A Municipal Finance Explainer by City Councilor Tom Peake

This was originally posted on Facebook. I’m republishing it here with permission from Tom Peake.

Here’s my first attempt at an informational post about municipal finance. I’m no Sam Hunter, who has done some fantastic posts about school finance, but my hope is that I help people to understand the process a little bit better.

Before I start, I should say that the hardest part about writing this is trying to figure out how much detail to include. I’m generally trying to present this in a digestible way, but that means simplifying some things, so if there’s something where you think I should have included more detail, please feel free to elaborate.

This first post is going to about revenue. City revenues can broadly be characterized into four categories: Cherry Sheet, local receipts, tax levy, and other. I’m going to try to focus on all of these, with an obvious emphasis on the tax levy because that’s one of the central components of the override conversation. But I want to at least touch on the other items.

Cherry Sheet revenue

Let’s start with Cherry Sheet. This is essentially the amount of money that we get from the state. It’s called that because the Department of Revenue used to release this information on pink paper. Now it’s all online. Cherry Sheet funds, are calculated as local aid minus offsets and assessments. Local aid is the amount of money that the state gives to us annually to help supplement our budget. Offsets and assessments are what the Commowealth charges us for services that they provide to municipalities.

Last year, our net Cherry Sheet revenue was just over $10 million dollars. This year, we project that it will actually fall by about 2 percent. The amount we will get from the state is projected to increase by about $300,000, but that’s not enough to offset increases in the assessments that the state is charging us. When I say “project” what I mean is that the state is notoriously bad about passing budgets on time. It has never happened in the eight years I have been on the Council. So, we go into the year with an estimate of what we will get in the final state budget, but it’s never certain.

One of the big complaints that I have with our relationship with the state is that they put a lot of limits on ways that we are allowed to raise revenue, saddle us with a lot of unfunded mandates, and then, when we are faced with substantial increases in the cost of providing services, are too reluctant to increase local aid. So when I say I would like to see more leadership from the Commonwealth on what is a growing statewide fiscal crisis, this is where I would like to see that leadership manifest.

Local receipts

Next up is local receipts. These are things like local option excise taxes (meals taxes, cannabis taxes, etc.), parking tickets, ambulance revenue, park fees, fees for inspections and permits, etc. What these receipts all have in common is that they are notoriously very difficult to predict. We can set an excise tax on cannabis, but how much money we make from that is a function of how much cannabis people buy in Easthampton. But, to give you a sense, last year, we raised about $6.5 million in local receipts, making it the smallest of these four categories. Our budget projects that revenue to fall somewhat in the coming fiscal year, in light of global economic issues.

Other

Before I go into the tax levy, I’ll briefly touch on the Other category. The two big things here are CPA revenue (whether from a surcharge on property taxes or from matching funds from the state) and enterprise funds, which are basically water and sewer funds. These funds are carved off into their own section of the budget where they support the services that fund them, which is why you aren’t going to hear anyone talking about laying off wastewater plant workers due to the override. Last year, we brought in about $800,000 in CPA revenue and $4.6 million in enterprise revenue. The other thing that appears in this section is any other sources of revenue, such as when the city has used stabilization funds to plug holes in the budget over the last few years. That decisions has not been without controversy, and it’s something I’m happy to discuss in greater detail elsewhere, but for now I want to focus on revenues.

Tax levy

By far the biggest section of the city budget is the tax levy. Last year, it was $34.4 million. The way that this is calculated is pretty complicated, and I worry that a lot of people, even people very involved with municipal politics, don’t fully understand it. I am going to attempt to explain it here. The tax levy is the amount that you are allowed to raise in local property taxes. To calculate it, the first thing you have to do is to take the amount that was raised in taxation last year. You can then increase that number by up to 2.5 percent. Most municipalities do raise it by the full 2.5 percent each year. You can then add to the levy any new taxable growth that has been developed in the last fiscal year, and, in the case of an override, you can add that as well. Finally, you can add debt exclusion to the levy, such as the bond payments to finance schools or municipal buildings, provided that the voters voted to approve those debt exclusions. The city also subtracts an “overlay” amount from that levy, which is essentially the amount that the city estimates it will not end up collecting because of property tax exemptions.

One thing that was very confusing to me for a long time was the relationship between the tax levy, the tax rate, and the amount that you end up paying in property taxes. For our local receipts, like the meals and cannabis tax, we set a tax rate, and then what we raise is the amount spent multiplied by that tax rate. That’s not how property taxes work. Once the levy has been set, the share of the levy that is paid by an individual property is essentially the share of the taxable value in the city that is located at that address. For example, the value of my home and the land that it was built on is about .01 percent of the city’s total taxable value, so that’s the share of the tax levy that I pay.

Tax rate

You might notice that the tax rate never came into that equation. The tax rate is set after the fact to essentially reflect the rate of taxation that would need to be assessed on each parcel in order to raise the tax levy. So, in my time on the Council, the tax rate has fallen every year. That isn’t because taxes went down. It’s just that the value of homes was increasing at a faster rate than 2.5 percent a year. So, if we raised taxes at the rate from the previous year, we would raise more money than we would be allowed to.

Assessments

Finally, some people will note that their taxes went up after property values were reassessed. That is true, but that’s because, after a reassessment, the value of someone’s property can change, and that can lead to them paying a higher share of the overall levy. That can be frustrating, and honestly, I think this whole system can be confusing and difficult to communicate to taxpayers. But while reassessments can change the share of the levy that are paid by an individual taxpayer, they do not change the size of the overall levy.

Closing

I hope this was helpful and/or interesting. I’m sure there’s a lot of stuff that I could have explained better, so please let me know what you would like to know more about, whether it’s related to this topic or something else.