Mark Tully: Proposition 2 ½ and its effect on Pittsfield's Finances
An extremely important milestone in Pittsfield's history has come to pass the other week with little media attention. At the Pittsfield City Council's tax rate review on Nov. 24, the Proposition 2 ½ levy ceiling became the levy limit. The levy is the amount of money a city raises through property taxes to fund the budget. In accordance with Prop 2 ½, there are limits to the amount a municipality can tax.
First, I'll provide a brief background on Prop 2 ½. The law was voted on in 1980, the same year Ronald Reagan won election, and enacted in 1982. At that time, property taxes in Massachusetts far exceeded the national average and there were no controls on levy increases. The passage of Prop 2 ½ was truly a taxpayer revolt. The levy limit was calculated at 2.5% of the community's fair market assessed value and allowed to increase 2.5% each year. Prop 2 1/2 also created the Massachusetts Division of Local Services to record, track and report tax levy information on every community.
Under Prop 2½; a municipality is subject to two property tax limits:
• Levy Increase limit: The annual increase of the property tax levy cannot exceed 2.5%, plus new growth; which is the taxable amount from new real property.
• Levy Ceiling: The total annual property tax revenue raised by a municipality shall not exceed 2.5% of the assessed value of all taxable property contained in it.
Since Prop 2 ½'s enactment, Pittsfield's tax levy reached its levy limit once, temporarily in the early 2000's; but the levy has always remained below the levy ceiling. Many communities in the state consistently function at their levy limit and depend on the 2.5% annual increase and new growth values in order to increase their budgets. If a community is at their levy limit and needs more money to fund their budget, an override request can be placed on the ballot to raise the limit permanently. A community may also request that voters approve a specific debt service or capital project cost that is outside of the limits. These provisions are called "debt exclusions" and "capital overlay expenditure exclusions" and are very specific on how the increased taxes would be used. Since fiscal year 2004, Pittsfield's property tax levy increased less than the allowed levy limit creating "excess levy capacity." If a community doesn't increase its levy to the full limit, the balance becomes excess levy capacity and may be used in the future, without a voter approved override.
As I mentioned earlier, the Levy Limit is one component of this law. The Levy Ceiling is the other component. The Levy Ceiling represents 2.5% of the assessed value of all the taxable property in Pittsfield. Our community experienced a rapid increase in assessed values starting from 2004 at $2.1 billion until 2008, where we ended at $3.4 billion. This represented an unprecedented 63% increase over that 5 year period. It is debatable whether this increase was real or speculative, but that's an argument for another day. The important fact is that since 2008, the total assessed value has not grown annually, but has decreased to $3.3 billion. This is where the levy ceiling comes into play.
At the Nov. 24 city council meeting, the tax rate was set and $1.5 million of free cash applied to the levy. The result is an excess levy capacity of $6.8 million. If history is an indication of the future, the excess levy capacity will disappear in 2 years because budget increases require that we raise the levy $3-4 million each year. There are no more annual 2.5% increases to the limit, because our levy limit is now the ceiling. Once the excess levy capacity is consumed by FY2019, increases in any city department's budget will have to be offset by a decrease somewhere else. When our tax levy reaches the levy ceiling, it cannot be raised even with a voter approved override. Pittsfield will not be able to increase property taxes. The only voter approved overrides allowed will be "exclusions" for items such as a specified debt or a capital project.
What is the answer? The answer is that we must increase our tax base with new businesses and residences while simultaneously reducing the cost of city government. That's an easy statement to make, but has been difficult, if not impossible, to implement. I have been studying the Prop 2 ½ limits on Pittsfield's levy for the past several years and am grateful to see that, at least, the conversation has begun. I am optimistic that this conversation will continue publicly through the next budget session.
Once we all understand our limits to growth, I am confident that solutions will arise.