Tax Rate Truth – Part 1: Summary

Screen Shot 2018-09-20 at 9.52.10 PM.pngWhen the Barzizza, Brown and Sanders team quote that your tax rate is up 44.1% since FY14 (Fiscal Year), they are wrong.  They rush to over simplify complex financial concepts to raise emotions. They are either not doing research, willfully ignoring fact or blatantly lying to voters.

This topic is complex and requires attention to detail to understand. To assist in this we are breaking the blog up into multiple posts to highlight important key aspects. While this post covers most of our key points, I encourage you to read them all for a better understanding so that you can make an informed decision, not an emotional one.

First and foremost the FY14 increase of $0.445 included a state required $0.095 increase to offset the impact of lower property value assessments. Shelby County reassesses property values every four years and Tennessee’s Truth in Taxation law requires that the rate be adjusted so as to not  impact the revenues collected by the city. FY14 is when you saw continued impacts of the down economy resulting in lower assessment prices. With lower assessments a higher rate is needed to collect the same revenues for the city. Because not all homes are impacted by assessments the same way, your actual tax bill will very even if there were no change in the rate. The $0.095 assessment impact is clearly called out in Mayor Goldsworthy’s cover letter on they FY14 budget.

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Had nothing else changed in FY14, the tax rate would have increased $0.095 and it would not be considered a rate increase.

Second, you need to do what is commonly referred to as an apples to apples comparisons of the increase to calculate the growth. It is like buying a car.  One cannot fairly compare cars on price alone – features must also be compared to adjust for price differences. My math below is a summary of several steps taken to do an apples to apples comparison of the base rate in FY14 vs. the easily identifiable increases that make up the FY14 and FY18 tax increases. Since FY14 your tax rate is up 36.7%, yes that is significant but not the 44.1% they claim. Based on my research I was able to isolate a few key drivers of the tax rate increase. The column on the right shows you just how much your taxes increased for each of these drivers.

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Tax Rate Truth – Part 2: Do the Math. My detailed calculations to normalize rates due to the impact of assessments are available here.

Two of these factors simply replace tax revenues from other sources. The FY14 shortage in Sales tax and the elimination of the Hall Income Tax. These two items account for $0.19 (or 13.2% points) of the $0.529 (or 36.7%) increase.

It is important to understand what makes up that increase and what you get for those dollars. The city’s investments include the addition of ambulance service, a new police precinct and capital spending for GMSD as part of this funding. Keep in mind that GMSD inherited $26 million of deferred maintenance from Shelby County. The last estimate I saw was that we had worked that down to $11.4 million in just 4 years. A significant portion of that being covered by capital funding from the city.

Now, let’s put the increase into context. In finance, we use a calculation called Compound Annual Growth Rate or CAGR to put into context growth that occur over time or at random intervals. It helps you to see what the increase would look like if it were steady as opposed to occurring at random intervals. The CAGR calculation tells us that the annual growth rate of property tax rate in Germantown was about 2.5% between FY04 and FY17. The current tax rate is expected to support the city for another 5 years and if that holds true the CAGR would drop to under 2%. During these 14 years the CPI or inflation rate has had a CAGR of approximately 2%. Thus our city has grown, given pay raises, serviced debt, added a school system, upgraded roads, parks and built stable reserve funds all at the cost of living increase in taxes.

That kind of growth shows strong fiscal management over the long term. Keep in mind that property tax is intended to generate flat revenues over time even if the value of your home changes, unlike income tax where you pay more as you make more.

In addition to the assessment impact, the FY14 rate includes adjustments for sales tax shortages and funding of reserve balances. High level math indicates that the sales tax shortages left the budget short $1.7 million. We have warned about the dependence on sales tax in our school funding blog, this is a real world example of potential impacts. Even in a strong economy, an over dependance on sales tax has created problems for Collierville this year and resulted in cutting employees. The city has learned from this lesson and now budgets sales tax revenues conservatively in order to protect the property tax rate. Alderman Massey and Barzizza have both pushed for higher dependency on sales tax in the last two budgets. Tax Rate Truth – Part 3: Sales Tax Risks.Click here to read more about the importance of managing sales tax conservatively, hear John Barzizza’s comments and see the story about Collierville cutting employees due to this issue.

Reserve funding sounds like a savings account for a rainy day. In some cases it is and in other cases it is used as a savings account to be able to pay cash for things. Reserves also play a big part in our credit rating and the interest rates on money we borrow. Tax rate stability is also very dependent on reserve balances. Inflation impacts just about everything. For example, many vendors have escalation clauses in their contracts. To keep tax rates stable I may build a reserve early in a contract and draw down on that reserve later in the contract. For simplicity, say I am obligated to pay a vendor $100 over 5 years. I would build a reserve for that by putting $20 a year into the fund. My actual payments may be $18 in year one,$19 in year two, $20 in year three, $21 in year four, $22 in year five. Still a total of $100 but if I don’t use a reserve I have to raise rates every year. Click here to see more about the importance of reserves and how they are helping us meet our demands for schools, fire and parks. Tax Rate Truth – Part 4: Reserve Funding. Click here to see more about why reserves are a crucial part of our financial stability.  

Author: Brian Ueleke

Husband, Father and Germantown resident. Offering experienced perspective with a Finance degree, MBA and 15 years of Corporate Finance experience in budgeting, operational and capital project analysis.

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