Author: Tony Rassias - Bureau of Accounts Deputy Director
In the December 6th, 2018 and March 7th, 2019 editions of City & Town, we highlighted two areas that factor into a municipality’s fiscal stress: reserve levels and pension funding. This article reviews another area of fiscal stress that may be seen graphically for your community in Category Three of the Division of Local Services’ (DLS) Municipal Finance Trend Dashboard (Dashboard): property tax limits. This article provides information for local officials related to provisions allowed for under Prop 2½ that may provide relief from budget stress.
The Tax Levy
In November of 1980, the people of Massachusetts passed by ballot vote Proposition 2½, or Prop 2½ so called, that among other things, placed constraints on the dollar amount of a community’s annual property tax levy beginning in FY1982. These constraints have continued to the present day.
The tax levy is an annual revenue source raised by the community’s taxation of real and personal property. For FY2022, with 349 of 351 communities reporting as of this writing, the aggregate tax levy is $19.8 billion, $834 million or 4.4% over FY2021 for the same 349 communities.
For most communities, the tax levy is the largest source of revenue that, along with state aid and other local receipts and reserves, supports local spending for public services. As shown below, over the last several fiscal years, statewide tax levies have represented close to two-thirds of all general fund operating budget revenue sources.
For FY2022, individual community tax levies as a percent of total general fund operating budgeted revenues range from 91.1% in Acton to 22.9% in Lawrence.
Because a community’s budget must balance revenues with expenditures, placing a limit on such an important revenue source could add fiscal stress when developing the annual budget unless other revenue sources are available to replace it (see City & Town, December 6th, 2018 for guidance on rebuilding and improving a diminishing level of reserves). If other revenue sources aren’t available, further local action may be necessary.
Fiscal Budget Stress from a Property Tax Levy Limitation
Prop 2½ imposed an annual levy limit, or incremental limit of 2.5%, that may prove insufficient to completely support the community’s annual spending needs. Prop 2½ also imposed a levy ceiling that caps the annual levy limit at 2.5% of the current fiscal year’s total assessed property values. The lesser of the incremental limit or levy ceiling controls. For most communities, the incremental levy limit controls.
For example, in the table below, the levy ceiling controls in FY1 and FY2 since each levy ceiling is less than the incremental levy limit for those years which results in lost taxing capacity. The levy limit is said to have “hit the ceiling.” In FY3, however, the incremental levy limit controls since it is less than the levy ceiling and there is no lost taxing capacity.
Of these two imposed limits, the levy ceiling is less of a concern for most communities as the statewide median of local taxation is currently about 1.52%. But for some, the incremental limit has risen faster than the levy ceiling and has collided with the ceiling or the ceiling has fallen and collided with a rising incremental limit. In either case, the levy ceiling controls and either a portion of or possibly the entire allowable increase to the incremental limit is lost.
Relief of Fiscal Budget Stress from the Annual Levy Limit
Prop 2½ included means to help moderate the effects of the incremental levy limit by allowing that limit to increase. This limit increases automatically by 2.5% above the previous fiscal year’s levy limit (not tax levy) and allows for further increases.
New Growth
New growth increases the annual levy limit, up to but not above the levy limit ceiling. It is based on the value of new construction and/or new articles of personal property in the community as determined by the assessors, converted into tax levy dollars, reported by the assessors to the DLS’ Bureau of Local Assessment (BLA), certified by that Bureau and then added to the levy limit. Provided the incremental limit does not “hit the ceiling”, new growth becomes a permanent part of the levy limit calculation.
As shown below, new growth added $371.8 million to FY2022 levy limits, but below the amounts added in FY2020 and FY2021.
When developing revenue estimates for the next fiscal year’s budget, local budget officials should request from, and then review with, the assessors any new growth estimate, any current trend, and whether a levy limit calculation demonstrates a possible ceiling collision. Assessors should then report new growth to the extent allowed by law, certify it through BLA, and then communicate the results to budget officials as final dollar amounts are determined.
Overrides
An override vote requires a majority vote of the electorate for approval to levy an additional amount above the annual levy limit for any lawful expenditure purpose. The vote must also include a certain dollar amount and a beginning fiscal year. Multiple overrides may also be presented for voter approval. If approved, the override becomes a permanent part of the levy limit calculation. For this example, assume that the levy limit has not “hit the ceiling.”
The graph below shows override votes taken and reported to the DLS Databank in the most recent fiscal years. For FY2022, 19 winning override votes taken by 11 communities added $19.2 million to levy limits for the following purposes: Schools (13), General Government Operations (4), and Public Safety (2).
For FY2022, the town of Phillipston voted an underride which reduced the town’s FY2022 levy limit by $97,763. An underride vote requires a dollar amount, a beginning fiscal year and a majority vote of the electorate for approval to permanently decrease the levy limit. Multiple underrides may be presented for voter approval on a regular or special municipal election ballot, but only three on a State biennial election ballot. Underrides may be placed on a ballot by a local referendum procedure authorized by charter or special act.
A special form of override earmarks additional tax levy dollars into a general or specific purpose stabilization fund (see Informational Guideline Release 17-20 for more details). For FY2022, no new communities voted this form of override. However, 10 communities that voted this form of override in the past continued this funding.
Either override form allows an increase to the incremental levy limit, up to but not above the levy ceiling. For a community where the incremental limit is nearing the levy ceiling and where an override is intended, local budget officials must be certain that the levy limit calculation shows the intended override amount not exceeding the levy ceiling. For a refresher on how to estimate what dollar amount an override will cost in tax rate terms, see the May 7th, 2015 edition of City & Town. DLS also provides guidance on Prop 2½ ballot questions.
Levy Capacity
A community is not obligated to levy a property tax up to its incremental limit in any fiscal year if it does not need to. The additional amount the community could have levied in a fiscal year, but did not, is called excess levy capacity. In the example below, assume that the levy limit has not “hit the ceiling.”
As shown in the table, excess levy capacity that is not levied when the fiscal year’s tax rate is set is lost for that fiscal year but can be captured in the next fiscal year. Not every community has capacity to capture either because they are levying up to their annual levy limit already or because they have legally exceeded their annual levy limit by a certain form of vote (see “Relief of Fiscal Stress from the Levy Limit Ceiling” below). Depending upon the amount, levy capacity can help a community escape from budget stress in the next fiscal year. Seen below, statewide total levy capacity has steadily risen.
As indicated earlier in this article, when the incremental levy limit has maximized to the levy ceiling, the incremental limit has “hit the ceiling,” the levy ceiling controls and either a portion of or possibly the entire allowable increase to the incremental limit is lost. As seen in the following table, the levy limit was between 95.5% to 98.9% of the levy ceiling in seven communities, and between 90.1% to 94.9% in seven communities.
The good news seen in the table above is that nine of the 14 communities have a tax levy below 95% of their levy ceiling, relieving some fiscal stress from potential lost capacity due to “hitting the ceiling.”
Relief of Fiscal Stress from the Levy Limit Ceiling
Prop 2½ also included several means to legally exceed the annual levy ceiling and relieve budget stress by moderating the effects of that limit. These means, or “exclusions,” when added to the lesser of the incremental levy limit or levy ceiling, establish a maximum levy limit which the actual tax levy for the fiscal year cannot exceed. The following will highlight two of the most common exclusions that allow the incremental levy limit to exceed the levy ceiling: the debt exclusion and the capital outlay expenditure exclusion.
Debt Exclusion
The debt exclusion is by far the more frequently voted exclusion that requires a majority vote of the electorate for approval to levy an additional amount above the incremental or levy limit ceiling for permanent or temporary debt service on a certain capital project or capital asset purchase until the debt is retired. Multiple debt exclusions may also be presented for voter approval. Unlike overrides, the dollar amount of the debt exclusion does not become part of the base in calculating the next fiscal year’s levy limit. Note from the table below that FY2’s base is FY1’s levy limit, not FY1’s maximum allowable levy. Note also that FY3’s base is FY2’s levy ceiling, not FY2’s levy limit, as FY2 in this example “hit the ceiling.” The debt exclusion adds to the lesser of the levy limit or levy ceiling.
The graph and table below show newly added debt exclusion wins and losses as well as winning vote purposes for votes taken and reported to the DLS Databank in the most recent fiscal years.
For FY2022, a total of 1,654 debt exclusion votes added $629.2 million to levy limits in 287 communities.
Capital Outlay Expenditure Exclusion
A second and less often voted form of exclusion is the capital outlay expenditure exclusion or capital exclusion. This exclusion requires a majority vote of the electorate for approval to levy an additional amount above the incremental levy limit or the levy ceiling for a specified capital project or capital purchase. Like the debt exclusion, this exclusion does not become part of the base in calculating the next fiscal year’s levy limit. From the table below, note that FY2’s base is FY1’s levy limit, not FY1’s maximum allowable levy. Note also that FY3’s base is FY2’s levy ceiling, not FY2’s levy limit, as FY2 in this example “hit the ceiling.” The capital exclusion adds to the lesser of the levy limit or levy ceiling. Unlike the debt exclusion, this exclusion is only applicable in the fiscal year indicated in the vote.
The following table indicates capital expenditure exclusion votes reported to the DLS Databank between FY2018 and FY2022. Over this time, there were 66 votes, 58 or 88% were wins and 8 or 12% were losses. 
A Cautionary Note – Burden on Taxpayers
Local officials should evaluate the public’s financial capability to pay the additional tax. The DLS Dashboard provides information on the community’s average single-family residential tax bill shown in whole dollars and measured against income and property value. A growth in this average measured against income may present a fiscal stress upon the average property taxpaying family’s ability to pay the property tax, which could result in disapproval of an override or exclusion vote by the electorate. View your community’s average single-family tax bill history.
Final Thoughts
The spotlight of this article was on an area of fiscal stress caused by statutory property tax limits. The roadmap to safety requires local officials to understand the levy limits on the community’s ability to tax imposed by Prop 2½ and how to apply the provisions of that law for fiscal budget stress relief from those limits.
Remember the important points from this article:
- Maximize new growth
- Decide whether an override is needed
- Check the community’s levy ceiling
- Consider a debt or capital expenditure exclusion vote
- Evaluate if an override or exclusion vote is affordable to your public
- Use the DLS Dashboard and other resources on the DLS website for further guidance on the provisions of Prop 2½ and on other matters related to municipal finance
Helpful Resources
City & Town is brought to you by:
Editor: Dan Bertrand
Editorial Board: Marcia Bohinc, Linda Bradley, Sean Cronin, Emily Izzo, Lisa Krzywicki and Tony Rassias
| Date published: | July 7, 2022 |
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