees to the level of the cost of providing the specific fee-based service,
municipalities’ sole remaining local revenue option is to ask voters to raise the property tax. The
Proposition 2 ½ law provides two separate and independent restrictions on the tax levy. The first of
these is absolute; it may not be breached. No Massachusetts community may impose a property tax levy
which in the aggregate exceeds 2.5 percent of the total assessed value of the community. This
calculation is called the levy ceiling. (In Brockton the city in FY2009 will tax at a little more than one-
half of its levy ceiling.) The second limitation is that a community’s levy growth is limited to 2.5% of
the levy limit of the prior year, plus taxation on new property growth, unless the voters approve
additional taxation. So, in the case of Brockton, the city could nearly double its levy limit with the
approval of the voters, and still remain under the levy ceiling; the extra levy if so authorized would
provide almost $80 million more in annual taxes. Clearly, the present need does not approach $80
million.
 -10-

However, an increase in the levy of about $5 million per year would provide sufficient funding for salary
and benefits to add 30 workers in the Public Property/Health/Highway functions, 40 in Public Safety,
and 8 in the Library system. This would increase annual property taxes only by about $125 for the
average taxpayer. I am not advocating for this specific amount, but I believe that the dilemma of slow
declines in services due to inadequate state aid can only be remedied by raising property taxes. The cost
to do so would not be extraordinary. The decision to do so belongs first to the city’s elected officials and
second to its voters.

The Prop ½ law provides for three different ways for the voters to increase their property taxes. The first
of these provides for a permanent increase in taxes. Each of the other two allow for only temporary
increases. A capital exclusion temporarily raises the tax levy in order to finance a capital acquisition in a
particular year. A debt exclusion raises the levy to provide for cost of bonds, with the increase in a
particular year determined by the amount necessary to pay for the bond costs in that year of a specific
bond issue; the authority for these increases expire when those bonds are paid off.

Before moving on, it is worth reviewing how the Prop 2 ½ restrictions nearly guarantee that municipal
budgets will be in a state of perpetual structural imbalance, the solution to which will require either
growing state aid or a periodic appeal to the voters under Prop 2 ½. The periodic nature of this repeating
problem frustrates the voters. Let’s assume that a municipal budget contains $100 million in spending,
with none for capital projects or reserve building. This spending scenario bears some resemblance to the
Brockton FY09 budget. Assume all of the spending is financed solely by $100 million in property taxes.
Let’s assume that the expenditures, because of health and energy costs included in the base, are growing
at a constant rate of four percent per year. The property tax levy grows at 2.5 percent per year, plus
taxation on new growth adds about 0.5% per year, so that the total revenue growth is about 3.0%. This
rate of tax levy revenue growth also is not too different than Brockton’s, but our expenses, because of
health insurance costs, have been growing at more than 4% per year. At any rate, in five years, the
expenditures will have grown by more than $21.6 million, but the revenues by only $15.9 million, and so
a deficit of $5.7 million will have required financing. This repeating problem will continue into the
future even if it is fixed after five years with an override. On the other hand, if the levy had been
allowed to grow at the rate of actual cost inflation plus new growth at 0.5 percent, after five years
revenues would have grown by about $24.6 million. The extra $3 million could have been applied to
building reserves and/or capital spending. Remember, we assumed neither of these was being
accomplished in the original $100 million. This is a more sensible structure with a far more desirable
outcome. Unfortunately, this structure is NOT the Massachusetts approach.

ENTERPRISE FUNDS

This category of budgets includes the new Renewable Energy Enterprise Fund, the Refuse Enterprise
Fund, the Water and Sewer Enterprise funds, and the Park and Golf Enterprise of the Recreation
Commission.

The Refuse Enterprise Fund is self supporting for FY2008, because about $855 thousand in Certified
Retained Earnings was available for appropriation to support the budget. This surplus resulted from the
FY2007 operations. The balance was used to support the waste removal contract without increasing the
fees. The present fee structure is now about eight years old, and in a couple of years, the city will need
to increase the $280 fee to maintain revenue sufficiency.
 -11-

The Recreation Commission is projected to generate about $800 thousand in fees for its own support.
This level of financing still required additional support of more than $900 thousand as provided by
subsidy from the General Fund. This subsidy is greater than in FY08. The subsidy breaks down about
one-half between service costs supported by direct General Fund appropriation and one-half for costs
borne by the General Fund for which the other Enterprise funds provide a reimbursement, but for which
the Recreation Fund lacks the revenue to reimburse. I believe that this problem could be mitigated, if
the Recreation Commission wished to do so, because the golf course’s revenues are below its potential.
The Recreation Commission assigns too many of the most favorable weekend tee times to permit
holders, who are playing for only the price of the annual fixed fee for the permit. This strategy is akin to
a store selling its best inventory for its cheapest price. Even worse, that inventory (a specific tee time on
a specific day) is instantly perishable; it can’t be held in inventory for sale at a higher price. Changing
the tee time allocation to an auction, or raising the fee for preferred tee time with a permit, would
increase revenues.

The Recreation Enterprise fund lacks funding to make improvements to its parks, ball fields, and the golf
course. As in FY07, support for after school programs has been eliminated. However, the support for a
children’s summer program has been continued.

Both the Water Enterprise Fund and the Sewer Enterprise Fund continue to receive the substantial
financial benefit which began nine years ago when a new twenty-year contract for operations and
maintenance took effect. It initially provided $3.0 million in annual budgetary savings, and it continues
to provide a modest amount of combined annual savings. The erosion of the initial savings benefits
derives from compliance with new regulatory mandates, contracted inflation cost index increases, and
higher electricity costs. Nonetheless, for many years the savings had permitted both systems to
undertake significant programs of capital improvements without rate increases.

For both systems, additional capital investments will be required, because the infrastructure underground
is old for both systems, and the treatment plants have seen many years of service. For the sewer system
in particular, the treatment plant requires upgrading, now being performed, which was mandated by the
regulators, and was also part of the recently executed consent decree. In order to finance the needed
work, for the sewer system a phased rate increase was authorized, beginning in January, 2005 through
January 2009.

In the sewer system, appropriations are proposed for FY2009 of $6.4 million in debt service, an increase
of $2.5 million. However, the system’s rates are no longer adequate to generate a significant surplus, so
there are not sufficient Retained Earnings to support other significant capital needs; only $60 thousand
of that source was appropriated to capital. Accordingly, all capital expenditure must be financed by
borrowing. This is not a healthy situation. In addition, cost inflation has affected the anticipated cost of
the consent decree at the sewer plant. Therefore, I believe a new series of rate increases will be required,
beginning in January 2010, in order to comply with the decree and also fund the system’s operations, but
it is a little soon to make a specific recommendation.

In the water system, the total capital appropriation of about $400 thousand is a decrease of almost $0.7
million from the appropriation of FY2000. Even with the rate increases effective July 1, 2004 and July
1, 2006, and the major increase for July 1, 2008, the first increases since January, 1994, annual revenues
are not adequate to support capital spending from operating revenues. Many requested capital projects
were deferred, and others can only be undertaken if the city council authorizes borrowing for various
projects.
 -12-

In the water system, in addition to capital requirements and operating cost inflation, the water
purchase contract for desalinated water will likely require additional increases over the next ten
years as the city’s fixed commitment increases. I believe that this need also should be anticipated
now and a phased program for future rate increases should be implemented. I urge the Water
Commission to recommend such a program for increases, and I recommend that the city council
act to approve such a request. This action would create a rate structure sufficient to support the
water purchase contract, and also to help to support the needed capital spending.

The final enterprise fund is the newly created Renewable Energy Fund. The purpose of this fund is to
budget and account for activities for renewable energy generation in Brockton. The first such project is
the creation of a solar energy plant on a prior Brownfield which is situated on adjacent land parcels
formerly owned in part by the city and in part by Bay State Gas Company. In helping to finance this
project, the city sold its parcel to Bay State Gas to create a single parcel, and the city then leased the land
back for a nominal fee after Bay State Gas conducted a site cleaning. On the site, the city has
constructed a solar energy generating facility, the cost of which was financed by revenue from the land
sale, by city borrowing, and grants. The construction was completed during the fall of 2006. The cost of
the plant’s operation will be borne by sale of the electricity produced as well as sale of “green energy”
certificates, or REC’s. Revenues are projected at $86 thousand, and retained earnings from the first
year’s operation of $100 thousand; these will offset the FY09 operating costs. Debt Service is paid in
the general fund for the $1.6 million borrowing. The City applied for and received “Certified Renewable
Energy Bond” status from the U.S. Treasury, so annual debt payments consist of principal only, with a
tax credit subsidy from the IRS to the bondholders replacing city interest expense.

CONCLUSION

In conclusion, I reiterate the critical importance of the adoption of water, sewer and refuse utility rates
which are adequate to maintain the self-sufficiency of these funds while also providing needed capital
investment. The General Fund cannot assume the financing burden for these funds, which can and
should be fully financed by the users. Given the extreme budgeting pressures on the General Fund, I
also recommend that the Recreation Commission take action on golf user fees and other Recreation fees
to ensure that the Recreation Enterprise Fund becomes as self sufficient as is possible.

In addition to the critical need for the city to establish and maintain adequate rates in its enterprise funds,
I want to return to the likely requirement for the city to request that its voters approve property tax
increases in order to finance essential services in FY2009. Earlier in this letter I believe I demonstrated
both that the need exists if we are to maintain core services and why the structural design deficiencies of
the Prop 2 ½ inflation index plus the unwillingness of state government to commit the needed state aid
will force the city’s hand. I now want to advocate that the city’s leadership be willing to forcefully and
visibly support a Prop 2 ½ referendum.

We as elected and appointed leaders in the public sector should not forget that this city is engaged in a
competition – for new residents, for new investment, and for school children to attend our schools. This
competition is waged on many fronts. The look and feel of our city, its citizens’ attitudes, the services
its government provides, its physical assets, the competence of its management, and the financing
structure it employs to deliver services, are all engaged. I firmly believe that the city rates very highly on
all of those attributes. Those who doubt my assertion should read the latest bond rating reports from
Moody’s and Standard and Poor’s. All of us involved with Brockton can take pride in these
 -13-

complimentary, objective assessments. We deliver a lot of value in services in return for the financial
contribution which we exact from our residents. Compare our trash service for a basic fee of $280 per
household to what is available in surrounding communities; compare our water and sewer rates to those
of surrounding towns, and then think of the advantage of public sewer over private septic, and of water
professionally treated at our plants compared to water delivered directly from wells. In FY2007, the
last year of full statistics from the DOR, the city’s residential tax rate was lower than the tax rate
for each of eight abutting neighbor communities. At $2,734, the average bill was nearly $1,000
lower than the average of those eight towns. If Easton is excluded from the average, the Brockton bill
is still $845.00 lower. At $9.39, our rate was only 89% of the eight community average. In fact, of a
total of 351 cities and towns in Massachusetts, Brockton’s median residential tax bill was only about
80% of the statewide median of residential tax bills. Almost 250 communities have higher average
residential bills than Brockton’s. Because of all of these positive factors, I believe we owe ourselves,
our citizens, and the city’s bright future, the willingness to take a stand and to ask the city’s voters for
the authority to levy more taxes under the technical provisions of the Prop 2 ½ statute, in order to protect
what we’ve accomplished and compete in the future.

Respectfully submitted,

John A. Condon
Chief Financial Officer

JAC/amw
Enc.
[FY09budgetltr]
I