Town of Brookline

Honorable Members of the Board of Selectmen
And Members of the Advisory Committee

In accordance with the provisions of Chapter 270 of the Acts of 1985 as amended (the Town Administrator Enabling Act) and with Section 2.2.5 of the Town By-Laws, it is my privilege to present the Town of Brookline Financial Plan for Fiscal Year 2004. This Financial Plan provides a complete and balanced presentation of income, operating expenses, and capital obligations despite an extremely unstable fiscal environment.

Preparation of the FY04 Financial plan in such highly volatile circumstances has been extraordinarily difficult. The good will and sound judgment exhibited by our Town Department Heads during this trying time has been both remarkable and refreshing. The relative calm here during this tumultuous period is due in large measure to their leadership. This community is very fortunate to have professionals of this caliber.

The difficulty in preparing for FY04 is obviously due to the extreme pressure on the Town’s budget from both the actual developments to date and the continuing uncertainty about Local Aid. Sharp cutbacks in Local Aid are compounding the deep stresses already in place from group health (+19%), retirement (+7.5%), energy (+11.6%), and general insurance (+10%). The move to cut FY03 Local Aid mid-year is unprecedented. Further, a newly elected Governor is constitutionally granted an extra month to file the State Budget, leaving estimates for Local Aid for the upcoming year without firm direction.

The FY04 Financial Plan, then, is based on two critical and quite adverse assumptions. It assumes a $756,647 Local Aid reduction in FY03 and a cumulative $2 million reduction for FY04, a total of approximately 10%. Overall, the FY04 Financial Plan totals $181,869,676. It includes a General Fund operating budget of $149,481,012 (an increase of 3.3 % from the FY03 budget as amended by the November 2002 Special Town Meeting). It also includes a tax financed capital budget of $7,246,117, enterprise/ revolving funds of $23,139,262, and an operating reserve of $1,070,000. (See pages I-19 and I-20 for summaries.)

If the Governor’s Budget, which is to be submitted to the Legislature before March 1st, contains Local Aid distributions at significant variance with our assumptions, then a Revised Town Financial Plan will be submitted in summary form to the Board of Selectmen and Advisory Committee in early March, 2003. Like the many other extraordinary events taking place, a formal revision of the Town Financial Plan has never before been considered. This unprecedented potential action could well prove to be a necessary step in response to conditions even more adverse than the estimates contained in this Financial Plan.

OVERVIEW

Over the past 25 years we have experienced several distinct economic cycles and fluctuating fiscal conditions for state and local government. Retrenchment periods for the municipalities have been marked by the 4% “budget cap” of the late-'70's; Proposition 2 ½ in 1981; the elimination of Federal Revenue Sharing in 1985; and the collapse of the real estate market and state assistance for cities and towns in the early 90’s.

The state’s current fiscal tailspin is well into its second year. In comparison to previous declines, this might ultimately prove to be the most acute yet for municipalities. The current demise is so pronounced that it has spawned an unplanned mid-year cut in Local Aid. Employing new budget-cutting authority granted by the Legislature, the Governor has used “9C powers” for a $756,647 reduction in the Town’s Lottery Aid and Additional Assistance. This translates into nearly a 20% cutback in the last two quarterly distributions of these accounts for the remainder of Fiscal Year 2003. In the history of all our previous down cycles, the only other forced mid-year cut was required in 1981 by Proposition 2 ½ which mandated an auto excise tax reduction in the January following the November 1980 vote.

Further, the magnitude of the overall Local Aid cutback we are likely to experience is beginning to approach the levels of the massive reductions of the early 90’s, but in an even more compressed period of time. Brookline endured several Local Aid cuts with the cumulative loss of approximately $5 million between Fiscal Years ’90 and ’92. The recently announced $756,647 reduction follows a $286,459 cut already made in the FY03 base of Additional Assistance. This $1 million FY03 reduction could be followed by more FY04 cuts ranging up to $ 4 million. While the cutbacks of 10 and 20 years ago were made against obviously smaller base budgets, the current reductions could be as intense as any ever experienced.

Because of the effects of the various economic and fiscal downturns over the past 25 years, it can be reasonably argued that the Massachusetts local government has also undergone the same kind of downsizing experienced by other service industries in the region. While local government can not relocate, take-over, or merge in the corporate sense, the municipal transformation over the last two decades is not unlike the restructuring that has also occurred in banking, insurance, and health care. Some of the dimensions of change for Brookline can be measured as follows:

	1981	2003
DPW Employees	293	182
Uniformed Police	149	140
Uniformed Fire	209	160
Fire Stations	8	5
Total Town Employees	850	704

Although these and other permanent reductions in Town operations have been accompanied by an infusion of technology, along with more effective management structures and expanded training, all of which have contributed to increased productivity, the configuration of Brookline government service is markedly different than two decades ago. If there was ever a municipal “bubble”, it has long since disappeared.

Now, in the current economic and fiscal slide marked primarily by the collapse of markets associated with the high tech boom, can Massachusetts local government and the Town of Brookline cope with another downturn? The answer to this question in part lies in wry observation made recently by a Boston area economist, “Economic cycles run approximately every ten years, but regrettably human memory seems to last only about seven years.” Has Brookline been able to apply the lessons learned from the past in order to withstand new budgetary setbacks? Naturally, these questions can not be answered fully at this moment. The magnitude of the fiscal challenge itself has yet to completely unfold, so the efficacy of the Town’s preparatory steps can only be truly measured when they are fully tested. However, one essential answer to the questions confronting us is that preparatory steps have indeed been taken:

· Two years ago, a careful analysis of town revenue was undertaken to determine, in the event of a slowdown in the economy, what level of local receipts would be sustainable. The effort, which established a new revenue mix for the FY 2002 budget, is helping to avoid erratic swings in service delivery.

· During the FY 2003 budget deliberations, the publicly stated strategy of both Town and School administrations was to position certain assets in budget appropriations which could be extracted from the FY 2004 budget plan in response to state aid reductions without elimination of basic services.

· On-going expenditure controls have been crucial in readying the Town for the downturn. Labor agreements have collaboratively balanced the Town’s ability to pay with the goal of security and stability for our valued employees. The number of FTE’s employees has been tightly controlled, with limited growth restricted primarily to public safety functions.

· Continued emphasis on community investment has reinforced the desirability of Brookline as a place to live and work, resulting in an extremely advantageous expansion of property tax “new growth” allowed under Prop 2 ½ . “New growth” in FY03 was the highest ever at $2.49 million

· For the FY 2003 budget the Town further enhanced the revenue mix by increasing a series of local receipts, some of which aided in the FY 2003 Financial Plan (Parking Meters), and some which resulted in a revenue capacity to be used in the FY 2004 Financial Plan (Parking Fines). This revenue capacity has helped offset the mid-year state aid reduction. Perhaps the single most immediate factor enabling the Town and Schools to avoid severe service reductions in FY04 is an anticipated $1 million increase in parking fine revenue.

·The Public Works Commissioner has concluded very successful negotiations for a multi-year refuse disposal contract, which controls the growth in this large cost center to 2.5% per year. This effort has spared the community significant cost increases while providing a predictable estimate of future costs.

FISCAL POLICIES

The preparations outlined above have dramatically reduced, but regrettably have not entirely eliminated, the need for retrenchment. Fortunately, our initial Financial Plan preparations were predicated upon the Fiscal Policies that guide budgeting in periods both of growth and curtailment. These provide well established reference points for resolving difficult details in this cutback environment.

Brookline is one of just 12 communities in Massachusetts that has the Aaa credit rating, the highest possible. Among other factors contributing to this rating, Moody’s Rating Services has cited the Town’s “sound financial operations”; “well developed capital improvement plan”; and commitment to “previously dormant stabilization funds”. Moody’s findings are linked directly to the Town’s Fiscal and Budgetary policies.

The FY04 Financial Plan continues the practice of adherence to the Selectmen’s Financial Improvement Programs and formal Budget Guidelines, which include:

- Retention of increased reserves
- CIP Financing policies
- Town / School Partnership Agreement
- Collective Bargaining settlements within ability to pay
- Position freeze on total number of Town employees
- Directives re: use of Free Cash
- Override requirements of 1994

Reserve Policies – During the FY 2002 budget process, a review of the Town’s Reserve Fund policies was conducted and areas of possible adjustment were identified. The FY2004 Financial Plan continues these adjustments for appropriated reserves, non-appropriated reserves, Capital Stabilization Fund, Catastrophe and Liability Fund, and Retiree Group Health Insurance Trust.

Appropriated Budget Reserve – In order to strengthen the ability of the Board of Selectmen and Advisory Committee to respond quickly to unforeseeable financial problems, this reserve is funded at the full amount (.75% of prior year net revenue).

Non-Appropriated Budget Reserve – Beginning in the FY 2002 budget and continued in the FY2004 Financial Plan, a reduction in the annual set aside
from 0.75% of prior year net revenue to 0.5% is again recommended.

Capital Stabilization Fund – The existing policy calls for a level of funding equal to 1% of the replacement value of municipal buildings and contents.
The purpose of the fund is to provide revenue for capital improvements if Free Cash were to fall below $2 million in any year. The Town has updated
the value of its municipal buildings and contents to the present value of $340 million. Due to investment yield, the fund currently has assets of approximately $4 million. An adjustment to the present policy, allowing the fund value to rise above the previously established ceiling and provide at
least four years of reserve, is being considered. No additional appropriation is recommended for FY04.

Catastrophe and Liability Fund – The purpose of this fund is to protect the community against major facility disaster or from a substantial negative financial impact of a lawsuit. Due to the effects of September 11th, the insurance industry, overwhelmed with losses, has changed its coverage for
terrorism related incidents. This reinforces the Town’s practice of funding reserves to targeted levels. Currently, the fund is at approximately $1.5
million.

Retiree Group Health Insurance Trust – According to a 1998 actuarial study, the Town had an un-funded post-retirement benefit obligation estimated at $94 million. In 2001 another study updated this figure to $118 million. In order to begin to address this issue, the Town adopted a strategy within the
FY2000 Financial Plan to divert savings from Non-Contributory Retirement to this fund. Unmatched health insurance appropriations were also
diverted to the fund at the end of the fiscal year. In order to continue progress in this area, several options have been included in the Financial
Plan: departments with employees funded by non-property tax sources (Water/Sewer, Golf, Recreation Revolving Fund, and CDBG) shall include
forward-funding for retiree health benefits in their budgets; when annual experience allows, unmatched funds will continue to be transferred
into the fund; once the Town’s Pension Fund is fully-funded, the savings will be reallocated to this fund; and it is proposed that once both the Capital
Stabilization Fund and Catastrophe and Liability Fund meet Town funding goals, savings from the non-appropriated reserve be diverted to this fund.

Debt Management Plan Adjustments – The Town's policy regarding capital financing is appropriate for a community of the size and needs of Brookline. Each year, 5.5% of prior year net revenue is dedicated to the improvement of capital and infrastructure. The guideline calls for 4.25% to be derived from debt financing and 1.25% from tax-financed sources. In recent years, a number of capital projects have received approval by Town Meeting for debt financing. Projects such as the Baker School, Library, Public Safety Building, and Lawrence School have added to the Town’s current debt levels. The effect of this rapid build-up of debt is the concurrent reduction in the tax-financed portion of the capital funding plan in order to remain within the 5.5% funding cap. Expansion beyond this funding level can lead to a transfer of allocations from direct services to debt service.

In order to keep within the Capital Financing Guidelines, the FY2004 Financial Plan continues the commitment of not exceeding debt service guidelines. In the next several years new projects, such as the Driscoll School, Beacon Street reconstruction, Landfill closure, Fisher Hill Acquisition, Muddy River Project, and the Health Department/Town Hall Rehab, will come on-line. The timing of these projects allows the Town to remain within a 5.5% debt service guideline.

Town / School Partnership Agreement – Crucial to our annual Financial Plan is the Town / School Partnership Agreement, signed by the Superintendent and Town Administrator and approved by both the Board of Selectmen and School Committee in 1995. Perhaps unique in Massachusetts’s local government, the Partnership Agreement affirms the primacy of education in the annual budget process. The Agreement establishes the objective of committing planned levels of operating revenues for education regardless of the extent of other demands. The Partnership Agreement commits to education 50% of virtually all revenue that is not dedicated to fixed costs, with the remainder then allocated to other Town operating priorities.

The FY04 Financial Plan contains a proposed 2.9% increase for school funding which compares favorably to the level-funding or outright cuts that had to be imposed on the Brookline Schools in previous periods of fiscal decline. The graph to the right shows the annual percentage change of the education appropriation since 1982. The striped lines highlight years when the economy declined and/or fiscal conditions deteriorated.

Collective Bargaining Guidelines – Five municipal labor agreements have been settled through June 30, 2004. One other agreement has been reached through June 30, 2003. The Selectmen have adopted economic and language guidelines for use by the Town’s negotiating team. The economic guidelines are predicated upon cost of living indices, settlement patterns in comparable communities, and the Town’s ability to pay. Language proposals are designed to address attendance and leave trends along with other areas in which potential efficiencies and savings have been identified, including the group health program.

No Net Increase in Town Positions – Several years ago, the Selectmen adopted a position freeze policy on the number of Town personnel. This policy establishes a cap on the total number of Town (non-school) personnel. The purpose of this policy is to ensure that Town staffing corresponds to the Proposition 2 ½ cap on town revenue so that, even in favorable economic periods, staffing is not increased to unsustainable levels. Because of the implementation of the Public Safety Joint Dispatch operation, the FY02 budget experienced a slight increase. A similar increase occurred in FY03 due to the reorganization if the Information Technologies Department. The total number of Town FTE’s supported by the General Fund is currently 704.46 positions. Finally, in response to severe financial conditions, the Board of Selectmen has imposed a temporary hiring freeze, through March 31, 2003 in order to avoid lay-offs, if workforce reductions are necessary.

Free Cash - The Board’s policy regarding Free Cash (that portion of undesignated fund balance certified as available for appropriation by the State Department of Revenue) requires that, after setting aside free cash in the amount of 0.75% of prior year net revenue as part of budget/strategic reserve funds, free cash will be used exclusively to fund capital or other one-time projects. Free cash for the fiscal year ending June 30, 2002 was certified by DOR in the amount of $6.3 million (see the Free Cash history on page II-28).

Override Requirements of 1994 – The Board of Selectmen has convened a Committee to review the provisions of the FY 1994 Override for the purpose of determining if the spending levels are appropriate to meet the needs of capital spending in FY 2004. Until this review is completed, this Financial Plan preserves the 1994 override allocations in the budget base. In the School budget, the override funding of $1.3 million is earmarked for the intended purpose of staffing, technology, supplies, and building maintenance. The $460,000 allocated as a tax subsidy to offset the user fee charge for Refuse Collection and Disposal is continued. In the Town budget, funding in the amount of $200,000 for building maintenance is fully earmarked. The Capital and vehicle replacement program within the Public Works, Police, and Fire Department budgets, in the amount of $1 million, is included within the fiscal plan.

Implementation of the IT Strategic Plan, as recommended by Pacific Technologies, Inc., continues. In the CIP, $130,000 is recommended for
projects recommended on the plan. In addition $150,000 is included in the CIP for the Instruction Technology Study, also recommended by PTI.

· Continuation of the funding plan for the Town’s Post Employment Health/Life Insurance obligation, estimated at $118 million. In FY04, $626,133
is recommended for this liability, of which only $95,000 is funded by general tax revenue. The remainder is funded with Free Cash and overhead
charges on enterprise/revolving funds.

FY2004 FINANCIAL PLAN

The FY2004 Financial Plan is in balance, provides for the continuation of core services, preserves the Town’s capital infrastructure, and protects the financial health of town government from the devastating effects of catastrophe, liability, and other emergency or unforeseen events.

The FY04 Financial Plan continues to reinforce service delivery tied to core municipal functions, while positioning assets for a potentially long-term public sector recovery from the current recessionary conditions. As examples: (i) Enterprise Fund budgets (Water, Sewer, Golf) include limited cash reserves that can offset revenue losses from unexpected weather (or other) conditions; (ii) overall reserves have once again been adjusted in accordance with standing policies and are not recommended as funding sources for operating requirements; and (iii) the Debt Management Plan continues the policy of funding capital improvements at a level indexed to 5.5% of prior year net revenues.

The FY04 Financial Plan includes a moderated estimate of property tax “new growth” from new construction in the amount of $1.3 million. This includes an estimated $300,000 for the Webster Street Hotel. Estimated receipts from the hotel excise tax are also increased by $240,000. And, of course, Local Aid is decreased by 10%, or $2 million.

Town fixed costs have been fully funded. Debt service will decrease by approximately $275,000 (-1.9%), as the retirement of current debt is offset by debt service for the Baker School, Public Safety Building, and Library. Group Health is a continuing major concern as costs increase by approximately $2.35 million (19.5%). The multi-year electric power contract with Exelon Energy expires in March, 2003 and $200,000 in additional funding is appropriated to cover the potential increased costs for a successor contract. Fortunately, favorable bids have avoided a spike in the Town’s long-term refuse disposal contract.

FY04 Initiatives
Despite the constraints of local aid cuts and reduced local receipts, the FY04 Financial Plan includes a limited number of initiatives designed to advance to the Town’s overall service program:

Funding for education is increased $1.54 million, or 2.9%, which is a significantly larger increase than provided in previous Town budgets in prior recessionary periods.

· Within the total $1.535 million allocation for schools, SPED funding is increased by $950,000, exclusive of collective bargaining, keeping pace with the needs described by the School administration.

· The accelerated replacement schedule of front-line fire apparatus is continued.

· The commitment to the Affordable Housing Trust is continued for a second year in the anticipated amount of $316,455, per the policy adopted by the Board of Selectmen.

FY04 Cost Centers
Finally, the FY04 Financial Plan addresses several perennial cost centers, which have, at various times, been characterized as “budget busters”. These are addressed in deliberate fashion consistent with the Fiscal Policies and recent past practice:

· The financial turmoil in the managed care industry continues to drive inflation of group health insurance to rates far exceeding the growth in government revenue. HPHC is still proposing double-digit increases to many Massachusetts communities and has notified the Town of a rate increase for its premium-based product of 17.56% for next year. Blue Cross / Blue Shield has priced its self-insured program at a 20% increase for the next year. This cost increase is exacerbated by a significant rise in the health plan employee enrollment. As employees retire, particularly teachers receiving incentives to retire early, they remain on the Town’s group health program before being covered by Medicare, if eligible, at age 65. Replacing the retired employee further adds to the group insurance enrollment. Finally, as School personnel levels rise, the School Department, through its share of fixed costs, absorbs a greater cost of group insurance. The total increase in FY04 for group health is estimated at $2.35 million.

The Town makes an extraordinary commitment to Special Education funding. Under the Town/School Partnership Agreement, SPED is considered a fixed cost, just as debt service obligations are considered a fixed cost. It is unlikely that any other municipality in the state makes this type of commitment to the funding of special education. Included in the FY2004 Financial Plan is a commitment of an additional $950,000 for this purpose. This follows increases of $535,000 in FY 2003, $730,000 in FY2002 and $600,000 in FY2001.

· Currently, all but one town collective bargaining agreement has been settled for FY 2003, in the amount of 3%. All but two agreements have been reached for FY 2004, in the amount of 2%. The total amount set aside in the FY04 Financial Plan for these purposes is $1.1 million

· In FY2004, debt service is expected to decrease by approximately $275,000 ($-1.9%). In FY2009, with the sale of debt for the Lawrence School, debt service is expected to increase by nearly $2 million. As part of the capital planning and debt management process, steps have been taken to slow new debt commitments until debt levels fall back to within the guidelines established by financial policy.

At a time of rising energy prices, it is impossible to maintain a conservation program comprehensive enough to offset rapidly increasing prices. A two-year natural gas contract was negotiated in FY2002 that includes prices similar to the prior year's contract. The current electricity contract, which has been extremely favorable for the Town, expires at the end of the third quarter in FY2003. As a number of municipal buildings are refurbished, it will be important to monitor consumption use and adopt stringent conservation efforts to stabilize future price increases. $200,000 has been appropriated for energy increases.

FY04 Cutbacks

As noted in the outset of this Budget Message we have entered a period of very deep retrenchment for Local Aid. The FY03 budget had already taken a $286,459 cut in the local aid category called Additional Assistance and another $756,647 mid-year reduction has just been announced for both Lottery Aid and Additional Assistance.

The Town By-Laws require the Financial Plan to be completed by February 15th. In most years, this provides the Town the benefit of knowing the Governor’s budget proposal for Local Aid, which normally is released on the last Wednesday in January. However, the state Constitution provides that a newly elected Governor has until the end of February to file House 1. Consequently, this Financial Plan has had to be prepared in an unstable fiscal environment with even less information about Local Aid than is usually the case.

For the time being, this Financial Plan assumes a cumulative Local Aid reduction of $2 million for FY04. It is assumed that the $756,647 mid-year FY03 reduction will be followed by another cut in Cherry Sheet aid of at least $1,250,000. A $2 million decline in FY04 aid from FY03 equals a 10% across the board cut in all gross Local Aid categories. This figure, while staggering enough in itself, does not take into account cuts in non-cherry sheet funding (grants, offsets, etc.) such as tobacco tax funded programs, the early literacy account, community policing, early childhood programs, and affordable housing. Further, they do not reflect the $200,000 non-payment for SPED reimbursement for FY03, which is proposed to be covered by FY03 reserve funds, pending restoration by the State in FY04 as indicated by the Department of Education.

Despite long-range planning, standing fiscal policies, and short-term preparatory steps by the Town and School administrations, cutbacks for FY04 are unavoidable. While the budgets for Town departments (non-School) are increasing 1.5%, operating requests have had to be reduced by close to $900,000:

- Virtually all accounts for materials and supplies have been frozen with cost inflation absorbed within departmental budgets at an estimated
$185,000.

- With only one exception, no recommendations for new staff have been accepted. This means that many requested, often repeated for years, such as
expansion of the park rangers and library staffing, must go unfilled, with overall staffing savings of approximately $212,000.

- With the exception of the mid-management pay plan, only two re-grading changes have been approved.

- Salary Reserve and Personal Services reserves have been cut by $350,000 reflecting reduced wage adjustments for both unionized and non-union
personnel.

- Public Safety injured-on duty accounts (Section 111F) are reduced by $100,000 due to conclusion of a long-term injury case.

- Through both changed operator agreements and reduced usage, telephone accounts will be $70,000 lower.

If additional local aid cuts beyond the $2 million already factored into this Financial Plan occur, then additional Town service reductions will have to be implemented. These additional reductions will be formally recommended, if the Financial Plan must be revised in response to Local Aid cutbacks greater than budgeted.

The Town Administration has been developing scenarios for additional Local Aid cuts in increments of $500,000 up to another $2 million for a cumulative FY04 reduction of $4 million. Per the Town/School Partnership these additional cuts would be absorbed 50%/50% by Town and School budgets.

To illustrate the impact on non-education "core services", the cuts in this table (not listed in any order of priority) are likely to be among those recommended, if another full $1 million reduction must be absorbed by Town departments. Because a $1 million to $2 million budget reduction is so sizeable, there is no choice but to consider cutbacks for the larger municipal departments (Public Safety, Library, DPW) which account for approximately 75% of the General Fund supported municipal departmental budgets. However, to the fullest extent possible, elimination of permanent jobs will be limited to vacant positions so that attrition rather than lay-offs will be utilized.

FY04 Potential Revenue Enhancements

In developing any budget, revenues are equally important as expenditures. The Town of Brookline has adopted an approach to financial planning that builds the overall budget plans upon sustainable revenue, rather than assuming the highest historic levels of collections. Prior to FY 2002, this approach left unallocated local receipts, contributing to surpluses and Free Cash. This policy helped the Town to catch up on the significant backlog of capital improvements. More important, it created a revenue capacity that is now being used to offset the serious decline in actual receipts.

In the last ten years, the Town has carefully increased fees when required to match the need to support controlled growth in expenditures. As an example, in FY 2003, parking meter fees were increased to offset declining state and local revenue. This was the key decision in balancing the FY 2003 budget. During the same year, parking fines were raised to strengthen liquidity needs in the current year and help offset the continued decline in state revenue in FY 2004. However, with these few exceptions, fees, fines and other charges have remained unchanged during this period.

The Board of Selectmen has established a committee to conduct a systematic review of revenues. As there are a large number of such fees, this study will be conducted over the next few years. Nevertheless, there is a potential of generating additional revenue to offset some of the reduction in state aid. Fee increases, such as the Refuse Fee, involve potentially controversial issues that pit those who believe the service should be paid for as part of the very high annual property tax bill, against those who believe that service reductions that affect the quality of life are unacceptable. During the FY 2003 budget deliberations, the Town Administration raised the issue of increasing the Refuse Fee from $165 per household to $195 per household. Further, it was suggested that the fee be indexed so as to support 75% of the total cost of the service. This proposal, which would generate approximately $360,000, should be discussed as a possible option to offset pending service reductions as the result of reductions in state aid.

CAPITAL IMPROVEMENTS PROGRAM

Over the past several years, the Town has made a significant commitment to its Capital Improvements Program (CIP) to address the backlog of capital needs created by the under-investment in the infrastructure during the late-1970’s and the 1980’s. In the last 11 years, the Town has invested more than $200 million in the CIP. Although there is more to do in the areas of street repairs, parks and open space improvements, and school facilities upgrades, the commitment to capital improvements is clearly showing positive results.

The recommended FY2004 – FY2009 CIP complies with the Board of Selectmen’s CIP policies, including the key provision of dedicating 5.5% of the Town's net revenue plus available Free Cash. The CIP policies define what a capital improvement project is, how projects are evaluated and prioritized, and how the CIP is financed. The complete text of these policies can be found in Section VII of this Financial Plan.

The recommended CIP calls for an investment of $79.7 million over the next six years, for an average of $13.8 million per year. This continues the Town’s commitment to maintain and improve its infrastructure and to reduce the backlog of projects requiring funding. This compares with the figure of $10.5 million per year noted by the CIP Policy Committee as the necessary spending level to maintain the Town’s capital infrastructure. The total appropriations from all financial sources by year and by project category are shown on the following table:

Developing the CIP so as to stay within the Board’s CIP financing policies was again very challenging this year. In recent years, the Town has committed debt financing for a number of large projects, including the High School, Baker School, the Public Safety Building, the Main Library, Landfill closure, the Lawrence School, and more. It is now believed that outstanding debt will exceed $140 million with an annual debt service cost of $15.9 million in FY2009.

While it is important that we maintain our commitment to the CIP, it is equally important that we remain committed to staying within our Capital Financing Policies. Given the rapid acceleration in our debt, and given that Brookline has the highest debt burden per capita of the Aaa communities in the state, it is crucial that we maintain fiscal discipline in this process. In order to remain within the Capital Financing Policies, there will be fewer tax-financed capital projects in the coming years. There is expected to be sufficient revenue from Free Cash, CDBG, and State/Federal Grants to provide adequate funding during this period. This will allow the Town the opportunity to pay down some of the existing debt service and re-establish the tax-financed source of capital funding.

Some of the major projects proposed in the Capital Plan are:

· Beacon Street Reconstruction - $9.9 million
· Landfill / Park - $8.4 million
· Various School Improvements - $9.8 million
· Health Building - $4.0 million
· Town Hall Rehab - $8.2 million
· Parks, Open Space, Recreation – $20 million
· Streets, Sidewalks, Traffic - $3.1 million

It is important to note that the recommendations contained in the CIP are based upon our best estimates of future revenue. Budget reductions at the State or Federal levels could require significant cutbacks in the recommended program for future years. Also, the amount of Free Cash available for the CIP can fluctuate drastically from year to year. Should actual amounts be less than anticipated, then the CIP recommendations may have to be revised.

LONG RANGE FINANCIAL PROJECTION

The cornerstone of our strategic budgeting process is the long-range financial projection. Based upon an analysis of the internal and external factors impacting the Town’s operations and finances, we have prepared the long-range projection, found on page I- , covering the period FY2004 through FY2008. The Town is facing an escalating deficit position for FY2005 and beyond. Collective bargaining costs, the continued commitment to capital investment, and extreme limitations on local aid, coupled with the structural shortfall caused by Proposition 2½, portend a deficit that will grow to $7.7 million by FY2008.

REVENUES

Overall, annual revenue increases (exclusive of Free Cash) are expected to range between $3.7 and $4.88 million, or approximately 2.78%. When water and sewer enterprise revenues and tax/reimbursements related to debt exclusions are also excluded, revenue will increase by approximately $3.4 million or 2.43%.

- The Tax Levy is projected to increase an average of 3.4% per year. In addition to the standard 2.5% increase allowed under Proposition 2 ½, new
growth in the tax levy resulting from building construction and condominium conversions is increased an average of $1 million per year. An amount
equal to debt service overrides less any School Building Assistance aid is also included in the calculation.

- Local Aid, is expected to decrease by $2 million in FY2004, a result of the state budget crisis. The Police Career Incentive (Quinn Bill) reimbursement
is expected to increase based upon a formula of 50% of the previous year costs. SBA is expected to increase in FY2007 for the anticipated
reimbursement for the Lawrence School project. Chapter 70 funding is expected to be level funded in FY04. All other Local Aid categories are level
funded throughout the term of the forecast.

- Free Cash, after deducting amounts for non-appropriated and strategic reserves, is used exclusively for the Capital Improvement Program. It is
expected that $5.6 million would be available for FY2004. This would gradually decrease to an amount of $5.4 million in FY2008.

- Other Available Funds, with the exception of enterprise fund overhead revenue and parking meter receipts, are expected to remain level
throughout the term of this forecast.

EXPENSES

- The cost of Municipal Services is projected to increase by $7.6 million from FY2004 through FY2008, an average of $1.9 million per year. Of the
total increase, $6.5 million is attributable to the cost of collective bargaining and steps. The balance of the increase, or $287,000 per year, is for all
other fixed cost increases such as energy, refuse disposal, capital outlays, etc.

- The cost of School Services is projected to increase by $9.1 million from FY2004 through FY2008, or an average of $2.3 million per year.
Collective bargaining and steps account for $6.9 million of the total. An increase of $575,000 per year is included for Special Education Tuition,
transportation, and education supplies.

- Water and Sewer service costs are expected to increase by $5.2 million (or 25.5%) from FY2004 through FY2008. The MWRA assessment
increase accounts for nearly all of this increase. Due to the State reduction in Sewer Debt Relief, it is expected that year to year increases will average
approximately 5% to 10% per year.

- Personnel Benefits, which include group health and life insurance, pensions, Medicare, workers compensation, and unemployment compensation, are
expected to increase by approximately 11.4% per year.

- Debt Service figures assume full implementation of the FY2004-FY2009 CIP which includes the Main Library, Baker School, Landfill closure,
Beacon Street Improvements, Muddy River Project, Fisher Hill Acquisition and Improvements, Lawrence School, and Town Hall/ Health Department
building improvements. The debt service amounts comply with the Board’s CIP financing policies that require 4%-5% of net revenues to be allocated
for this purpose. Both Water/Sewer and Golf Debt are included in enterprise revenues paid to the Town in the form of overhead charges.

- The Revenue Financed CIP policy faces tremendous pressure in the next few years. This policy establishes a guideline of 1.25% revenue
financed and 4.25% debt financed capital funding each year. Debt service levels are predicted to be greater than the 4.25% goal in three of the next
five years. When debt service rises above the 4.25% debt guideline, fewer funds are available from the revenue-financed category.

- Non-appropriated Expenses include State and County assessments, Cherry Sheet offset items, tax abatement overlay reserves, and court
judgments. The two largest expenses are the MBTA assessment and the tax abatement overlay reserve. State and County assessments are
expected to decline in each of the next three years by approximately $160,000 per year because of a decrease in the MBTA assessment. Due to
declining requests for tax abatements, the tax abatement overlay reserve will be tied to an amount equal to 1.4% of the annual levy.

CONCLUSION

While the many components of the Financial Plan are complex, the message for the FY04 budget is in the end quite simple. Through the collaboration inherent in the Town’s long-range financial planning, Brookline’s budget is positioned to take advantage of unprecedented “new growth” in the property tax base and increased parking fine revenue in order to absorb massive fixed cost increases and staggering local aid reduction, while proceeding with a 2% wage adjustment and maintaining essential reserves and capital outlay without laying off permanent town or school personnel. When one considers that the 2 ½% allowable levy increase is $2.7 million and that the cost of the group health increase alone is $2.3 million, sustaining essential services under such extreme pressure from fixed cost and local aid is no small accomplishment.

For Brookline to maintain its budgetary equilibrium under such difficult circumstances is testimony to the leadership of our elected officials, the expertise of our management team, the efforts of our many volunteers, the dedication of our work force, and ultimately the high expectations and support of our citizenry. Standing fiscal policies, the Town/School Partnership, labor/management collaboration, and other features of our financial planning could not succeed without a shared commitment to the well-being of the overall enterprise ahead of individual constituency interests. To preserve services through imaginative approaches; to explore local option and town-based revenue possibilities; and to move the Governor and Legislature to a new partnership with local government will require our undivided attention to long-term structural solutions.

In the coming weeks the collaborative underpinnings of Brookline’s financial planning could be tested as never before. The Town and School administration have had to prepare worst cast scenarios as part of formulating budget plans for next year. The scenarios anticipate the possibility of a $4 million local aid reduction and entail the cutbacks of 24 town and 39 school positions along with the curtailment and/or elimination of basic town and education services.

There appears to be virtually universal opinion that the state’s fiscal recovery will take longer than one year. When local aid was cut drastically in the early 90’s it took several years for intergovernmental revenue to be restored fully, even with the strongest economy in decades. In fact, local aid as a percentage of the Town’s total revenue has never come close to returning to the high water mark of 1988. Everyone’s creativity and perseverance will be needed to bring Town finances back from the point where cutbacks to essential services are not seriously imminent.

In closing I want to extend my heartfelt appreciation to Deputy Town Administrator Stephen Cirillo and Assistant Town Administrator Sean Cronin for their determination and skill in managing the preparation of the budget. They are doing everything possible within the revenue available to the Town to maintain the services that the Brookline community justifiably expects. And finally, I am extremely grateful for the dedication of the Selectmen’s Office staff who have labored for months without complaint under additional workload imposed by a vacancy due to the hiring freeze. The town is very fortunate to have employees like Patty Parks, AnnMarie Cedrone, Mary McMahon and Brenda Costello who continue to serve the public every day regardless of the fiscal pressures at hand.

I and all the members of the Town Administration look forward to working with everyone in the Brookline community to develop constructive solutions to the challenges that lie ahead in implementing this Financial Plan.

Richard J. Kelliher
Town Administrator