Tax Rate Truth – Part 4: Reserve Funds

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It is vital that we maintain the healthy reserves that keep our community fiscally secure. Alderman Massey refers to these as “profits” in his discussions on the topics; however, it is more accurate to think of them as savings accounts. In the next to last reading of the budget Alderman Massey (seconded by Alderman Barzizza) proposed a property tax cut (discussed in this blog). Their proposed cuts remove the funding that goes into our reserve balances and potentially require the draw down of those reserves.

Reserves are built over time with the knowledge that there are significant investments in infrastructure that are needed to maintain a city like Germantown. This is something the city has done very well over the last 20 years. Responsible fiscal management has lead to award winning budgeting processes and allowed our city to not just grow but thrive. This firm financial base is the foundation for our best in class city services like our Fire and Police. They don’t come cheap and require investment to maintain those levels long term, along with our schools and quality of life amenities like GPAC, Library and Parks.

Let’s look at a real world example. The city will likely need a new fire station in the not too distant future. This is something that is in the city plan and part of the strategy for building reserves. We as a community could pay for this one of two ways. We could build reserves and pay for most of it as the expense is incurred or we could borrow money to pay for it. At current rates and a 20 year bond term we would pay $6,476,702 for a $5,000,000 fire station as opposed to paying cash out of our savings.

But the implications of borrowing money go beyond the cost of borrowing money. This is where experienced financial leadership and municipal planning become extremely important. If you borrow money for the fire station you can’t borrow money for other improvements or even maintenance items in the city. Think about all the deferred maintenance that is being addressed for GMSD as they catch up on years of neglect. Like your household, the city has limited borrowing capacity so we need to be wise about what we choose to use the bond funding option for. It doesn’t stop there either. The more you borrow the more reserves you need to maintain your bond rating or the rates for borrowing go up. The other option is that you get a tax increase every time the city has to do a major project. Poor planning puts the city in a “paycheck to paycheck” mentality and increases the likelihood of more frequent tax increases.

The other thing of concern is that if we follow the policy proposed in the last budget meeting it is likely that we would lose our AAA bond rating. This just compounds the fiscal issues by raising the rates at which we borrow money. While this policy may reduce your tax rates in the short term it is very concerning in the long-term impact of raiding the piggy bank for a short-term win. It takes years of disciplined fiscal management to get in our enviable position. Unfortunately, one bad budget can undo all of that work.

Tax Rate Truth – Part 3: Sales Tax Risk

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Too much dependency on sales tax leads to a need to raise property taxes when the economy slows down. Improperly tying support of our schools to sales tax revenue also will lead to property tax increases.  Here we see a clear example of this in FY14, proof that we need to be careful about how we use our variable revenues. Recent budgets show the City has learned from these lessons and remains conservative in their sales tax revenue projections. What does that mean in layman’s terms? If you are paid on commission for your work, you probably shouldn’t build your household budget for the year on your best month of sales. Alderman Barzizza and Massey both pushed for the last two budgets to include a higher dependency on sales tax revenues.

Hear him in his own words here. Then listen to Patrick Lawton explain the way sales tax is budgeted and why.

Shortfalls in sales tax projections first impact Infrastructure Replacement Programs (IRP) and then Capital Improvement Programs.IRP projects are things like roads, drainage and water main projects that provide services to our city.  CIP projects are investments in our future like a fire station, schools or greenway improvements. Being conservative in our estimates allows the city to pay cash as opposed to issuing debt and maintains our fund balances needed to keep our rates low. Click here for more info on the Reserve Balances in Tax Rate Truth – Part 4

The budget doesn’t clearly call out the impact of the sales tax shortages other than showing a 4% shift. High level math says that a 4% shift in the General fund of $43.6 Million would be a $1.7 Million shift into property tax funding. With the FY14 Budgeted Property Tax Revenues of $28 Million that implies that roughly $0.12 of the $0.445 increase is due to Sales Tax short falls.

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Keep in mind that the value that you get for that $1.97 (or $1.95 for FY19) tax rate. Our neighbors in Memphis pay $4.05 or over double our rate. Collierville pays $1.83 but they have a much larger dependency on Sales tax with more big box stores like Lowe’s, Home Depot and Walmart. They also see more sales tax revenue from car dealerships and the Carriage Crossing Mall. Collierville’s dependency on sales tax, and shortages this year, resulted in them having to cut positions from their FY19 budget. We don’t want to be in that position.

Tax Rate Truth – Part 2: Do The Math

For over 15 years I have worked in corporate finance. I have made a living telling stories with numbers, helping executive leadership to understand complex investments, operations and projects in as simple terms as possible. It is easy to get turned around by all these numbers, it happens to the best of us. That is why I have worked with my father, a retired Certified Financial Planner, to double and triple check these calculations.

The first step in this process is to look at the FY14 rate and its individual components. As you read this you will find that there are clear economic, legislative and community needs that drove the increases.

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Step two is to account for the impact of the FY18 reassessment impact. The reassessment raised the average value of property in Germantown by 9.7% between FY14 and FY18. That doesn’t mean that every house went up in value by that amount, it is simply the weighted average impact to assessed values of property in Germantown. To keep comply with the Truth in Taxation laws and keep the revenue generated from the city’s property tax rate flat, it was calculated that the rate should go down to $1.76. So all of the items above that used to sum up to a $1.93 tax rate now sum up to $1.76. I will refer to that impact as rate restatement. That means that the base rate in FY14 is no longer $1.485, the impact of the reassessment make that $1.354. The math in the table below shows the breakdown of the FY14 rate in FY18 terms.

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One major part of our concern is that the impact of the FY14 reassessment is lumped into their calculation for the tax increase. In FY14, the decline of property values meant that the rate had to be increased to hold revenues flat (the inverse of what happened in FY18). That is the second of the two lines highlighted in red above. That going forward that number is included in my FY14 base as it is not an assessment impact as opposed to a rate increase.

To accurately state a growth rate you have to have a good starting number. When they use $1.485 as their starting point they are omitting two key factors for accurate analysis, assessment impact and rate restatement. So when you restate the rate it is $1.354 and add back the assessment impact of $0.087 your growth rate should be calculated based on $1.441 in terms of the FY18 tax rate.

The table below shows how you add up the restated components of the FY14 tax rate with the FY18 increases to get the final rate approved by the BMA.

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Now we are in a position to calculate a growth rate. We have a correctly adjusted base number to have a true apples to apples comparison. You can see the components that drive the increase. Please take a moment to understand the importance of the Sales Tax Impact and why we must be conservative in our budgeting of it by reading Part 3 of this blog. It is also important to understand that the FY14 increase was intended to restore reserve balances that had been lowered due to the Great Recession, read more about that in Part 4 of this blog.

Also keep in mind that these rates help fund our schools and 9% points of the total increase of 36.7% directly funds the needs of our new elementary school and Forrest Hill improvements needed to access it. The Hall Tax is a state income tax that was allocated to municipalities and is being phased out. That funding gap needs to be addressed. When you look at the components, it is clear to see your taxes were not frivolously raised for no reason. As stated previously, there are clear economic, legislative and community needs that drove all of these increase. These rates have helped fund deferred maintenance at GMSD, invest in parks, improve the police force and add ambulance service. All these things add to quality of life in Germantown and make it the place to live in Shelby County.

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Keep in mind that the value that you get for that $1.97 (or $1.95 for FY19) tax rate. Our neighbors in Memphis pay $4.05 or over double our rate.  Collierville pays $1.83 but they have a much larger dependency on sales tax with more big box stores like Lowe’s, Home Depot and Walmart. They also see more sales tax revenue from car dealerships and the Carriage Crossing Mall. Collierville’s dependency on sales tax, and shortages this year, resulted in them having to cut positions from their FY19 budget. We don’t want to be in that position thus we budget conservatively.

 

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?

 

Will Apartments Overcrowd GMSD Schools?

Recently, the issue came up as to whether GMSD has adequately planned for growth in the event of a full build-out in the city of Germantown. Specifically, will new apartments overcrowd our schools?

Parents and the community members can rest assured that GMSD officials are continuously reviewing data and monitoring student enrollment. They have identified our district’s needs based on Germantown’s projected growth and expected demographic changes. Armed with this information, GMSD has implemented the necessary capital improvement plans to meet our needs as a growing district.

Take a look below for more specific information.

Q & A with Superintendent Manuel:

What’s the current enrollment at GMSD schools?

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What is the difference between programmatic and optimal capacities?

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What are the capacity issues for our schools?

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What is being done to alleviate K-5 overcrowding?

Check out this link to see GMSD’s newest school being built.

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Will all portables be removed in the near future from GMSD campuses?

“Yes. We will be removing all portables once the new school is built and school numbers will be able to accommodate optimal staffing.”

See the link from GMSD’s website

 

What space will be available for growth when the new elementary school opens? 

“You can see the total amount of space available once we open [the new elementary school]. Please look at the attached link below. It shows our forecasts for total build out in the city.”

See the link from GMSD

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In the event of a total city build-out, could GMSD still accommodate all students?

“Even if the city was completely built out. We would have capacity at k-5. See chart below.”

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What about middle school students, what are your plans for them?

“We do not have any capacity at the middle school level and need a wing and additional gym at Houston Middle school.”

 

These numbers are all based on a demography report, are you sure it is accurate?

“The demographer was very accurate in his forecasts for all schools. In the first year after his study, he projected within 5 students in the k-5 grade band. The second year after his study, we had 57 students less than projected because the district reduced the number of transfer students we accepted.”

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Looking for more info? Check out this link from GMSD.

The Truth Behind Overcrowding at GMSD Schools

Getting our own municipal schools in Germantown wasn’t easy. Voters in each of the suburban towns and cities approved referendums on forming municipal school districts in August 2012. But the results were voided months later in a decision by U.S. District Judge Samuel “Hardy” Mays and the Tennessee state legislature responded in 2013 by passing a new law that lifted the statewide ban on the creation of such school districts. With the new law, aldermen in each of the six towns set a new election date for the same ballot questions.

After these legal battles and two votes of the citizens, the Germantown Municipal School District (GMSD) opened its doors in 2014. Since then, the district has grown, and the city has benefited from these excellent schools. Overall, the district has grown 638 (15%) resident students in its first four years according to the District’s 2017 Facilities Plan.

Achievements

During those four years, the District has achieved quite a lot.

  • Houston High School has the highest public high school district ACT average in the state for the third consecutive year
  • GMSD was named a District of Distinction in 2017 for work on Exceptional Student Education Transitional Experience
  • Houston Middle School counselors were recognized with the RAMP recognition from ASCA this year (the only middle school in Tennessee to meet qualifications for the counseling program award)
  • Memphis Business Journal recognized Houston High as both the Most Challenging High School and the #1 Best Public High School
  • Each year, Houston High sets new records for students in the HHS 30+ ACT club

Because of these accolades, GMSD has become a school district of choice for many young families as evidenced by how quickly sold signs replace for sale signs in Germantown. Since 2013, the average number of days on the market for Germantown homes has decreased 65% from 113 to just 40, according to statistics from the City of Germantown.

Capacity

As a result, many are concerned about overcrowding at our schools and wonder what the GMSD administration is doing about it. You may even see or hear some candidates campaigning on this topic.

In the Spring of 2017, the district hired a professional demographer to project enrollment for the district over the next ten years. If you want to read the entire study, it can be found here.

Total district enrollment is forecasted to increase by 286 students, or 4.9%, between 2016-17 and 2021-22. Total enrollment is forecasted to decline by 108 students, or -1.8%, from 2021-22 to 2026-27.

But what does this mean for our current schools’ capacity? Many are concerned that the schools are overcrowded, and students are suffering as a result. Let’s take a look at capacity.

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Screen Shot 2018-08-21 at 8.21.01 PM.pngMaximum capacity is defined as the number of students that can be accommodated within a classroom. The utilization rate determines how efficiently the student population and programs operate within the available classroom space. Utilization rates are at or above 90 percent at each school. The district strives for enrollment at each school to be below the maximum capacity allowed by state standards and as such has defined optimal capacity as 2 students per teacher below the state maximums.

To achieve an optimal capacity, the district committed to various options to balance enrollment among the elementary and middle schools. Utilization rates currently above the desired thresholds and are being addressed temporarily through the use of modular classrooms at Dogwood and Farmington. This is a legacy solution inherited from Shelby County Schools. Removing portables has been a high priority item for GMSD as evidenced by the investments at Riverdale which facilitated the removal of portables there.

However, as seen in the maps above, the opening of the new Forest Hill Elementary School in 2019 will provide relief to Dogwood, Farmington, and Riverdale Elementary. Rezoning students at Dogwood, Farmington, and Riverdale will relieve capacity issues at these schools, allow the removal of modular classrooms that have been added to Dogwood and Farmington, and allow the district to explore staffing at a more optimal capacity for teacher to student ratio.

GMSD is watching closely the growth at the middle school level as well. With support from the City, they are preparing to fund a $5 million expansion at Houston Middle School as soon as fiscal year 2020. The absolute need will be determined once GMSD has carefully reviewed growth projections, the results of revising the school transfer policy and the effects of zoning changes planned for the 2019-2020 school year.

Support from the City of Germantown

In fiscal year 2019, the City of Germantown’s general fund budget allocates $6.9 million to directly support GMSD. This includes $2.5 million in maintenance of effort funding required by the state.

What is maintenance of effort? If you remember our previous post The Truth About School Funding and Sales Taxes, we explain 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)

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. We should all thank the administrators who crafted the wording of the resolution because they understood this and thus worded the referendum accordingly.

This is why the fiscal policy of tying school funding to a variable revenue source is dangerous. 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.

Additionally, the City of Germantown provides an additional $4.4 million to cover costs related to student safety and continuing the improvement of our school facilities.

More specifically:

  • $1 million for replacement of the failing boiler system at Riverdale School with an additional $1.5 million included in the fiscal year 2020 budget to complete the work
  • $1.36 million in debt service payments for the new elementary school currently under construction
  • $560,000 for school resource officers and crossing guards at each school
  • $500,000 for safety and security improvements at each school
  • $440,000 in debt service payments for the Riverdale addition
  • $355,000 court-mandated annual payment to Shelby County Schools
  • $200,000 each year for the next five years to help fund Houston Arts and Athletics Foundation field house construction and auditorium renovation projects at Houston High School.

As we head toward the November election, remember that your city government and the GMSD School Board actually has been planning for overcrowding in our schools and for any scenario growth in our city may throw at us.

Reference

(1)   Maintenance of Effort: The Basics