For the last several years I’ve been pushing to change the way budgeting is done in Arlington. I’d like to explain my proposal, argue why it is a better process than the one we have today, and make some points about why now is a very good time to make the change.  (This is only about budgeting expenditures, not revenues.)

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.

Black text is mostly objective, red text is mostly subjective in nature.

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.