The votes necessary to seek approval from the Massachusetts Department of Revenue of the tax rate for FY2019

To The Honorable, the City Council:

The establishment of the FY19 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 FY19 property tax levy, property values, and other supporting information.

OVERVIEW

I am pleased to inform you that the actual FY19 property tax levy is $409,809,861. This is an increase of $20,729,502 or 5.3% from FY18 and reflects the City Council goal to “Ensure the City’s Budget allocates resources responsibly and responsively.” This increase is lower than the estimated increase projected in May 2018, and what was presented to the rating agencies in February. The FY19 Budget adopted by the City Council in May 2018 projected a property tax levy increase of $23 million, or 5.91%, to $412,085,225 in order to fund operating and capital expenditures.

The 5.3% property tax levy increase is above the FY18 increase of 4.4% and is the highest since FY13, and above the five-year annual average (FY15-FY19) increase of 4.52%. With approval of these recommendations, the ten-year annual average (FY10-FY19) increase will be 4.86%.

The FY19 Adopted Operating Budget increased by 4.22% over the FY18 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 resources to support the City Council priority to create and preserve affordable housing within the City with the addition of a City Manager’s Housing Liaison and an Inclusionary Housing Planner as well as $3.5 million, funded from building permits, which is an increase from $2.8 million in FY18.

This in addition to the $10.2 million appropriated by the City Council from FY19 Community Preservation Funds as part of the $24.1 million identified for City initiatives around housing and homelessness in the FY19 Budget.

The FY19 Budget also includes funding for a winter warming center to serve our homeless population, an additional $1.1 million in our comprehensive early childhood system, increased investment citywide for the Science, Technology, Engineering, Arts and Mathematics (STEAM) Initiative, and a 5.4% or $8.5 million property tax increase in School Funding. The FY19 Adopted Budget also includes 25 new positions to provide support for the growth in programs throughout the City.

Also, the FY19 Police Budget includes funding to create the “Family and Social Justice Unit” which seeks to formalize its social justice approach to policing and increase its capacity to serve and protect the most vulnerable populations: juveniles, homeless, those suffering from mental illness and substance 2

abuse, seniors in need of dependent care, and survivors of domestic violence and/or sexual assault. The budget also includes funding the creation for the “Office of Procedural Justice.”

In addition, the FY19 Budget supported Capital Improvements which included to support cycle five of the Participatory Budget program, supporting information technology initiatives, and our multi-year Municipal Facilities Implementation plan.

Based on a property tax levy of $409.8 million, the FY19 residential tax rate will be $5.94 per thousand dollars of value, subject to Department of Revenue approval. This is a decrease of $0.35, or -5.6% from FY18. The commercial tax rate will be $13.71, which is a decrease of $1.10, or -7.4% from FY18. This is the sixth consecutive year that the City has reduced tax rates for both residential and commercial taxpayers, which mitigates the impact of 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 FY18 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 $2,750,000 from the original projected property tax levy for FY19. This is due to the use of increased non-property tax revenues based on FY18 actuals, which include $1,000,000 in Investment Income, $750,000 in Room Occupancy Excise Taxes, $1,000,000 from increases to building permit revenues, $150,000 in Payment In Lieu of Taxes, and ($150,000) in Penalties and Interest. The final Cherry Sheet had a net negative impact of $408,786 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

$412,085,225

Net Cherry Sheet

$408,786

Non-Property Tax Revenue

$-2,750,000

Overlay Adjustment

$65,850

Actual Property Tax Levy

$409,809,861

This recommendation includes the use of $11.0 million in reserve accounts to lower the property tax levy: $2.0 million from overlay surplus and $9 million in Free Cash. The certified Free Cash amount of $231,744,243 an increase of $20.7 million or 9.78% over the previous year’s certification, is inflated by $9.0 million in unappropriated mitigation receipts. Per 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 $222,775,488. 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 $3.5 million from the City Debt Stabilization Fund to offset increases in debt service costs that would otherwise have been funded from property taxes. This 3

amount replenishes the amount recommend for use in FY19 from the Debt Stabilization. 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. It is also important to recognize that a healthy balance of development between residential and commercial be continued to ensure homeowner’s real estate taxes remain affordable.

The following pages provide additional details.