SECTION I

It is my privilege to submit this annual Financial Plan, including detailed projections of all revenues and expenditures for the Fiscal Year 2023 Budget, a six-year Capital Improvement Plan and a Long-Range Financial Forecast.

The Fiscal Year (FY) 2023 Budget represents the continued recovery from the worldwide COVID pandemic. However, this recovery is to a “New Normal” that involves economic uncertainty and continued public health challenges from a stubborn and highly contagious virus. At the same time, people have become impatient and tired of delays and lack of progress caused by COVID. They are demanding direct response to services for persons disproportionately impacted by COVID, and have grown impatient with constraints to municipal budgets that impede progress towards important public policy goals. Unfortunately, the FY 2023 Budget reflects modest revenue growth. This revenue growth is insufficient to meet the rate of increase in the Town’s fixed costs, never mind the ability to fund new investments and enhanced services. A substantial infusion of federal American Recovery Plan (ARP) funds can support some of this demand, but creates its own challenges given the temporary nature of this revenue.

Overall, revenue to fund the Town’s Budget in FY 2023 is $383 million, up by 4.3% from FY 2022. Based on expenditure projections and requests from the School Department that would increase their budget by 7.89% over FY 2022, available FY 2023 revenue allocated to the School Department is short by $5.8 million. Municipal departments are also limited in the allocation of revenue, creating a shortfall of $1.2 million. The challenge in FY 2023 and beyond is to determine the level and purpose of federal funding that can meet immediate needs and be sustained over a longer-term. Since the federal funds are only available for two fiscal years, the challenge naturally involves a longer-term approach to budgeting, including an honest assessment of future property tax overrides and exclusions.

The FY 2023 Budget balances $382.7 million in total revenues and expenses, covering the operations and capital expenditures of all municipal departments, the School Department, Enterprise activities and other legal obligations of the Town. My recommendation of the School Department budget is based upon an objective formula intended to allocate the Town’s general revenue in a fair and consistent manner. This allocation of revenue first deducts shared Town expenses, such as debt service and capital improvements, and then applies an allocation formula that more accurately reflects the traditional percentage share of the School budget. The following table summarizes the overall revenues and expenditures that make up the FY 2023 budget.

Property taxes are a stable source of municipal revenue in an otherwise unstable time. Proposition 2½ dictates the annual 2.5% in the property tax levy each year. The law allows additional taxes to be raised on new construction value (New Growth) and any tax overrides or exclusions authorized by Brookline’s voters. Overall, property tax revenue is projected to increase by 3.4% in FY 2023.

Despite the uncertainty of the economy, many local revenues have rebounded well from the early months of 2020. In particular, the municipal share of state excise taxes for meals and hotel rooms has increased by 13% over FY 2022. Licenses and permits related to business activity have grown, as have revenues from parking meters and parking fines. I am proud of the Town’s proactive and creative measures to keep our restaurant and food service industry open during the worst days of the pandemic. 2022 represents the year that state excise taxes from the sale of adult-use cannabis has exceeded taxes from alcohol sales. With Brookline becoming one of the first communities in eastern Massachusetts to license adult-use sales, marijuana excise tax revenue rose swiftly, with $900,000 projected in annual revenue in FY 2023. That level has plateaued somewhat, based on impacts from COVID and with growing competition in the regional marketplace. The Town also receives a 3% host community fee that dedicates $1 million for expenses related to the impacts from cannabis sales. In addition to allocating these funds for direct oversight, mitigation and enforcement activities within various operating budgets, the Town has aggressively used host community money to fund public health, racial equity and other initiatives. Realistically, the Town should plan for State law and regulations to limit the value of the HCA as this industry matures. If this happens, I am hopeful that the State will consider an increase to the 3% excise tax available to cities and towns from the overall state tax of 10.75%. Excise taxes are far greater in other states legalizing adult sales, including California (15%), Arizona (16%), and Oregon (17%). Newer taxation models from recent state legalization efforts have used alternative approaches that could prove useful to Massachusetts.

We are disappointed that the Governor’s proposed state budget for FY 2023 limits local aid to municipalities during a time of favorable revenue growth. Despite state revenue growing annually by 24% as of January 2022 (and 7% over the FY 2022 state budget benchmark), the Governor is projecting state revenue growth in FY 2023 at 2.7%. This is the rate at which the Governor’s budget proposes to increase general unrestricted aid to Brookline. Chapter 70 Education Aid is also projected to be limited to Brookline. The Governor’s budget allocates the minimum $30 per-pupil aid to Brookline in FY 2023. We were also surprised and disappointed to see the Town’s assessment for MBTA operations increase by 9% over the prior year, wiping out the modest gains in state aid. At the time this document is being finalized, we are still unaware of the reason for this increase, although we suspect it may relate to Brookline’s population growth in the 2020 Census. Many communities, along with the Massachusetts Municipal Association, are encouraging the Legislature to use more realistic revenue growth projections to support cities and towns. We will follow the state budget process carefully this year, beginning with the House Ways and Means Budget in April, to determine whether this state aid estimate can be increased.

The Town’s fund balance from FY 2021 was healthy, part of a strategic plan to bolster reserves necessary to retain the Town’s Aaa bond rating. The unreserved fund balance certified by the state is referred to as Free Cash, and this amount is used by the Town solely for reserves and capital expenditures. In FY 2023, a total of $14.2 million in Free Cash has been certified. About $6.1 million of this amount will be allocated to preserve fund balance while another $6.8 million will fund the town’s Capital Improvement Plan. The balance is then allocated to various operating and special reserve funds of the Town in accordance with formal fiscal policies. I am pleased to report that the Town is on track to increase its ratio of reserves to 10% of revenue, which is the accepted minimum rate for Aaa-rated communities.

The Town of Brookline is the recipient of an award of federal funding from the American Recovery Plan Act (ARPA) passed by Congress in March of 2021. The total award is $43.9 million, $32.4 of which is received directly from the federal government and $11.5 which is passed through Norfolk County. The funding is paid over two years and must be expended no later than December 31, 2024. There are four categories of use for the funds; COVID-19 Expenditures, Revenue Replacement, Premium Pay for Essential Workers and Investments in Water/Sewer and Broadband. Funding from the ARP is separate from the normal budget and accounting systems of the Town. The grant is administered by the United States Treasury department with voluminous requirements for use and reporting of expenditures. Despite its independence from the normal budgeting system, use of these federal funds is inexorably linked to the Town’s FY 2023 budget and future financial planning. Eligible expenses of the federal grant often overlap with expenses included in the Town’s budget, creating funding flexibility. In addition, ARPA regulations allow a municipality to spend at least $10 million of its grant for any purpose under the Revenue Replacement category use. To date, the Select Board has authorized the expenditure of $1.8 million from the ARPA to fund direct COVID-related expenses. The purposes and timing of allocating the remaining funds will be integrated into the FY 2023 budget planning process. The Select Board has initiated a robust community engagement process led by the Brookline Community Foundation that will serve as the basis for this discussion. The temporary nature of this federal grant will force difficult decisions around the sustainability of programs and services it will fund. All expenditures must be evaluated for their ongoing impact upon the Town’s budget, including options to transition funding when the federal dollars expire. We must also consider the availability of other federal programs when allocating both ARPA and municipal funds so that we can maximize the Town’s financial benefit. For example, the new infrastructure bill passed by Congress could fund many capital projects of the Town currently included in the Town’s Capital Improvement Plan or proposed to be funded by ARPA. Many other federal programs are funded through ARPA, including substantial funding to the Commonwealth of Massachusetts for specific program objectives. We must be vigilant about these other funding opportunities, which can have the effect of expanding the overall federal funding available to the Town.

The FY 2023 “New Normal” budget restores some, but not all, prior reductions in municipal departments needed to balance the last two budgets. In addition, a concerted effort is being made to enhance the funding available to reach collective bargaining agreements with Town unions and to establish competitive wages for management and non-union employees. In the initial FY 2022 Budget, no funding was made available for this purpose, given the constraints imposed by the COVID pandemic. As actual revenues played out, we allocated all of the supplemental revenue appropriated to municipal departments at the Special Town Meeting in November to the Collective Bargaining Reserve. We have allocated additional funding in FY 2023, and are hopeful that this will enable long-term agreements with our unions. Despite the limitations on the Town’s funding created by our structural gap, we were able to accomplish some modest investments in areas that are the focus of policy initiatives passed by Town Meeting. While much more attention will be focused in these areas during the ARPA process, we were able to make some movement in the FY 2023 Budget for the advancement of key policy priorities, including Sustainability, DEI, Historic Preservation, Traffic and Pedestrian Safety, Fire Prevention and Responsiveness.

Funding the Town’s liabilities for employee pensions and related health benefits (OPEB) continue to have an enormous impact on the discretion available within the operating budget. State and municipal employees in Massachusetts do not participate in Social Security (new members are eligible for Medicare), making the defined benefit state retirement plan the sole vehicle for retiree compensation. The funding of this pension system is a local obligation which was historically funded on a “pay as you go” basis. The Town is now following an actuarially approved plan to meet the unfunded liability of this obligation. This plan requires increased appropriations of nearly 7.85% annually until the plan reaches its fully-funded basis in 2030. At that time, the Town will shift this investment into the unfunded liability of its OPEB obligation, involving health insurance benefits for Town and School retirees and their survivors. The Town has been allocating the sum of $250,000 annually to this obligation until such time as the funded plan will commence in 2031. This annual allocation was level-funded during the FY 2021 and 2022 budgets but the annual growth of $250,000 has been restored for FY 2023.

The Town has funded capital expenditures for FY 2023 as part of a longer-term Capital Improvement Plan (CIP). Town financial policies require at least 7.5% of the prior year net revenue be allocated to the annual capital budget. This covers both the cost of pay as you go cash projects and the annual debt service on projects that were financed with municipal bonds. Over the last few years, our fund balance has allowed additional investment to meet a backlog of capital projects, especially related to school classroom expansion. In FY 2023, our overall investment in the capital budget represents 8.3% of prior year net revenue. The Town’s long-term capital improvement plan is addressed in more detail in Section VII of this Budget Message and discussed further in the Policy Issues section of this Introduction. The issue of the Town’s debt burden has been a subject of policy discussions, including concerns expressed by the Brookline Fiscal Advisory Committee (BFAC). While our financial policies dictate that the Town’s debt burden should never exceed 6% per capita, it was never anticipated that so many large-scale capital projects such as school building replacement would be funded outside the Proposition 2½ property tax levy limit. As of FY 2023, debt financed within the tax levy is relatively low at 3%, but when added to $350 million of “excluded” debt, this pushes the overall per capita costs to 11%. The current CIP, which assumes more large-scale projects being added to the mix, is unsustainable.

In the sections that follow, a more detailed analysis of the revenues and expenses that make up the Budget is presented, along with a discussion of the associated policy issues.