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Note
3: Revenues
In our last note, we discussed how the town
spends the money it receives.
We now turn to the sources of that revenue.
There will be a lot of numbers flying past,
so feel free to skim – we will alert you to the
things that really matter.
In fiscal 2006 (which runs through
June 30, 2006
), Hopkinton will bring in approximately $55.6
million in revenues.
At the risk of slight oversimplification,
this money comes from five primary sources, each
of which will be discussed in turn:
- Local Property Taxes: $35.7 million (64.2%)
- The State: $9.2 million (16.5%)
- Other receipts (primarily from car excise tax): $3.6
million (6.5%)
- Enterprise Funds for water & sewer; $2.8 million
(5%)
- Everything else: $4.5 million (8.1% and declining)
(Observant readers will note that these
numbers add up to more than the expenses of $52.2
million mentioned in our last note.
The remainder is money spent on some other
expenses that don’t fall in specific budgets or
on items approved in town meeting articles.)
Property taxes are paid by both homeowners
and businesses, at a single rate of $12.47 per
thousand for 2006.
It should come as no surprise that
residential property accounts for the vast
majority of the total assessed value in town -
almost 85% - and therefore contributes
approximately $30.3 million of tax revenues.
This residential proportion has increased
steadily over the past several years, from 81% in
fiscal 2002 to the current 85%, and expectations
are that it will continue to grow.
As we all know, Proposition 2 ½ limits the
growth in property taxes to no more than 2 ½% per
year, absent a voter-approved override.
Carrying this through the budget, if 64% of
the revenues (the property tax proportion) can
increase by 2 ½% per year, that implies that the
increase in total revenues each year from taxes
will be about 1.6% – not a lot.
In terms of dollars, the 2 ½% increase
will yield the town about $770,000 this fiscal
year, increasing by $40-50,000 each year.
The single largest contributor to revenue
growth in the recent past has been new property
development. As
the town went through its phenomenal building
phase over the past decade, additional tax
revenues provided by new homes built each year
generated a huge influx of revenues – which is
what made the budget process so much easier.
The revenue from new homes added to the tax
rolls each year in effect subsidized the budget;
the tax revenues would come in immediately but the
expenses (largely in the form of school age
children) only came later.
For better or worse, that wave of
development has peaked and the expected level of
new growth is substantially lower.
Tax revenues from new development have
declined steadily over the past three years, from
a high of $1.3 million in fiscal 2003 to $876,000
in fiscal 2006.
We currently estimate that new growth in
town can reliably generate about $800,000 in
revenues each year – though, given the recent
trends in home prices, there is a risk that that
number is more likely to go down than up.
If you’ve been skimming, here is the place
to pay attention.
The town can reliably depend on about $1.6
million in additional property tax revenue next
year, split about equally between Proposition 2 ½-limited
increases on existing property and new tax
revenues from additional development.
That represents the single largest revenue
item for the town and it will increase by about
$100,000 each year.
The second largest source of town revenue is
“state aid” - funds distributed by the
Commonwealth to towns each fiscal year, allocated
according to a set formula.
For the past several years, state aid has
been in the range of $8-9 million, with a wide
variance in the size of the annual increases.
The expected increase for 2006 is
approximately $500,000, which is about $100,000
higher than initially planned.
Although this is good news, these increases
are not enough to fix the budget.
Further, increases of this size are not
dependable – a more likely scenario is annual
growth in the range of 4-5%, depending upon the
state of the economy.
Continuing down the list, we find
“estimated receipts”, which are fees such as
automobile excise taxes paid to the town.
They provide approximately $3.6 million for
2006, increasing by about $100,000 per year –
dependable but slow growth.
Next are the revenues for the water and
sewer enterprise funds, which are entities
established to provide those services to parts of
the town that are eligible.
Though connected to the town (which
ultimately guarantees the debt), these are
technically separate organizations whose costs are
supposed to fall upon those who receive the
services rather than be spread across the entire
town. These
funds contribute approximately $2.8 million in
revenues on a steady basis - although all of that
money (plus some additional, currently) is used
for debt service on the enterprises.
In other words, though the revenues fall on
our town income statement, they don’t contribute
anything beyond the costs of the enterprises.
The remaining recurring revenue sources are
each much smaller, aggregating to slightly more
than $4.5 million in fiscal 2006, but declining
sharply to less than $2 million in fiscal 2007. The
components fall into three categories: funds left
over from the prior year, called “free cash”,
money from transfers between budgets and a small
reserve fund.
Free cash is the largest of these,
providing $1.1 million for fiscal 2006.
This line item sometimes raises eyebrows
because it implies that we gave departments more
money than necessary in the prior year.
While true, this number is relatively small
as a percentage of the budget (less than 2%) and
it has been falling steadily for several years.
All other funds for transfers and a small
reserve for unforeseen needs add to less than
$500,000. On
a final note, the fiscal 2006 budget was inflated
by an unusually large amount of transfer funds,
approximately $2.8 million, which will not be
repeated.
The last substantial cash source is the one
we have used a lot over the past three years –
the Stabilization Fund.
This is, in effect, the town’s savings
account; a fund established to hold surplus
revenues (back in the days when we had them) until
they were needed.
The fund initially was conceived as a
temporary solution for unexpected budget
shortfalls, whose balance would ebb and flow with
the economic cycles.
Instead, it has become a necessary
component of our recent financial survival.
In each of the past three years we have
used stabilization funds, drawing down the balance
from a high of over $4 million in 2001 to the
current $1 million. In
two of these years, even with use of
stabilization, we still required Proposition 2 ½
overrides to balance the budget.
To accomplish that goal in this fiscal
year, we drew $1 million from the stabilization
fund and voters approved a $600,000 override - by
24 votes - at the town election.
At this point, the Stabilization Fund is
essentially unavailable - to use the final $1
million, given all the uncertainties facing the
town, would be irresponsible at best.
In summary, absent some major and completely
unforeseeable change, we currently anticipate that
the town will generate about $2.2 million in net
incremental revenue next year - $1.6 million from
property taxes, $500,000 from the state and
$100,000 from other sources.
This represents less than 4% of the current
year’s budget.
As we noted in the last article, the growth
rate of expenses – which primarily consists of
the wages and benefits of town employees – has
averaged over 4% for the past two years.
Our benefits costs alone are expected to
increase by over $1 million next fiscal year.
When we add in the additional capital
expenses and other increases we anticipate (e.g.,
energy), we see a wide – and growing – gap.
The ramifications of that shortfall are the
topic of our next article.
Next:
The Gap
This
is the third installment in a series of articles
on the town’s finances prepared by the Hopkinton
Appropriations Committee.
To receive future notes in this series,
please send an e-mail to: appropriations@hopkinton.org
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