City faces budget challenges


WESTFIELD – Mayor Daniel M. Knapik is preparing the city’s 2014 fiscal budget, which begins July 1, 2013. He will present the budget to the City Council in May, a process that began in earnest in January with department heads submitting budgets reflecting current operations and future needs.
Last year, for the current FY 2013 budget, Knapik had to bridge a $3.5 million gap between revenue and expenses. This year that gap is $2.5 million, principally funding for the city’s school district, which is the largest municipal department and accounts for nearly half of the budget.
Knapik is also working with a “ball park” projection of the level of state aid allotted to cities and towns. Governor Deval Patrick has submitted his proposed FY 2014 budget to the House and Senate that will both create their own versions of the state budget with different local aid numbers, then there will be a reconciliation process to identify the final budget that is approved by the Legislature. The instability of state and federal funding, which accounts for roughly a third of the budget, is an annual challenge. State aid has dropped $3.2 million since 2009.
“I have never has the chance to prepare a (municipal) budget with a finalized state budget,” Knapik said. “So I’m going off the Governor’s numbers, which are subject to change.
“The Senate budget has typically been more generous to communities than the other budgets because they have the benefit of going latest in the process, with the most accurate information,” Knapik said. “There are projections that federal revenue is up, so by the time the Senate gets the appropriation bill in May, the state’s economy may have fired up, increasing revenue.
“I’m also putting out a budget based on nine months of departmental receipts and (revenue) projections for the final three months of the fiscal year,” Knapik said. “By the time I get the budget to the City Council, at the third Thursday in May, it’s based on a lot of projections put into place in late March, so when the councilors are reviewing the budget in June, they are seeing actual revenue two and a half months after me.”
Other challenges in the development of a budget are directly related to union contracts for salaries and benefits, as well as post-employment benefits for the city’s retired employees.
“The biggest budget drivers are the other post employment benefits (OPEB).  Basically retired employees get health insurance for life and pensions,” Knapik said.
The city recently hired an actuarial firm to conduct an audit on its OPEB liability, which presently is $275,787,643. That report also included several funding schedules to address that liability, which the city could fully fund in 26 years if $24.9 million was appropriated in each of the annual budgets, a little less than a quarter of city’s budget.
City employees and retirees hired before 1987 pay for 35 percent of their health care, with the city funding 65 percent, while employees hired after 1987 move to the Medicare system when they turn 65 years of age.
“So the cost for the OPEB goes down dramatically for those employees,” Knapik said.
Active teachers, like other city employees, pay 35 percent of health care into the system, but upon retirement, they move to the state-sponsored Group Insurance Commission (GIC) account, which requires retirees to pay only 15 percent of their health care costs and communities pay 85 percent of that health care cost.
“So what is causing some consternation in communities is that the cost for retired teachers goes up every year as more teachers enter the GIC system,” Knapik said. “City leaders need to engage in a meaningful conversation on how we address retiring teachers’ because the state assessment on the City to pay for that benefit has increased by $400,000, or 16 percent, for the coming fiscal year.”
“Keep in mind, that $275,787,643 liability is due only if everyone retired today,” Knapik said. “The state will need to provide serious reform and relief packages to allow us to continue services at the local level. The governor has proposed an OPEB reform bill which is certainly helpful, but if the Legislature enacts the provisions as proposed, cities and towns will have to wait three years before they can adopt it.”
The actuarial firm is also providing hard numbers for the OPEB cost of employees of “enterprise” departments, those that collect revenue from fees charged to city residents. Those departments or divisions include the Water Resource Department, the Wastewater Treatment Department, the Stormwater Management division of the Department of Public Works, and the Westfield Gas & Electric Department.
“The consultant will provide the dollar value that needs to be put into reserve for employees now in the pipeline for retirement,” Knapik said. “Those departments will begin paying for that (OPEB) debt through their rate structures.”
Knapik said the city is “on target to fully fund the pension programs by 2032” and that the pension, which is managed by a local board whose members are elected by current employees and the Mayor, is currently funded at 69 percent of the liability.
“The board hired an investment counselor and since then the rate of return on their investments has increased,” Knapik said.
Another major topic of discussion, especially among City Council members, is the city debt, money borrowed for projects and repaid over time to the lenders. The positive note in that discussion is that Moody’s Investor Service, a bond rating firm, is considering lift the city’s rating from A1 to AAA. The current rating “reflects the city’s healthy financial operations, stable and diverse tax base and moderate debt burden.”
Knapik said the firm has recommended that the city increase its stabilization account and more free cash allocations for purchases, as opposed to bonding for those expenditures. Moody’s projects that the city will retire 85.5 percent of its current debt obligation by 2022.
“We are on the path to a triple A rating,” Knapik said. “The stabilization fund will be $7.5 million by 2014, an increase of $1.4 million from today’s number.”
Knapik said the city’s debt strategy, developed through the City Council’s Finance Committee several years ago when former Councilor John Liptak was the chairman of that board, is to maintain an annual debt payment of between $5 and $7 million.
“You want to add to the debt to the books as older bonds are retired or the funds would be used for operating budgets and would not be available for future bonding,” Knapik said. “We’re in a position of having excess debt capacity right now. I wouldn’t put anything in front of the (City) Council that we can’t afford to pay and right now is a good time to borrow because interest rates are historically low, and we can’t count on such low rates forever,” he added.

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