March 6, 2021 by Carol Britton Meyer
Two former Advisory Committee chairs have created an updated financial planning model to help individual property owners determine the impacts of potential future overrides and excluded debt projects (such as a new school or municipal building) on their tax bills. Overrides become a permanent part of the tax base, while excluded debt affects taxes until it's paid off.
In presenting this tool to the Selectmen recently, Jonathan Asher and Jim Taylor demonstrated how it works using hypothetical inputs to display the potential tax impact for an average homeowner in Hingham with a house assessed at $875,000.
For example, an operating override of $6 million in 2022 would increase taxes by more than $7,695 over the next 10 years (approximately $770 per year, or a 7.4 percent tax increase), while $80 million in new excluded debt beginning in 2025 would increase taxes by another $758 per year (6.5% increase) based on the average home assessment.
These increases would be in addition to the estimated 3 percent year-after-year increase that would be expected to happen without an override or new excluded debt," Taylor told the Hingham Anchor. This forecast sensitivity tool is available on the town website, hingham-ma.gov, for the public's use.
Because an override is a permanent tax increase, it is a way to both balance the FY22 budget and address future-year deficits. "Under a 2 percent expense growth assumption, future year deficits are manageable. However, growth rates in excess of 3 percent result in significant deficits that would require an override every two years to maintain services," Selectmen Chair Mary Power told the Hingham Anchor.
Additional funding will be needed
There are a number of important capital projects and programs that will require additional funding, according to Power. "Having overrides to maintain services makes it more difficult to get taxpayer support to fund those projects and programs. While the Town can -- and will -- continue to look for ways to accelerate revenue growth, some of our budgets are growing at an unsustainable rate. We don’t just have a revenue problem, we also have an expense problem. We must work together to solve them both."
Like many municipalities, Hingham prepares a five-year forecast that summarizes the Town’s current and future revenue and expenses. The forecast is developed using a data-driven process, with an emphasis on identifying available revenue.
"The expense portion of the forecast shows one way that available revenues could be applied to various town departments and is the starting point for the development of annual expense budgets," Power said.
Taylor and Asher developed the forecast sensitivity tool to help citizens understand the impact of different alternatives to balancing the FY22 budget and assessing the impact on future years.
From a revenue perspective, this model shows the impact of using fund balance (the town’s "rainy day" fund), of an override and of different expense growth rates.
Significant future deficits expected
"The forecast sensitivity tool illustrates the pitfall of using fund balance to close our remaining budget gap," Power said. "While the budget will be balanced in FY22, there are still significant deficits in future years that will not go away on their own. The Town would either have to continue using fund balance (which would deplete it within five years) or ask for an override to maintain services."
Power explained that Hingham’s revenue comes from three main sources -- the tax levy (which grows by 2.5 percent each year as of right under Proposition 2-1/2), state aid, and local receipts, including motor vehicle excise taxes and ambulance and meals tax revenues.
"Revenue forecasts are based on the limitations of Proposition 2-½, historical trends, input from organizations such as the Massachusetts Taxpayers Foundation, and guidance from our state legislators," Power explained. "These forecasts are updated periodically during the budget process as new information is available (for example, when the governor releases the state budget)."
Balanced budget required
Under Mass General Laws, municipalities must prepare a balanced budget. Expenses must match available revenue. Because the majority of town revenue is subject to the limits of Proposition 2-½, the five-year forecast assumes a 2 percent growth in municipal and education budgets.
Expenses are updated to include recommended budgets from the town administrator and superintendent of schools, and for new information such as employee health insurance rates.
At the start of each year’s budget process, it is not uncommon for the five-year forecast to show a deficit for the upcoming fiscal year. "The fiscal year 2022 deficit was initially $7 million, which is considerably higher than in past years," Power said. Town Administrator Tom Mayo proposed using $2.4 million in excess unassigned fund balance (from the "rainy day" fund) to offset temporary revenue loss and to fund non-recurring expenses resulting from COVID-19.
The current forecast shows a deficit of $4.6 million for FY22, with deficits of $4.5-$5.6 million in each of the next four years. "While there are still a few additional revenue and expense items to be finalized, the town administrator expects the town will be facing a sizable deficit for both the upcoming fiscal year (FY22) and for the next four years," Power said.