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.  

“Warn your neighbors and friends?”

Jeff Brown continues to champion a narrative that schools are going to be overcrowded despite the clear data that states otherwise. I have been out of town for two weeks out west celebrating my 10 year anniversary with my wife and then spending a week elk hunting with my Father. When I got home I was made aware of comments by Alderman Massey on one of Dr. Brown’s posts. See below.

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He gives no factual basis for stating it is flawed data. Just because the outcome of professional analysis doesn’t support your personal theory doesn’t mean it is wrong.

Betsy Landers’ treasurer happens to be my Father. Betsy is a friend from church. So, as you can see, the roots of whatever conspiracy he is insinuating have a real shady basis (I am rolling my eyes as I write this). The problem is that Alderman Massey implies that everything is a conspiracy. If you are friends, neighbors, members of a commission or club or just support the same person you are clearly part of a conspiracy in his mind.

Alderman Massey uses his platform to question people, so now I am going to use my platform to provide the truth.

His comments insinuate that my father and sister are of questionable character and that the public should be warned. This conversation could be about any of the people listed above. Alderman Massey impugns the character of anyone that disagrees with him. That includes many good people who he believes have no valid opinions because in his eyes they support the mayor. He doesn’t attack the ideas; he attacks people.

So yes, warn your “neighbors and friends” that a man who is a nationally respected financial professional is supporting the election of School Board candidate Betsy Landers. A man with integrity, my father, founded a company which pioneered fee-only financial planning in the Mid-South. Making sure that his company’s goal aligned with clients as opposed to selling the highest commission product. Yes, warn people that a man that helped establish Habitat for Humanity of Greater Memphis and raised his kids to work on weekends putting siding on houses in Rossville is supporting a candidate.

He is so nefarious he is receiving the lifetime achievement award from the Estate Planning Council of Memphis and has been a leader in the Community Foundation of Greater Memphis. On our drive home from the elk hunt, he spent an hour on the phone coaching a Missionary in Costa Rica whom he helps. I could go on and on about his work with Rotary International and many other community and mission organizations. Most of all, he is a man of faith; the basis of his integrity. I am proud to be his son. I can’t tell you how many people stop me to tell me what a good man he is.

He raised his daughter, who lost that election Mr. Massey mentioned, to give back to her community. Service that continues even after that loss, with thousands of volunteer hours in our schools. Not service for recognition, but service for love of our schools and the children of this community. He raised his daughter to have values that turn tragedy into hope for others. She and her husband gave the ultimate gift of her late son’s organs following his untimely death at age 2.  She became an advocate for organ donation and took a role as a member of the Advisory Board for Mid South Transplant Foundation and the National Kidney Foundation.

Me, I am just lucky to call these people family. I am proud, too. So yes, I am on my soapbox but if you want to warn people about my family please go ahead and show them this blog.

I have only known Alys for a couple of years and honestly, I thank you for that Dean. Had you not blocked me, we would have probably would not have crossed paths. Your mission to suppress open conversation about issues brought us together. Alys and I stand by what we write. We have a common goal to covey the truth and provide context to a political environment that has become way too convoluted with spin and lies.

Your instinct to brand people as the “Mayor’s Supporters” is a detriment to you. You should learn that we all bring value and perspective to the conversation. Instead, you choose to ignore people who don’t align with your view. Either way, this election falls out, you will need to work with the citizens you look down upon. The issues facing this city require that we work together for the common good. Perhaps when you realize this, we can work together.

Note: It appears this post has since been deleted. Clearly Dr. Brown wants to maintain the perception of distance between him and Alderman Massey. I don’t blame him but how separate are they when they have both so strongly tied themselves to Candidate Barzizza?

 

Tax Cuts?

  • Germantown is committed to long term financial stability with five year financial plans not one year budgets.
  • This planning method provides stability in the tax rate for those on fixed incomes, demonstrates ability to service debt to financial markets and allows flexibility in changing economic conditions.
  • At the June 11, 2018 BMA meeting, Alderman Massey made a motion to reduce the property tax rate by $0.11 without collaboration with city staff and no fiscal analysis to support his position. (motion failed 2-3, Massey & Barzizza voting yes)
  • Estimated impact of this cut is $1.8-$1.9 million to the city budget, and there was no recommendation on how to meet those cuts.
  • Disregarding a long-term plan would likely require annual tax increases and also reduce the stability of our finances. Essentially forcing the city to live “paycheck to paycheck.”

Municipal finances are complicated. As I discussed in the piece on school funding, the city is funded by multiple sources. The majority of that funding comes from property tax. In 2017, the Germantown tax rate was $1.97. Now how your bill is calculated is a little more complicated. The county assesses the value of your property and then you pay tax on 25% of that value. So, a $250k house at 25% is $62,500 of assessed value. You then divide that by 100 (the rate is per $100 of value) and multiply by $1.97 for a tax bill of $1,231. For a comparison, commercial properties pay 40% of the value of their property.

Near the end of the June 11, 2018 BMA meeting, Alderman Massey began questioning the City Administrator and Chairman of the FAC about how they came up with the tax rate. This meeting was the second reading of the budget, certainly a proper time to ask questions but probably not the best time to make fundamental changes to the budget that will be in place on July 1 or just 20 days from the meeting. The budget process has been ongoing for months. He has been at some of these meetings. He knows the work the City and FAC are doing to pull a budget together and it appears to have never approached the FAC or city staff with his proposal. What proposal? Alderman Massey made a motion to reduce the property tax rate by $0.11.

Link to YouTube Video of Massey’s remarks

Rightfully, he was questioned about his support for this cut. This is a 5.6% cut to the city’s primary source of funding. Do you have a budget in your household? I hope so. In essence, what Alderman Massey is proposing is to make the city live pay check to pay check. That would likely require annual tax increases and also reduce the stability of our finances. The city budgets for stability. The city administrator clearly states “we don’t do one year budgets we do a five year plan.” Admittedly, I don’t know all of their process but from the City Administrator’s presentation they clearly budget five year capital plans and do high level expense projections to at least that term. The debt projections presented went out to 2048. I can tell you that in corporate finance we look out 5-10 years and sometimes longer.

The city’s commitment to long term financial stability helps on many fronts. The idea is that our tax rates are stable for 5-6 years at a time and some times longer. That stability allowed the city to make it through the great recession without a tax increase. This happens by being able to build up reserves and then draw down on them as time goes on. It works much like your escrow account for taxes and insurance on a house.

The stability this method offers allows people on fixed incomes to budget accordingly and shows the financial markets we are a responsible community and have the ability to service our debts. These funding levels help to dictate the rates we are charged when we borrow money. It also gives the city flexibility to adjust to changing economic conditions as they did in 2008. These are all the reasons Germantown wins awards for their budget processes.

So what support and analysis did Alderman Massey bring for his proposed cut? None, merely a statement that “the ratios, I think, bear out that this will not change our ability to maintain the funding.” Budgets are not built on ratios, they are the product of observations and trends. As I said before, this process has been going on for months. A team of financial professionals from both the City and Financial Advisory Commission (FAC) have worked and reviewed the budget to get to this point. It clearly appears he has not asked anyone on staff to look at this and he has no analysis to support his claims. Alderman Massey has asked for transparency in government and transparency would be evaluating this proposed reduction thoroughly prior to voting on it. I am very concerned that there was no supporting documentation for this proposed cut and two Aldermen (Massey & Barzizza) voted for this not knowing the potential impact.

This is the City of Germantown’s budget ladies and gentlemen. The budget as presented projects property taxes of $32.8 million of property tax revenue. That implies that at the proposed rate of $1.95 (after a $0.02 reduction from 2017 for assessor adjustments) each penny of the tax rate generates $168,000 of revenue for the city. The proposed tax cut would result in a reduction of approximately $1,850,256. The city is required to have a balanced budget. I would like to see where the proposed cuts would come from to meet this type of reduction. Do they come from our ISO Class 1 Fire Department, award winning police department or any of the other great services offered by our city?

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The truth about school funding and sales taxes

It’s budget season again and inevitably we have claims about sales tax and school funding being tied to each other. If that sounds familiar it should, the same claims were made last year.

Everyone who purchases goods in the City of Germantown pays a 9.75% sales tax on those goods. That tax rate is made up of 7% for the State of Tennessee, 2.25% for Shelby County and 0.5% for the City of Germantown. In 2012, we voted to establish our own school district but to do so required that the city contribute funding equal to $0.15 of the property tax rate. This is only the City’s portion of funding. School funding is a mix of Municipal, County, State and Federal funds. To meet this obligation we voted to raise the City’s portion of the sales tax rate from 0.25% to 0.5%. The referendum was worded so that the funds would not to be tied to the schools but would easily meet the requirements for generating the funds the City would be obligated to contribute to GMSD. 

In other places, especially those with small independent school districts, public education is funded by a school tax. While school tax laws vary, typically, the taxing authority lies with the school board that determines the tax rate. Along with that power to levy taxes, the school board bears the responsibility of providing for the needs of the district with school tax revenue. This means the school board must balance their budget based on the revenue they generate from the school tax they levied on taxpayers. And ultimately, the Board of Education must answer to the public politically for the imposed tax rate and stewardship over revenues.

We don’t work that way here. Our school boards do not have the authority to levy a tax. Instead, our public schools are mostly funded by revenue generated primarily from state sales tax and county property tax. Each county in Tennessee is required to operate and contribute funding for a public system of education. In order for a municipality to operate its own separate and independent district, the municipality must provide SUPPLEMENTAL funding. It is up to the municipal governing body to determine the amount and source of supplemental funding within the parameters of state law. So, what are those parameters?

At this point lets stop for a moment to discuss maintenance of effort or MOE.

The term “Maintenance of Effort” (“MOE”) generally refers to a requirement placed upon many federally funded grant programs that the State Education Agency (SEA) and Local Education Agencies (LEAs) or school districts, demonstrate that the level of State and local funding remains constant from year to year.(1)

Ask the City of Memphis about this. They famously tried to cut funding from Memphis City Schools and ran into issues with MOE. So what does MOE have to do with the sales tax? Great question! Sales taxes are elastic, meaning that they fluctuate based on economic conditions. More simply, it fluctuates based on how much you and I shop in Germantown. Had we tied the sales tax to the schools, MOE would require that every time we break a record in sales tax collections, we would then have to meet that funding level going forward (even if we hit a recession and collet fewer taxes). You can always go up but never down, it is a one way street with MOE.

The administrators who crafted the wording of the resolution understood this and thus worded the referendum accordingly. It allowed the new sales tax rate to fund our obligations without escalating due to economic ups and downs. This is fiscally smart because when sales tax revenues drop the only other source to pay that obligation is your property taxes. In a recession not only would you have the negative impact of a down economy, the city would be in a position to be forced to raise your property taxes to meet the MOE requirements.

This is why the fiscal policy of tying school funding to a variable revenue source is dangerous. That policy reduces the predictability of property tax rates for people on fixed incomes. One year you are fine and the next we have a tax hike to offset sales tax shortages. 

See the CA article below to read how Aldermen Barzizza and Massey raised the same issues last year…

Despite public view, sales tax hike was never intended solely for suburban school systems

Bonus – Why Sales Tax vs. Property?

Sales tax is a burden shared by everyone purchasing goods in Germantown. It allowed the City to meet the revenue generation needs with out over burdening home owners. It spread that revenue generation across the broader community. You come from out of town and spend money in Germantown? You help fund our schools. And we thank you!

Reference

(1)   Maintenance of Effort: The Basics