First, let’s look at the current town budget, in rough numbers. For the sake of example, if the budget was under $1 million, it got lumped into another budget. (You can see a much more detailed version of the FY10 budget here).

Those two last line items are not like the others. I know what the DPW does.  I know what schools do.  I know that the capital budget buys buildings and trucks, and I know the MBTA runs buses in town.  But pensions and insurance are different. They’re not a department, or a service, or a town activity. These two line items are different because they are an aggregation of costs that are incurred in other budgets. The insurance is the cost of providing a current health insurance benefit to our town employees and retirees. The pension is a combination of current and future obligation to provide a retirement benefit for our town employees.Pensions and insurance are related to all of the other line items, but they are secondary, not primary, to a town function.

So what drives the size of pensions and insurance?  Basically, it’s the number of town employees, and the amount of money they earn in wages. The town spends a bit more more than $50 million in wages. That $50 million number can’t be determined from the budget information I posted above; I did a back-of-the-envelope calculation from the various departments’ budget details.

To put it another way: for every dollar the town budgets for wages, it must also budget another $.50. For the purposes of this proposal, I’ll call those numbers “salaries” and “overhead.”

This is the root of why I don’t like the current budget process. Say you’re the Police Chief, and you’re looking a tough budget with unpleasant choices. You’d like to hire an additional patrolman, and you manage to scrape $50,000 out of your expenses budget in order to make it happen. That didn’t leave any budget for the $25,000 in overhead. A different example: say you’re the school Superintendent, and you’re trying to find a way to keep class sizes small in your biggest elementary class. You can’t fire any kids, but you can hire a couple more teachers – you forgo some text books, delay a network upgrade, and find the $100,000 in your budget to hire those teachers. Again, that didn’t leave any budget for the $50,000 in overhead for those new teachers.

I know we hire smart administrators in Arlington. I am certain that the people making these hiring decisions know that the employee benefits cost money. Still, the current budget process doesn’t provide any incentive for them to account for it. Their professionalism keeps them from taking advantage of the system. But when the toughest decisions are being made in the wee hours of the morning, when the edge cases are being decided, they have the luxury of making the overhead cost someone else’s problem. I’ve been on the Finance Committee for five years now, and I know that it happens. I interview the budget writers, I quiz them on their decision process, and I know that it happens. This statement is not meant to blame the town’s administrators. “You get what you measure” is one of my favorite aphorisms. We measure our administrators to deliver services on a limited budget, and we can’t hold it against them when they do that with some creativity.  With our current budget process, the cost of that creativity is hiring decisions that don’t account for the full cost of the employee.

So here’s the alternative. Reshuffle the budgets such that overhead is included in each departmental budget. Apply the cost of the health care and pension at the same place that it is incurred, right with the salary. Here’s what my new budget would look like, roughly (the by-department overhead budgets are very rough estimates):

Some key points about the model:

• It’s a net zero-budget change. This doesn’t make any changes in service levels, doesn’t move money from one department to another, and doesn’t save any money (at least not in and of itself).
• A few people I shared this idea with were concerned that it would be a health privacy (HIPAA) violation to print what insurance various employees are getting. I’m not suggesting that we do that. I’m suggesting we use average healthcare and pension costs, based only on salary and other already-public information. Departments don’t get charged for their individual employee health care decisions. They get charged for the average cost, multiplied by the number of employees.
• Computationally this is pretty easy. At the start of every budget cycle the Town Manager (or Comptroller or Treasurer or whomever) would publish that year’s overhead rate, and every department would get it in their budget spreadsheet.
• The insurance budget is always a difficult one to predict, not least because the town sets the rates in December, halfway through the budget cycle. This plan doesn’t help or hurt that risk. It still needs to be managed.
• No overhead is charged when there is no salary paid.  That’s why budgets like the capital budget would be unaffected.

There’s another interesting side-benefit to this method.  The town’s labor contracts are negotiated in two chunks, one by the Town Manager and the other by the school Superintendent.  The current system doesn’t really reward a specific budget when there is a negotiated health care savings.  The new method would permit the parties to come to an agreement that is more specific to the union in question.  If the firefighter’s union wishes to trade higher salary for a smaller health benefit, the new budget system would be able to accommodate that.  Likewise, if the teacher’s union wishes to negotiate a lower salary for a larger health benefit, that isn’t difficult to place into the budget.  This idea isn’t core to my proposal, but it’s worth mentioning.

I’d also like to make the case that now is a better time than any other to make this change:

• We’re going into the next year without a five-year plan. If we change the budgetary rules in the middle of a planned period, we’d also have to update the plan, and that is contentious. By making this change now, we get to tackle the challenges separately.
• The town is already in an introspective period. The Town Reorganization Committee is already meeting, and this is a perfect topic for it to consider.
• The town’s budget process is already changing. Nancy Galkowski has been the budget’s shepherd for a long time, and she has moved on to a different job. The process is certain to change as a new cat herder is brought to the process.

This overhead-based budget process brings the true costs of hiring closer to the hiring decision. Our town budget makers will be reminded of the actual cost of hiring at the time they make their budget. Armed with that information, they can make the best, most-informed decision in the town’s best interests. Now is the right time to make the change.

Tonight was the annual organizational meeting of the Finance Committee.  It’s often an interesting meeting because you get to hear updates on everything that has happened since Town Meeting – a digest of the last 4 or 5 months.

Town Manager Brian Sullivan and Deputy Town Manager Nancy Galkowski reviewed the five-year budget projections.  The revenue for FY11 (the fiscal year that starts in July 2010) is projected to be $2 million (1.8%) lower than the current fiscal year. The biggest revenue decrease is the savings account from the 5-year plan.  The 5-year plan included $2.7 million from that savings account for FY10, the fifth year of the plan.  That’s a structural deficit that carries into FY11, and there’s only $1.3 million left in the bank, meaning a $1.4 million drop in revenue.the next biggest chunk is a forecasted decrease in state aid ($1.2 million).  This is an excellent time to remember that the town lost a million dollars from the savings account because the Treasurer invested the money in the stock market.  Wouldn’t it be nice if he’d followed basic financial prudence and invested that money in something safer?  Wouldn’t it be nice if the town’s revenue drop was 50% smaller?  I’m reminding you now, and I’ll keep reminding you as we go forward.

The next biggest decrease is in unencumbered funds, aka free cash; that is a result of a tighter budget in FY09 that were spent to their max, leaving less money turned back to the town at the end of the year ($900,000).  The end of the federal stimulus money is the next biggest at $469,000.  The regular property tax increase of $2.1 million is not sufficient to cover all the decreases mentioned, and the result is $2.0 million in lower revenue.

We then reviewed the anticipated appropriations for FY11.  General expenses were anticipated to increase at 4%.  There was no general salary increase included, but there are the usual steps and longevity increases, for a 4% increase.  Insurance (including health care) is expected to increase 8% (the bids for half of the year are already in, so that’s a fairly solid number)  After a bunch of other relatively minor changes, the result is a 2.19% ($2.5 million) increase in expenses.

If you’re quick with the math, you can see that is a $4.5 million deficit.  The town has to balance the budget.  The manager also provided a version that closed the deficit by reducing the town and school budgets by 2.85% (a swing of 6.85%, from +4 to -2.85).  He took the money out of salaries, meaning layoffs.  The manager said that was a layoff of 100 people, but I think that is a bit exaggerated – by my math it’s closer to 70.  Still, a very big number.

Two key questions in the budget are pensions and the GIC.  The retirement board has seen huge losses in the fund; they could drastically increase the amount the town must pay and the town will have no choice but to pay.  The manager is waiting for a state commission’s report in November.  That will help the retirement board judge its options.  The GIC is the state health care system.  If the town and the unions can agree to enter the GIC, that could be a large decrease in health insurance ($2-3 million).  The deadline is December 1st.

After the budget, the manager answered a number of questions.

• The Symmes property may be sold shortly.  The deal involves both JPI and the bank taking losses and selling to Tremont Capital.  We should know in a month or so if that goes through, and maybe even some foundations being poured this year.
• The Brighams property is under study by a developer with an option to buy.  They are looking at residential uses.  The town initially wanted commercial, but they’ve since received advice that grouping commercial properties is best, and the Brighams property is too far from other commercial areas.
• CVS project is moving.
• The next step in the Mass Ave project is a state hearing.
• The Mugar property is being reviewed by a developer who has an option on it.  The developer is doing site study that might demonstrate that parts of the land are above the flood plain.  The plan might include putting some buildings on stilts.  The analysis is ongoing.
• There have been some regionalization talks, particularly around the health department.
• There is a draft report on the Parmenter and Crosby schools.  There should be more public information in a month.
• The police department is managing the 8 vacancies brought by the change in retirement plans.  The hiring freeze is still in effect.  The manager is considering hiring for 2 or so of the 8 vacancies.  The town did not get the federal grants hoped for during the spring budget meetings.

The manager left and we moved to the Special Town Meeting scheduled for November 16.

The first question is whether the town should accept the local option and increase the meals tax by .75%.  The result would be about $200,000 in revenue.  Somerville, Cambridge, and Boston have already done the increase and Winchester, Lexington, and Burlington are likely to do so.  Al Tosti strongly endorsed it, saying that state lawmakers were likely to not give more money if the towns don’t do the tax increase.  I argued against it, saying that the state has mis-managed the revenue from the beginning.  I did  not want to give those lawmakers the political cover they were looking for.  FinComm endorsed the new tax 14-1.

The hotel tax was next, an increase from 4% to 6% for $70k in revenue.  Also approved 14-1.

A few more items were discussed:

• The special town meeting has 2 alcohol votes and a change to the town reorganization committee.
• If there’s going to be an override, it has to come from the selectmen.  There is still information and outcomes to wait for (like the GIC). Pay-as-you-throw is also sure to come up when the DPW reports.  A five-year-plan style override would be more than $9 million, more than 50% bigger than the last one.
• Minuteman High wants renovation money.  I pointed out that we are at a key point to ask for changes to the organizational structure for the school.
• The schools will look at a draft budget in November, earlier than usual.
• The question of how to choose a new superintendent is in flux.
• With the pension reform bill, only assessors currently qualify for pension benefits.  If their pay is dropped from $5200 to $4999 they are no longer eligible.
• The town reorganization meeting was discussed.

The Finance Committee discussed changes to the vacation policy so that it can no longer be accumulated  indefinitely.

We re-elected our same officers, with Al Tosti as chair, Charlie Foskett, Alan Jones, and Dick Fanning as vice-chairs, and Pete Howard as secretary.

We have vacancies in Precincts 6 and 11.

We’ve had five FinCom meetings this year so far.  I missed two (out sick).  I only put up notes on some FinCom meetings, partly because of my time constraints, party because some of the stuff is just too dry to get excited writing about.  Tonight there was enough interesting stuff to write, so here goes the first FinComm post of ‘09.

I think the most important thing we talked about was to not decide the budgets yet.  Ordinarily at this point in the budget cycle we’d have a bottom line in mind and a draft set of budgets that come close to that bottom line.  We’d be meeting with departments, reviewing the budgets, and getting them on target and sync’d up with general policy.  This year, we have draft budgets that reflect an increase in spending (higher than level funding, lower than level service).  The consensus is that the current expected revenues require a 1% cut in funding – our draft budget is out of date.  Additionally, there are a whole bunch of unknowns: the state has a couple different pots of stimulus money that have a real chance of affecting the town’s revenue.  There is a new chairman of the House Ways and Means committee, which makes local aid less predictable (and likely to be late in releasing a budget).  The Community Development Block Grants (CDBG) are likely to be larger because of stimulus spending.  There is a movement to increase meals taxes and return the money to state and towns.  When you look at the timeline and likely outcomes, the budgets are likely to change a half-dozen times between now and Town Meeting.

So, our plan right now is to wait.  We’ll meet with departments but not try to finalize any budgets.  Town Meeting will open.  Town Meeting will dispose of zoning and bylaw articles.  We’ll then ask Town Meeting to adjourn until late May or June.  We’ll finalize budgets in May with the departments, and then have Town Meeting vote on those finalized budgets.

We’re not locked in on this plan.  We may change our minds if other town bodies/officers recommend otherwise.  I think this is the right way to go.  There are so many variables, we’ll be chasing our tails making a budget this month.  We can reasonably expect most of the variables to be resolved by May, and we can write a believeable budget then.  I believe Town Meeting members will understand the logic.  It’s an unexpected inconvenience, but it’s the right thing to do.

In other business, the committee voted to table the vote on pay-as-you-throw legislation until the Selectmen have considered it.

The committee voted to table the Recycling Committee’s budget until after the Eco-fest so as to judge demand for compost bins.

Barbara Goodman came in and spoke to her request for home rule legislation that would, in the end, permit her to buy two years of retirement for her time as a school committee member.  The committee considered the proposal and voted unanimously to recommend against it.  There were a variety of reasons discussed.  

• The committee would rather that  retirement benefits for volunteer positions be less available, not more common, and will not vote to expand it.
• We should stick with the standing state law on the matter.
• This is an example of the abuse cited by the governor’s blue-ribbon commission on retirement reform.
• As a home-rule petition, the legislature would likely make Arlington accept the liability and pay for the additional retirement benefits.
• Town Meeting can choose to grant a salary if it chooses, and it has not.

I made the motion on this one.  My arguments are mostly in bullet points 1 and 3 above.  In my mind, that isn’t work that makes you eligible for retirement benefits.  I don’t think that selectmen or the moderator should be elibigle either.  Pensions benefits should be reserved for full time workers, not volunteers who receive a stipend.

We heard a presentation from Jay Weinberger about his 13-year-long attempt to remedy drainage issues and water damage on Mead Road.  After hearing the story, the committee tabled the issue and asked for more information from the DPW.

We hear a report from Bill Shea of the Permanent Town Building Committee centered on the firestation rebuilds.  He wants to modify the language of the FY09 vote.  I pointed out he could do that if he got on the warrant for the Special Town Meeting, which is open tomorrow.

The Human Rights Commission was heard.  They reported on their activities of the year and asked for a level-funded budget.  We recommended level funding for them and a handful of other committees.

The minutes were approved.  A few other items were discussed without decision.  We adjourned early, at about 9:40.

Dick Fanning took over to chair the meeting. The minutes of 5/12, 5/19, and 5/21 were approved. The Treasurer presented his preferred version of the the PoBs (pension obligation bonds) legislation. The FinCom version required PoBs to be approved by 2/3 at Town Meeting, the treasurer, the Board of Selectman, and FinCom. It also limited the amount to 20% of the total fund. The treasurer wanted to remove the 20% restriction and the FinCom approval. After discussion the treasurer agreed to re-insert the FinCom approval. The 20% cap is likely moot because by 2009, in current market conditions, the remaining liability will not be much larger than 20%.

There was discussion about the risks of PoBs and the effects of the legislation. It was noted that the proposed vote is only to create enabling legislation. There is no money spent, no commitment made, no risk taken on. It’s just to keep options open. The treasurer’s language was approved.

Treasurer Stephen Gilligan wanted to talk about Article 47, which we’d had a hearing on in February.  FinComm had voted to recommend the request for special legislation, making POBs at least possible, but voted against actually permitting to borrow the money, and added a couple other restrictions including requiring explicit approval of FinComm and restricting the amount of money that could be borrowed.  The treasurer appeared to support borrowing money at this town meeting anyway, as indicated by the draft language circulated in March.

Tonight, the treasurer said that he was not seeking permission to borrow money at this time; he was only seeking the special legislation.  He did want to put the vote in a different form than the FinComm recommended vote.  FinComm codified the restrictions in the request for special legislation.  The treasurer wanted to make the restrictions part of the vote, but keep them out of the special legislation.

The treasurer said he would circulate new language.  He also said he would postpone discussion until 5/28 because Charlie Foskett would be traveling and unable to attend Town Meeting until then.  (Al Tosti has recused himself from the discussion of this issue because of a potential conflict of interest).

Personally, I’m likely to be happy with the language as the treasurer described it.  The devil is in the details, of course, and I look forward to reading the actual text.  Several other members of the board are more skeptical.  We’ve talked about this issue at least 4 times now, and we still don’t have recommended text.  If that text isn’t ready beforehand, several people will vote “no” just because they won’t have had time to study the text.  I’m inclined to agree.

The minutes for 4/30 and 5/5 were approved.

Today we first approved the minutes of the previous meeting.

We then revised our vote on Article 75.  The original vote was no longer needed given the Contributory Retirement Board’s surprise announcement that they would move Arlington’s funds into PRIT.  A vote of no action was then recommended on the article, by a vote of 15-1.

The reclassification article was adjusted by $14.

The minutes from the last meeting were approved.

First up was the Capital Budget, discussed on Monday. The budget was recommended at $8,538,000. There was almost no discussion; we’d talked for an hour and a half earlier in the week.

Article 17 – Holding the warrant open until 60 days before Town Meeting. This was put on by the TM Procedures committee. John Leone and John Maher spoke. Evidently the Selectmen are agreeing to open the warrant in the first week of December and closing it in the 3rd full week of January. The article will be withrawn.

Article 44-45 – John Maher spoke about the destination of the OPEB funds. Maher repeated his statement that the only option offered by the special legislation was to transfer the funds to the Retirement Board. FinComm then voted a recommendation of no action on Article 45 (the article that would transfer the money somewhere else). As I previously blogged, I think we were outmaneuvered. I wouldn’t choose to give this money to the Retirement Board, but they won this battle when Town Meeting asked for the special legislation.

Article 19 – Housing Director Laura Weiner, AHA Board Chair John Griffin, and Town Counsel John Maher spoke about this article. The Symmes agreement includes a $150,000 payment to be used towards affordable housing. This would be the place to put it. There were several questions about the potential increased costs to the town: employees, eminent domain, management of property, and others. The goal was stated to be a “bank account” for affordable housing – when a developer wants to build affordable housing they could borrow money from this trust to build the housing. Several questions were asked about whether the trust had too many downsides – the general goal of bank account could be met through a regular town fund. It was stated that there are many towns using this structure, but they are mostly town who have adopted the Community Preservation Act. It was noted that there are several options for the Symmes payment; the money can be accepted and used by the town without this article. After discussion, the committee voted to recommend no action on this article. This article would erect a new bureaucracy with lots of potential costs and risk. The potential upside is small. There are three active affordable housing organizations in the town, including the non-profit Housing Corporation of Arlington. I strongly prefer that this excellent organization continue its work. A town trust would only slow things down and increase costs.

Minuteman - Superintendent Bouquillon presented the Minuteman budget. His presentation was consistent with what I saw in January. He talked about MCAS success, out of district students, recruitment goals, communication with other districts and towns, recruiting new members, program choices, and more. The assessment this year is smaller than last year, mostly due to a lower enrollment figure. I continue to be impressed with the Superintendent. There are a lot of things right about Minuteman, and a lot of problems. He’s not hesitant to address the problems and talk about solutions. The budget was recommended at $3,153,000.