Frequently Asked Questions About the City's Finance
What is our ability to pay for more – why can’t we increase our budgets?
Because our ability to raise taxes is limited by Proposition 2 ½, there is little to no capacity to increase operating budgets beyond their current levels. Every year, we calculate the amount of taxes we are legally allowed to raise based on the year before: we add 2.5% to last year’s limit plus new growth.
If we don’t raise everything we are legally allowed to, that’s called “excess tax levy capacity”. Melrose has essentially no excess levy capacity. In Fiscal Year 2021, for example, we only had $765 excess levy capacity. This year, we had about $25,000 excess levy capacity. On average for the past five years, we only could have raised $12,000 more than we did. If we needed to raise more than that to meet our budgets, we would need to vote another override.
What about new growth? My home value has increased - doesn’t that help us pay for more?
New growth adds to our tax levy limit without needing an override. It is important to note that the increase in the market value of a property does not count towards growth. Only major changes like the number or type of units or substantial additions on a lot adds to new growth. Communities that see a lot of development also see a lot of new revenue on their tax rolls. Unfortunately, Melrose is over 95% residential, and there is not a lot of available land here that can be developed or redeveloped.
On average, Melrose has had just over $600,000 in new growth applied to our tax levy limit over the past 5 years. Other communities that have more room for industrial parks, malls, or large-scale housing developments see many times more the new growth than Melrose does. For example, last year, Wakefield had $1.7 million in new growth applied to their tax levy limit and has averaged $1.4 million in new growth over the past 5 years. Having a lot of new growth can substantially contribute to a community’s ability to pay for budgetary increases. Communities like Melrose that don’t have a significant amount of new growth have a much harder time increasing spending.
How much more tax revenue will Melrose have next year to fund the things we need?
Last year’s tax levy was just over $69 million. 2.5% of that is $1.7 million. If we estimate new growth conservatively at $500,000, that will give us approximately $2.2 million that we can add to our costs, across all departments, without an override. To give you an idea of how far that much money goes, our health insurance and Medicare line item is expected to grow next year by $746,000. This is not a discretionary cost – we must pay for this.
Doesn’t state educational aid help us pay for what we need for our schools?
Like every other community in Massachusetts, Melrose receives state educational aid (known as “Ch. 70 funds”) based on a complex formula that is set by statute. Ch. 70 aid does not generally grow over time to meet increased costs - it has averaged about $8.4 million over the past five years in Melrose.
Unfortunately, state funding does not come anywhere near the amount of money that we are required to spend (the “Foundation Budget”), or to the amount we actually spend (“Net School Spending”) to the Melrose Public Schools. In FY21, for example, we received $8.5 million in Ch. 70 state aid, the foundation budget was $43.6 million, of which Melrose had to fund at least $35.1 million, and we actually funded $42.9 million to run our school district that year. If you add up all costs for the schools paid for by the City, this represented nearly 65% of our entire City budget that year.
What about Free Cash? Why do we have it? And why can’t we use it to fund our operating budget?
“Free Cash” is a term that refers to the money that is left over at the end of a Fiscal Year. Having free cash is expected and routine, and there are many valid reasons why a city will generate it. The annual budget approved by the City Council each year is a good-faith estimate of revenues and expenses but it is never exact. Sometimes free cash is generated because revenue is greater than anticipated and sometimes because expenses are lower than budgeted. So for example, when the economy is strong, the City might get a lot of property owners pulling permits to build a pool or fence, or residents may buy newer cars that generate more vehicle excise taxes than expected. Or a long-term employee might leave and be replaced by someone at a lower salary, and those unspent salary funds would become free cash at the end of the year.
When you add it all up, free cash can be anywhere from zero (or even negative) to a substantial amount. The Massachusetts Department of Revenue recommends as a best practice that communities try to have a free cash balance of 3-5% of their operating budget. And, as the amount of free cash each year is variable, it is also best practice for municipalities to use free cash to fund one-time, non-recurring expenses such as capital, to avoid creating a structural deficit by basing an operating budget on funds that might not be available in the future.