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Note
4: The Gap
Last year at town election, voters passed a
$600,000 tax override by 24 votes.
That override, plus the use of $1 million
from the Stabilization Fund, was necessary to
close a $1.6 million deficit we faced on the
budget that was approved at town meeting.
In each of the past two years, town meeting
has approved a budget in the vicinity of $50
million with a unanimous vote, after less than
five minutes of discussion.
By way of contrast, meeting attendees two
years ago had to stand three times and endure
lengthy debate over the issue of whether homes
with unlicensed dogs should pay a fine of $25 per home
or per dog.
This past spring, we participated in
perhaps thirty minutes of back-and-forth over a
proposed zoning change that primarily affects the
keeping of livestock.
This is not to belittle town meeting – the
purest form of democracy we know and something we
vigorously support - or to imply that the issues
mentioned weren’t important.
The point is that those of us in the
position of trying to determine what the town
wants have great difficulty discerning the meaning
of these conflicting data points.
This year’s budget seemed completely
non-controversial at town meeting – yet it
passed at the election by the slimmest of margins.
Tea-leaf readers on both sides of the
more-taxes-vs.-less-spending debate insist that
the evidence supports their views.
The importance of this issue grows as we
reach the point where we must make some difficult
decisions. As
described in our previous articles, town expenses
– primarily consisting of salary and benefits
for town and school employees – are growing at a
rate equal to, or greater than, revenues.
The gap in the budget was $1.6 million last
year; this year the initial budgets provided to
the Appropriations Committee would generate a
budget shortfall of over $2 million – and it
could go higher.
Over the past three years, the Stabilization
Fund has served its purpose and helped us avoid
the need for either substantial service cuts or
larger tax increases.
But we have drained that resource as far as
we dare; the balance of the fund is now only $1
million. To
use this final amount would serve little purpose
and leave the town with no financial cushion at
all for unforeseen events.
We will soon have to make some hard
decisions about a combination of service cuts and
tax increases – the choice is how much of each.
To illustrate the extreme ends of the
spectrum of options, we will assume that the
decision is binary: either cut the entire $2
million in expenses, or raise the entire amount in
taxes. In
each of these cases, what will be the impacts?
We start with the expense reduction.
Assuming an across the board cut, the
majority would come from the place where most of
the money goes - the schools.
As we previously discussed, over 75% of the
budget goes to three things: schools; debt
service; and benefits.
Since debt service cannot be cut and
benefits are difficult to address quickly, any
immediate budget cuts must come from the other
departments. Once
debt, benefits and enterprise funds are removed,
the schools represent 75% of this discretionary
portion of the budget, which means they would lose
about $1.5 million.
All other town departments represent 25%,
implying a reduction of $500,000.
This would mean a cut of about $130,000 for
public services (primarily highway and trash
collection), a little over $90,000 for the police
department and slightly less for the fire
department.
There are two important caveats to this
example. First,
some might argue these “cuts” are better
described as, “reductions in growth.”
This example does not actually reduce the
money spent by each department; it instead does
not provide all of increases they request.
Whether this truly represents a “cut”
is a complicated question.
Second, these numbers are not exact.
Since the budget mostly pays for people,
cutting expenses likely means cutting headcount -
which also means the costs of benefits will
decrease. The
actual cuts needed would therefore be somewhat
smaller.
Some readers may note that this discussion
does not cover what may seem like another option:
cut capital expenditures.
This is because capital expenditures
generally sit outside the operational budget and
are voted upon separately.
In other words, buying new trucks,
buildings or computers adds to taxes, but
eliminating them does not reduce the problem of
the operating deficit.
To give some idea of the scale of these
expenses, voters in 2006 also approved about $2.5
million for capital equipment and other special
purposes. The
$2 million budget shortfall we currently forecast
for next year does not include any expense for
capital items.
At the other end of the spectrum is a tax
increase. Raising
taxes is always a difficult proposition, and one
that causes Hopkinton town officials particular
discomfort because of the recent experiences with
override votes.
Some of you will recall the challenge we
faced in 2003, when the initial override vote
failed to pass and the town was forced to scramble
to find a way to deal with the budget shortfall.
Many of us have property taxes folded in
with our already substantial mortgages and
therefore may not even have a good idea of how
much we pay to the town; still, the idea of voting
them higher is challenging.
So what does a $2 million override do to our
taxes? Assuming
no other changes, each $1 million in override for
next year would mean an increase in the tax rate
of $.33 per thousand.
A $2 million override would therefore add
$.66 per thousand of assessed value, equal to
about a 5% increase on the current rate.
The dollar impacts would be:
o
For a house valued at $400,000: $264 increase;
o
For a house valued at $600,000: $ 396 increase;
o
For a house valued at $800,000: $528 increase;
o
For a house valued at $1,000,000: $660 increase.
These increases are in addition to the 2 ½%
increase allowable without an override, which in
dollars would be about half the above amounts.
In other words, if your house is valued at
$600,000, and the tax rate is $12.47 per thousand
(which is the 2006 rate), your current taxes
should be $7482.
Next year the town can raise it by 2 ½%,
to $7669. With
a $2 million override your taxes would increase by
an additional $396, to $8065.
Any capital items approved would further
add to that increase.
Each of these extreme solutions has
significant drawbacks.
And this is not a simple, one-year
question. No
matter what path we choose for next year, we are
still going to have a $2 million (or larger) gap
the following year and likely the year after that.
Under the most optimistic scenario, we can
hope for perhaps 3.5-4% “natural” growth in
revenues each year – a combination mainly of 2
½% tax increases, new growth and increased state
aid – about $2-2.5 million in all, increasing by
$100-200,000 per year.
That barely covers wage and benefit cost
increases to employees, with little or nothing
left over for other uses.
A stable solution will probably require
some combination of service reductions, tax
overrides and slower growth in expense items such
as benefits.
On that note we find ourselves having
traveled full circle, back to the beginning
article in this series and to our initial request:
tell us what you want.
In our next and final article, we will look
briefly at what some other towns have done in
similar situations and discuss a few of the less
extreme options.
We will also provide additional details on
other activities that the Appropriations Committee
is sponsoring in an effort to give further
information and to receive feedback from the town
on what choices we should, and shouldn’t,
consider.
Next:
Where Do We Go From Here
This
is the fourth 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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