Budgeting Season and Prop 2 1/2 Explained in Detail
If our houses cost so much, don't our taxes just increase, too? Prop 2 1/2 constraints help us understand why this isn't the case.
Budget Hearings
Melrose is now in the midst of its budget season, which means that every department and commission of the city presents their budget to the city council. The council asks questions, gathers any information needed, and then votes on whether or not to approve a department or commission’s budget number. Of note, the city council does not have the authority to increase any budget number put forth by Mayor Brodeur. Their authority is only to accept or decrease the proposed figure.
This budget process will continue over the next five weeks, with a schedule listed on the city’s website and a final vote scheduled for Tuesday, June 20. If the council does not approve a budget by Friday, June 23, the city automatically reverts to the mayor's proposed budget.
To review, the mayor has presented a FY24 budget of approximately $101 million, an increase of 3.9% over FY23, with revenue growth of $1.8 million in tax revenue (the total increase in the amount of taxes collected by property owners) due to the increase allowed by Prop 2 ½; $500,000 in new growth that comes from utility work and other residential improvements; and a net increase in state aid of approximately $2.4 million.
Local receipts
There is a fourth income stream called local receipts, which is the revenue that comes from sources other than property taxes, and includes things like fees, excise tax, rental income, and other charges. This figure was $7.1 million in 2023 and is expected to be slightly higher in FY24, but I will use the FY23 figure, noted as “approximately $7.1 million” or ~ $7.1 million) in calculations.
The mayor stated that one shift he has proposed is to increase the percentage of revenue from local receipts that is set aside for the operating budget, from 75% to 82.5%. This means that 82.5% of ~$7.1 million, or ~$5.8 million will be allocated for budgeted city expenses, with 17.5% of ~$7.1 million, or ~$1.2 million set aside for unpredictable, unexpected expenses.
What about marijuana revenue
Melrose has one recreational marijuana shop, Garden Remedies, that began operations in 2018. Recreational marijuana has both a sales tax (6.25%) and an excise tax (10.75%) added to the sale of its products (excluding medical marijuana). The excise tax is a specific tax imposed on certain goods sold (such as fuel, tobacco, and alcohol) and is separate from the state sales tax collected. Both are recurring revenue that can be expected to be received by the city, and Melrose is anticipating including excise tax numbers in its budget going forward.
The Melrose board of alderman (now called the city council) voted in 2019 to direct 1.5% of the excise tax to a city stabilization fund that will be used to fund a number of things, including substance abuse prevention, schools, and public safety. This recurring revenue should be available for budgeting purposes, and this year will amount to approximately $250,000.
A third fee, called the Community Impact Fee (3% of the gross sales amount, approximately $1 million), was collected from this shop, but because it was time-limited, it appears that this fee ended at the beginning of 2023.
Adding all of these revenue numbers gives Melrose a total of slightly more than $101 million for the FY24 budget.
Expenses
Budget hearings occur through the Appropriations & Oversight Committee, chaired by Leila Migliorelli and co-chaired by Maya Jamaleddine, and will continue from now until June 15 (except for Memorial Day week, when the meeting will occur on Tuesday). Budget materials can be found in the city's meeting agenda portal and on the city's website.
The first four budget hearings included presentations by the following city departments and commissions: solicitors office, human resources, worker’s compensation, unemployment, employment benefits (health care), city clerk, city council, pension/retirement, police, fire department, the Commission on Women, the Human Rights Commission, the disability commission, the conservation commission, the liquor commission, the Beebe Estate, and veteran services. Each of these budgets was approved by the council, some with slight increases.
More on structural deficits, underfunding, and non funding
The city council acknowledged the impending $2.3-$2.7 million shortfall (structural deficit) inherent in the city budget number that will be most clearly shouldered by the school department, whose budget will be presented on June 1. The councilors acknowledged the risk of this situation for our educators and students, as well as the long-term practice of underfunding the actual cost of education. That is, the mayor has presented a budget number that is lower than the costs outlined and approved by the school committee to fund FY24 costs. While this year’s expected shortfall is larger than in previous years, it is not a surprise to be entering the fiscal year with the expectation of needing to find and then appropriate one-time funding during the year to cover expected financial shortfalls.
Underfunding
The school department is not the only department that operates with costs outstripping funds. It is merely the most obvious and most expensive. Other departments, when presenting their budget requests to the city council, also acknowledged that some of their expected costs will not be covered in the upcoming year. For example, the Human Rights Commission budget of $3,000 is well short of their $10,000 expenses, and they routinely rely on grants, donations, and other non-city funding sources. Underfunding also was discussed by the police and fire departments, who routinely need replacement of vehicles and equipment, but make due for longer periods than is optimal.
Non funding of municipal buildings
It is no surprise that Melrose’s lean finances over decades has provided limited funds for large-dollar maintenance and improvements. That is, the budget number has not generally included substantial costs for repairs and upgrades of many of the most expensive items: our very old buildings. Rather than being a deficit, it has been more of an avoidance or a non funding, and this avoidance is now manifested in the significant disrepair and deterioration in many of the municipal buildings, some that are over 100 years old.
To address this, in 2021 Mayor Brodeur resumed the Melrose Public Safety Building Committee (MPSBC), first created in 2017 under Mayor Dolan. This committee is tasked with planning the large-scale renovations of the city’s public safety buildings, specifically the police headquarters and three fire stations across the municipality.
This ten-member committee consists of Melrose residents, a former city councilor, heads of the police and fire departments, the DPW Director, and representatives from the public safety unions. An architecture firm has developed plans for new safety buildings, and a schedule has been developed that will allow for continued operations during the building and transition to new and/or repaired buildings.
The MPSBC will be presenting its final budget numbers to the city council on Tuesday, May 30 and later in the summer will work to formulate a ballot question to be included in the 2023 election. This ballot question will ask city residents to determine funding of this significant improvement project. Information can be found at their website: http://melrosepsb.org/
The process for funding these kinds of expenses is known as a debt exclusion and it occurs when tax payers vote to voluntarily raise tax revenue above the limit set by Proposition 2 ½, specifically for debt used for specific purposes. The debt is paid back over 20-30 years, and thus taxes are temporarily raised over the length of the loan.
Proposition 2 ½ and Calculating Your Taxes
Proposition 2 ½ is a law that was passed in 1980 and went into effect in 1982. It places constraints on the amount of the total taxes (called the tax levy) raised by a city or town, and on how much the levy can be increased from year to year. While it may sound like Proposition 2 ½ means that your taxes will not increase more than 2 ½ % above the previous year’s, it is a more complicated equation when determining individual tax numbers.
A levy limit is a restriction on the amount of total property taxes a community can collect each year and Proposition 2 ½ established that three numbers are added together to calculate each year’s new tax levy limit: the previous year’s levy limit, 2 ½ % of the previous year’s levy limit, and new growth. (Please note: A correction has been made in my previous post that discussed this.)
New growth is the increase in taxable property added to the city over the previous year that comes in the form of additions to existing properties, additional developments, and/or changes in tax status.
The equation is: New tax levy limit = previous year’s levy limit + 2.5% x (previous year’s levy limit) + new growth.
We see in the above calculation that the new total tax levy is somewhat higher than 2.5% over last year’s tax levy limit, as it includes the new growth number. For example, Melrose had a tax levy of $73.9 million for FY23 and has a new growth estimate of $500,000 for FY24. Using the above equation, the FY24 new tax levy = $73.9 million + .025 x $73.9 million + $500,000 = ~$76.2 million. (Note that .025x$73.9 million = $1.8 million, which is one of the revenue numbers discussed above in Mayor Brodeur’s budget presentation.) This is a ~3.1% increase in the total tax levy.
Then, the city determines its tax rate, which is the percentage per $1000 of assessed value to be taxed. The total assessment value of the city is set by Melrose Board of Assessors. Then, the tax rate = new levy limit / total assessment valuation of the city.
This tax rate (currently 10.42% per $1000) is then multiplied by your property assessment value (called taxable value) to get your tax amount. Therefore, your tax = .01042 x taxable value. You can find each of these numbers (tax rate, taxable value, and your tax) on your tax bill.
In looking at my property taxes over the past 23 years (2001 – 2023), in some years, my taxes increased by 1.2%, sometimes by 30%, while in other years, it decreased by .1% and sometimes by 17%. Averaging out the numbers, my taxes increased by 3.4% over a 23 year period. This is remarkably consistent with the 3.1% increase in taxes just calculated above, even though over this time period there were several home improvements and one override.
Over this same period, housing prices have sky rocketed and the assessed value has increased significantly. Notice, however, that while the assessed value has, over that time period, more than doubled, my taxes have not. This is the result of the Proposition 2 ½ calculation noted above, namely that the total tax levy only increases by two factors: the 2 ½ percent increase over last year’s levy limit plus new growth. A property’s assessment value is not included in calculating a city’s levy limit. You will notice that as assessed values balloon, the tax rate decreases. Over the past 23 years, the tax rate in Melrose has gone from 13.65% to 10.42%.
Proposition 2 ½ does provide communities with some flexibility to raise the tax levy limit, either temporarily or permanently. The temporary increase (with temporary being 20-30 years) was discussed above as a debt exclusion. An increase in the levy limit on a permanent basis, known as an override, would be used to fund recurring costs needed to raise the city budget (to address issues such as structural deficits, underfunding, and non funding).