Upscale Medway teeters on the brink of financial ruin

Medway On a Monday night in late February, several hundred residents of this small town on Interstate 495 gathered in the high school auditorium for what was said to be the first-ever “State of the Town” meeting.

As everyone already knew by then, the state of the town was not good. Two-thirds into the 2006 fiscal year, Medway was staring at a $1.8 million deficit. If the town couldn’t come up with the money in the next four months, it would default on its bills, and its finances could fall under state control.

Town officials called the meeting to inform taxpayers about their two choices for closing the deficit: a Proposition 2½ override to raise the property tax, or a $3 million loan from the state that would be repaid over 10 years, with interest. The message to residents was unpleasant but clear. “You obviously are not going to do nothing,” said Suzanne Kennedy, the town administrator, “because we can’t continue to exist as an operating entity and do nothing.” She added, “Neither option is terribly attractive.”

The town ultimately decided to pursue both options. At a meeting on March 13, the board of selectmen scheduled an override referendum for April 24 (after CommonWealth went to press), and a week later, as a backup plan, town meeting authorized the selectmen to petition the state Legislature for the loan. (The loan petition will be withdrawn if the override passes.) After so much that has gone wrong for the town over the years, few were willing to put their faith in a single solution.

Medway is not alone in its money troubles. Certain costs, including energy bills and municipal employees’ health insurance, are rising rapidly throughout Massachusetts. And in most places, special education programs mandated by the state are eating up an ever-greater portion of the school budget. More important, as town officials will tell you, these costs are outpacing state aid. It’s no surprise, then, that nearly a dozen towns are facing budget gaps of up to $4 million and are considering Proposition 2½ overrides.

Towns like Needham and Shrewsbury, however, are facing shortfalls for the upcoming fiscal year, 2007. Medway is perhaps the only town in Massachusetts with a significant shortfall in the current fiscal year. That the town even considered a bailout loan from the state is another dubious distinction. While cities such as Pittsfield and, most recently and notoriously, Springfield have received such loans in the past, Medway would be just the third town in the last decade to opt for one. Southbridge borrowed money from the state early last year, and Swansea—a town about the size of Medway that was also facing a $1.8 million deficit—borrowed $2.5 million in 2002. Wall Street has taken notice of Medway’s troubles and the possibility of its joining such bad company: Moody’s Investors Service recently downgraded the town’s bond rating and placed the town on a 90-day credit watch, with no guarantee that the rating would be helped by either an override or a state loan.

 

how did it come to this? How did an affluent town of 13,000 residents (its 1999 median household income was $75,000, or almost 50 percent above the state average) with a $37 million budget arrive at the brink of default?

This question has been the subject of considerable finger-pointing in Medway for some time. After several years of financial missteps, budget shortfalls, override debates, and budget cuts, it became obvious that a problem existed, but no one knew definitively who or what was to blame. “The problem,” says resident Ted Hurlbut, “is that we’re spending more than we’re bringing in. And nobody seems to be able to get their hands around that.” More complicated explanations have begun to emerge only in recent months, thanks to what town officials refer to as a “forensic” audit.

Suzanne Kennedy, a former town and county administrator on Nantucket who more recently served for seven years as budget director in Rochester, NY, was hired as Medway’s town administrator because of her expertise in municipal finance. When she took over in mid-July, she declared that she was “focused exclusively on bringing fiscal order to Medway.” That proved a more difficult task than she expected. Within a month of her arrival, the town’s accountant and treasurer resigned—a bad sign. “The deficiencies are much more extensive than what was represented to me,” she told the Milford Daily News in mid-September.

Around this time, the state Department of Revenue issued a report, solicited by the five-member Medway board of selectmen, on the town’s finances. The DOR report pointed to the strain placed on the town’s finances by its growth over the past 20 years, during which the number of single-family land parcels in town increased by more than half, from roughly 2,350 to 3,560. Since 1980, the town’s population has grown by more than a third, from around 8,500 to nearly 13,000.

DOR also noted the town’s recent loss of a potential major source of revenue. In 2001, at a town meeting at which they also approved the construction of a $39 million high school, residents voted to allow the expansion of a local power plant in exchange for $50 million, to be paid out over 20 years as an alternative to property taxes. (Both the town and power plant preferred a sum that would not be affected by changes, upward or downward, in the property tax rate.) The expansion involved a 540-megawatt plant next to an existing 160-megawatt plant on a seven-acre site, and it would have added a much-needed revenue stream to Medway’s overwhelmingly residential tax base. But a year later, as construction was about to begin on the high school, the energy company announced it was abandoning its plans for the new plant. (The company, Sithe Energies, blamed price caps on electric energy imposed by ISO New England, the entity that oversees the wholesale energy market in the region. See “Power Failure,” CW, Winter ’06.) Town officials, in the thick of budget season at the time, saw its budget gap suddenly double, to more than $2 million.

Even after taking the town’s population growth and the power-plant debacle into account, DOR pointed to mismanagement stretching back more than 10 years as the source of the town’s financial woes. The report criticized the board of selectmen and a former town administrator, but zeroed in on incompetence in the town’s financial offices.

Override opponents decry an ‘entitlement mentality.’

The town’s forensic audit has only amplified the DOR report. Kennedy, working alongside a $100-an-hour consultant hired by the town, has discovered what she has called “incredible dysfunction.” Town employees, according to Kennedy, were neither following standard accounting practices nor conducting rudimentary budget forecasting. Among other failings, they consistently budgeted insufficient amounts for predictable cost increases, such as health insurance. In one egregious example, for several years the town set aside just over $50,000 for snow and ice removal, then paid for the inevitable overruns, usually three or four times that amount, out of its cash reserves. (Besides being a safety net, cash reserves are an important factor in a town’s bond rating.)

But some residents see more than incompetence at work. They say the town has lacked fiscal discipline, and has grown accustomed to living beyond its means. In the 1990s, says Hurlbut, who has lived in Medway for 20 years, “When we should have been socking away some rainy-day cash, we were out spending it, down to the last dollar. So on top of the fiscal mismanagement, there is also a sense in town that the group of people that have chosen to pull papers for elections have never been able to say no to a spending proposal.”

Joe Dziczek, who has been a selectman in Medway for all but three of the last 14 years, disputes that the town’s spending in the 1990s was excessive. Each year, he points out, selectmen scaled back budget requests from the various town departments. On the other hand, Dziczek admits that longstanding budget practices such as under-funding snow and ice removal were effectively “raiding” the town’s reserves in order to avoid cuts to the operating budget. “That’s bad management,” says Dziczek, “but it’s what they [town officials] had to do to get [the budget] through town meeting.” He adds, “We couldn’t put $200,000 more into the snow removal because we didn’t have it. We would have had to close down the library.”

Nevertheless, Dziczek blames the current crisis largely on a convergence of trends over the past four or five years. “Not to use the old phraseology the ‘perfect storm,’” he says, “but we weren’t collecting enough taxes at the rate that we were growing, and we weren’t bringing in businesses and increasing our industrial [tax] base. We were anticipating money coming in from different areas, and all of it dried up.” State aid started decreasing, he points out, and not only was the power plant not expanded, but new state regulations allowed the power company to devalue the existing plant significantly, lowering the company’s tax payment to the town.

Town officials are not solely responsible for what spending there was, in any case. Taxpayers have directly authorized most expenditures—including new police and fire stations and a new elementary school—in one way or another, by voting for nearly $55 million in debt exclusions since 1990 (including the new high school), and by passing the budget each year at town meeting. But residents complain—reasonably, it seems, in light of Dziczek’s admission—that they were chronically misinformed. After all, the balanced budget presented at last year’s annual town meeting has turned into a $1.8 million deficit, due in large part to overestimated revenues, underestimated expenses (including for snow and ice removal), and unresolved deficits from prior years.

Although townspeople express appreciation for the 12-hour days Kennedy has been putting in and the seemingly new era of transparency in Medway, years of mismanagement (and property tax increases) have sown frustration and suspicion among them. “The reviews on Ms. Kennedy are wonderful,” says Hurlbut, “but nobody believes anything here anymore.” In the question-and-answer segment of the February meeting, several residents questioned whether town officials were competent or even forthright enough to be trusted with an override. “What type of accountability is going to be in place, from the board [of selectmen], from the town administrator, back to us?” resident Mark Dergarabedian asked. “I want to hear more about accountability. I heard the word once tonight.”

 

medway residents have been presented with two paths out of the town’s financial crisis, and the debate over which one to follow has centered on one question: to cut or not to cut.

The $2.5 million override proposed by the board of selectmen would, by Kennedy’s reckoning, carry the town through the next three fiscal years without a budget gap, and would not require cuts. It would also increase the average property tax bill by about $600 a year, or more than 10 percent.

Alternatively, the $3 million loan from the state would force a round of cuts to the town and school budget, unless voters were to raise taxes through a subsequent debt-exclusion override (which increases property taxes only for a fixed amount of time). The loan, known around town as deficit financing, would not by itself address the so-called structural deficit, the built-in gap between expenditures and revenues; without cuts to future budgets, it would leave the town with a budget gap of more than $3 million in the spring of 2007. “Deficit financing is not a cure,” Kennedy has said on several occasions.

Deficit financing requires the stamp of the state Legislature, not expected to be a problem in the case of a small community such as Medway, and carries some conditions. A town must file quarterly reports with DOR, save a certain percentage of its budget in a special stability fund each year, and complete its annual audit before it sends out its tax bills. Naturally, the forced savings and interest costs eat into a town’s operating budget, and require cuts. “It’s like a second mortgage,” says Gerard Perry, a deputy commissioner with DOR’s Division of Local Services.

But budget cuts are precisely what appeal to the members of Medway Tax Facts, a local anti-override group that supports deficit financing. The group was founded three years ago by Sal LaRiccia, a Medway resident of more than 30 years who is fond of comparing the town’s spending habits to a drinking problem, and who has placed Proposition 2½ underrides on town meeting warrants in 2003 and 2004. (Neither passed.) The group’s main talking points are tax affordability for all residents and the town’s contribution to employee health care plans—which stood at 90 percent until recently, when it was negotiated downward a few points. (According to LaRiccia, this is a higher rate than in any of the nearby towns, some of which contribute as little as 60 percent.) In addition to the budget cuts that wou ld result, LaRiccia and the other Tax Facts members, about a dozen in all, are attracted to another condition of deficit financing: If a town fails to balance its budget in any year during the bonding period, the state imposes a control board to oversee the town’s finances. (Springfield is currently operating under such a finance control board.) Town officials responsible for the imbalanced budget can also be held personally liable.

LaRiccia launched his anti-override campaign in March at the local VFW, at a breakfast meeting of the Medway Business Council. Reading from a prepared speech, he accused town officials of displaying an “entitlement mentality,” and suggested several cuts to the school budget. “Our taxpayers have been overly generous in the past,” he said at one point. “This must stop.”

When LaRiccia finished, Kent Scott, chairman of the board of selectmen, began to respond—but he was interrupted by the cell phone of a fellow selectman seated nearby. “It’s a warning to get away from the windows!” shouted Mark Cerel, the town moderator, getting a big laugh.

One foe of state aid likens it to a deal with a ‘loan shark.’

LaRiccia and the town’s selectmen have been sparring for years. With one exception, the current board members unequivocally supported an override, which suggests that Medway, in addition to the Tax Facts crowd, contains a large if considerably less boisterous constituency that shudders at the thought of gutted school budgets.

Keith Peden was the only resident to speak out in favor of an override at the February town meeting, when he likened deficit financing to dealing with a “loan shark.” When you consider property values, Peden says, an override is a good investment, because well-funded schools are far more important than property taxes to the type of people who would consider moving to Medway. “If you look at the homes being built in this community, they’re very upscale homes,” he says. “Tell me that those people who are moving in at a purchase price of $700,000, $800,000, or more, are going to be dissuaded by a property tax that goes up a couple of dollars on an annual basis.”

Last spring, facing a $2.7 million gap between the proposed budget and projected revenues for fiscal 2006, Medway was forced to make drastic cuts to the police department, town offices, the library, and the schools, after voters soundly rejected a $2 million debt exclusion. The town entered the fiscal year with a balanced budget on paper, but over the course of the ongoing audit, that balanced budget has turned into a $1.8 million deficit. This time around, most town officials consider additional cuts unthinkable. Imagining the impact deficit financing would have on the municipal and school budgets at a recent board of selectmen’s meeting, Scott exclaimed, “We might as well pack up and move to another town!” As if catching himself, he added, “Some people might make that choice.” Speaking to the selectmen and audience earlier that evening, LaRiccia, who was seated a few feet away in the small audience, had said he has already put his house up for sale.

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On the first day of spring, an overflow crowd packed the high school auditorium to decide whether to pursue the loan from the state. After about an hour of discussion that touched on the pros and cons of an override and the possibility of receivership—“We’re not there yet,” said one selectman—a voice vote was held to authorize the board of selectmen to petition the Legislature for the loan. That passed, and was followed by a second voice vote to approve the borrowing itself. It sounded like the required two-thirds majority was met, but the moderator asked for a hand count. The no’s were only about 50 strong—less than one in 10 people. As residents filed out into the parking lot afterward, some were already discussing how to make lawn signs to fight the override vote, which had been approved a week earlier.

Earlier in the evening, after referring to the town’s financial crisis as a “brush with death,” a member of the town’s board of assessors, Pace Willisson, tried to inject a bit of perspective into the proceedings. Medway, he pointed out, has been around for almost 300 years. “I’m sure the town has come through harder times than this,” he said. “Imagine what it must have been like during the Depression, or the Civil War, or the Revolutionary War.” It was not entirely clear whether he meant that the financial crisis of 2006 paled in comparison, or was good enough for fourth place.