This continues to share the Five Year Fiscal Outlook for the Town of Franklin as published by the Town Administrator, Jamie Hellen:
FY23 Financial Outlook
Revenues
As the Town enters FY23, revenues look to be stable in all areas: local receipts, state aid, and new growth. Up until FY23, state aid has remained at less than a 1% annual increase due to the dynamics of the Chapter 70 formula, town demographics and the Town’s growing affluence. Local receipts have remained on a steady increase due to the incredible work of our municipal staff due to an increased demand in services, such as ambulance, EMS services and permitting. FY22 saw a decrease in New Growth from FY19, FY20 and FY21. I expect a modest, stable year again. It is important to reemphasize that our permitting boards continue to see a lukewarm construction market relative to the pre-pandemic years with a notable leveling off of applications before the permitting boards. With supply chain problems continuing globally, I expect property improvement investments will maintain a plateau until there is greater confidence in those goods being provided and/or cost increases subside.
Property values, which are the foundation of the entire town budget through the property tax levy, remain strong due to supply and demand dynamics in the real estate and housing markets. Property taxes are the baseline, as well as largest source of revenue, for the town's services. As long as property values maintain a high value, the town will see decent stability in the budget.
As usual, once the state legislature is done with the legislative session and the various legislative packages being considered are complete, including the state budget, staff will see where all the numbers fall later this summer and propose any adjustments to the Town budget prior to the tax rate hearing in December. I anticipate an increase in state aid, but as discussed for years, not by enough to make a significant new investment impact in the local budget. Any additional revenues will be used to cover shortfalls in other areas due to rising costs of goods and services and labor/personnel.
Expenditures
As of this publication, the main fiscal concerns and challenges for the Town in FY23 are the issues we are all seeing in the news: rising interest rates; inflation; gas/diesel and electricity/gas costs; rising costs of goods and services; health care costs; labor and personnel costs; and the overall uncertainty of the economy. FY23 appears to be a “settle into a new normal” year of actually feeling the impacts of inflation within the local budget.
There will be stress on the FY23 budget due to inflation and increased costs. For example, the Town is looking at a doubling of the cost of fuel/diesel over FY22. Additionally, we are looking at escalating electricity rates of possibly two-plus cents a KW higher. As basic operating costs, such as utilities rise, this will have an impact on other areas of the budget.
We are also seeing bids for construction projects coming in much higher than anticipated. For example, the recent SNETT trail project we are working on with the state DCR was estimated at $200,000 a year ago when the work was designed and approved by the Conservation Commission. The bids came in between $400,000 to $800,000 - double to four times the estimated cost from one year ago! We are seeing similar issues on smaller projects. The Red Brick Schoolhouse bids came in $50,000 to $250,000 over the estimated cost, which was just designed four months ago! These examples depict an environment everyone will need to get used to: money will not be going “as far” as it did a year ago. The Town is only one month into the fiscal year and inflation is going to settle into the budget.
To weather this storm, the Town must use nimble strategies throughout the fiscal year to make sure there are no significant cost overruns by next spring. The community should be prepared
that costs for basic services, such as snow and ice removal, parts, supplies, personnel, goods, services, etc., will all place a strain on the FY23 budget throughout the year and therefore may require services to be reduced in areas of the budget. FY23 has all the markings of an adjustment year in terms of what levels of service the tax levy can support and how consistent the economy can be for revenues.
FY23 should also see all major collective bargaining agreements being resolved, which is good for labor relations and recruitment, staff morale, as well as financial predictability. The downside is that to complete these contracts, the use of one-time revenues for the school and town unions sets up an inflationary situation within the Town’s operating budget come the expiration of those funds in the next couple of years.
FY23 capital projects
To ensure the Town is ready for the altering dynamics in FY23, any new capital improvement projects (facilities, roads, infrastructure, borrowing) that come to our attention after August 1st, 2022 will be postponed and put on hold for discussion to ensure the Town has the accurate resources to fund current projects. All capital projects currently authorized by the Town Council or in the Town Council’s goals for 2022-2023 will continue to move forward. However, as we move through the phases of a project (design, procurement, borrowing, awarding contracts, beginning work), I will not commit to any new projects until the town has greater certainty around the cost effects of that project. In other words, unless there is a significant public emergency, do not expect new projects entering the pipeline. As described above, inflation is caused by the high demand in spending with not enough supply to accommodate the demand. Franklin will need to consider doing our part to decrease the demand in the marketplace.
I will have to evaluate and view the FY22 capital program in a new light when free cash is certified later this fall. I cannot make any commitments for new projects due to rising interest rates and the fact that many of the projects currently in the pipeline are seeing cost increases that may need to be augmented from capital funding later this fall and winter.
The American Rescue Plan Act (ARPA) federal stimulus money is proving to be a bridge for the town on many fiscal obligations that could have had a negative effect on the town’s budget and delivery of services. ARPA money allowed the town to push the implementation date of the new stormwater utility fee out one year to FY24 (July 1, 2023), which has provided financial relief to all citizens for this upcoming FY23. Other financial obligations such as water main infrastructure, sewer infrastructure, personnel and labor costs, and the mental health crisis are all areas that the Town would not have been able to subsidize or invest in without these funds.
Speaking of sewer, an issue to watch in FY23 is the Beaver Street Interceptor project: the 109-year old pipe that hauls ⅔ of all town sewerage to the Charles River Pollution Control District. This will be one of the most expensive and complicated public works projects in town history. Sewer rates are expected to rise in late FY23/FY24 to pay off the borrowing with this project. While some may say to put a project like this on hold, the truth is the cost of inaction will be far more expensive and damaging to the community than the cost of the rate increases. Nonetheless, a project of this size and importance will be taken step by step to ensure the best return on investment for the ratepayers and may require nimble decision making based on market conditions as the project moves forward. These rate increases will only affect sewer system customers, not private septic residents.
In closing, FY23 appears to be a transitional year toward a new, inflated normal with inflation, interest rates and rising costs. I remind all readers, what happens in the news on a daily basis around the economy can take months or years to actually settle in at the local level. That relates to both the good and bad news. Also, reversal of these trends also can take months or years (even decades) to recover from. As everyone knows, every day has both positive and negative signs for future economic fortunes. I have provided a few economy related reference points as the fiscal year starts to offer context as to how international and national affairs have an impact on the state and local budgets:
● The Federal Reserve has recently increased interest rates multiple times and will continue to raise them until a recession-like economy is inevitable.
● On July 27, 2022, WBUR provided a great summary on the national economics and the Federal Reserve. Many of the trends in this story ring true in Franklin.
● Massbenchmarks’ latest “Current and Leading Index” report shows what we all know: inflation, labor supply, labor and personnel costs, and uncertainty weigh on consumers in Massachusetts.
● The message coming from Fortune 500 CEOs shows a recession is inevitable.
One thing is for certain: economic volatility and mixed signals will continue for the foreseeable future, as the country struggles to get into a pre-pandemic economic rhythm. ALL departments need to be cautious about overspending. The effects of inflation could be significant as the fiscal year evolves.
Continue reading the full report in this PDF -> https://www.franklinma.gov/sites/g/files/vyhlif6896/f/uploads/2022-08-15_fy23_to_fy27_town_administartor_fiscal_forecast_1.pdf
Part 1 (FY 2022 closing) was shared previously
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