Looking at the possible Tax Increase for New Lowell High School

The Following information is contained in this week’s City Council Packet available on-line here. I’ve shortened it a bit and bolded text I thought was important.

TO: Kevin J. Murphy, City Manager
FROM: Conor Baldwin, Chief Financial Officer
DATE: March 2, 2017
SUBJECT: MOTION RESPONSE 7.3 of 3/7/16 CC Meeting – C. Leary – Req. City Mgr.
Provide A Report Outlining The Proposition 2 1/2 Debt Exclusion Process As It Would Relate To Funding Of The Lowell High School Project, The Report Should Include The Positive And Negative Aspects Of Funding The High School Project In This Manner.

Municipalities can raise tax revenue beyond annual statutory limits imposed by Proposition 2½ (M.G.L Ch. 59 Sec. 21C) through a referendum to approve an override or exclusion (i.e. “debt exclusion”). Legal authority to place a question on the ballot in a municipality like Lowell, with a Plan E form of government, resides with the City Council. Debt exclusions require a two-thirds vote of the local appropriating authority and must receive a majority of votes in a city election.

Under the Proposition 2½ statute, the local appropriating authority is defined, in a city, as the city council, with the City Manager’s approval when required by charter.
A debt exclusion, as prescribed by MGL Chapter 59, Section 21C(j), raises additional tax revenue to pay debt service costs to finance a capital project, or sometimes to fund a major capital purchase (i.e., the construction/ renovation of a municipal building).

The excluded amount, or additional tax, is not specified in the referendum language, but need not equal the anticipated annual debt service obligation in its entirety. A limit on the amount to be raised is initially set in the bond authorization and requires a two-thirds vote of the city council. The additional property taxes are not permanent, but are removed from the levy when the term of the bond ends. It is likely that the term for the Lowell High School project would be thirty years.

It is important bear in mind some aspects of Lowell’s property tax levy when considering the pursuit of a Proposition 2 ½ debt exclusion. A community may choose to set its levy at any amount below or equal to its levy limit. When a community sets its levy below the limit, the difference between the levy and the levy limit is referred to as “excess levy capacity”. The City of Lowell has historically limited the year-to-year tax increase and, therefore, has accumulated a significant amount of excess levy capacity.

As of FY2017, Lowell’s excess levy capacity is $16,674,500.

This amount represents that additional amount of taxes that Lowell could—but
chose not to—levy. The formula for determining excess levy capacity is as follows:
Levy Limit ($140,808,634) – Levy ($124,134,134) = Excess Levy Capacity ($16,674,500)

The concept of excess levy capacity is not a part of the Proposition 2 ½ law, as are the levy limit and levy ceiling. However, excess levy capacity is important weighing the positive and negative aspects of a Proposition 2 ½ debt exclusion. Each of the of the projected average annual debt service payments for the four LHS project options approved by the City Council could be absorbed within the existing levy ceiling, but without a debt exclusion the increase would permanently increase the levy. The amount of excess levy capacity would then be reduced by the additional taxes needed to fund the high school.

If a Proposition 2 ½ debt exclusion is approved, then after 30 year term for the LHS bond has been satisfied, the levy would decreased by the approved amount.

For each percent raised in taxes, revenue for the City budget would increase by approximately $1.24 million.

The annual debt service costs for the four options approved by the City Council
are $7.49 million for Full Renovation, $8.72 million for Add/Reno Option 2, $8.13 million for Add/Reno Option 3, and $9.54 million for New School/ Cawley Site.

The tax increase necessary to meet the funding requirements for the four high school options would be approximately 6%,7%, 6.5%, or 7.7%, respectively.

Any additional funding needs for the annual operating budget for fixed costs, additional debt service for capital improvements for curb appeal and infrastructure investment, or any other budgetary needs of the city, would be in excess of the
aforementioned tax increases.

Because of the size of Lowell’s excess levy capacity, the City Council has some financial flexibility—albeit limited—to phase the tax increase needed to fund the LHS project into the budget in advance of the first major principal and interest payments are due in FY2020.

This financing strategy may mitigate the impact of the project and avoid potential “sticker shock” that could occur if property values continue to increase. With a Proposition 2 ½ debt exclusion vote, however, the tax impact would take place immediately following approval by the City Council and the voters.

When considering a debt exclusion for the Lowell High School project, it is important to review the tax impact that the capital outlay for the project may have on residential homeowners’ tax bills To more fully determine the impact to residential
homeowners throughout the city, the finance team has conducted a tax impact study that
addresses five groups of home values. Most residents will find that their property falls within one of the five groups and more accurately estimate the impact on their annual tax bill for the LHS project’s debt service.

In FY2017, the average single family home in Lowell was assessed at $253,908. However, there are 24,183 parcels taxed at the residential rate which range in value, significantly. Of those, there are 11,683 parcels classified as single family homes. The chart below summarizes the distribution of values for single family homes throughout the city in FY2017.

The overwhelming majority of single family homes fall between $250,000 and $350,000 (86%), while the next most populated range is from $350,000 to $450,000 (41%).

Depending on the assessed value of an individual’s home, the corresponding tax impact will vary accordingly. The tables below summarize the estimated tax impact of the four options submitted by Lowell to the Massachusetts School Building Authority (MSBA)12.