Town Finance Terminology
What is debt exclusion?
A self-imposed tax increase by voters typically to pay for large building projects. Tax is strictly tied to the debt to pay for the capital project. Once debt is paid off, the taxes are no longer charged to property owners.
What is a tax override?
A self-imposed, PERMANENT tax increase by voters to fund Town department budgets/salaries. Ordinarily, tax increases are limited to a maximum of 2 ½ percent of the previous year’s Town budget. The “Proposition 2 ½” restriction can be ‘overridden’ by a town wide vote by an exact dollar amount, not a change of the percentage in the Proposition 2 ½ law.
What are municipal bonds?
What is excluded debt VS. inside budget debt?
A city, town or municipality like Stoughton can go to the bond market to raise funds for a fixed cost project or projects. While individuals can go to a local bank to borrow money called a “loan”. The Bond market is basically a bank for municipalities or State government.
Town’s that go to the bond market to borrow money can pay back the loan or bond through a self-imposed tax increase (via debt exclusion vote) which is separate or ‘outside’ the town’s operating budget.
Or, from debt service ‘inside’ the existing town department budgets. Towns have a department operating budget to fund debt which uses tax revenue sources that are already available. The level of debt inside the budget is funding not available for town department salaries and capital expenses. And vice versa. The more money is raised within each town department budget directly results in money NOT available to use for debt service. A town with stable debt policies will place minimum and maximum debt levels allowed within a town budget. Having policies and managing inside debt helps to prevent the need for debt excluded tax increases.
What does excess capacity mean?
What does the term new growth mean?
What is prop 2 1/2 mean in a town
The amount of money not spent against the maximum taxation (2.5% above the previous year’s budget) allowed for each city and town in the MA Commonwealth. Property owners get tax relief by a dollar amount not spent against the maximum a municipality can raise taxes. Excess Capacity is a reserve (savings) amount that a town policy board can tax in a future fiscal year without the need for a town wide ‘override’ vote. This is NOT a permanent tax cut.
Any new construction, renovation or expansion of property in Town which contributes to the tax base. Expanded tax base is calculated as New Growth in the 1st year it enters a town as revenue. However, it's available for expending on any part of a town budget including one-time capital purchases, debt service inside the budget and ongoing department budgets (salaries etc).
The maximum amount of property tax increases allowed by state law over the previous year’s property taxes. Town’s that are fiscally strong will raise less than the maximum 2.5 percent allowed to build up Excess Capacity reserves.
What is a levy?
The property tax rate set by the Selectboard in the Fall timeframe. The Board of Assessors will make a recommendation to the Selectboard on how much they can charge to both the commercial and residential property owners while staying within the levy limit taxing authority. In the Town of Stoughton we have a split tax rate in which commercial property is taxed at a higher rate than residential property. The Levy is basically the actual amount of taxes imposed on property owners within the Levy Limit of our town.
Explanation of a
levy ceiling.
The assessed "full and fair" cash value of all taxable property in a city or town is the basis for a levy ceiling. The Commonwealth of MA sets a maximum of 2.5% of all assessed values for the levy ceiling each year. Within the taxing authority of a town like Stoughton under Proposition 2 1/2, if the tax amount hits above the levy ceiling amount, the city or town is forced to cut budgets until taxes drop below the levy ceiling. Fluctuations in the economy can directly impact a municipality budget if tax rates grow faster than the levy ceiling can support it.
Explanation of a
levy limit.
What is a tax
(Prop 2 1/2) Underride?
The dollar amount each year that a city or town is allowed to tax at 2 1/2% above the previous year's levy limit regardless of how much money is not spent each year. The levy limit basically gives city or town officials their limited or maximum property tax authority. The levy limit only changes or adjusts after a city or town votes to approve a Prop 2 1/2 override or underride.
A self-imposed tax cut by voters. This tax cut tool is available for all municipalities in the Commonwealth to cut taxes by an exact dollar amount, not a change in the Proposition 2 ½ law. A tax cut from an Underride will reset or lower the levy limit for future years. In effect, after an Underride is passed, the Proposition 2 ½ levy limit continues as an available increase of future taxes but grows from the adjusted levy limit amount.