Understanding The Map

(from Maine Townsman, July 2005)
By Jeff Austin, Legislative Advocate, MMA State & Federal Relations


map reflecting property tax increases, decreases

This map shown on the cover of this issue of the TOWNSMAN is an attempt to depict the location of property tax relief that could reasonably be expected from municipalities following the Legislature’s actions this session on LD 1 and the state budget.

LD 1 contains two elements that have broad-based impacts on how much money towns will have available (or not) to lower property taxes on a town-wide basis in FY 06. The first element increases education aid by $96 million for FY 06 and distributes all education aid ($836 million) through the new EPS-based funding formula. The second element, while providing no additional revenue than would otherwise be available for towns, adjusts how municipal revenue sharing funds will be distributed.

Additionally, the two-year state budget as finally enacted contains a series of reductions and modifications to municipal programs such that local property taxes may have to increase in FY 06. This analysis incorporates the most significant reductions for FY 06: reduced revenue sharing for all communities and the delayed reimbursement of the veterans and tree growth exemptions for the "fiscal year" municipalities.

Excluded from the analysis are the targeted measures in LD 1 of expanding the circuit breaker and the expanded (but unreimbursed) homestead exemption. In each case, the town is not being given extra funds by which it could lower its mill rate or its levy. In fact, the homestead proposal raises mill rates in every community; some taxpayers are adversely affected by this (e.g. renters and businesses) and others (owner-occupiers) are helped by the increased exemption. Nevertheless, these proposals are targeted to individual taxpayers and do not impact municipal taxes evenly across the town.

Department of Education (DOE) data forms the material used in this analysis to estimate the property tax impact of LD 1. By comparing property taxes raised for education in FY 05 to what each town will need to raise in FY 06, an estimate of money available for property tax relief could be calculated. The analysis estimates FY 06 school budgets based upon a DOE default assumption that school budgets will increase by an inflation factor of 2.5%.

Two issues must be accounted for in understanding this analysis: debt and inflation.

Unlike previous MMA estimates, this newest estimate attempts to account for the impacts of school debt payments that either expired in FY 05 or will begin anew in FY 06. At first blush, some towns appear to gain a considerable amount of new aid. For example, Biddeford's education aid increased by $1.9 million in FY 06.

However, many school systems, such as Biddeford's, also took on new school debt in FY 06. For example, Biddeford has a debt payment of $1.2 million which begins in FY 06. This $1.2 million is not available for property tax relief because it is earmarked by the state for debt payments. As an initial starting point, Biddeford would only have $700,000 available for property tax relief, not $1.9 million.

Correspondingly, some systems which received debt reimbursement in FY 05 will not receive it in FY 06 because the debt was retired. These communities would appear to be losing state aid unless we account for the decrease in local costs. For example, the Greenbush school system's education subsidy at first appears to be dropping in FY 06 by $55,000 compared to FY 05. However, the data also suggest that school's $95,000 debt service obligation was retired last year, so after taking both subsidy and debt obligations into account, the school system appears to be "netting" a modest $40,000 increase in state support, which is not enough to cover both the normal inflationary increases facing the school and simultaneously provide any property tax relief.

In summary, this analysis washes out these new or expiring debt obligations to give a more accurate representation of the potential for property tax relief pursuant to LD 1.

The second issue to consider is inflation. To project the local costs for FY 06, the DOE assumed the FY 05 school budget would increase in FY 06 by 2.5%. This is inflationary type growth and below historical averages. It would cover increases such as gasoline prices for school buses and heating oil for schools (at least when energy prices were stable) as well as teacher salaries and health care. This analysis is used for almost all systems.

For example, Biddeford's school budget was $22.25 million in FY 05. Increased by 2.5%, the FY 06 amount is estimated to be $22.80 million. Thus, DOE estimates that school spending in Biddeford will increase by $550,000. Again, this amount is also not available for relief and it must be deducted from the $700,000 Biddeford was estimated to have available above. This leaves a net of $150,000 that might be available for property tax relief; approximately 10% of the increased education aid to Biddeford.

DOE also provided 2005-06 projections based on 84% of the operational component of the EPS model, which is the amount of the school funding model that the state will recognize in FY 06 under the terms of LD 1. (The other 16% of the operational model will have to be entirely funded with local property tax dollars.) For fourteen school systems that are currently spending below 84% of the EPS model, the 84% EPS-based projections were greater than the actual spending projections. If the sum of inflationary spending plus new debt was less than 84% of EPS, this analysis assumes that those school systems would spend at least to the higher state target of 84% of EPS.

Another complicating issue is the apportionment of funding among towns that are within SADs and CSDs. The DOE has provided both the cost apportionment percentages pursuant to EPS and pursuant to the local cost share agreements that were in effect in FY 05. For amounts up to 84% of EPS, this analysis allocates costs according to the EPS percentages; for amounts above 84% of EPS, the local costs are allocated according to the preexisting cost share agreements for purposes of this analysis. (It should be noted that the implementation of the new state-mandated cost sharing arrangements is being accomplished differently by different school districts. This analysis may or may not account for adjustments to the local cost agreements that have been enacted during the past 6 months.)

In summary, the method of analysis is as follows:
1. Determine the local [property tax based] appropriation for education in FY 05;
2. Estimate the total state and local appropriation for FY 06 on the basis of DOE's inflation-based projections;
3. Determine the state aid for education for FY 06, adjusting for changes in debt service;
4. Determine the projected local appropriation for FY 06 and identify the increase or decrease in property tax effort compared to FY 05.

Revenue Sharing

Redistribution. LD 1 increased the amount of the Local Government Fund revenues distributed through the "Revenue Sharing II" formula, which favors high mill rate communities, and decreased the amount distributed through the traditional revenue sharing formula. For the purpose of this analysis, the revenue sharing calculation was fairly straightforward. First, the total amount of revenue sharing for FY 06 was distributed according to the pre-LD 1 formulas. That same amount of revenue sharing was then distributed through the LD 1 formulas. The difference is a town's gain or loss.

Reductions. The state budget included two reductions to municipal revenue sharing for FY 06. An additional reduction in revenue sharing was enacted to take effect in FY 07.

First, there was a change in the way the Business Equipment Tax Reimbursement program (BETR) is accounted for by the state. This accounting change moves the program, totaling $75 million annually, out of the state's General Fund. Municipal revenue sharing is reduced by over 3% by moving BETR "offline". Similarly, the state's "Circuit Breaker" property tax and rent rebate program was expanded in LD 1, and the Circuit Breaker program was moved "offline" by the previous Legislature. The $17 million expansion of the Circuit Breaker program also negatively impacts the level of revenue that would otherwise accrue to the Local Government Fund. As a result of moving BETR offline and increasing the Circuit Breaker program's funding by $17 million, municipal revenue sharing will be 5% less than it would be otherwise, without these financial accounting changes at the state level.

The second reduction occurred when the state budget eliminated the municipal regionalism accounts that had been established by Question 1A. These accounts were funded by setting aside 2% of revenue sharing moneys. In essence, the state diverted this money for the state's general fund.

This analysis reflects these changes to revenue sharing.

State Budget

Tree Growth & Veterans' Exemptions. The State Budget postpones the FY 06 reimbursements that municipalities receive for property in the state's Tree Growth property tax program and for veterans' exemptions. The FY 06 reimbursements are apparently going to be made in August 2006, during Fiscal Year 2007. Therefore, municipalities with a July 1, 2005 - June 30, 2006 fiscal year will have to cover the shortfall by raising property taxes.

Net Impact
Communities that have a net loss in education, revenue sharing and budget adjustments in FY 06 must make up that loss by increasing their tax commitment from the previous year by a corresponding amount. Those that have a net gain are presumed to have money available for tax relief.

We analyzed 486 municipalities. According to a gross analysis, approximately 245 municipalities will need to increase property taxes as a result of LD 1 and the budget while 241 municipalities may be able to lower property taxes.

Because some of the impacts are so small, we believe they will be imperceptible to the average taxpayer. So, we have selected arbitrary but reasonable cutoff points of +/- 2%. That is, any community having a net impact on their property tax commitment between plus-or-minus 2% will not be able to provide any perceptible property tax relief or tax hike based on LD 1 impacts.

Using these markers (as shown on the map), 158 communities will feel no impact, 174 should see tax cuts and 154 should see tax increases.