Finance

Transition Policy Committee Summary of Findings

Committee Name

Finance

Committee Members

Joe Curtatone, Janice Delory, Councilor Ben Ewen-Campen, Douglas Foy, Andrew Maylor, Samantha Silverberg, Bill Valletta

Key themes and trends:

During the past several years, the city has benefitted from a strong regional economy, substantial public and private sector investment, and jobs expansion. These conditions have produced new growth in the property tax base, allowing the tax levy to grow beyond the 2 and a half percent statutory limit each year.

This steady growth in revenue has made it possible for the city to carry out an ambitious program of improvements to government operations; compassionate expansion of social services; large-scale infrastructure projects and school construction; and many open-space and neighborhood-scale improvements. In order to manage its revenue, spending and borrowing, the city has followed a strategy of budgeting and financing with three key elements:

First, the Operational Budgets have been formulated using methods of “level-service” budgeting. Each year, the budget analysis has started (i) by reviewing all existing agency lines; (ii) proposing additional funds to each line for expected salary and O&M cost increases; and then (iii) providing some new programs that can fit within the anticipated tax levy growth along with a cushion of surplus “free cash.”

Second, the Capital Improvements Plan has been organized as two lists of: (i) infrastructure projects and long-term system investments with funding, already approved for bonding or committed from established accounts; and (ii) a wish list of future projects with a five-year schedule of anticipated new bonding and commitments. The methodology has assumed that the combined total of the two lists will be kept well-below the statutory debt limitations. This prudent planning (along with disciplined spending and saving) has enabled the city to gain a Triple A bond rating.

Third, the city has been aggressive in seeking federal and state grants, and in requiring developers and investors to share the gains in asset value, which the city creates by its actions of zoning approval, permitting or license grants. These linkage payments and conditional contributions are put into the stabilization, trust and enterprise reserve accounts, with a goal of 30% aggregate total (of tax revenue) to meet the Triple A bonding standard.

In FY2026 and looking forward, the fundamental economic conditions have changed. Investment in the major sectors of the regional economy has declined and in Somerville, the planning/construction pipeline has no non-residential projects that will add growth to the tax base in coming years. The city may even face a decline in assessed values, if vacant commercial/lab buildings and unfinished construction sites persist. The trend of change in revenue can be seen in the following table:

Somerville: Yearly New Growth in the Property Tax Base and Tax Levy

[Table: Growth / 2019/20 / 2020/21 / 2021/22 / 2022/23 / 2023/24 / 2024/25 / 2025/26 / 2026/27 / 2027/28 | Tax Base / -- / $758 mill / $782 mill / $840 mill / / $917 mill / $532 mill / -- / -- | Tax levy / $8.4 / $10.3 / $10.7 / $12.3 / $17.7 / $14.1 / $7.8 / $5.0 / zero]

Compounding the pessimistic financial picture, the costs of government operations, supplies, capital construction, and debt service likely will continue to grow. In this context, the methods of budgeting, capital planning and financial/asset management will need revision. Methods of “performance-based budgeting,” more disciplined capital improvement planning and the use of other sources of funding to replace borrowing and plentiful free cash will be needed.

Guidance from the Mayor on these big-picture questions must also be accompanied by oversight and support for the operational improvements that the divisions of Finance have underway. These involve the up-grading of technical systems and clarification of protocols, intended to provide more robust data, better analyses, improved interagency communications and financial reporting, and more transparent and meaningful public information.

In the coming years, city leaders and the agencies will need to be frugal in their spending and investment and they will be seeking new revenues. The residents, property owners and taxpayers of the city, who will be asked to diminish their expectations and contribute more, will need to fully understand the financial choices and decisions and be confident that their added burden is balanced by efficiency and disciplined spending for all city activities.

Existing initiatives:

Each of the divisions of Finance and of Infrastructure and Asset Management are now carrying out projects of systems improvement, which are intended to increase efficiency and provide more accurate data and analyses:

The Finance Department is working with its contractor to complete the Gateway and Merchant Services system for electronic bill-paying. This databank receives and processes all small payments from taxpayers, service users, permit applicants, etc. It also processes the micro-payments from parking meters. The system has standardized and consolidated the separate payment methods of the different departments and it links into the MUNIS system of administrative data management for scheduling, performance management and reporting.

The Budget Division has introduced the methodology of performance based budgeting, making use of the Fiscal First Aid Framework developed by the Government Financial Officers Association. This guidance material is being used for staff training of all the agencies, as they are carrying forward the formulation of their FY2027 budget requests. Using these analytic methods, the budget will shift away from line-by-line calculations to more consolidated or cross-division reviews of programs to determine where spending will achieve the best outcomes with greatest efficiency.

The Accounting Division has been working with Human Resources to implement the Governmental Accounting Standards Board (GASB) Statement 101, which is a method for standardizing the calculations and reporting of employee compensated absences. This tool is needed because different categories of leave accrue in different ways and compensation can be by cash or non-cash (alternative time off) methods.

Procurement and Contracting has completed its Central Submission Portal and is making improvements to the public information databank of current and closed bids.

These are just some of the initiatives of technical systems and process improvements that will require careful oversight and, where appropriate, the endorsement and support of the Mayor in the coming months.

Gaps:

The primary problems for Finance in the coming months will be the need to track closely the economic trends and carefully measure the likely impacts on city revenue and costs. Several:

Tax levy projections – It appears certain that the years of strong new growth in the tax base and tax levy from commercial, industrial, and laboratory developments are over. However, the divisions of Assessing and Budgeting do not foresee losses of property value, strong enough to push the city into negative tax losses year to year. A few other sub-sectors of the real estate market appear to be holding steady – in particular the demand for housing units in one-to-four and small-scale multi-family projects. Additionally, investments appear to be continuing in areas of retail space and “tough tech” fabrication. The city's Economic Development Division is able to attract new companies with tax-increment financing (TIF) or similar mechanisms – this will avoid a precipitous drop in assessments for vacant lab buildings.

State Aid – Revenue from state aid will stay unchanged, given the budget constraints of the Commonwealth. The city's main sources of state aid are the annual transfer of unrestricted local government aid and school aid (based on student enrollment).

Local Option fees and taxes -- The state legislature may authorize cities to increase by small amounts several of the “local option” taxes and fees – such as hotel and restaurant sur-tax. If these proposals are passed and then adopted by Somerville Ordinances, then a modest increase of about $1 million in revenue a year could be expected.

City employee health coverage -- Significant increases are anticipated in the costs of health insurance coverage for city employees – which went up 11% last year ($3.3 million) and are expected to increase 12% ($3.8 million) in February 2026.

School operations – The increase in schools spending has been an average of 7.8% per year in the recent past, and the three-year forecast has been set at 6.6%; that would be a $7.5 million increase for FY2027.

City employee wage growth – Given that the significant re-adjustments of wages to accomplish equity among job classifications has already taken place, the coming year's anticipated wage increases are likely to be reasonable. In addition, any accumulated retroactive adjustments can be covered from the Wage Stabilization accounts, already reserved for this purpose.

Debt service – In general, the downward trend of interest rates and the city's favorable Triple A rating should help to keep the city's burden of debt at reasonable levels. However, three items of immediate borrowing needs – (i) financing a new elementary school in the range of $300 to $400 million; (ii) carrying the debt for 90 Washington Street; and (iii) the sewer/water improvement projects and MWRA capital projects – will likely push the borrowing needs above the statutory debt limit for the near term. The city will be making efforts to minimize the volume of these capital costs, such as working to maximize the state contribution to the elementary school construction, and disposing of the 90 Washington site to maximize recovery of its acquisition cost. Nevertheless, in order to undertake the school construction project, a debt-exclusion or Proposition 2 and1/2 override will be required.

Amid the work of up-grading data, management and inter-agency communication systems, the Finance Department divisions are still encountering some obstacles and deficiencies. For example, the Finance Department systems for employee wage, timekeeping, leave and absence, and compensation, do not yet interface fully with those of the Schools Department. One example of a resulting failure is that employees, who leave the schools, do not get automatically removed from the Finance lists and often the city has continued to pay insurance for them until the errors are later discovered.

Opportunities:

There appear to be some opportunities to find new revenues and savings to balance the expected revenue limitations and rising costs; however, these opportunities involve multiple small-scale activities.

For example, the city already has authority to increase the user fees that bring in routine revenue – parking meters, building permit and zoning application fees. Similarly, if the state legislature does authorize municipalities to increase local option taxes, Somerville should take advantage of these revenue enhancements.

More substantial savings should be sought in the Budget process by formulating and applying more clear criteria for priority-setting. Programs that have been developed as desirable services and amenities in the period of generous federal and state grants, but which have proven to have limited outcomes or have attracted only small numbers of participants will need to be removed in a period of limited funding. Thus, it will be important to support and enhance the work of the Finance department in incorporating the methodologies of program-analysis into the Budget process.

Recommendations for action:

Short-term:

In the short-term, the most pressing need for Mayoral attention must be the Budget and guidance to the agencies and Finance Department on priorities and the best methods to achieve restraint in spending. While it will not be possible to immediately change the methodology to “performance-based” budgeting, nevertheless, elements should be introduced at once in order to signal prudence and frugality in the coming fiscal year.

Medium term:

As decision-making for the re-construction of Winter Hill School and related school projects moves forward, preparation should be underway for a debt-exclusion. This will allow the city to add to the property tax levy an amount that will cover the excess debt service. This authorization must go on the ballot and be approved by the voters and the question must state the specific amount of taxes to be collected. Therefore, the action must be ready for placement on the ballot by the deadline date, and the campaign of public education must be well-underway in advance.

Revisions to the process of formulating and reviewing the Capital Improvement Plan should be undertaken. The changes in methodology should be similar to the “performance-based” budgeting. That is, they should emphasize priority projects and needs, rather than presenting a wish-list of visionary ideas. The procedures of CIP amendment and revision should take place more frequently, in order to keep the cost projections up to date with inflation. Each revision should involve re-calculation of the outcome/benefits of projects and clarify how they will fit within the statutory debt limitations (or give rise to a needed debt-exclusion).

Also in the medium term, there should be a review of the overall strategy for management and use of the stabilization, trust and reserve accounts. Over the years, the stabilization accounts alone have filled with a total of more than $135 million, money that is being held both for “rainy day” purposes and for a variety of ear-marked local amenities. If the city faces the need for a high-priority infrastructure and school project that cannot be funded without pushing far over its debt limitations; there should be a way to draw down and consolidate funds from these small and low-priority accounts to re-direct into the high-priority need. There is precedent for such actions (GLX Stabilization funds were transferred to cover some High School construction costs). But the city has not yet stated a policy, clearly researched the legal issues or impediments, or defined any method or criteria for how and when similar actions might be taken.