Zero inlation factor in '15 likely to put severe strain on Laconia budgets in '16

LACONIA — First the city manager and now the School Board have questioned the preliminary decision of the City Council to cut the draft 2015-2016 municipal budget by $200,000, both warning that the reduction could weigh heavily on future budgets.

The $64.1 million 2015-2016 budget proposed by City Manager Scott Myers would raise $41,291,854 in property taxes, which includes the city, school — both local and state — and county taxes. The council has trimmed, thus far, $84,000 from the city budget and, at the council's direction, the School Board has cut $100,000 from the school budget, which together would reduce the amount to be raised by property taxes to $41,091,854.

Myers , along with Scott Vachon, who chairs the School Board, and Ed Emond, business administrator of the school district, suggested this week that the mechanics of the tax cap would prolong the effects of reducing this budget to the next and beyond.

The tax cap limits the annual increase in total expenditures funded by property taxes to the rate of inflation, measured by the Consumer Price Index — Urban (CPI), for the prior calendar year, plus an additional amount representing the value of new construction, which is calculated by multiplying the value of building permits less the value of demolition permits issued between April 1 and March 31 by the prior year's property tax rate. That is, the 2015-2016 budget will be the base against which the CPI is applied as a multiplier and to which the taxable value of new construction is added to calculate the increase in the amount that can be raised by property taxes the following year without exceeding the cap.

For 2014, the CPI was 1.6 percent, which enabled property tax revenue to rise by $640,035 without breaching the cap. The value of new construction was $29 million, which represented additional property tax revenue of $649,600. Altogether the tax cap enabled the amount raised by property taxes to increase by $1,289,635

However, in the first five months of 2015 the CPI has been a negative 0.4 percent, which indicates that the CPI would have to rise to 2 percent in each of the seven remaining months of the year to reach an annual rate of one percent. Very likely the CPI applied to calculate the tax cap for the 2016-2017 budget will be less than one percent.

Myers said that while it is too soon to estimate the value of new construction, he expected that the projects either underway or planned for this construction season would ultimately amount to approximately $20 million of additional property value, about a third less than this year.

Despite the near $200,000 difference between the budgets recommended by the city manager and City Council, the effect of the lower rate of inflation and value of construction in calculating the tax cap for the 2016-2017 budget is negligible — a few thousand dollars.

But, the reduction of both multipliers would reduce the amount to be raised by property taxes within the tax cap by about a third. A CPI of one percent would represent about $411,000 of additional property tax revenue while new construction of $20 million would represent another $452,000. Altogether the amount to be raised by property taxes could increase by some $862,000, about $428,000 or a third less than the increase this year.

At the same time, a $200,000 reduction in the 2015-2016 budget would carry forward to future budgets. With the tax cap tightened by low inflation, Myers has cautioned the City Council against shrinking the budget. He noted that contracts negotiated with the four unions representing city employees include annual cost-of-living adjustments of 2.5 percent, which trigger attendant increases Social Security and retirement contributions, while the cost of health insurance premiums also rises annually. Likewise, he expects the Belknap County tax assessment to increase in 2016-2017 with the renovation and reconstruction of the county jail.

Likewise, Emond noted that as all three contracts with the School District's employees expire on June 30, 2016 and any increase in compensation must be funded in the 2016-2017 budget, along with a likely increase in health insurance costs.

The City Council is expected to finish deliberations and adopt the budget when it meets on Monday, July 13, beginning at 7 p.m.