We hear a lot of discussion about how Belmont funds the schools and town services, and how our taxes contribute to what Belmont can afford. This post will explain how Belmont generates revenue and what some of those frequently used terms mean. Financial literacy, municipality-style.
How does the Town get its money?
Okay, let’s start with the basics: how the Town gets money. Money to fund Belmont’s annual operating budget (transportation, education, emergency, recreation, DPW, etc.) comes overwhelmingly from property taxes. Each year, approximately 80% of our revenue comes from property taxes.
(This is high. By comparison, the average for a municipality in Massachusetts is 59%.)
Since property taxes are by far the most important driver of Belmont’s revenue, that is what we will focus on here.
What is a tax levy?
A tax levy is the total dollar amount of revenue that the Town is able to bring in from property taxes in order to fund the annual operating budget.
It is calculated by taking the budget and subtracting other sources of revenue the Town might have (such as any state aid, money received from fines and licenses, etc.). This is what Belmont needs to raise and, absent Proposition 2 ½, would be the amount of the tax levy. However, per Proposition 2 ½ (more on this below), the tax levy cannot be more than 2.5% greater than the previous year’s levy. So, if the amount needed is more than 2.5% greater, the tax levy is reduced.
The tax levy is then spread across residents according to their property’s assessed value and the residential tax rate.
How are residential tax rates determined?
The residential tax rate is determined by taking the tax levy and dividing it by the total assessed value of all property in town.
Tax Rate = Tax Levy / Total Assessed Value
Each year, homeowners pay taxes based on the assessed value of their property and the current tax rate. The assessed value of each property is determined annually and is generally commensurate with market value (you can learn more about the assessment process here).
Belmont’s current residential tax rate is 11.54. This means that for every $1,000 in assessed value, homeowners will pay $11.54 in taxes this year.
This is quite low. The average residential tax rate in MA for 2021 is 14.88.
For a median home worth $1,200,000, the annual taxes would be:
$1,200,000 (Assessed Property Value) x .01154 (Tax Rate) = $13,848 (Annual Taxes Due)
What is Proposition 2 ½?
This one is important.
In 1980, Massachusetts enacted a law known as Proposition 2 1⁄2. This law limits the amount of money a municipality can raise through property taxes. Specifically, it states that cities and towns:
Cannot issue a tax levy greater than 2.5% of the full and fair market value of all property in Town. This is known as a levy ceiling.
Cannot increase the total property tax levy by more than 2.5% over the prior year, unless the increase is approved by voters. This is known as a levy limit.
The effort to enact Proposition 2 1⁄2 was led by the anti-tax group, Citizens for Limited Taxation. It is similar to other "tax revolt" measures passed around the same time in other parts of the United States.
Because of Proposition 2 1⁄2, Belmont’s income will decline in real terms whenever inflation rises above 2.5%. In other words, if costs rise faster than 2.5% per year, the Town cannot raise taxes quickly enough to maintain services from the prior year.
This matters, as historically, inflation has been above 2.5% for a majority of the years since 1980 (25 out of the 42 years to date), thus resulting in a real decline in local tax rates and local spending ability.
“For towns like Belmont that rely mostly on residential property tax revenue, recurring revenue generally is unable to fully fund recurring expenses. This puts municipalities like Belmont in an untenable situation where periodic operating overrides are required to maintain a “level services” budget. Said another way, Belmont requires periodic overrides in order to simply maintain the same Town and School services that residents currently receive.”1
The intent of Proposition 2 1⁄2 was to give voters control over when and how tax levies should be increased through mechanisms like overrides and debt exclusions (more on those below). Rather than the result of town mismanagement, overrides and debt exclusions are the tools with which the law intended voters to determine when and for what purpose taxes should be levied.
And, if you happen to be more a video vs text person, checkout these explainer videos from the state on Prop 2 1⁄2.
What is a structural deficit?
A structural budget deficit exists when recurring expenses increase faster than recurring revenues on an ongoing basis.
“Given the constraints on revenue due to Proposition 2½, if key cost drivers increase more than 2.5% - 3% annually, towns will face structural budget deficits. Belmont has faced and continues to face many of these unavoidable cost drivers,” such as:
Growing K-12 enrollment (more students + growing expenses = less spending per student, larger class sizes, fewer advanced courses)
Historically under-funded maintenance (roads, sidewalks, buildings) that is now resulting in capital needs
Major costs going up (insurance rates, salaries, pension obligations, state-mandated services, etc.)
Belmont’s structural deficit means that, absent additional measures, the costs to run the town are increasing faster than our ability to pay.
Here is a simple analogy:
Let’s say you decide to rent an apartment. You find one that fits perfectly within your budget and move in. Over time, due to market rates, your rent increases, as does the cost of your utilities. During this same time, your salary continues to go up, but only half as quickly as your rent and utilities. Before too long, through no fault of your own or anyone else, that nice apartment is no longer affordable. If you wish to keep the same apartment with the same level of utilities, you need more income.
Similarly, if Belmont wishes to maintain the same level of services we have today, we need more tax revenue. Since costs are rising faster than 2.5% each year, we need our levy limit to increase by more than 2.5% each year. Otherwise, we have to cut — less road maintenance, decreased DPW service, fewer dollars per pupil, etc.
Where do overrides fit into all of this?
So, what can be done? This brings us to the next topic: overrides. Overrides are one of the ways voters can raise revenue to fund basic town services.
An override allows a town to increase its property tax levy beyond the 2.5% allowed in a given year. For an override to take effect, the Select Board places it on the ballot, and a majority of voters elect whether or not to pass it. Overrides can be for any amount so long as the total tax levy stays below the levy ceiling.
An override is a very helpful tool because once it is approved, the amount of the override plus the current tax levy becomes the new levy limit.
Overrides are typically used to address structural budget deficits and add money for ongoing, operational expenses. They are not used to fund large, one-off projects.
And what about debt exclusions?
Debt exclusions are used to fund large, one-time projects. These are projects that have a big cost, but do not impact our ongoing operating budget since once they are paid for, the cost goes away.
A debt exclusion is a temporary increase in property taxes, outside the limits of Proposition 2 ½ (meaning not subject to the levy limit or levy ceiling), to raise the funds necessary to pay for such projects. Debt exclusion funds may only be used for that specific project.
Examples of prior debt exclusions in Belmont include: Belmont High School, the Underwood Pool, and Fire Stations.
Past Overrides and Debt Exclusions in Belmont
A history of proposed overrides and debt exclusions, from 1987 through today:
https://www.belmont-ma.gov/sites/g/files/vyhlif6831/f/uploads/ftf2_override_recommendation_exec_summary_-_revised_-_2020-07-24.pdf