Whether you are an admirer or critic of the government spending limitation system known as LD 1, it is undeniable that the system has had its intended impact on municipal spending. Based on the results of a survey completed by 275 communities across the state, during LD 1’s second year of implementation municipalities kept the growth of property tax revenues spent on municipal services well under the growth in total personal income (TPI). In other words, growth in Maine incomes outpaced the rate of growth in property tax dollars spent on municipal services, and Maine’s municipal governments did their share for a second year in a row to reduce Maine’s overall tax burden.
As enacted by the Legislature in 2005, the goal of LD 1 with respect to local government is to reduce Maine’s property tax burden by placing spending limits on the amount of property tax dollars schools, counties and municipalities can raise for services before needing special permission from the local legislative body.
Although the LD 1 terminology and math are new, the concept behind the system is relatively simple. The process requires a community to establish a property tax levy limit for its municipal budget. Once the limit is established, it then becomes the basis for each succeeding year’s budget. The initial levy limit is calculated by first determining how many property tax dollars were used to fund municipal services in the previous year’s budget (core municipal commitment). A growth allowance is applied to that “core municipal commitment” to arrive at a property tax levy limit. This levy limit sets a benchmark for the increase in property taxes that will go to fund the municipal side of the budget in the current year. The growth allowance, or growth factor, combines two indexes: 1) the annual real growth rate in Maine’s total personal income; and 2) a unique local growth index based on the growth in new property value in the municipality compared to the total municipal valuation. If a community finds that it cannot live within the calculated limit, the LD 1 system allows the community to exceed its limit provided that the local legislative body (i.e., the council or the town meeting) votes to do so using a special override process.
During 2005, only municipalities operating under a state fiscal year (July to June budget year) were required to undertake the limitation process. According to the results of a LD 1 impact study conducted by MMA in the fall of 2005, the 143 participating fiscal year communities stayed well within the LD 1 limits. The 2005 study found that while the participating municipalities could have increased property tax revenue spending by over 4.8%, the growth in property tax dollars for municipal programs grew by just 2.5%. In that same year, the nominal TPI growth (used in determining tax burden) was 3.56% — a full percentage point greater than the property tax increase for municipal budgets.
Although much to the chagrin of the skeptics of LD 1, the “fiscal year” municipalities illustrated a capacity, in the aggregate, to live within the spending limits. The next test of the effectiveness of the spending limitation system followed in 2006. Not only were the fiscal year communities under pressure to maintain a level of frugality, but also for the first time since its inception the LD 1 limits would apply to all municipalities statewide.
As expected, the municipal community once again succeeded in its efforts to contribute to the reduction in Maine’s property tax burden. While on a municipality-by-municipality basis, the second year LD 1 results appear to be mixed (162, or 59%, stayed within the limit and 113, or 41%, were over the limit), in the aggregate, municipalities did very well. The 2006 analysis reveals that property taxes raised to fund municipal programs grew at a rate much less than the allowable LD 1 growth rate. According to the survey results, the amount of property tax dollars spent to fund municipal programs could have grown by 4.7%, and yet actual growth was an astonishing 1.85%. Although nominal TPI numbers are not yet available for 2006, it is reasonable to assume that the 1.9% growth in property tax revenue spending for municipal services will be less than the growth in TPI for 2006.
Although municipal restraint has contributed to reducing the overall tax burden, that success is not as clear-cut when examining the total growth in property tax revenue. In addition to funding municipal programs and services, property tax dollars are used to fund schools and county government. An MMA analysis that will include information about the LD 1 compliance of schools and counties in 2006 will be made available in early 2007.
Each year, municipalities report their total property tax collections to Maine Revenue Services on the Municipal Valuation Return (MVR). The MVR is supposed to be filed by November 1 of each year. MMA was able to obtain a partial list of municipal property tax collections for 2006 from Maine Revenue Services. While not a complete list of municipalities, the list was large enough to extrapolate some reliable statewide data on total municipal property tax collections for 2006.
Property tax data from last year’s MVR was very positive. The year-to-year increase in total property tax revenues (2004 to 2005) was just 1.75%, far below the nominal growth in TPI. The preliminary data for 2006 is not as encouraging, from an LD 1 perspective. According to MMA’s analysis of 2006 MVR data, total property taxes raised are projected to increase by 3.8%, a rate of increase that is above last year’s nominal TPI of 3.56% but one that falls under the 10-year average TPI growth of 4.99%. More specific analysis of school and county spending in fiscal 2006 will be necessary to track the origin of this rate of growth. As described in a separate article in this edition of the Maine Townsman, MMA is working collaboratively with the Maine Chamber, Maine Education Association and others to amend the existing LD 1 system to ensure compliance at all levels of government, including the state.
Preliminary LD 1 Analysis for 2006
At the time this article was being written, a total of 275 communities had responded to the LD 1 surveys sent out by MMA and the State Planning Office (SPO). The SPO survey was included as a voluntary section of the 2006 MVR, while the MMA survey was a stand-alone survey sent to each municipality. What follows is a preliminary analysis of municipal LD 1 compliance based on data gathered from these two surveys. The 2006 analysis applies to all communities. Fiscal year communities (July-June) were in their second year of LD 1 while all other communities (e.g., calendar year) were subjected to the municipal spending limitation system for the first time.
Statewide Results. The 275 communities included in this year's LD 1 analysis ranged in population from 6 to 63,905 and accounted for 70% of Maine’s total population. The assessed value in the participating municipalities accounted for 71% of the 2005 statewide, municipal valuation (2006 values are not yet available). Thirty-six (57%) of the state’s 63 classified service center communities participated in the survey. Municipalities from each of the state’s 16 counties are also included in the analysis. In other words, the municipalities participating in the survey are fairly representative of the state as a whole.
Aggregate survey results show that in 2006, the participating municipalities raised $382.8 million in property tax revenue to help fund municipal services. After adjusting downward for any “net new state funding”, LD 1 would have allowed these municipalities to raise $393.8 million in property taxes for municipal services and still stay within their aggregate limit. As illustrated in Figure 1, in 2006 property taxes could have grown by $17.9 million, but instead grew by only $6.9 million, which is $11 million less than what the LD 1 limit would have allowed. Stated in the form of a percentage, municipalities could have increased municipal reliance on the property tax by 4.77%, but property tax revenues for municipal services grew by only 1.85%. Not only did a majority of the municipalities stay within the limit, 37% of the survey respondents actually reduced their property tax levy for municipal services from 2005 to 2006.
2006 LD 1 Impact on Aggregate Municipal Spending
While in the aggregate municipalities more than met the LD 1 challenge, 113 individual municipalities exceeded their LD 1 limit. Based on survey data, communities that exceeded the growth limit did so by an average of 11% (see Figure 2). Communities that adopted budgets which were under their LD 1 limit did so by an average of nearly 6%.
Municipalities Above and Below the 2006 LD 1 Limits
For the most part, the municipalities filling out the surveys indicated a need to exceed the LD 1 spending limit for one of three reasons: 1) increases in the cost of petroleum based products, including heating oil, fuel and road construction materials; 2) increases in health insurance costs; and 3) the desire of the town meeting to maintain and fund the existing level of municipal services.
In an effort to determine the factors that may have played a role in a community’s need to override the LD 1 limits, the population, geography and type of the communities involved (e.g., rural vs. urban or fiscal year vs. calendar year) were examined.
Population. The average population of the 113 communities that exceeded the LD 1 limit was nearly 2,000, while the average population of the 162 communities that stayed below the LD 1 limit was 4,100. Generally speaking, larger communities were better able to stay within the LD limits in 2006 than the smaller municipalities, although this was not universally the case.
The 10 largest communities participating in the survey that stayed within their LD 1 limits were Portland, Lewiston, Bangor, South Portland, Biddeford, Sanford, Scarborough, Augusta, Windham and Waterville, with a combined population of 267,800 and representing 30% of the total population of the municipalities participating in the survey. The 2006 average municipal commitment limit in these ten communities was $17.9 million, with actual commitment being $17.4 million, $525,000 less than the limit (see Figure 3).
Meanwhile, York, Presque Isle, Skowhegan, Buxton, Cumberland, Farmington, Lincoln, Bridgton, Bar Harbor and Paris, with a combined population of 75,300 and representing 8% of the total population of the municipalities participating in the survey, were the 10 largest communities participating in the survey that exceeded their limits. The 2006 average municipal commitment limit in these ten communities was $3.1 million with their actual property tax levy for municipal services being just over $3.3 million — $207,000 more than their aggregate limit.
While on the surface, population seems to have played a factor in the need to exceed the LD 1 limit; growth in new property value also had an impact. The average property growth rate for the ten largest communities that stayed within their LD 1 limit was 2.59%, while the average growth rate in the ten largest communities exceeding their limit was 1.59%.
Population Impact on LD 1 Limits
Under Limit - 10 Largest Communities
Over Limit - 10 Largest Communities
Geography. If slow growth is a driving factor behind the need to exceed the LD 1 limit, it would be expected that the communities in Maine’s slow-growth counties, including Aroostook, Franklin, Oxford, Piscataquis and Washington, would have exceeded the 2006 limit, at least on average. However, as illustrated in Figure 4, that assumption is not always realized. While on average the municipalities in the counties of Franklin, Oxford and Piscataquis did collectively exceed the LD 1 limit, the municipalities in Aroostook and Washington counties did not. As expected, the municipalities in two of the state’s fastest growing counties, Cumberland and York, were within the LD 1 limit.
2006 Municipal Impact by County
Service Center Communities. As illustrated in Figure 5, the service center communities, as a whole, met the spending limit challenge, but the non-service center communities did even better. Although the average 2006 commitment limit in the service center communities was almost $6.6 million, the actual commitment for municipal services was less than $6.5 million. While, the average 2006 commitment limit in non-service center communities was $655,712, average actual municipal commitment was $628,881. Property taxes for municipal services in the service center communities grew by an average of 2.69% between 2005 and 2006, while property taxes in non-service center communities grew by an average of only 0.56%.
LD 1 Impact on Service Center Communities
Service Center Communities
Non-Service Center Communities
Fiscal Year vs. Calendar Year. In the aggregate, municipalities operating under a July-June fiscal year were able to stay within the LD 1 limit, while calendar year communities, in the aggregate, did not. As shown in Figure 6, while the average commitment limit in municipalities with a July 1–June 30 fiscal year was $2.77 million, actual commitment was $2.68 million. The 152 “calendar year” municipalities participating in the survey did not stay within the LD 1 limits, using the aggregate analysis. While the average limit in the calendar year communities was $345,734, average actual commitment was $346,288. Aside from the structure of their fiscal year, the major difference between “fiscal year” and “calendar year” municipalities is their population. The average population of the 123 “fiscal year” communities in the study was 5,655, while the average population in the calendar year communities was 1,265.
Although this is the first year that the LD 1 limit applied to all communities, "fiscal year" towns and cities have now undertaken the process twice. In an effort to gauge the success of the state’s limitation system, we examined the growth trends in the 96 municipalities that participated in both the 2005 and 2006 MMA surveys. In 2005, the municipal commitment in “fiscal year” communities represented in both surveys grew by 2.01%. In 2006, the municipal commitment in those communities grew by 1.01%. It is obvious that municipalities are being responsive to their taxpayers' interests.
LD 1 Impact on Fiscal Year and Calendar Year Communities
Fiscal Year Communities
Calendar Year Communities
While the argument can be made that some factors, such as population and slow growth, have an impact on a community’s ability to stay within its LD 1 limit, it appears the will of the local legislative body, whether it be the town/city council or town meeting, is having the biggest impact on whether or not a community stays within the LD 1 limit. In a state that has long treasured local control, it is fitting that Maine has adopted a spending limitation system that is crafted to provide local decision makers with the tools necessary to determine what is best for their communities.
MMA appreciates the effort of the municipal officials in those communities that participated in the LD 1 surveys. The information you provided has helped us to illustrate that municipalities are working toward the goal of reducing Maine’s property tax burden. Municipal officers, officials and town meeting participants should be commended for their efforts to reduce property tax burden in Maine through the careful consideration of how budget decisions impact overall burden.