The votes necessary to seek approval from the Massachusetts Department of Revenue of the tax rate for FY2017:

To The Honorable, the City Council:

The establishment of the FY17 property tax rate by the Board of Assessors, subject to the approval of the Massachusetts Department of Revenue, is the final step in the fiscal process that begins in the spring with the submission of the annual budget to the City Council. With this memo, I am transmitting to you my recommendations for the required votes necessary to minimize taxes on residential properties. In addition, you will find analyses of the FY17 property tax levy, property values, and other supporting information.

OVERVIEW

I am pleased to inform you that the actual FY17 property tax levy is $372,674,087. This is an increase of $18,243,334 or 5.1% from FY16 and reflects the City Council goal of evaluating “City expenditures with a view of maintaining a strong fiscal position and awareness of the impact on taxpayers while providing a high quality array of City services”. This increase is lower than the estimated increase projected in May 2016, and what was presented to the rating agencies in February.

The FY17 Budget adopted by the City Council in May 2016 projected a property tax levy increase of $22 million, or 6.2%, to $376,448,690 in order to fund operating and capital expenditures. The FY17 adopted operating budget increased by 4.8% over the FY16 Adjusted Budget.

The City has been able to control budget growth and property tax levy increases, while at the same time expanding services and adding new initiatives such as the early childhood strategic plan and Envision Cambridge, the multi-year community planning process. The FY17 adopted budget also includes 21 new positions to provide support for the growth in programs throughout the City.

The 5.1% property tax levy increase is slightly above the five-year annual average increase of 4.50%. With approval of these recommendations, the ten-year annual average increase will be 4.87%.

Based on a property tax levy of $372.7 million, the FY17 residential tax rate will be $6.49 per thousand dollars of value, subject to Department of Revenue approval. This is a decrease of $0.50, or -7.2% from FY16. The commercial tax rate will be $16.12, which is a decrease of $1.59, or -9.0% from FY16. This is the fourth consecutive year that the City has reduced tax rates for both residential and commercial taxpayers, which mitigates the increase in property values.

In May, the City Council was informed that the actual tax levy increase was likely to change. This was based on the possible use of additional non-property tax revenues, which would become available based on FY16 actual collections and final Cherry Sheet distributions.

As we previously projected, the use of additional non-property tax revenue and other adjustments have allowed an overall reduction of $1,260,000 from the original projected property tax levy for FY17. This is due to increased non-property tax revenues, which include $200,000 in Room Occupancy Excise Taxes, $100,000 in Meals Excise Taxes, and $1,040,000 from increases to building permit revenues, and ($80,000) in other departmental revenue adjustments. The final Cherry Sheet had a net 2

positive impact of $2,403,218 on the property tax levy. Table 1 reflects these changes and other minor adjustments:

TABLE I

Summary of Tax Levy Changes from Adopted Budget

Tax Levy Changes

Property Tax Levy As Adopted

$376,448,690

Net Cherry Sheet

-$2,403,218

Non Property Tax Revenue

-$1,260,000

Overlay Adjustment

-$111,385

Actual Property Tax Levy

$372,674,087

This recommendation includes the use of $12.2 million in reserve accounts to lower the property tax levy: $2.0 million from overlay surplus and $10.2 million in Free Cash. The certified Free Cash amount of $202.5 million is inflated by $4.9 million in unappropriated mitigation receipts. According to MGL Chapter 144 Section 53, these receipts must flow through the Free Cash certification process before being available for appropriation by the Council.

Excluding mitigation receipts, net certified Free Cash will be $197.6 million, which represents an increase of $21.5 million over the FY16 Free Cash amount. The City Manager will be coming before the City Council with a recommendation for the appropriation of mitigation receipts later in the fiscal year.

This recommendation also includes the use of $1.7 million from the City Debt Stabilization Fund and approximately $0.5 million from the School Debt Stabilization Fund to offset increases in debt service costs that would otherwise have been funded from property taxes. Prudent use of reserves allows the City to maintain stability in our taxes while investing in significant capital and infrastructure projects.

This strategy of using an increased amount of non-property tax revenues and reserves to lower property taxes will not jeopardize our long-term fiscal health. However, if the City used too much of its reserves in one year to artificially reduce property taxes, it would mean that in the following year, the City would be required to either increase taxes significantly or dramatically reduce expenditures.

This prudent and planned use of the City’s reserves has been positively recognized by the three major credit rating agencies and is reflected in our AAA credit rating.

IMPACT ON TAXPAYERS

This will be the twelfth year in a row that a majority of residential taxpayers will see a reduction, no change or an increase of less than $100 in their tax bill. In fact, in FY17, approximately 67% of residential taxpayers will see a reduction, no increase or an increase of less than $100. We have been able to consistently achieve these results while maintaining City and school services that citizens have come to expect and while providing a robust capital improvement program.

While the Department of Revenue (DOR) regulates the Board of Assessors under strict tax policy regulations, the City will continue its dialogue with the DOR in relation to the City Council Orders regarding possible legislative changes which enable the development of a more progressive tax policy. However, the DOR has not been open to changes to existing tax policy at the local level.

Given that any proposed changes of this magnitude to tax policy would be significant, it would be necessary to file statewide legislation to amend the current tax policy. 3

TABLE II

Change in the Residential Tax Bills*

Change in Tax Payment

Number of Parcels

Percentage Cumulative %

Less than $0