April 11 2024 CC SC Final Slides — File 24-0498

FY25 Budget Update City of Somerville, MA Katjana Ballantyne, Mayor Presented to Somerville City Council & School Committee April 11, 2024 Ed Bean, Finance Director

Section 1 Historical Trends How have investments in recent years shaped City & School budgets?

The City’s General Fund budget has grown by 72% since FY14 100 150 200 250 300 350 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 Millions General Fund Operating Budget

New departments New departments FY16: Fields Maintenance FY20: Public Space & Urban Forestry, Office of Housing Stability FY22: SomerViva & Racial & Social Justice Departments FY16: Health & Human Services Reorganization FY18: Fleet Management FY23: Emergency Management Added staff to systems, IT, web and Finance Generational Investments Generational Investments New neighborhood in Assembly Square New Somerville High School Somerville Ave Utility & Streetscape Improvements Expansion of affordable housing and social services including food access, mental health Modernization Modernization This growth in budget has enabled a growth in scope Residents continue needing and asking for more, and the City has responded

FY22: +8.13% Increase FY22: +8.13% Increase Added 13.7 FTE Funding for MBTA student passes Unidos curriculum at ESCS Transition of school nursing to the district budget Added 41.4 FTE Extended Unidos curriculum through 5th grade Added school-based social workers at every school Funding for enrollment study FY24: 7.9% Increase FY24: 7.9% Increase Added 18.1 FTE Out of school time investment of $500k Extended student MBTA passes to full year Additional 14.1 FTE transitioned from ESSR to GF FY23: 10% Increase FY23: 10% Increase Concurrently, the Somerville School Department has added significant programming in recent years

Change in Budget over time Budget growth has increased social services, school staffing, and capital projects Note that School Nurses migrated from City to Schools during this time period. Category FY20 FY24 $ Increase FY20-FY24 Share of Gr owth General Govt. $25,260,279 $43,414,378 $18,154,098 23% Public Safety $48,854,895 $51,601,931 $2,747,036 3% Culture & Recreation $4,540,398 $6,082,622 $1,542,223 2% Public Works $29,678,100 $39,479,201 $9,801,100 12% Debt Service $12,511,140 $21,061,108 $8,549,968 11% Pension & Fringe $40,930,420 $52,156,324 $11,225,904 14% Other $3,291,237 $6,896,401 $3,605,164 4% State Assessments $14,608,938 $15,524,980 $916,042 1% School $76,257,481 $100,009,209 $23,751,728 30% Totals $80,293,266

1,581 2,166 0 500 1000 1500 2000 2500 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 37% increase in FTE across all City departments since FY14 to enable this increase in scope

FY24 Budget Composition Schools remain the largest component of the City budget, at 30% of all budgeted expenditures.. Schools 30% Pension & Fringe 15% Public Safety 15% General Government 12% DPW 11% Debt Service 6% State Assessments 5% Other 2% Capital 2% Culture & Rec 2% Schools Pension & Fringe Public Safety General Government DPW Debt Service State Assessments Other Capital Culture & Rec

Fixed Costs Drive municipal budgets More than half of the City’s General Fund pays for employee wages. (52.5%) More than half of the City’s General Fund pays for employee wages. (52.5%) Almost one out of every ten dollars funds health insurance for employees. (9.5%) The City funds 80% of premiums. Almost one out of every ten dollars funds health insurance for employees. (9.5%) The City funds 80% of premiums. 4.9% of the City’s budget goes to the Somerville Retirement Board based on a full funding schedule complete in 2033. 4.9% 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 When added together, Personal Services, Health Insurance, Pensions, and Debt Service comprise 73% of the City’s budget

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: Like trash collection and emergency 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 internal services departments such as HR, IT, and Finance • 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 the General Fund to external pressures

FY24 Revenue Composition Property taxes remain the largest source of funding for City General Fund operations at 72% of all revenue. Property Taxes, 72% 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

Revenue Category Budgeted Collected To date Percent Collected Property Taxes 244,828,530 180,100,912 73.6% Excise Taxes 11,512,653 8,018,923 70.0% Penalties &Interest on Taxes 696,812 687,170 98.6% Payment in Lieu of Taxes 1,661,522 81,255 4.90% Sanitation Fees 76,879 76,242 99.2% Fees 1,850,773 1,641,947 88.7% Rentals 85,144 139,502 163.8% Other Departmental Revenue 100,000 20,298 20.3% Licenses & Permits 13,186,071 12,703,607 96.3% Fines & Forfeits 5,168,951 5,549,367 107.4% Investment Income 2,321,526 2,988,196 128.7% Miscellaneous Recurring 961,611 1,083,738 112.7% State Revenue 53,669,744 39,459,037 73.5% Other Financing Sources 4,458,805 4,458,805 100.0% Total Revenue & OFS 340,579,021 257,009,010 75.5% FY24 Revenue Performance Revenue performance for the current year is on track through March.

General Fund Performance FY2024 Through 74.2% of the fiscal year, 72.35% of the General Fund appropriation has been spent or encumbered. Appropriation Year-To-Date Expended Encumbered Available Percent Used City 239,328,884 158,638,870 17,625783 63,064,230 73.6% Schools 100,667,037 62,955,768 6,761,455 30,949,813 69.3% Total 339,995,921 221,594,638 24,387,238 94,014,043 72.35% Data presented through April 5, 2024

Other Potential Appropriations Needed in FY24 • Dilboy Pool • Electrical & Plumbing Work needed to open pool • Estimated Need: $160,000-$200,000. • East Somerville Police Sub-Station • Funds needed to fit out station and install wall and bathroom • Additional $13,800 Needed for Lease • Edgerly Renovation for Winter Hill Students • 90 Washington Street Litigation • Homelessness needs may require an appropriation of free cash to the Emergency Stabilization fund. Unexpended balances or transfers within the operating department are the preferred route to close deficits or supplement the budget. Bigger ticket items require free cash or additional borrowing authorization. No other Ordinary Maintenance Deficits indicated by Department Heads. With 3.5 months remaining in the fiscal year, the possibility of other deficits may occur.

Careful planning and strategic growth have sustained this increase over time The City has seen record new growth each year since FY20, from $8.3M up to $17.7M in FY24. 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 FY20 FY21 FY22 FY23 FY24 Residential Commercial, Industrial, Personal Property

We also benefit from harnessing our strengths: Somerville is a destination in a vibrant metropolitan area 0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 FY20 FY21 FY22 FY23 FY24 (YTD) Meals Excise Hotel Excise Building Permits Revenue since FY20 Meals Excise: $7.9M Hotel Excise: $8.5M Building Permits: $70.0M

Section 2 The FY25 Budget Recalibrating based on emerging trends

FY25 Levy Calculation – How we project tax revenue $238,122,572 FY2024 Property Tax Levy – Below the Levy Limit $ 341,368 PLUS FY2024 Unused Levy $238,463,940 EQUALS FY2024 Levy Limit $238,463,940 FY2024 Levy Limit + $ 5,961,598 PLUS 2 ½ % + $ 12,000,000 PLUS Estimated new growth $256,425,538 EQUALS FY2025 Levy Limit A potential $18,302,967 in new property tax revenue could be raised in FY2025 under the levy limit.. *This projection assumes $12M in new growth.

Commercial New Growth in FY25 Current projections indicate a slowdown in commercial new growth for FY25, relative to recent years. FY 24 New Growth = $17,763,972 FY 25 Projection = $12,000,000. Reduction of $5,763,972 Vacancies in commercial real estate resulting in lower valuations High Interest rates are hampering investment, construction, and refinancing. Recent changes in State regulations allow lab office buildings to be categorized as “manufacturing corporations”, exempting them from personal property taxation. Two of the city’s nine lab office buildings have now qualified for this manufacturing status. We expect the other seven to follow.

Category Program FY24 Cherry Sheet FY25 Governor’s Proposal Variance Education Chapter 70 21,245,048 21,399,428 154,380 Education Charter Tuition Reimbursement 2,004,332 882,585 -1,121,747 Gen. Govt. Unrestricted General Government Aid 30,121,177 31,024,812 903,635 Gen. Govt. Veterans Benefits 79,485 105,108 25,623 Gen. Govt. Exemp: VBS & Elderly 219,702 216,284 -3,418 Offset Receipt Public Libraries 162,341 162,699 358 Total Estimated Receipts 53,832,085 53,790,916 -41,169 State Aid – Governor’s FY25 Proposal

Category Assessment FY24 Cherry Sheet FY25 Governor’s Proposal Variance State Charges Air Pollution Districts 33,589 34,429 840 State Charges MAPC 46,255 47,411 1,156 State Charges RMV Non-Renewal Surcharge 160,500 208,540 48,040 Transportation MBTA 5,807,352 5,963,341 155,989 Transportation Boston Metro Transit District 1,198 1,198 0 Annual Charges Special Education 17,516 32,014 14,498 Tuition School Choice Sending Tuition 67,704 63,032 -4,672 Tuition Charter School Tuition 9,390,866 8,398,039 -992,827 Total Estimated Assessments 15,524,980 14,748,004 -776,976 FY25 Cherry Sheet - Assessments

FY24 FY25 $ Increase % Increase Total Estimated Receipts 53,832,085 53,790,916 Total Estimated Assessments 15,524,980 14,748,004 Net State Aid 38,307,105 39,042,912 +735,807 1.92% FY25 Net State Aid Summary

FY24 FY25 $ Change % Change Circuit Breaker Reimbursement $3,423,220 $3,363,014 -60,206 -1.7% Chapter 70 School Aid* $21,245,048 $21,399,428 +154,380 +0.7% FY25 Schools State Aid Summary *4.45% increase in Chapter 70 funding from FY21 to FY25

Revenue growth is expected to moderate in FY25 Current projections indicate a slowdown in revenue growth for FY25. FY2023 Revenue = $313,469,451 FY2024 Revenue = $340,579,021 Increase of $ 27,109,570 FY2025 Projected Revenue = $356,239,860 Increase of $15,660,839. Building Permit revenue down by $3 million. Construction Related Permits (Electrical, Plumbing, Safety Review Fee) all down Interest rates will drop lowering Investment Income.

Revenue Category FY 2024 Budgeted FY 2025 Estimate $ Variance Property Taxes 244,828,530 263,004,297 18,175,767 Excise Taxes 11,512,653 12,676,587 1,163,934 Penalties &Interest on Taxes 696,812 745,332 48,520 Payment in Lieu of Taxes 1,661,522 1,691,522 30,000 Sanitation Fees 76,879 76,861 (18) Fees 1,850,773 1,649,256 (201,517) Rentals 85,144 89,644 4,500 Other Departmental Revenue 100,000 70,000 (30,000) Licenses & Permits 13,186,071 9,889,038 (3,297,033) Fines & Forfeits 5,168,951 6,038,667 869,716 Investment Income 2,321,526 1,857,221 (464,305) Miscellaneous Recurring 961,611 775,321 (186,290) State Revenue 53,669,744 53,637,569 (32,175) Other Financing Sources 4,458,805 4,038,545 (420,260) Total Revenue & OFS 340,579,021 356,239,860 15,660,839 FY25 Revenue Projection As of March, 2024. Estimates will change

FY25 Major Cost Drivers: Health & Pension Group Insurance Commission increased plan amounts on average of 8.8%. This is the highest increase we have experienced. At current caseload levels, we anticipate the health insurance appropriation to increase by approximately $2,140,346 in FY25. The current caseload is 2,942 plans. New positions added to the FY25 Budget will increase this amount. Health Insurance Current unfunded accrued liability: $119,508,568. FY25 Appropriation will increase by $354,723 to $16,990,644. Full funding schedule ends in 2033. Pension

Projected Debt Service for FY25 Debt Service Type FY 2025 Current – Projects already bonded as of June 30, 2023 13,404,463 Active – Projects already approved by Mayor & Council but not yet bonded 1,689,681 High School Debt Excluded 6,578,758 Grand Total 21,672,902 +$621,797 from FY24 Assumes 4% LTD 3% BAN

FY25 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 the entire organization. Salary Contingency The following bargaining units are in negotiations: • Fire Suppression & Alarm • Police Patrol & Superiors • E-911 • SMEA Settlements reached in the next few months will be built into Departmental salaries. Capacity must be reserved to these ongoing negotiations. Collective Bargaining

Other Cost Drivers Impacting the FY25 Budget • Tufts Administration Building lease will be fully budgeted. This adds $1,549,975 in capital costs. • Assembly Square fire station comes online. The FY25 budget must include lease payments and twelve new Firefighters in January of 2025. This adds $1,154,196 in salary and capital costs. • American Rescue Plan Act. City staff are continuously assessing the use of ARPA to maintain existing social service programs and mitigate the ARPA cliff. • Somerville School Department budget growth & Elementary and Secondary School Emergency Relief Cliff – To what extent ESSR staff and programming be assimilated into the General Fund Budget. • Continuing impacts of inflation on vendor contracts and utilities. FY25 estimated revenue growth is only $15.6M at this time. This means the City must fund the sum of all increases within this target.

Section 3 Solutions & Opportunities How will we maintain the base budget and find opportunities moving forward?

Short- and Long-Term Priorities for financial sustainability City staff are currently reviewing updated rules from the US Treasury in order to maximize the impact of the American Rescue Plan Act (ARPA) in supporting existing activities. ARPA usage Lobby for more funding flexibility via our state delegation. 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

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 CY23 Capital Investment Plan. Strategic use of reserves City policy references specific measures of fiscal health which must be adhered to in the long term. 1. Ensuring projected surpluses in future years. 2. Utilizing Debt Service in a sustainable way. 3. Fully funding our long-term liabilities. Stay anchored to our key financial metrics.

What to expect in the FY25 General Fund Budget The FY25 budget will largely be focused on level service, funding the base budget and core services. The FY25 budget will largely be focused on level service, funding the base budget and core services. Large increase in Salary Contingency to protect the base budget going forward. Large increase in Salary Contingency to protect the base budget going forward. With $12M in projected new growth, Somerville remains in a strong position relative to our peers. With $12M in projected new growth, Somerville remains in a strong position relative to our peers. Level Service Investments in Staff Investments in Staff Still growing, just less than FY24 Still growing, just less than FY24 More than prior years, there may be opportunities after July 1 to make supplemental appropriations. Final budget is in the Fall. More than prior years, there may be opportunities after July 1 to make supplemental appropriations. Final budget is in the Fall. Patience

Question & Answer www.somervillema.gov/budget for more information