Mayor, there must be a mistake in my tax bill! Part 1, the revenue side

October 30, 2012 | Capital expenditures, Democracy, Elderly, Housing, Local issues, Real estate taxes, Referendums, Saco, Tax credits

By:David A. Smith


You and your friends are dining out; it’s a large gathering, convivial, people you know and like and with whom you have much in common and many stories to tell.  You’re hungry at the beginning, so everyone agrees to share several of the special appetizers.  The wine flows; the courses come.  Laughter rises; confidences are exchanged.  Naturally everyone orders dessert, and coffee, and maybe a liqueur to finish things off. 


With a discreet cough, the waiter presents the bill, and it’s got at least one more digit than you imagined possible.


“All right, who ordered the Hennessy?”


That, more or less, is the reaction of homeowners in the pretty Down-East town of Saco [rhymes with Taco – Ed.], Maine, when confronted with the consequences of their previous authorizations, as presented in a deceptively bland article in the Saco Sun-Chronicle (October 3, 2012)


Tax hike anger spurs initiative in Saco


Saco, Maine – Calling this year’s 18% tax hike in Saco “an outrageous increase,” resident Mary Pelkey has called together a few like-minded taxpayers to talk about how residents can better influence the annual budget process in the future.


As Kate Smith once said, the best exercise is pushing away from the table.


That’s not going to work as exercise, Kate


Maybe Saco’s taxpayers ought not to have ordered all those expensive delicacies.


According to Cheryl Fournier, Saco’s finance director, the tax rate now is $18.30 per $1,000 of valuation, which is a nearly $4 increase from last year’s rate of $14.42 per $1,000.


Saco’s tax dollars at work: Cheryl Fournier


Saco’s rate went up 26% [$18.30 / $14.42 = 1.26 – Ed.], yet the taxes themselves went up only 18%.  Ergo, if anyone did the arithmetic, aggregate valuations in the town of Saco had to have gone down 7%.  And in fact they did, as reported on the City of Saco web site:


In addition, the Assessor has recognized the “lower market values” and has reduced assessments from 103% to a citywide average of 96%.  [100% – 96%/103% = 7%. – Ed.]


Evidently Saco does not do comprehensive individual-property reassessments; rather it must have adopted a baseline set of assessments some years ago, and then simply adjusted everyone’s assessment by a percentage that represents a notional ‘average appreciation’ of properties.   That allows the city council to expand the city budget (because the assessments rise) while simultaneously saying it hasn’t “raised taxes”, because the rates didn’t go up.  It’s a neat finesse for letting expanding municipal budgets pass unobjected-to – until the market goes into reverse, when the customers/ ratepayers suddenly notice their houses are worth less than the assessment, and start appealing their assessments and winning their appeals.


Some things weren’t meant to reverse suddenly


Then it’s time for an assessment reduction … but then the shareholders notice the rate jump.


This adjustment has a neutral effect on the total taxes paid. The $1.28 tax rate increase is offset by the lowered assessment.


All this is in line with the dynamics of basic budget algebra for localities.  Real estate taxes are set to equal the aggregate total budget; assessments and rates are merely devices to allocate those operating costs among property owners in a way that is perceived to be politically fair.


Pelkey scheduled a meeting of irate taxpayers for Wednesday [October 3, 2012 – Ed.], after the Sun Chronicle’s deadline, at the train station on Saco Island, and hopes enough people will turn out to get the attention of city leaders.


All aboard in Saco


Perhaps ironically, the train station in which Ms. Pelkey and her neighbors met is itself a town expenditure: in 2007, back when things were rosier, it was comprehensively renovated in hopes of being a regional amenity (like Scranton’s parking garage):


Back when trains were green transportation: Saco, 1879


In his speech Saco Mayor Ron Michaud said that since passenger service began on the Downeaster train in 2001, more than 1.7 million passengers have taken the train, which makes five trips daily between Portland and Boston. He also said more than 100,000 Maine students have taken field trips to Boston aboard the train.


I particularly like this bit:


The station will be powered by a windmill and be heated and cooled with a geo-thermal energy system. In addition, it will house the offices of the Biddeford-Saco Chamber of Commerce.


Biddeford-Saco: that’s no BS


So Saco wanted an oh-so-stylish Chamber of Commerce Building, and now that tangible esidue of past spending is being used to rally those who’d like to see a significant rollback on the taxes for future spending.


In addition to a letter to the editor in last week’s Sun Chronicle, Pelkey has reached out to others upset by their tax bills through social media like Facebook and Craig’s List, an online classified advertising forum.


When asked why she called the meeting, Pelkey said, “I got to thinking if we don’t say anything, (the council) would (pass another tax increase) again.”


Inherent in Ms. Pelkey’s comments are two premises that people instinctively believe are true even when they are probably false:


There are two things that might be true

And they’re known as thing 1 and thing 2


1.     City councils raise property taxes just because they can.

2.     Complaining about property taxes retards their rise.


Certainly, if Premise 1 is true, then Premise 2 is likely:


Pelkey is upset about the tax rate increase in Saco this year because she feels the City Council does not listen to residents and “is used to doing exactly what it wants to do.”


Still, Premise 1 has the cart before the horse.  Property taxes are raised to pay for things voters or their elected representatives have decided they want (like an ultra-green new train station to lure Bostonians).


“On Wednesday, I hope we hear from people how they’ve been impacted,” she added. “Saco now has the highest tax rate of any surrounding towns. My daughter’s bill went up $2,000.”


Again Ms. Pelkey unwittingly conflates rate and payment … and her daughter’s house has a valuation of about $740,000.  [Verification of the arithmetic is left to the reader.  – Ed.]


Biddeford’s tax rate is $16.54 per $1,000, according to the city assessor’s office, which represents an increase of $1.12 from last year’s rate of $15.42.


Assuming that Biddeford made no change in its assessments, that’s a 7.25% increase.


Neighbors in the economy, too: Saco, Biddeford, and Old Orchard Beach


And in Old Orchard Beach, the tax rate is $13.44 per $1,000 of valuation, which is a 44-cent increase from last year’s rate.


Up 3½%.


Maybe Old Orchard Beach’s finances as are shaky as its famous pier?


What upsets Pelkey the most about the tax increase in Saco is that residents have not yet approved a school budget for the three-community school district, which also covers Dayton and Old Orchard Beach.


“(The City Council) shouldn’t have committed the taxes without knowing the full amount. The school budget hasn’t even passed yet,” she said.


Actually, the City of Saco did exactly the right thing by sending out the bills when it did, because most households appreciate, and may need, the notice period to have the cash ready.  In any case, it’s unlikely that the actual property taxes will be lower than what Saco sent out, as that was their budget.


While Pelkey feels Saco should not have sent out its tax bills without first knowing how much the school budget would be, Fournier said the decision was made by the City Council in July to commit the taxes based on the combined budget at that time – $22.1 million in municipal spending and $43.1 million for the RSU [Regional School Unit – Ed.].


Local taxes pay for local services and local schools. 


“We already had to take out a tax anticipation note (TAN) at a cost of $5,000,” she said, “and if we’d waited until November to send out the tax bills, we would have had to borrow even more money” to keep the city afloat.


A TAN is a borrowing, with an interest rate.  Generally speaking, a TAN is a signal that a city’s CFO hasn’t managed things well.  The Town of Saco was right to send the bills and limit the borrowing costs.  At to the overall increase, the City of Saco web site explained it this way:


The City Council voted to approve the FY13 municipal budget (city services such as fire, police) on May 21, 2012. The municipal budget increased 6.2% over FY12 (last year). The combined budget (schools, county and municipal) has gone up 18%.


Obviously the school budget is the driver; then too, there’s this:


It has been a rough year for the city and school officials dealing with budget cuts stemming from the federal and state government reducing their funding responsibilities.

Set aside the presumption that it’s the federal and state governments’ responsibility to pay for directly and exclusively local benefits; as we’ve seen in multiple posts, states are in fiscal trouble (and I haven’t posted on the Federal government’s runaway deficits only because they are self-evident and well reported elsewhere). 


And those were the projections: the actuals are worse

[Continued tomorrow in Part 2.]