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

-2enjoy 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.

-3GENERAL 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 Increased Tax Levy Increased Cherry Sheet Chapter 70 Increases (net) from Other Cherry Sheet accounts Increase in appropriation of Free Cash Increase in appropriation of other Available Funds, except Stabilization Decrease in Appropriation for Personal Services Decrease in Appropriations for Purchases of Services Decrease in Appropriations to Reserves Decrease in Appropriations to Capital and Debt Decrease in Non-Net School Appropriation to Brockton Public Schools Total Financing Sources 1,800,000 $ 12,674,476 21,720 77,047 42,369 607,748 $ Value of Change 3,089,185 6,329,808 122,607 273,869 310,123

-4USES OF FUNDS FOR INCREASED SPENDING, DECREASED REVENUE, AND OTHER REQUIREMENTS FOR FINANCING IN GENERAL FUND Category Net Increase in Appropriations for Goods, Because of Increased Liability Insurances Increase in appropriations for Personal Services Overtime Increase in Net School Spending Appropriation to Brockton School Department Increase in Appropriation to Southeast Regional Voc. Tech. Increased Appropriations to Employee/Retiree Insurances Increased Medicare Tax Appropriation Increase in State/County Assessments and Other Amounts Raised Increase in Pension Appropriations Increase in Snow/Ice Removal Appropriation Decrease in Local Receipts Estimate Decrease in Appropriation from Stabilization Net Increase for all other increases/decreases Total Financing Requirements 322,000 245,087 150,000 894,470 3,109,670 261,420 $12,674,476 4,957,041 168,731 1,934,807 180,000 $ 319,696 131,554 $ Value of Change

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

-5them. 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

-6almost 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.

-7Returning 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.

-8The 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) 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 . Data Processing – 2 (attrition)

-9An 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 onehalf 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.

-10However, 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.

-11The 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.

-12In 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

-13complimentary, 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

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