Simsbury, CT - February 14, 2006

The Regular meeting of the Board of Finance was called to order at 6.30 P.M. in the Conference Room D-172 at Simsbury High School. The following members were present: Chairman Paul Henault, Peter Askham, Candace Fitzpatrick, Nicholas Mason, Anita Mielert, and Kevin North. Also present were Finance Director/Treasurer, Kevin Kane; First Selectman Tom Vincent; Water Pollution Control Superintendent Jim Clifton; Town Engineer Rich Sawitzke; Library Director Susan Bullock; and other interested parties.

Mr. North noted a transposition of numbers on page 3, 4^th paragraph and asked that the number 1.179 be corrected to be 1.917. Ms. Fitzpatrick asked that a clarification be made on page 3, paragraph 3 and the term “extraordinary and special needs” was amended to “extraordinary special needs”. Also the final sentence was edited for clarification.

Mr. Henault referred to the memoranda from Water Pollution Control (WPC) entitled “End of FY 05-06 Projection” (Addendum I) and “FY 06-7 Budget Cap Concerns” (Addendum II) as well as the document entitled “Fiscal Year 2006-2007 Proposed Budget/Upgraded Treatment Facility Start-Up Budget” (Addendum III).

The waste water energy plant is a heavy energy consumer in terms of power and fuel and that is where the largest increases are. For example, the electric expense is projected to be an increase of close to $200,000. The new facility that is being brought online has larger pumps, which are large consumers of power, and will additionally move the WPC into a higher charge rate. Also, electric costs are projected to increase by approximately 22%. Fuel charges for natural gas are projected at the last two months’ rate.

Mr. Sawitzke pointed out that there will be some environmental upgrades in the new facility, some of which have some interesting asides. First, the new facility will remove all nitrogen components from the waste, which are a major pollutant of rivers and Long Island Sound. Even if this upgrade were not done, the WPC would have to buy credits similar to what is done for air pollution control. The second environmental improvement is the elimination of chlorine. Finally, odor control will be installed on the plant as this has been an issue from time to time.

The facility is nearly 30 years old and much of the equipment would have to be replaced in any case. The WPC is projecting a significant increase in their consultant service charges due to the fact that there are other components of the facility such as major pump stations on Wolcott Road and Drake Hill Road that need improvements. Those consultant fees will allow the WPC to get on the State Clean Water Fund list for funding those improvements in the future.

Many of the customers that would use the new facility are in areas that do not have connector pipelines. The scenario for paying for this addition relies to a good extent on new customers. Only half of the existing sewer district is serviced as it exists; there are some 2,200 acres in town where homes exist with no trunk lines. Those consultant fees would pay for those designs.

The proposal is to adjust connection charges effective in April to be $4,090 and those dollars over a 20-year period would go towards costs associated with plant expansion. It is also being proposed to increase the sewer use fee to $290 to address the costs of operating the plant on an annual basis as well as to build up a reserve to retire the environmental costs. The thought was that the current users and future users should pay those environmental costs which are an overall benefit. The pay- off period for the bonds begins in October 2007 and a portion of the reserve would be used to retire this debt at a rate of approximately $800,000 per year.

Ms. Mielert asked for clarification of policy decisions in which the budget relies on new users and where new sewer lines would be extended. Mr. Sawitzke replied that the portion for expanded capabilities of the plant relies on new users in Simsbury, Avon and Canton. He indicated that the lines would only go into the service area. The original sewer plant was designed so that biological processing depends on waste to purify the waste. If the plant were to be built out to its ultimate capacity of 3.8 million gallons per day, there would not be enough waste to run that process. The original overall sewer facility in Simsbury was designed where the pump stations and the pipes would handle everything in the service area. The original plant was actually designed to handle 50% of the homes in the service area. Expansion would be within the service area based on neighborhood requests.

Ms. Mielert asked, if a sewer pipe were to be run down a street, would every resident on the street have to tie in to it or would they have a choice. Mr. Sawitzke replied that they would not have to tie in, but the Authority looks for a super-majority (75%-80%) of people on the street desiring sewer service. At that level, if the Authority decides to go ahead with the extension, all the residents would be assessed, but they would not have to pay connection charges.

Ms. Mielert asked about the sewer use fee increase and the reserves. Mr. Sawitzke responded that raising the fee from $200 to $290 would allow the Authority to operate the new facility, build up some reserves and, if energy charges do not continue to rise, should be a rate that will hold for a while. Mr. Sawitzke stated that the reserves would be used to retire the loan and for maintenance.

Mr. Kane stated that, once the new facility is complete and the loan repayment kicks in, debt service will require in excess of $800,000 per year and that is the problem. When the budget was projected a few years back, it showed revenue over expenses of just over $500,000. However, when the debt repayment kicks in, there would still be a gap and the plan was to use the build-up in fund balance in those years to fill the gap that would eventually happen in future years. When the new budget showed only $350,000 of revenue over expenses, although he could not comment on the budget itself, he noted that this amount would not be enough to pay for debt service.

Mr. North asked if surplus could be used to pay debt service. Mr. Kane stated that, originally when the plant expansion issue first came up, the consultant made a recommendation to have the taxpayers (the General Fund) pay for the plant expansion. Mr. North stated that he recalled that the essence of the discussion was that, even if there were no new users, the existing users could be levied a rate increase that would be sufficient to cover the cost of the project and that that rate increase would still be at or below the median for average sewer use charges throughout the State. Mr. Kane agreed, but when the analysis was done several years ago, there was a general inflationary increase in the budget, but it was not 30%.

Mr. North asked how we wean ourselves off of using reserves to pay debt service as debt service exists for 20 years. Mr. Kane stated that money should have been put aside in the first place for this plant. In the past, the WPCA had the lowest user fees in the region for a reason in that they also had the lowest fund balance in the region. Mr. North stated that in his mind the fund balance is appropriately used to effectively meet the depreciation that is going to take place on the physical parts of the plant.

Mr. Sawitzke stated that there was originally some discussion about using general tax revenue to retire certain portions of the plant costs, primarily the environmental improvements. The ultimate scenario ended up using new user fees for the expansion portion of the plant, using existing and future users to pay for environmental improvements and then using money from the fund balance for capital improvements.

Mr. Mason asked if it was fair to say that we were undercharging for a long period of time. Mr. Clifton agreed. Mr. Mason asked what the desired level of the reserve would be at this point. Mr. Clifton stated that it should stay where it is at currently. Mr. Mason asked if there was an element of surprise other than the substantial increase in electrical rates. Mr. Clifton indicated that any surprises were compounded by the simultaneous increases in electric and natural gas rates. Mr. Henault asked, if these increases had not happened, was everything else as it had been projected to be. Mr. Clifton responded that it was. Mr. Henault asked what kind of increase the Authority would be looking for if the energy increases had not happened and Mr. Clifton stated that they did not look at that.

Ms. Fitzpatrick recalled discussion of using the reserves to offset some of the capital expense and that it sounded now to her like it was being used to fund a budget shortfall or gap. She wondered how much the user fees would have to increase in order to not use the reserves to fill the gap. Mr. Sawitzke estimated that it would be approximately $30, but noted that the estimate was like a moving target as the user base is increasing.

Mr. Henault stated that one of the selling points that the consultant noted involved nitrogen credits. Once the plant is up and running, Simsbury will be able to sell nitrogen credits. Mr. Henault asked when the Town would be able to start selling these credits and what revenue can be expected from their sale. Mr. Clifton indicated that they could be sold as soon as the plant starts up (currently projected to be May/June), but that it is based on a calendar year and for the 2006 calendar year they will take out about 2/3 of what they put in, so it will probably result in a net pay-out. For 2007, they will get a small check.

Ms. Fitzpatrick asked how many credits could be sold and what does each sell for. Mr. Clifton responded that currently it was around $2.00/lb. Mr. Henault asked, if under-utilization would result in a lot of credits to sell. Mr. Sawitzke responded that there would be in the early years, but as the plant capacity gets used up, the amount goes down. Mr. Henault asked how much money could feasibly be generated in 2008 and Mr. Clifton thought it would be approximately $35,000-$37,000.

Although new users generate connection charge fees, Ms. Mielert wondered if they would not also increase expenses as well, such as costs of pipes and connections. Mr. Sawitzke replied that most of the connections are already out there to be had. Also, developers bear the costs of any new connections. Ms. Mielert asked if any new staff would be required to operate twice as much plant. Mr. Clifton replied that the new plant supervision would be computerized and would free up staff for field work.

Mr. Mason asked if, when a homeowner’s septic system fails, they are required to hook up to the sewer system. Mr. Sawitzke responded that currently the cost to repair a failed septic system in the Town of Simsbury can be $20,000-$30,000. Mr. Mason asked how many new connections happen due to septic failures and Mr. Sawitzke responded that most of the approximately 200 connections made last year were due to failures. He also stated that connections are primarily due to failures, additions on to homes that would require very large reserve areas, and it is a selling point for a home sale. Ms. Fitzpatrick noted that they could get the failure statistics from Farmington Valley Health District.

Mr. Henault asked what the Authority needed from the Board of Finance this evening and in the next few months. Mr. Sawitzke stated that this portion of the Town budget cannot adhere to the Board’s budget guideline, but it is a self-sustaining fund and, therefore, does not require any formal action by the Board. Mr. Kane stated that, although the WPCA is a separate fund under the Board of Selectmen, the Board of Finance is a budget-making authority and if the Board is unhappy with the policies or budget, it should be conveyed to the Board of Selectmen as, ultimately it will fall back to the Board to approve and this is definitely the time to discuss it. Mr. Henault pointed out that the voters did approve this project and now it is coming online and it was known that there would be increases in expenses and the critical factor that is making it a bit more extraordinary is the rate increase for electricity and natural gas.

Mr. North asked if they would be making a draw down of reserves if they did not have to pay down debt or have these extraordinary fees. Mr. Kane stated that, although he cannot speak to the budget itself, he can say that if this budget comes in $200,000 lower, the fee could be cut by $30, but that they need to build up the differential just to meet the debt service. Mr. Askham stated that, as a sewer user, he would like to see that reserves are not being built up excessively and that this number has never been focused on before. Mr. Kane stated that actually the rating agency Moody’s noted that they needed to indicate how they were going to pay for the debt. Moody’s neutral opinion was based on an analysis that they were given that showed that Simsbury would sustain this new plant through its users and not throw it back to its taxpayers.

Mr. Henault summarized that the Board would like to have Mr. Sawitzke prepare for its February 28^th meeting a summary of the increase in the WPCA budget absent the increase in electrical and natural gas rates as well as comparison of pre-project pro forma expenses associated with maintaining the new sewer plant that evaluates how on or off the mark the upkeep costs are from what was previously projected.

Ms. Fitzpatrick also requested that the Board receive a three-year projected budget showing the proposed effects of nitrogen credits and connection fees on the WPCA budget. Mr. Mason stated that he would like to see some assurance that the usage charges will remain relatively stable, given no large increases in energy costs. Mr. Clifton noted that this is a start-up budget for a plant that has not yet gone into operation and that he will make his best attempt to provide some realistic numbers.

Mr. Sawitzke also noted that, relative to the 2005/06 budget, they would expect to be coming before the Board to request a transfer from reserves sometime in the future to cover the shortfall. Mr. Kane stated that the Town’s legal counsel was going to determine whether the WPCA was governed by the Town Charter’s 1% policy. Mr. Henault thought that it would also be possible to declare a fuel emergency.

Mr. Vincent stated that the Board of Selectmen voted on the six year plan at their budget workshops and that he was at this meeting to present that plan to the Board of Finance. He noted that the capital plan begins in 2006/07 and concludes in 2011/12 and that the projects for next year are split almost 50/50 between general government and Board of Education projects. The Town projects consisted of sewer extensions, park improvements and the library expansion. The park improvements include playground equipment replacement, field lighting, irrigation, parking lot construction and field improvements. The Board of Education projects consist of computer technology, renovations and additions to Tariffville School, system telecommunications and security lighting upgrades.

Mr. Sawitzke gave an overview of the library project, which was developed from a needs assessment that was completed in 1999. Subsequently, the Board of Finance and the Board of Selectmen approved funding for preliminary and design development plans as well as a professional cost estimate and those tasks were assigned to the Public Building Committee and they have been completed. Now the suggested schedule is to do the pre-referendum planning and documentation. If the project is approved to be built, it would go to contracts and specs between June and August 2006 so that construction could begin in October. Currently, the project consists of two major areas: a complete renovation of the present 20,000 square feet in the building and 19,000 square feet in additions to three sides of the building for an expanded children’s library, an expanded program room and youth area, new computer information and access area and staff support areas.

Mr. Henault asked if Mr. Sawitzke could prepare a hand-out of his breakdown of proposed project expenses. Mr. Sawitzke stated that the new portions will cost $182/square foot and the renovations would be $171/square foot. Mr. Henault asked how that compared with the high school project. Mr. Sawitzke replied that the high school was around $155/square foot and noted that the library had extraordinary demolition costs due to all the ledges and higher floor loading required for the library stacks, which resulted in the higher cost.

The major renovations and upgrades would include lighting, new floor covering and a sprinkler system. Ms. Bullock also noted that all the stacks would need to be respaced to provide the clearances required by ADA. Mr. Henault asked if there was any major variance from last year’s proposal and what was currently being presented. Ms. Bullock stated that there was no change to the square footage and that the major change was to a drive and a walk to the Boy Scout Hall area that was taken out and replaced by retaining walls and additional parking spaces.

Mr. Henault asked if all the money appropriated for preliminary design had been used and what had it been used for. Mr. Sawitzke stated that approximately $70,000 has been expended and that it was used for evaluation engineering of the existing facility, lighting and finishes and to re-evaluate the scope of the project.

Mr. Henault noted that New Hartford had just been granted a $500,000 state grant for a 10,000 square foot addition to their library and wondered why Simsbury was required to add 19,000 square feet to qualify for its $500,000 grant. Ms. Bullock explained that the needs assessment is based on a mathematical model that asks how much volume you have, services that you would like to provide, projected populations, etc. and the square footage is an end result; therefore, you are going to get different results with very different communities such as Simsbury and New Hartford. Ms. Mielert pointed out that $500,000 is the maximum grant that the State awards.

Mr. Henault asked, if the project moves forward and gets voter approval and the Town cost that is approved is $5.6 million and the costs escalate to $8 million, what is the fallback position for the project, i.e., would they eliminate the additional square footage or the modernization of certain parts of the building. Mr. Kane stated that he would hope that the project stops and that there would be discussion as to how to modify and that they have to get back to the Boards and the public as there will be a problem if the project does not meet the scope of the bond issue.

Mr. Henault asked if they have a pro forma laid out as to what their additional expenses will be for maintaining this new facility (electricity, heat, maintenance, staffing, etc.) and is it safe to assume that, since they are doubling the size of the building, expenses will also double. Mr. Sawitzke stated that, due to the introduction of several energy efficiencies in the mechanical system and lighting, he would anticipate a 65% increase. Ms. Bullock stated that the new building will be able to be staffed with the current level of staff (except for the addition of a part-time janitor) due to the preservation of sight lines in the new layout. If additional staff were to be required, it would not be due to the additional space, but rather due to an increase in usage of the library. But to mitigate that need, there will also be automations added.

Mr. Henault asked for clarification of the temporary costs that were mentioned. Ms. Bullock explained that the $300,000 cost represented overhead for staying in the building during the renovations. The Library Board is researching whether or not it would be more cost effective to move out of the building and have asked for a quote from the same firm that moved the Police Department during their renovations. They have received a quote of $187,000 for warehousing equipment and the stacks. They are also looking for approximately 10,000 square feet of available space in Simsbury. Mr. Sawitzke indicated that the rental cost would be approximately $13.00 per square foot. Ms. Bullock stated that, although they really would prefer not to move, safety is their first consideration. As the parking areas will be used as staging areas, children’s safety is an issue. Currently, they feel it is a wash cost-wise no matter which way they go.

Ms. Fitzpatrick noted that the space requirements were a result obtained after plugging in the demographics and were based on a Library Board sub-committee’s program specifications which outline services that the Library Board approved that they felt were proper for the library moving forward. Ms. Bullock stated that every project starts with a long-range plan that consists of two parts: 1) a technology plan for the next five years and 2) the kinds of services that the library wants to provide. This plan indicated that a business resource center, an instruction area, and certain children’s library program specifications were wanted. Ms. Bullock also stated that a book containing the long-range plan and the mathematical formula used for determining square footage needs are at the reference desk at the library.

Ms. Fitzpatrick asked how the money is received from the State grant. Ms. Bullock responded that 50% of the money is released when 50% of the project cost is expended and another 40% is released when 75% of the cost is expended. Mr. Sawitzke stated that the state grant also requires an expenditure authorization which would require a referendum. Ms. Fitzpatrick asked what would happen if the Friends of the Library were unable to raise the $500,000 that they have pledged. Ms. Bullock responded that they would not be able to purchase furniture and equipment. Ms. Fitzpatrick asked if the library could operate without those purchases or would the project be in dire straits and look bad. Ms. Bullock stated that, in the unlikely chance they were unable to raise the $500,000, then they would cut back on their expenditures for computers and furniture.

Mr. Askham asked how the money would flow from the Friends of the Library. Mr. Henault also asked if there was any kind of commitment that the funds will be received other than verbal. The President of the Friends of the Library was acknowledged to answer these questions and she responded that the pledge was made based on a combination of fund raising and reserves and an endowment fund and they are, therefore, very confident that they will meet the pledge of $500,000. Although they have not yet addressed the flow of funds, she indicated that when the building was originally built, the Friends purchased the equipment directly. She also stated that the pledge has been made in writing via a letter sent. Mr. Kane indicated that, if the Friends purchase the equipment directly, then these items should not be included in the appropriation that goes to referendum.

Mr. Henault asked about the 2007/2008 projects that were on the previous plan and Mr. Kane confirmed that they had all been pushed back one year. Mr. Askham asked if a 10-year bond was assumed and Mr. Kane responded that it was. Mr. Henault stated that no action was needed at this time. Ms. Mielert asked , given the two large projects being taken on simultaneously, what would happen if the three smaller projects listed were pushed back to next year. Mr. Kane responded that the projects are so small that they really do not have an effect at all. Ms. Mielert also stated that funding things like computers that have such a short life span via bonding make them much more costly. Mr. Askham stated that they could feasibly be paid out of reserves. Mr. Henault stated that, although the Board has previously discussed transferring a set amount out annually to smooth these items out, they have never done so. Mr. Mason pointed out that computer items in this budget are more infrastructure, like wiring, and not actual computers and Mr. Kane concurred that computers are actually budgeted for in two places to reflect this difference.

Mr. Henault stated that the Town will probably get a little extra money ($10,000). Also, he noted that the State is discussing taking over the levying of car taxes from the towns and, while on the surface that would seem good in that the residents would not have to pay a tax on their cars, there are some significant concerns around that. Simsbury should be concerned as it will most likely not be funded at the current rate with an increase each year and, if there were to be a formula that might be applied in years going forward, the Town of Simsbury would most likely come out on the short end.

Mr. Henault asked Mr. Kane to put together an analysis of the potential exposure for the Town of Simsbury because, if the funding goes away, the Town’s expenditures do not go away and it still has to collect revenue and that will have to be done by further increasing the mill rate. Mr. Kane stated that initially it looks like Simsbury will potentially see a decrease of up to $1 million in revenue. Mr. Askham stated that, if this proposal is approved, then the mill rate could feasibly have to be adjusted in May to cover a shortfall. Mr. North stated that, as long as the State does not increase the rate, the taxpayer will come out net ahead even if the mill rate increases. Mr. Henault stated that this would be the case only if you have a newer vehicle.

Ms. Mielert noted that the State’s proposal to fund this program out of casino income is just a “shell game” as that money had previously been used for something else and now a source of revenue will have to be found for that. Ms. Mielert also noted that, in the past, when the State took away the towns’ ability to tax personal property, such as computers, that belonged to corporations, the experience was that the percent that the Town recouped became lower and lower and Mr. Kane concurred that the Town never gets back long term what it does when such a proposal is first introduced.

Mr. Henault asked Mr. Kane to advise the Board at a later date with recommendations as to what type of funds the $600,000 GASB amount should be invested in, how this amount should be allocated between the BOS and BOE and if the actuaries are going to be adjusting the implied interest rate.

Mr. Henault asked Mr. North to report on his attendance at a meeting of the Connecticut Municipal Consortium for Fiscal Responsibility. Mr. North provided the Board with handouts explaining the nonpartisan mission of the Consortium (Addendum VI). He suggested that the Board of Finance might want to encourage the Board of Selectmen and Board of Education to join them in endorsing the Consortium as other towns have done.