Tax cap looking like it will be much tighter fit next year

With less new construction and a lower tax rate the property tax cap will fit tighter during the 2007-2008 budget cycle.

The tax cap limits the annual increase in expenditures funded by property taxes to the rate of inflation, measured by the Consumer Price Index — Urban (CPI), for the prior calendar year, plus extra wiggle room to account for the benefit of new construction activity. The tax cap value of the latter factor is calculated by multiplying the value of building permits issued between April 1 and March 31 by the prior year's tax rate.

In other words, the size of the allowed budget, to some extend depends on variables beyond the control of the City Council.

This week City Manager Eileen Cabanel told the council that she anticipated the tax rate, which stands at $16.72 per $1,000 of assessed value, would drop by at least $1 and probably a little more. The decrease in the tax rate reflects an increase in the total assessed valuation of some $300 million, or 14 percent, from $1.9 billion to $2.2 billion, rather than a decrease in spending.

Since the 2006 tax rate will be applied to the value of new construction to calculate a portion of the allowable increase spending under the tax cap, the decline in the tax rate will be reflected in a corresponding reduction in the size of the next budget.

At the same time, the value of new construction appears to be lagging behind the pace set last year. Between April 1 and October 16, 2005, 303 building permits were issued with an aggregate value of $36.3 million. During the same period in 2006, 224 permits with a total value of $17.3 million were issued.

In 2005-2006 the value of new construction reached $46 million and was multiplied by a tax rate of $16.72 to add $769,120 to the spending limit. This year both the tax rate and the value of new construction are expected to decrease, shrinking the amount of allowable additional expenditures in the 2007-2008 budget.

If the value of building permits falls by half to $23 million, at a tax rate of $15.72 the additional allowable spending from new construction would shrink by more than $400,000.

Meanwhile, for the first three quarters of this year the rate of inflation, which the remaining variable in calculating the tax cap, has run at an average of 3.6 percent, slightly ahead of 2005, when it closed the year at 3.4 percent. The current budget raises $33.5 million from property taxes, including $4.5 million from the statewide property tax for education.

Assuming the rate of inflation for 2006 remains constant at 3.4 percent, expenditures funded by property taxes could increase $1.1 without breaching the tax cap. Altogether the allowable increase in spending would be about $1.5 million, about $300,000 less than last year, the first with the tax cap.

However, last year members of three of the four unions representing municipal employees did not receive cost-of-living adjustments (COLAs) while this year all five unions — the union representing the teachers as well as the four representing municipal employees — will seek to negotiate new contracts slated to begin with the 2007-2008 budget on July 1. Compensation and benefits are the largest single portion of of the municipal and school district budgets, with the cost of the city's share of healthcare premiums and retirement contributions set by collective bargaining agreements.

Finance Director Pam Reynolds said yesterday that together with Cabanel she has begun making projections, acknowledging that the variables that set the parameters of the budget along with the costs of some obligatory expenditures have yet to be determined. At the same time, she said department heads are preparing their budget requests, which are due at City Hall by December 1. Reynolds described the departmental budgets as "needs budgets" that Cabanel will ultimately squeeze under the tax cap.