FY26 Budget CC_SC presentation 04162025 — File 25-0777

FY26 Budget Outlook City of Somerville, MA Katjana Ballantyne, Mayor Presented to Somerville City Council & School Committee April 16, 2025 Ed Bean, Finance Director

Section 1 Historical Trends How have we gotten here?

The City’s General Fund budget has grown by 77% since FY14 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 Year-over-year increase (%) CPI % Change CPI change in Boston over the same period amounts to 34.7%. This means the City budget has grown at more than twice the rate of CPI since FY15. Source: US BLS: https://www.bls.gov/cpi/regional- resources.htm

5-year perspective on budget changes Pension/Fringe +$11.1M Education +$28.8M General Gov’t +$26.7M Public Safety +$7.4M Public Works +$13.3M 0 50,000,000 100,000,000 150,000,000 200,000,000 250,000,000 300,000,000 350,000,000 400,000,000 FY25 Budget FY21 Budget Education General Government Pension & Fringe Public Safety Public Works Debt State Assessment Culture & Recreation PAY GO

Schools are our largest investment The greatest proportion of growth has come from the School Department, Nearly one in every three new dollars. Since FY16, the school budget has increased 5.96% annually, on average. Since FY20, the school budget has increased 6.99% annually, on average. $- $20,000,000 $40,000,000 $60,000,000 $80,000,000 $100,000,000 $120,000,000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 +1.65% average +4.83% average +4.80% average +6.99% average

Fixed Costs Fixed Costs Insurance Pension Information Technology HR & Accounting Debt Service Water & Sewer Building Maintenance Playground & School Yards ARPA projects Capital Projects & Renovations Dilboy & Ginnie Smithers Pool WHCIS Interim Projects Programming Programming Health & Human Service Food Access SomerPromise Mayor’s Jobs Program Youth Services Teen spaces across the city Parks & Recreation Libraries Facilities & Assets Facilities & Assets Investments in families, youth, and our schools are found throughout the budget. These programs and facilities are essential to our work and to the community.

School Expenses on the Municipal Budget Source: FY24 DESE EOY Report Expenditure Type FY24 Expenses Health Insurance $13,693,159 Workers Compensation $271,414 Utilities for School Buildings $2,972,474 Maintenance & Repair of School Buildings $6,315,668 Trash Removal $223,942 Snow Removal $519,547 Debt for School Construction $9,303,871 Pension $3,051,852 Total $36,351,926

FY25 Revenue by Type The City continues to lean on property tax as a primary funding source in the face of middling State Aid and limited revenue generation opportunities. 76% 16% 8% Taxes State Aid Local Receipts

FY25 Revenue Composition The City continues to lean on property tax as a primary funding source in the face of middling State Aid and limited revenue generation opportunities. 72% 16% 4% 3% Property Taxes State Revenue Licenses & Permits Excise Taxes Fines & Forfeits Other Financing Sources Investment Income Fees Payment in Lieu of Taxes Miscellaneous Recurring Penalties &Interest on Taxes Other Departmental Revenue Rentals Sanitation Fees

The City has benefitted from record new growth since FY20, but projections show a slow down **Based on current projections** 0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 18,000,000 20,000,000 New Growth Applied to the Levy Limit: FY02-FY25 Residential Growth Commercial Growth

Total Tax Levy Debt Exclusion Tax Levy w/o exclusions Increase from prior year FY20 167,812,263 167,812,263 FY21 184,014,988 1,335,839 182,679,149 14,866,886 FY22 200,839,916 6,033,610 194,806,306 12,127,157 FY23 221,093,410 6,674,013 214,419,397 19,613,091 FY24 244,828,530 6,705,968 238,122,562 23,703,165 FY25 264,969,748 6,625,681 258,344,067 20,221,505 Property Taxy Levy History We anticipate a slowdown in budget growth for FY26, primarily due to lower new growth.

Section 2 FY26 Outlook: Revenue Recalibrating based on emerging macro trends

Commercial New Growth in FY26 Current projections indicate a slowdown in commercial new growth for FY26, relative to recent years. FY 25 New Growth = $14,139,848 FY 26 Projection = $9,000,000 Reduction of $5,139,848 Development has slowed due to high interest rates and inflationary pressures on construction costs. Vacancies in commercial real estate have resulted in lower valuations in the region. Vacant lab buildings are taxed at 60% of their potential value and there are presently 7 vacant lab buildings in the city.

FY26 Levy Calculation – How we project tax revenue $ 258,344,068 FY2025 Property Tax Levy – Below the Levy Limit $ 221,319 PLUS FY2025 Unused Levy $ 258,565,387 EQUALS FY2025 Levy Limit $ 258,565,387 FY2025 Levy Limit + 6,464,135 PLUS 2 ½% + 9,000,000 PLUS Estimated new growth $274,029,522 EQUALS FY2026 Levy Limit A potential $15,685,454 in new property tax revenue could be raised in FY2026 under the levy limit.. This is a reduction of $4,536,051 from FY2025 Levels. *This projection assumes $9M in new growth.

Building Permits remain a core revenue source, but growth is moderating due to macroeconomics - 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 2019 2020 2021 2022 2023 2024 2025 YTD 2026 (est) Building Permit Revenue: FY19-FY26 estimated Fiscal Year Change from prior year 2020 27% 2021 25% 2022 166% 2023 25% 2024 40% 2025 52% 2026* 4%

Excise Tax growth is moderating, but remains a valuable part of our revenue - 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 2021 2022 2023 2024 2025 est 2026 est Annual Excise Revenue by Type: FY21-FY26 estimated Recreational Marijuana Motor Vehicle Hotel/Motel Meals

Category Program FY25 Cherry Sheet FY26 Governor’s Proposal Variance Education Chapter 70 21,780,232 22,166,857 286,625 Education Charter Tuition Reimbursement 1,435,013 890,118 -544,895 Gen. Govt. Unrestricted General Government Aid 31,024,812 31,707,358 682,546 Gen. Govt. Veterans Benefits 105,108 135,461 30,353 Gen. Govt. Exemp: VBS & Elderly 196,465 318,526 122,061 Offset Receipt Public Libraries 185,433 190,323 4,890 Total Estimated Receipts 54,727,063 55,408,643 681,580 State Aid – Governor’s FY26 Proposal

Category Assessment FY25 Cherry Sheet FY26 Governor’s Proposal Variance State Charges Air Pollution Districts 34,425 34,346 -79 State Charges MAPC 47,404 48,837 1,433 State Charges RMV Non-Renewal Surcharge 240,400 240,400 - Transportation MBTA 5,963,341 6,171,253 207,912 Transportation Boston Metro Transit District 1,198 - - Annual Charges Special Education 32,198 44,654 12,156 Tuition School Choice Sending Tuition 73,009 83,416 10,407 Tuition Charter School Tuition 8,969,269 8,326,984 -642,285 Total Estimated Assessments 15,361,244 14,949,590 -411,654 FY26 Cherry Sheet – Preliminary Assessments

FY25 FY26 $ Increase % Increase Total Estimated Receipts 54,727,063 55,408,643 Total Estimated Assessments 15,361,244 14,949,590 Net State Aid 39,365,819 40,459,053 +1,093,234 2.78% FY25 Net State Aid Summary

Revenue Category FY 2025 Budgeted FY 2026 Estimate $ Change Property Taxes 264,969,749 280,730,444 15,760,695 Excise Taxes 12,916,349 13,407,044 490,695 Penalties &Interest on Taxes 745,332 972,057 226,725 Payment in Lieu of Taxes 1,691,522 1,717,564 26,042 Sanitation Fees 76,861 76,861 - Charges – Electricity - 40,605 - Fees 1,656,415 2,048,452 392,037 Rentals 89,644 89,644 - Other Departmental Revenue 40,000 60,000 20,000 Licenses & Permits 9,889,038 9,650,839 (238,199) Fines & Forfeits 6,038,772 7,772,213 1,733,441 Investment Income 3,750,794 3,750,794 - Miscellaneous Recurring 775,321 778,383 3,062 State Revenue 54,541,630 55,218,318 676,688 Other Financing Sources 4,380,730 4,101,961 (278,769) Total Revenue & OFS 361,562,157 380,415,179 18,853,022 FY26 Revenue Projection As of April 16, 2025. Estimates will change

Section 3 Expenditures FY26 outlook on primary drivers of change.

FY25 Budget Composition Schools remain the largest component of the City budget, at 30% of all budgeted expenditures.. 30% 16% 15% 14% 11% 6% 4% Education General Government Pension & Fringe Public Safety Public Works Debt State Assessment Culture & Recreation PayGo Capital Overlay Other Financing Uses

Fixed Costs Drive municipal budgets More than half of the City’s General Fund pays for employee wages. (51.0%) More than half of the City’s General Fund pays for employee wages. (51.0%) Almost one out of every ten dollars funds health insurance for employees. (9.3%) The City funds 80% of premiums. Almost one out of every ten dollars funds health insurance for employees. (9.3%) The City funds 80% of premiums. 4.8% of the City’s budget goes to the Somerville Retirement Board based on a full funding schedule complete in 2033. 4.8% of the City’s budget goes to the Somerville Retirement Board based on a full funding schedule complete in 2033. Salaries Health Insurance Health Insurance Pensions Pensions

Key components of a base budget While we grow our scope of services, fixed costs rise and may conflict with future planning. When we refer to a ‘base budget’, it means fixed costs as a proportion of the overall budget. • Essential Services: These are non-negotiables for a functioning city. • Operational Costs: The ongoing expenses for running the city. • Personnel: The cost of salaries and benefits for employees including health insurance and pension benefits. • Operating Expenses: Utilities and • Maintenance: Keeping our city's infrastructure, parks, and public spaces in top shape and investing in them to mitigate long term costs. While the base budget covers our essentials, it doesn't include new projects or expansions. Discretionary and new investments typically come second, ensuring we're always focusing on what's crucial while preparing for the future.

This law places constraints on the amount of property taxes a community can levy. Proposition 2 1/2 Adding new positions increases exposure to CBA changes, benefits costs, etc. Salaries & Benefits Inflation can put upward pressure on contract values and limit capacity in future years. Economic Factors Preserving future capacity is essential to meet these required costs that communities face. Long-Term Planning 01 02 03 04 A higher base exposes us to external pressures

FY26 Major Cost Drivers: Health Insurance Group Insurance Commission increased plan amounts on average of 11.4%. Last year's average increase was 8.8%.This is the highest increase we have experienced. At current caseload levels, we anticipate the health insurance appropriation to increase by approximately $2,999,753 in FY26. Current caseload is 2,960. New positions added to the FY26 Budget will increase this amount. City contributes 80% of the premium. Health Insurance Plan Name Type FY26 Increase for Family Plan Harvard Pilgrim Explorer* POS 10.0% Harvard Pilgrim Quality HMO 11.0% Health New England HMO 9.4% MGB Complete HMO 10.4% Wellpoint Total Choice Indemnity 14.6% Wellpoint Community Choice PPO-type 11.2% Wellpoint Plan/PLUS PPO-type 12.4% Harvard Pilgrim Across America PPO 12.5% *Harvard Pilgrim Explorer is the City’s most common plan.

FY26 Personal Services: Labor & Employee Staffing By planning for these costs in advance, we ensure stability in services and workforce, avoiding last-minute budget adjustments or cuts to other essential items. This proactive approach demonstrates fiscal responsibility and supports the long-term sustainability of municipal operations, ultimately benefiting every department. Salaries must be sustainable in the long term, to avoid layoffs or service cuts. Salary Contingency & Reserves The following bargaining units settled collective bargaining agreements recently: • Fire Suppression & Alarm • Police Patrol • E-911 • SMEU B • Non-Union re-classification* Settlements reached in the next few months will be built into Departmental salaries. Capacity must be reserved to these ongoing negotiations. Collective Bargaining

FY26 Cost Drivers: Pension Appropriation The Somerville Retirement System conducted an updated actuarial study of our pension liability as required by law. The current unfunded pension liability is $138,847,324. Full funding of the liability will be achieved in 2033. The pension appropriation will increase by $1,359,251 in FY2026 from $16,990,644 to $18,349,89. Somerville Retirement Board

FY26 Cost Drivers: Debt & CIP Debt Service • FY25 General Fund Debt Service within the levy limit is $15,080,422. The City will be going out to market in mid-May with the assistance of Hilltop Securities to finance active capital projects. The estimated debt service for these projects to be borrowed in May and paid in FY26 is $3,394,886. The appropriation increase in FY26 is expected to total $ 2,304,107, factoring in pay-downs and debt drop downs. • The Somerville High School Debt Service Exclusion amounted to $6,625,680 in FY2025. Estimated Debt Service in FY2026 amounts to $6,700,922. The City estimates a long-term bond rate of 3.8% and short-term rate of 3.5%. Should the market yield more favorable results, the FY26 appropriation will be less.

Buildings, Facilities, & Apparatus Buildings, Facilities, & Apparatus City Hall/Edgerly Engineering Annual Building Improvements Assembly Sq Fire Station Edgerly & WHCIS Improvements Fire Pumper Somerville Ave Streetscape Annual Pavement Program Union Sq Streetscape & Plaza Design Central Hill Campus Open Space Spring Hill Sewer Streetscape Clarendon Hill DIF 217 Somerville Ave Park Parks & Streetscapes Parks & Streetscapes The following projects will be included in this May’s General Obligation Bond borrowing. Debt payments for these investments will occur in FY26. Additional Investments in Assets to be funded via reserves (Capital Stabilization) Brown School Boiler Argenziano Classroom

• The Trump/Vance Administration ordered federal agencies to pause all activities related to obligations or disbursement of all federal financial assistance while the new administration reviews all federal programs for alignment with the Trump/Vance agenda. • The City and schools received approximately $19.5 million in federal funds in FY2024. Approximately, $11.5 m of that federal funding was passed through the state. • Federal Funds support a variety of critical services including school lunch, special education, community development block grant initiatives, public safety services, roadway safety initiatives, homeless prevention services, and efforts to address and reduce youth tobacco usage and alcohol consumption. Local government’s ability to regularly access federal grant funding awarded to them remains uncertain at this time. Addressing the threat of Federal grant cutbacks

Federal grants range from essential to supplementary SPS receives $4M in Federal funding, $3.5M in Federal entitlement grants, as well as a diverse roster of other grants. A cutback in these funds would impact critical programs that serve our students, which will result in: • Impacts to food security programs, widening achievement gaps, and increasing disparities between students from different backgrounds. • Drastic cuts which would impact students, educators, and families. On the City side, Federal grants are typically supplemental, funding one-time purchases or supplies. Losses of these funds will force difficult decisions in the future.

FY26 Budget Development Update Departments have submitted their level service budgets along with department-specific revenue projections. Departments have submitted their level service budgets along with department-specific revenue projections. City staff continue to meet with School Leadership to work on a final budget proposal. City staff continue to meet with School Leadership to work on a final budget proposal. Awaiting final estimates for Health Insurance, State Aid, Debt Service, updated new growth. Awaiting final estimates for Health Insurance, State Aid, Debt Service, updated new growth. Level Service Review School Department Collaboration School Department Collaboration Pending Final Estimates Pending Final Estimates

Short- and Long-Term Priorities for financial sustainability Reviewing potential to fund one-time projects or investments with reserves or free cash. Netting down debt service with strategic use of reserves, per long- range forecast and as planned in the Capital Investment Plan. Strategic use of reserves 1. Targeted cuts to non-personnel line items. 2. Capture as much “new growth” as possible. 3. Re-examine all revenues 4. Consider Alternative funding sources 5. Encourage employees to review lower cost health insurance plans and City’s Opt-Out program Balanced Budget Techniques

Short- and Long-Term Priorities for financial sustainability Lobby for more funding flexibility via our state delegation. Municipal Empowerment Act can give municipalities the power to raise more revenue. Fair Share Amendment @ Beacon Hill is an opportunity to share Beacon Hill “As cities and towns continue to see expenses outpace local revenue growth, especially within the restrictive confines of Proposition 2½, finding other sources of revenue is critically important, as is finding ways to make local government more efficient.” (source) Adam Chapdelaine MMA Executive Director and CEO Lobby and support legal efforts against the cutting of federal funds to institutions that do not comply with the President’s political priorities. Federal Government

What to expect in the FY26 General Fund Budget The FY26 budget will largely be focused on level service, maintaining services on which our residents rely. The FY26 budget will largely be focused on level service, maintaining services on which our residents rely. Working cross-departmentally to identify opportunities, make progress on them, and break down silos. Working cross-departmentally to identify opportunities, make progress on them, and break down silos. Building out the foundation of the organization is a priority identified by staff this year. We expect to utilize existing resources to enhance service delivery using what we already have. Building out the foundation of the organization is a priority identified by staff this year. We expect to utilize existing resources to enhance service delivery using what we already have. Level Service Coordinated efforts Coordinated efforts Focused on maximizing resources Focused on maximizing resources A conservative budget will ensure that the City and Schools are ready for whatever happens over the next twelve months. A conservative budget will ensure that the City and Schools are ready for whatever happens over the next twelve months. Preparing for uncertainty