By Geoff Herman, Director of State & Federal Relations, MMA
Of the several major components of LD 1 — spending limitations, school funding, homestead exemption, circuit breaker program, and municipal revenue sharing — the limitation systems that are applied to the spending decisions of counties, schools and municipalities are the most complicated, difficult to explain and foreign to Maine law. The purpose of this article is to lay out the local government spending limitation systems in a step-by-step manner. All of the steps are summarized in the table on pages 14-15, which is a sample calculation of the property tax levy limit for a small town with a total taxable value of $88 million.
Before the how-to explanations begin, however, it should be pointed out that LD 1 was hastily assembled and hastily enacted. The legislation includes gross errors in language and terms and definitions that are ambiguous to the point of obscurity. LD 1 will undoubtedly keep municipal officials, state agencies, local government attorneys and the courts busy for years interpreting its language. As a result, the reader will encounter interruptions in the flow of the following instructions in order to navigate through the uncertainties created by this somewhat cobbled-together new law.
As is the case with much of LD 1, it is generally helpful to try to understand the goal of the legislation before getting immersed in its details. With respect to the municipal spending limitation system, it is clear that the goal of LD 1 is to:
• Focus attention on the year-to-year growth of the property tax commitment that relates to municipal spending. School spending is controlled by an entirely separate system;
• Create a formula that is flexible to the unique needs of each municipality and allows for growth in the property tax commitment from one year to the next;
• Make sure the municipality’s legislative body is completely aware of the proposed limitation on the growth in commitment as generated by the formula;
• Authorize the local legislative body to either exceed the limit in response to special financial circumstances or increase the limit as a home-rule decision, according to slightly modified governance procedures; and
• Provide an opportunity for the electorate to challenge by referendum the decision of a town or city council to either exceed or increase the growth allowance generated by the formula.
Which municipalities are immediately affected? The municipal spending limitation in LD 1 applies to municipalities whose fiscal year begins on July 1, 2005 or thereafter. No municipalities that operate on a calendar fiscal year or modified calendar fiscal year (such as February 1 – January 31) are required by this new law to apply the spending limitation system during this 2005 budget cycle. Because all schools in Maine operate on a July 1 – June 30 fiscal year, however, the school spending limitation system (see article in this issue) will apply during this current budget cycle throughout the state.
Property Tax Levy Limit
There are three steps to calculate your municipality’s “property tax levy limit.”
Step 1. Calculate the “property tax levy” that is being limited by this system, which MMA refers to as the core municipal commitment.
Step 2. Calculate the “growth factor,” which is a percentage of allowable growth that is applied to that core commitment.
Step 3. Adjust that limit, if necessary, by the “net new funds” calculation.
STEP 1: Determine Core Municipal Commitment
The starting point in defining each municipality’s spending limit under LD 1 is identifying the core municipal commitment that will be subject to the formula-driven growth allowance. LD 1 defines this core municipal commitment as the “property tax levy” but, as will be noted, it is only the portion of the “property tax levy” that is related to municipal spending. Specifically, the starting point for a municipality preparing a proposed budget for FY 06 would be to identify the total property tax commitment for the current year (FY 05) and make four subtractions.
• Total funds raised and appropriated for the schools;
• Total county assessment;
• All Tax Increment Financing (TIF) payments or other special tax district payments; and
• The overlay.
With these four subtractions, the total commitment for FY 05 has been reduced to the core municipal commitment, the year-to-year growth of which is what LD 1 attempts to control. Just as the total property tax commitment is reduced by these four categories for the purpose of defining the starting point, the municipal spending limitation system going forward does not directly or indirectly control or influence spending decisions regarding the schools or counties, does not include TIF or special tax district expenditures within the limit, and does not alter in any way the municipal authority to include an overlay in the commitment.
An offshoot of LD 1, which should be welcomed by the municipal community, is that municipal spending is now going to be measured separately from school spending and county spending. The school officers are going to be more directly responsible for school spending trends, the county officers are going to be more directly responsible for county spending trends, and the municipal officers’ responsibility will be focused on just the municipal side of the ledger.
The calculation of this core municipal commitment is the first step toward determining the municipality’s “property tax levy limit,” but it is a task that will never have to be repeated. Next year, when the municipality’s budget process for FY 07 begins, the starting point will be the FY 06 “property tax levy limit” rather than the FY 06 core municipal commitment. In this first year of implementation, a baseline is being identified using actual commitment data. After establishing the “levy limit” using this baseline data, each succeeding year begins with the previous year’s levy limit as a starting point, rather than the actual commitment. For example, assume that after all the calculations are completed, the municipality’s final “property tax levy limit” is $500,000, and the town meeting ultimately approves a budget that results in a core municipal commitment of $480,000. A year from now, when the assessor and other municipal officials begin to calculate that subsequent year’s “property tax levy limit,” the starting point will be the preceding year’s limit of $500,000, rather than the preceding year’s core municipal commitment of $480,000.
STEP 2: Calculate 'Growth Limitation Factor'
After the core municipal commitment, or “property tax levy,” is calculated, the next step is to determine the “growth limitation factor” that can be applied to that base municipal commitment.
The growth limitation factor is a blended percentage, and there are two ingredients to the blend.
Average Real TPI. The first percentage, which is given as a base growth factor to every municipality, is the “average annual real growth in total personal income.” This particular calculation is used as a base growth factor for the state and counties as well as the municipal spending limitation system. “Total personal income” (TPI) is the sum of all Mainers’ salaries and wages as well as social security benefits, welfare benefits and other forms of disposable income. TPI is currently just short of $40 billion in Maine and it grows at an average rate of approximately 5% from one year to the next. The “real” growth in TPI is the year-to-year growth minus the effect of inflation. The “average annual” growth in TPI, according to existing state law, is a rolling 10-year average. According to current calculations, the “average annual real growth in total personal income” that applies to the FY 06 analysis is 2.58%.
Property growth factor. The other half of the blended percentage that makes up the total “growth limitation factor” is a percentage that is unique to each municipality. In LD 1 it is called the “property growth factor.” The terminology in LD 1 that defines the calculation of the “property growth factor” is an example of the ambiguous LD 1 language referred to at the beginning of this article which makes a definitive description of its calculation a little difficult. What follows is MMA’s interpretation of how to calculate your municipality’s property growth factor. For several reasons, MMA is taking a conservative approach to the calculation. From MMA’s vantage point, the conservative approach to determining the property growth factor makes taxpayer challenges less likely, diminishes the possibility of political repercussions from inflated growth factors, and is more aligned with the “spirit” of the law; that is, what appears to have been intended. Having said that, alternative interpretations regarding this analysis are perfectly defensible based on a straight reading of the language in LD 1.
Property growth factor: The concept. Every proposed governmental spending limitation system relies on an index or formula of some kind to measure the levels of increased governmental spending that should be allowed without resorting to a special governance procedure. Some systems would use the Consumer Price Index, which suggests that government spending should grow no faster than the inflationary increases in costs of certain consumer products. The so-called Taxpayer Bill of Rights (TABOR) proposals attempt to link allowable increases in governmental spending to population growth, suggesting that the cost of governmental services reasonably rises or falls in proportion to the population being served.
The “property growth factor” in LD 1 is apparently grounded in the supposition that the costs of providing municipal services should reasonably increase in proportion to the rate additional property is created within the municipality. The public policy seems to hold that new property that is built, installed or created in the community will reasonably stimulate the need for additional or expanded service, therefore some measure of new value in a community should be included in that municipality’s “growth factor.”
Property growth factor: The calculation. Each municipality’s “property growth factor” is a percentage that is calculated as a fraction with a numerator and a denominator. The fraction is designed to measure the new real value that has come into the municipality as a percentage of the municipality’s total taxable value. “New value” is defined in such a way as to not include inflation-based valuation increases.
LD 1 allows the municipality to base the calculation on the most recent tax year for which data is available. For the “fiscal year” municipalities that are currently attempting to calculate their property growth factor, the data will be drawn from the tax year based on the April 1, 2004 assessment. When the “calendar year” municipalities pick up this task in the next budget cycle, they will draw from the April 1, 2005 property tax assessment.
Long division and shortcuts. What follows is an explanation of the way to calculate your municipality’s “property growth factor.” This approach assumes the town’s assessing records are set up so as to easily compile the new value increases from each individual property tax record. The account-by-account analysis is clearly allowed by LD 1 and is the method that would most accurately identify the town’s property growth factor.
Because LD 1 was enacted and put into effect so rapidly, no municipality was prepared to organize its assessing records with the property growth calculation in mind. In preparation for next year and the years ahead, municipal assessors should be making adjustments to the record-keeping system in order to facilitate the calculation. At the end of the explanation of the “long division” method of determining the property growth factor, some possible shortcuts are discussed to facilitate the calculation for this first year of implementation.
The denominator. The denominator of the fraction is perfectly straightforward. It is the total taxable value of the municipality for “the most recent tax year for which data is available.” For “fiscal year” communities, that will most likely be the April 1, 2004 municipal valuation. Generally, that value will be the total taxable value that formed the basis of the municipality’s property tax commitment, but if that total value was subsequently adjusted by abatements or supplemental assessments, the finally-calculated taxable value would be used.
The numerator. Calculating the numerator of this fraction is a less straightforward task. LD 1 identifies three types or categories of “new value” that in combination contribute to the total numerator entry. The “new value” for the fiscal year communities will be changes that occurred between April 1, 2003 and April 1, 2004. Parsing the definition as worded in LD 1 to make it as coherent as possible, it reads as follows:
'The numerator is the amount of increase in the assessed valuation of any real or personal property in the municipality that as of the April 1 date of assessment:
1) Became subject to taxation for the first time; or
2) Is taxed as a separate parcel for the first time; or
3) Has had an increase in its assessed value over the prior year’s valuation as a result of improvements to or expansion of the property.'
The following interpretation of how to apply this definition assumes that all examples of “new value” fall into just one of these three categories: That is, it is either (1) completely new construction; (2) a split lot; or (3) an improvement, renovation, remodeling, or retrofit of structural real estate or personal property that was already being assessed by the municipality.
New construction. The new construction category is relatively straightforward. If a house or other completely new structure is built and taxed for the first time as of the April 1 date of assessment, the value of that new structure would be placed in the numerator. Although the definition of this category makes little sense (“the increase in value of property that became subject to taxation for the first time”), it appears to be targeting all new construction that would not be considered part of an improvement made to pre-existing structural or personal property.
Split lots. The “separate parcel” or split lot category could throw a curve or two in its application. The assessed value of any parcel or subdivided parcels that are split off a big parcel would quite obviously be included in the numerator, but the value of the remaining “mother” parcel would not be included in the numerator because it is not being taxed as a separate parcel for the first time.
The analysis might be a little different, however, when entire parcels are subdivided in such a way that there is no remaining “mother” parcel. In that circumstance it would appear that all the subdivided parcels would be identified as separate parcels being taxed for the first time, and the assessed value of each of those subdivided lots would be placed in the numerator.
Improvements. The analysis becomes most subject to various interpretations with respect to the third category which is real or personal property that has had an increase in its assessed value over the prior year’s valuation as a result of improvements to or expansion of the property.
Generally, it seems clear that this category is calling for the net increase in the assessed value of certain property from (in this example) April 1 of 2003 to April 1 of 2004 to the extent that increase is attributable to improvements to that property, rather than the effects of inflation.
An easy example of this type of improvement would be if a homeowner replaces a deck on his or her house. If the total value of the new deck is $2,000 but the value of the replaced deck on the property tax card was $500, then only the net increase in value — or $1,500 — could be put in the numerator. Since the creation of new value was an improvement to structural property that was already being assessed, all that can be considered is the increase in assessed value attributable to the improvement, not the gross new value of the improvement.
Under no set of circumstances does any net negative change in assessed value go in the denominator. LD 1 is clear on that point. The numerator in this calculation only accepts year-to-year increases in assessed value.
On a larger scale, however, it gets more complicated. In a major personal property account owned by an industry, the year-to-year changes in assessed value are affected by improvements, renovations, removals and depreciation. Unlike land and structural property in most real estate markets, personal property generally depreciates in value until it hits a floor as long as it remains functioning, income-producing property. The question is whether in this type of industrial application, the assessor should: (1) just identify the value of the newly installed property; (2) identify the increase in the assessed value of the particular machine or identifiable unit of industrial production which was improved by the installation of new property without any offsetting consideration of the unit’s depreciated value; or (3) identify the net increase, if any, of the owner’s entire personal property assets, considering all factors, including all improvements, all removals, and all depreciation.
One source of guidance could be the overarching public policy that appears to be driving the municipal spending limitation system in LD 1. That policy would suggest that the goal is to identify new value that is installed or constructed in the community that would reasonably lead to an increased demand for services. An industrial retrofit that doesn’t even outpace the depreciated value of the plant’s production property would typically not represent the addition of new property that is going to compel increased municipal services. This approach would suggest that only when there was a net increase to the entire personal property account, would any “new value” from an industrial improvement be placed in the numerator.
Another assessor could correctly observe that the “new value” analysis clearly ignores the effect of inflationary increases in value, and therefore should similarly ignore the effects of depreciation. Under this analysis, only the value of the newly installed property, less the assessed value of any removed property, would be identified and placed in the numerator, and there would be no adjustment on the basis of the underlying depreciation of the industrial holdings. Proponents of this approach point to Massachusetts’ Proposition 2 ½, which is apparently implemented without consideration of depreciated value. The only difference in language between Massachusetts law and LD 1 with regard to the identification of “new value” is that Proposition 2 ½ expressly requires the new value analysis to be performed on each “parcel of real, or article of personal property over the assessed value of such property during the prior year.” Since LD 1 incorporated the Massachusetts’ language almost word-for-word, but excluded from that definition the reference to “each article of personal property,” it could be argued that LD 1, is more realistically referencing the real or personal property aggregated within each property tax card or property tax account, rather than calling for the identification of “new value” on an item-by-item basis.
Shortcuts. With this background information regarding the three elements of the “new value” calculation, the municipal officers and assessors may be in a position to take a shortcut to determine the municipality’s property growth factor, at least for this first year of implementation.
The less complicated the municipal tax base, the easier the shortcut will be for a municipality that:
1) Did not revalue or adjust by percentage (“factor”) any property or classes of property as part of the last April 1 assessment;
2) Does not include any significant personal property in its tax base; and
3) Does not include any significant movement either into or out of any of the “current use” tax categories (Tree Growth, Farmland, Open Space) or tax exemption categories (“charitable” doctors’ offices, nursing homes, summer camps, etc.)
For towns with an uncomplicated tax base, the simple difference between the municipality’s total assessed value on April 1, 2003 and April 1, 2004 should yield the municipality’s “new value” numerator for the “property growth factor” calculation, although the assessor should not allow factors that affect certain classes of property, such as mobile home depreciation and state-imposed changes to Tree Growth values, to influence the calculation.
To the extent the municipality did revalue or “factor” some or all of the town’s taxable property, care will need to be taken that the valuational data in the numerator and the denominator is all adjusted to a common assessment ratio. Municipalities that conducted a full revaluation as of the April 1, 2004 assessment face a particular challenge because the “new value” and the “existing value” are all combined in the process of revaluation. Municipalities in those circumstances will have to make a good faith effort to retrieve their new value on the basis of building permits, subdivision records, or ratio-adjusted comparisons of the April 1, 2003 and the revalued April 1, 2004 assessing records.
To the extent the municipality has significant personal property accounts within its tax base, it would be to the municipality’s advantage to identify the net increase in each account, rather than perform a single aggregate analysis of all personal property in the community. It should be reiterated that the entire goal of this exercise is to identify “increases” in value, so negative changes in value are not recorded in the numerator under any circumstance. The net negative changes in a municipality’s taxable value will be ultimately reflected in the denominator of the calculation.
To the extent a municipality has experienced movement of property out of a “current use” category, those changes should be excluded from the numerator of the calculation. For example, if property is removed from the Tree Growth program, its assessed value would increase from one year to the next, but that increase doesn’t count in the “new value” analysis because it is not an improvement, a split lot, or property that is subject to taxation for the first time. If a charitable nonprofit institution were to lose its exempt status, the value of that property could be included in the numerator because it meets the definition of property being assessed by the municipality for the first time.
Property growth factor: summary. It is probably the case that the most important part of every municipality’s calculation of its property growth factor is that it is accomplished in good faith and with an understanding of the goals or presumed intention of LD 1 spending limitation system, and that the source material and mathematics of the calculation are recorded. This type of approach to the task certainly outweighs any need for absolute uniformity in methodology from one municipality to the next. Given the ambiguous language the Legislature provided the municipalities to administer this policy, rigid uniformity could not have been the intention. Presumably, a consensus will develop with time over a common methodology to identify the “new value” of any community. It is certainly the case that assessors, going forward, will be in a better position to track “new value” as it is discovered and identified, which will make it all the easier to identify “new value” next year and beyond.
Total growth factor. The total growth factor is simply the sum of the “average real TPI” factor, which is 2.58% in today’s currency, and the town’s unique “property growth factor”. In the example provided in the accompanying table, the blended total growth factor is 4.71%. That blended growth factor is then used to expand the “property tax levy” or core municipal commitment that was identified in Step 1. The math is straightforward. The core municipal commitment is multiplied by one plus the growth factor percentage.
STEP 3: Adjust for 'Net New (State) Funding'
The third and final step in determining the municipality’s “property tax levy limit” is an adjustment that may or may not have to be made after the first two steps in the process. The underlying concept behind the “new state funding” adjustment is not hard to grasp. It is obvious that the idea was developed with the expectation that school systems would be receiving significant increases in state support for their educational programs under LD 1, and there should be some mechanism to make sure that those increases in state aid, after some reasonable adjustments for inflation, would be used to reduce the high level of property tax support for the schools.
The irony. The irony is that the “new state funding” requirement in LD 1 does not apply to increases in school aid. It only applies to state funding provided to municipalities for existing services funded in whole or in part by property taxes, excluding school services and excluding school spending. During and after the enactment of LD 1, there was a tremendous amount of political rhetoric to the effect that “90 cents out of every dollar of increased state aid to education will be returned to the property taxpayers”. Actually, there are no requirements to that effect in the text of LD 1.
What state funding is included? For most municipalities, there will only be three forms of state subsidy that would fit the definition of “state funding for existing municipal services funded in whole or in part by property taxes”: (1) municipal revenue sharing; (2) local road assistance (now called Urban-Rural Initiative Program, or URIP); and (3) General Assistance. That the General Assistance reimbursement is included in this calculation is a travesty of public policy, but it would not seem to escape from the definition provided in LD 1.
What state funding is not included. The various tax-related reimbursements a municipality might receive (Homestead Exemption, Tree Growth reimbursement, veterans’ reimbursement, etc.) do not represent state funding provided for the purpose of any specific existing service. Many of the specific-purpose grants a municipality could receive would also not apply because they are federally funded grants that are merely being distributed by the state (e.g., CDBG ). In other cases, the occasional state grant is not being provided to support an existing municipal service but is, instead, specifically being provided to fund a service that the municipality would otherwise not be able to afford. Simply put, these grants are not being awarded to supplement local funding for an existing service, and therefore would not be included in the calculation of this adjustment. It is fair to speculate, however, that under certain circumstances a municipality may want to think carefully before accepting a state grant of any substantial size that would be provided to support an “existing” municipal service, because the effect of that acceptance could significantly reduce the municipality’s ability to raise funds for other core municipal purposes.
The “net new funding” calculation. For a municipality whose next fiscal year (FY 06) begins on July 1, 2005, the calculation begins by identifying the state funding the town received during the current fiscal year (FY 05); that is, the sum of all revenue sharing, URIP funding and General Assistance reimbursement. The next step is to subtract from that total the state funding the town received during the previous fiscal year (FY 04) in those same three accounts, multiplied by one plus the municipality’s “growth limitation factor.” If there is “new state funding” in the current year that is over-and-above the state funding from the previous year adjusted by the growth factor index, then that extra new state funding must be deducted from the town’s property tax levy limit. The effect of this calculation is to allow inflationary-type growth with respect to the various state subsidies, and only require a downward adjustment to the town’s property tax levy limit if the level of state subsidy growth outpaces the municipality’s growth factor. In the sample calculation of the property tax levy limit provided in the table on page ###, the “net new funding” was $8,227.
One-way valve. One would think that if a town must reduce its property tax levy limit when there are increases in state subsidy, there would be a corresponding allowance for the town to increase its property tax levy limit when there are decreases in state subsidy. LD 1 does not create such an allowance, however. It only works in one direction. There is no authority in LD 1 to ever adjust the property tax levy limit upwards through any administrative action. Only the legislative body of the municipality — the town meeting or the town or city council — can act to exceed or increase the limit.
Final Calculation of Levy Limit. The three components of the calculation are now completed, and the municipality’s property tax levy is determined. It began with the identification of the core municipal commitment. That dollar amount was increased by multiplying the core commitment by one plus the municipality’s “growth factor.” Finally, that subtotal was adjusted by the “net new funding.” A step-by-step calculation for a sample town is provided with the table that accompanies this article.
EXCEEDING OR INCREASING LIMIT
The legislative body of every municipality – the town meeting or the town or city council – is authorized to exceed or increase the property tax levy limit. Although the special governance procedures to exceed or increase the limit are essentially the same, the act of “exceeding” the limit is done for different reasons and with different implications than the act of “increasing” the limit. The discussion regarding the process of exceeding or increasing the property tax levy limit can be broken down into four parts:
• Reasons for and implications of exceeding the limit
• Reasons for and implications of increasing the limit
• Town meeting governance procedures, sample warrant articles
• Town or city council governance procedures
Exceeding the property tax levy limit. The local legislative body is authorized by LD 1 to “exceed” the property tax levy limit to address certain “extraordinary circumstances” that are listed in the new law. As will be described below, the local legislative body is also authorized to “increase” the levy limit under its home rule authority, without reference to any “extraordinary circumstances” or other particular reason. The alternative systems to “exceed” or “increase” the levy limit creates some confusion among municipal officials. Why would the law require specific justifications in order to accomplish a certain result if the same law also allows that result to be accomplished without the special justifications? Curiosities of this nature are not uncommon within the text of LD 1.
In any event, the “extraordinary circumstances” provided in LD 1 are: (1) catastrophic events such as natural disaster, terrorism, fire, war or riot; (2) unfunded or underfunded state or federal mandates; (3) citizens’ initiatives or other referenda; (4) court orders or decrees; or (5) loss of state or federal funding.
Of these five possible categories of “extraordinary circumstances,” the most commonly applicable to municipalities would be responses to fire or flood (“natural disasters”), unfunded or underfunded state mandates, and losses in state or federal funding. LD 1 provides that any “extraordinary circumstance” must be outside the control of the local legislative body, therefore the reference to the possible costs of “other referenda” does not refer to the costs associated with bond issues, borrowing or similar decisions authorized by a local referendum vote. Those costs would be within the control of the local legislative body.
If during the development of the municipal budget it appears that the spending plan to be proposed to the town meeting or council will likely exceed the property tax levy limit, and that the over-the-limit spending is attributable to an “extraordinary circumstance”, then the decision could be made to prepare a separate article seeking approval of “exceeding” the property tax levy limit, along with some detail of the “extraordinary circumstance” (or circumstances), both in terms of their identification and value. Sample wording of the appropriate town meeting article and the specific governance procedures to follow are provided below.
There are implications related to “exceeding” the property tax levy limit rather than “increasing” it. LD 1 provides that the legislative act of “exceeding” the limit does not alter the property tax limit that will form the base of the calculation of the municipality’s property tax limit for the next year. For example, if the municipality’s property tax levy limit is $500,000, and the voters approve “exceeding” the limit by $50,000 in order to rebuild the town office destroyed by fire, when the town begins to calculate its property tax levy limit for the following year, the levy limit upon which that calculation is based will be $500,000, not the actual commitment of $550,000. If the town meeting, instead, voted to “increase” the levy limit to $550,000 — a decision for which no justification or reason is required by LD 1 — the starting point upon which the subsequent year’s calculation would be based is the increased limit of $550,000.
Increasing the property tax levy limit. As just discussed, LD 1 requires no specific justification or demonstration of an “extraordinary circumstance” for the town meeting or town or city council to “increase” the property tax levy limit. It is strictly a decision based on home rule authority. In all probability, there will be a need for explanation and justification at the local level; it is just not required as a matter of state law.
As also just discussed, “increasing” the levy limit rather than merely “exceeding” it has the effect of overriding the formula and creating a new property tax levy limit.
There are number of circumstances that might put a board of selectman or a city council in a position to consider increasing the property tax levy limit. Many communities made decisions last year that would have been structured differently had they been aware of the inner workings of the spending limitation system of LD 1 and its immediate implementation.
For example, there are a few municipalities that have a core municipal commitment of zero. With a base of zero, that town’s property tax levy limit will be zero regardless of that town’s “growth factor.” In those communities, the property taxes in the previous year were collected in order to fund the schools and county government, and the municipal side of the budget was totally funded with excise tax revenue, municipal revenue sharing and appropriations from surplus. The funding of the municipal side of the budget totally from non-property tax resources may not be possible this year, and those communities should consider seeking an “increase” in their property tax levy limit, which would be an increase from zero.
“Calendar year” communities, which will have to take up the calculation of the property tax levy limit in the next budget cycle, might want to consider appropriating less from surplus this year so as to establish a more workable core municipal commitment for 2006. Especially if your community has a “zero” or negative municipal commitment, a limited appropriation from surplus in 2005 would be prudent.
A new debt service obligation is another example of where LD 1 could have caught a municipality by surprise.
If the voters in a municipality last year approved a bond or other borrowing proposal, a new debt service obligation will likely be kicking-in for this upcoming budget cycle. In some cases, the new debt service is simply replacing retired debt service which was a part of the base year’s core municipal commitment, and so the new debt service will not aggravate the levy limit. In other cases where the base municipal commitment did not encompass the new debt obligations, the spending limit system in LD 1 presents an immediate challenge. The challenge is exacerbated by the fact that the debt obligations must be paid, and so they could muscle-out other core municipal programs if the formula-driven spending limit is going to be adhered to. It is correctly observed that when the voters approved the new debt obligations they had no reason to believe that the new debt payments might have to be honored at the expense of other municipal programs. Newly-enacted spending limitation systems typically exclude pre-existing debt. That is not the case, however, with the Legislature’s LD 1.
The options in this circumstance are to either fit the new borrowing costs within the property tax levy limit generated by the formula, “exceed” the property tax levy limit to accommodate the new spending (if the new borrowing is for a purpose that fits within one or more of the “extraordinary circumstance” categories), or “increase” the levy limit to accommodate the new debt service obligations.
Since the local decision to “exceed” the limit for an “extraordinary circumstance” is a decision that only applies for that budget year, but the new debt service obligations will likely run for many years in the future, it might make more sense in this circumstance to ask the municipal legislative body to “increase” the limit in order to establish a base commitment level that recognizes the new debt service that has already been authorized by the voters.
Town meeting governance procedures and sample warrant articles. Any municipal budget that results in a property tax commitment (excluding school spending, the county assessment, TIF or special tax district payments, and overlay) that exceeds the spending limit must be finally approved by a summary article that in the words of LD 1 “specifically identifies the intent to exceed the property tax levy limit.” LD 1 establishes three requirements regarding this special governance procedure:
1) It must be a separate article and not embedded within a larger town meeting action.
2) It must specifically identify the intent to exceed or increase the property tax levy limit.
3) The article must be taken up by the town meeting voters through a written (or “paper”) balloting process, rather than a voice vote or show of hands.
Wording of the article. If the board of selectmen intends to ask the town meeting to override the spending limit for one or more of the “extraordinary circumstances,” the following article should be placed as a summary article at the end of all the articles that raise and appropriate funds for any municipal purpose.
Article X.To see if the town will vote to [or “Shall the town….” for a referendum question] exceed the property tax levy limit established for (name of town) by State law, due to extraordinary circumstances outside the control of the municipal legislative body; namely, (here set forth the reason or reasons related to one or more of the five criteria set out in LD 1, for example: “…the loss of the town hall due to fire (Article A)” or “…the reconstruction of the section of the Bean Road washed out by flooding (Article B)” or “…in order to construct a federally mandated storm water treatment system (Article C).”
If the town meeting approves the article, the money to be raised and appropriated associated with the referenced articles would be exempt from the property tax levy limit.
Increasing the spending limit without reference to an “extraordinary circumstance.” Although the ultimate property tax commitment will not be precisely known at the time of the town meeting, the board of selectmen or town council, after preparing a budget for the town meeting, will know whether that proposed budget will be clearly below the limit, above the limit, or at or near the limit. If the proposed budget is close to the limit or clearly above the limit, the special article to authorize an increase to the limit must be included in the warrant.
Furthermore, because the town meeting process is active, interactive and unpredictable, a board of selectmen can rarely know with certainty whether the municipal budget being proposed will be increased or decreased by the town meeting, and therefore will not know in advance whether the town meeting will raise and appropriate sums in excess of the property tax levy limit. For that reason, it makes sense to include an article dealing with the property tax levy limit on the warrant if there is any chance that the town meeting will approve a budget that approaches or exceeds the calculated limit. This article would be placed after all other articles that propose to raise and appropriate funds for any municipal purpose.
Before the article is taken up by the town meeting, the selectmen or treasurer should provide an explanation regarding the impact of the town meeting’s actions on the municipality’s “property tax levy limit.” It certainly will not be possible at that time to define the exact amount of the final property tax commitment, and therefore it will not be possible to identify the exact dollar amount that the town meeting appropriations might surpass the defined “property tax levy limit.” The property tax levy limit itself, however, should be a known number, and an approximation of the degree to which the final commitment will be over or under that levy limit could be provided.
Article X. To see if the town will vote to [or “Shall the town…” for a referendum question] increase the property tax levy limit of $__________ established for (name of town) by State law in the event that the municipal budget approved under the preceding articles will result in a tax commitment that is greater than that property tax levy limit.
If the town meeting has made decisions in such a way that when this article is reached there is clearly no need to exceed or increase the property tax levy limit, the town meeting moderator should be asked for the procedure to “pass over” or “indefinitely postpone” the article.
Town or city council procedures. For all municipalities that have vested final budget adoption authority on the town or city council, the special procedures for the council to adopt a municipal budget that exceeds or increases the property tax levy limit are also based on three requirements in LD 1.
1) The action of the council must be considered as a separate action and not embedded within a larger council decision.
2) The form of the council action must specifically identify the intention of the council to exceed or increase the property tax levy limit.
3) The council’s vote must be by a majority of the entire elected members (“strict majority") rather than just a majority of a quorum (“simple majority”). For example, if the council has seven members, an affirmative vote of at least four councilors is necessary to exceed or increase the property tax levy limit.
Reconsideration by Initiative and Referendum
LD 1 creates a “petition and referendum” process for certain council decisions regarding the municipal budget and, separately, certain council decisions regarding the school budget. Another term for the “petition and referendum” process that is more common to municipal charters is the “initiative and referendum” process. There are some differences with the LD 1 procedure depending on whether it is a municipal or school budget that is being adopted by the council. What follows is a description of those procedures as they pertain to the adoption of the municipal budget. The details of the initiative and referendum process as it applies to the school budgeting process are described on page 7. All of the municipal procedures in LD 1 regarding the initiative and referendum process only apply in those municipalities where the local charter vests final budget adoption authority in the town or city council.
Municipal budget, general rule. On the municipal side of the budget, the initiative and referendum process becomes available to the voters if the town or city council adopts a budget that exceeds or increases the property tax levy limit. Upon such a vote by the council, the voters of the community have a general right under LD 1 to initiate by petition a referendum vote on the question of exceeding or increasing the property tax levy limit. This general right may not apply in some municipalities depending on the wording of the town or city charter.
Relationship to the municipal charter. According to LD 1, the opportunity for the voters to petition for a referendum vote on the council’s decision is not provided if the municipal charter “prohibits a petition and referendum process.” As is the case with much of LD 1, it is not clear how these words apply to the real world. One obvious interpretation is that the initiative and referendum opportunity created by LD 1 does not apply if the municipal charter expressly prohibits a local petition process to challenge a council’s budget action. Otherwise, the LD 1 provisions do apply, but if alternative procedures are provided in the charter (such as different requirements regarding the number of signatures or the petition submission deadline), the charter’s alternative procedures would apply.
Another interpretation notes that when a charter vests all legislative powers in the council and does not provide for an initiative opportunity for budget matters, that charter effectively “prohibits” such a petition even if the prohibition is not expressed. It is not clear how an implied prohibition on budget-related initiatives interacts with the “peoples’ veto” opportunities in LD 1.
Given these ambiguities, any “charter municipality” that might be affected by the petition and referendum system created by LD 1 would be well advised to obtain an opinion from its municipal attorney regarding the applicability of the new law given the specific initiative and referendum provisions of the town or city charter.
Municipal budget: petition and referendum process. In order to initiate the referendum vote on the council’s decision to exceed or increase the property tax levy limit, a petition must be filed with the municipal officers within 30 days of the council’s vote to adopt the budget and to exceed the property tax levy limit. The petition must be signed by at least 10% of the number of registered voters voting in the last gubernatorial election in the municipality, unless the municipal charter requires a different number of signatures. If a valid petition is submitted in a timely manner, the council must schedule a referendum vote at the next regular election or at a special election called for that purpose. The ballot article the voters will be voting on is, in the words of LD 1, “their opinion” of the budget article adopted by the council, yes or no. The results of the vote must be declared by the municipal officers and entered into the municipal records. It is not clear what the effect is of the voters’ “opinion” on the council’s budget if that opinion is negative.
Overlay: The Final Consideration
The calculation of the property tax levy and a description of the governance procedures to exceed or increase that limit is almost complete. The last step occurs after the town meeting or after the council finally approves the municipal budget, at the point of fixing the property tax rate and committing the collection of taxes. The municipal authority to add an “overlay” to the total municipal appropriations that contribute to the property tax commitment is not changed or impaired by LD 1. Even if the town meeting or town council adopts a budget that goes to the limit allowed by the “growth factor” formula, an overlay can be applied at the point of commitment even if it exceeds the limit.
It should be reiterated that the application of an overlay that “exceeds” the property tax levy limit only “exceeds” the limit; that is, the underlying levy limit is unchanged by the overlay, and next year, when the subsequent property tax levy limit is being calculated, the starting point is this year’s levy limit without the additional overlay.