Meeting with Charlie Lyons July 2003 with additions from discussions with Barbara Goodman, Al Tosti and John Bilafer.

[Please note that any and all errors are solely the responsibility of Colleen Kirby-who is
just trying to make sense from all these different viewpoints-and originally intended this meeting to focus on state funding issues]

Attendees: Colleen Kirby, Barbara Goodman, Sue Sheffler, Andrew Fischer

There are two ways to look at what will happen to the state budget next year. You can look at what happened this year and suppose that similar big cuts are coming our way again next year. Or you can look at the long-term political viewpoint which indicates that a new Governor will push hard for big tax cuts in a non-election year, but that next year things will be relatively stable as more big cuts won’t be workable for politicians in an election year.

According to Charlie Lyons, the big budget problem we have in Arlington is primarily due to the decrease in discretionary State Aid (and our budget busters: Health Costs and Pension Fund obligations). In the early 1980s the Local Aid formula was determined using a mix of 40 or so discrete variables (including such numbers as the age of housing stock pre-1950, per capita income, and so on.) The total amount of Local Aid going to cities and towns was a consistent 24% of the state budget. From this money, Chapter 70 would first be fully funded, then Additional Assistance would be the leftover distributed to the towns that needed it the most. Since 1992, the Local Aid formula was no longer used, and only the school formula became the basis for determining fund dispersements. Now the state gives towns and cities less than the 24% and it’s down to 21% now. Charlie would like to see towns and cities getting a specific % of the state budget for Local Aid every year.

According to Charlie Lyons, as Arlington spends more money on their schools than the required Net School Spending determined by Education Reform and we are spending above the Foundation Budget, the state thinks all is fine with Arlington so they aren’t going to send more money for the schools. If you count all per pupil spending in Arlington (including special education and Minuteman) our per pupil expenditure is above the state average. However, according to Barbara Goodman, our average per pupil expenditure - non intergrated ( ie excluding sped and Minuteman) was about $120 dollars less than the state average. We are about $100 dollars less per pupil spending based on '02 preliminary figures for day programs.

Although Title 1 funding went up across the state, our funding went down by $100,000 in Arlington. Both Barbara and Sue said they would follow up on ways to encourage more eligible families to apply next year.

We have received funds from a federal entitlement grant 94-142 for Special Education for many years. According to Barbara, this money has increased by a bit over $100,000. We were recently notified of this and have not yet sent in the grant application. Unfortunately, we have also received decreases in other grant programs for Special Education. I am not sure if we will have a net increase in special education funds or not.

Charlie mentioned that the state is now covering more of the cost for students who need out of district placement, and this money will go directly to the Arlington schools for reimbursement. This appropriation has already been made this year so this money should be in the current FY04 budget. According to Barbara, this circuit breaker just passed at the state level may mean *UP TO* $300,000 more for us. However the law was passed with a catch. The state will pay up to 75% of a certain cost IF the funds are available. We of course need to pay 100% up front and they will reimburse in 4 installments if money is available. Thus it is difficult to count on these funds.

The Hancock case is being fought with the voice of the poor districts. Charlie thinks we need to join this case with other communities in a similar situation by filing an Amicus brief. Where we are being hit hard in the school funding formula is that a community’s wealth is determined solely by looking at per capita income and the valuation of residential homes. Commercial property valuation is not included as part of the towns wealth. For communities with large amounts of commercial properties, this wealth is a hidden resource and is a boon. For towns that are primarily residential, such as Arlington (Belmont, Melrose, others?) we do not have access to large amounts of commercial property taxes. Charlie suggests we make the case that this is unfair in the Hancock case. He says that both Jay Kaufman and Jim Marzilli are also interested in following up on this legislatively. Thus instead of determining a communities wealth solely based on Residential Equalized Valuation X Per Capita Income; the formula would use Total Equalized Valuation = Residential EQV + Commercial/Industrial EQV and multiplied by per capita income to determine a communities wealth factor. If this were done, then Arlington might not be so disadvantaged in the current way school funding is determined. This is not a quick fix, it would take several years and tens of thousands of dollars, and would take a coalition of similar minded communities to push for this change. Arlington is 94 % residential, while Boston is only 26% residential. Any communities with EQV greater than 80% should be interested in joining in on an Amicus bried arguing this point.

Also we need the towns wealth to be determined such that it is dependent on property owners’ ability to pay, ie it is the property owner who pays the property tax, not the tenant. (I’m having some trouble following this one as I thought property owners pass on property taxes in the rent in any case?) Although I guess then there would be fewer incomes taken into account as the sum of all tenant incomes would be irrelevant and just the fewer landlords and owner occupied incomes would count?

Charlie would like to find a way to protect our income poor and property tax rich seniors from property tax increases. In Cambridge they use a formula such that for seniors, they would be taxed as usual on the first 200,000-300,000? valuation on their home, then they would get a 20% or so break on the valuation from say 300,000-700,000, then they would get fully taxed on any amount above that. We need to look at the rule in Cambridge to find out the details and think about implementing that here in Arlington through a home-rule petition at Town Meeting.

Charlie thinks the real estate transfer tax recently implemented in Winchester will be killed by the state. We need to increase state income taxes instead.

Charlie thinks we need to spend down our Reserves now or the state will just look at the money we have in our Stabilization and Reserve funds and say “see you guys have plenty of money and don’t need any help from us” they won’t say, “hmmm that town is being fiscally responsible and cannibalizing their young”. Diane Mahon has also indicated that she thinks we need to spend down more free cash and stabilization money.

Al Tosti says that the basic fact of the Town's fiscal 2004 budget was that we were spending more money than we were bringing in. This was caused by factors largely beyond our control. To solve this problem, we either had to raise more money(override) or reduce expenditures. The use of reserves is a stop-gap, temporary solution to get us through the tough period to a hopefully improving economy. But it cannot fill the gap completely or for very long. The budget presented to Town Meeting and approved by that body included the use of $5.9m of reserves to cushion the blow to Town services, but without the override, services had to be further reduced. Next year we will use another $3.6m of reserves and in fy06 another $1.4m. At that point our reserves will be almost exhausted. Our interest income on town funds will be substantially reduced, we might have to borrow temporarily for operating expenses because of cash flow problems, and our credit rating will be in severe jeopardy. The hope is by that time an improved economy will allow us to stabilize services and begin to rebuild these reserves in preparation for the next recession. This plan to utilize reserves to carry us over a multiyear problem is responsible and was not challenged by a vote of any of the major Boards involved in the process.

According to Al Tosti, without the override, expenditures had to be reduced. That is a fact of life. To throw all of our reserves against our budget would have resulted in a disastrous situation for the next fiscal year and would have been irresponsible. The State would have looked at us and declared that we were a basket case of our own making. They would not take funds from others who had made the tough descisions to give to us who didn't.

It seems that the idea to use all of our reserve and stabilization funds this year is predicated on the idea that we will not be in a fiscal crisis next year, whereas the course we did follow was a 3 year plan for using up reserves. It does seem more prudent to follow the 3 year plan to me especially as the economy sure doesn’t seem to be on an upswing yet. Am I not understanding something?

Charlie suggested we need to look at the Pension fund timetable and see if it makes sense to extend it more next year. The legislature recently allowed? towns to not put money into the pension fund for 1-2 years and then make up for it in later years. We need to see if this would make any sense for Arlington.

John Bilafer stresses that we should not extend the timetable out to 2028 which is the maximum as it sends a negative signal to the credit rating agencies that the Town of Arlington is experiencing a weakness of resolve regarding its willingness to confront and deal with its long-term obligations. This has the potential to increase borrowing costs for the Town. In addition, our consultant, Larry Stone of Stone Consulting, said it would cost the town an estimated $37.5 million in additional interest cost over the duration of the schedule. Finally, if we extended the funding schedule to the maximum, the Retirement Board would lose all budgetary flexibility with regard to smoothing out future portfolio losses in the event of another sustained downturn in the market. As it is, the timetable extension From 2012 to 2022 saved Arlington over $1.1 million. This extension was unanimously supported by a Pension and Reserves Subcommittee established by the Board of Selectmen on March 6, 2003. The subcommittee members were Selectman Kevin Greeley, Charlie Foskett-Finance Committee, Ruth Lewis-Town Comptroller, Joani Lamachia-School Committee and John Bilafer-Town Treasurer and Retirement Board. On June 9th, Town meeting finalized the appropriation process by funding the retirement budget.

However it is not clear what the effect would be to extend the pension fund out by one or two more years (to 2023 or 2024) rather than to the maximum (2028). Or what the cost or savings would be if we were allowed to not pay into the fund for one or two years under new proposed state guidelines.

Charlie said he could possibly see a modest override in the amount of an additional 2.5% (around $1.5M) combined with a progressive circuit breaker for house-rich, income-poor elderly.

Charlie thinks we need to aggressively pursue Homeland Security Funds to possibly institute a Radio Frequency System in Arlington as a warning system for our region. We also need to push hard on the unions to accept a 3 tier for drugs medical insurance plan with an 80%/20% copay split.

In the long term, the National League of Cities is joining with the National School Board Assn. and the School Superintendents Assn. to push at the Federal Level for fully funding the No Child Left Behind Act. Charlie says we also need to push to decrease the intrusive aspects of the bill to make it more effective. As he is president-elect of the National League of Cities, he looks forward to pushing this. We also need to push for full funding of IDEA, the special education mandate (which is currently being funded at 12% but was promised to fully fund at 40%). The Federal Government deficit of $455B is more than current spending on all schools and higher education combined. The National League of Cities opposed the president’s tax bill cut. We did help push for the $20B which was returned to the states earlier this year.

Massachusetts received $550M from the Federal Government to help with the fiscal crisis. $300M is earmarked for Medicaid. But that means it frees up money we were using for Medicaid. The remaining $250M was meant to go back to the states to be used to jump start the economy, not to be put into a bank account where it doesn’t do any good. There is talk at the Federal Level to force states to use this money or they will take it back. Initially $87M of this money was supposed to be earmarked to go to cities and towns but that provision of the bill was altered. But we should demand that Massachusetts honor this and give us the money intended for cities and towns. It’s our share and we need it now! The first priority for that money should be the $32M needed to fully fund Chapter 70. Also the School Building Assistance Funds should be funded. Arlington received a 20% cut in Chapter 70 this year, plus a 20 % cut in Minuteman Chapter 70 funds. If we got our share we would recoupe these funds. This would be something to push with your statewide coalition partners.

According to Charlie, in poor economic times, the Federal Government needs to jump start the economy. So be on the lookout for new grants for improving infrastructure like rebuilding the Fire Station and the Schools. We need to have those Dallin school plans ready to go and go ahead and build it. Construction costs are down now because demand and prices have gone down.

The O’Neill formula is minutiae as compared to our budget busters of Special education costs, Health insurance costs and Pension funding, and State Aid cuts.

It was not clear whether it was easy to compare student expenses across towns as various factors may be included differently in different towns. Sue Sheffler was going to look into this issue.

Charlie supposed that if he were a member of the school committee and he thought we were cutting essential services at the schools, he would have a warrant article at the next Town Meeting asking for the funds to cover those essential services. Charlie would think we could cover essentials from the stabilization funds up to $1M. But he would be very specific about what exactly those funds were being used for. He would try and get the town to partner with the current private fundraising effort and get matching funds from the town. There may be a Special TM in the fall.

However, it seems that this supposition is based on thinking that our reserve and stabilization funds are expendable and will not be needed for fiscal years 2005 and 2006. It is not clear that this is the case.