EagleTribune.com, North Andover, MA

December 15, 2013

Methuen council eyes cash reserves to limit tax hike

By Brian Messenger
bmessenger@eagletribune.com

---- — METHUEN — After a five-day delay, the City Council is expected to set property tax rates tomorrow night for residents and business owners.

Mayor Stephen Zanni has put forth a proposal to raise the average single-family homeowner’s annual tax bill by $136. But some councilors appear willing to use cash reserves to defray that increase.

The mayor’s plan already requires the use of $255,000 in free cash to cover operating expenses. At a meeting Wednesday, three councilors expressed support for pulling additional money from the stabilization fund, which has been bolstered this year by local meals tax revenue.

A $200,000 transfer from the stabilization fund into the operating budget would reduce the average annual residential tax increase from $136 to $125. Similarly, a $400,000 transfer would decrease the average tax hike to $114.

But relying on reserves comes with risk. Local officials have been instructed by credit agencies to build up reserves to improve the city’s bond rating, which impacts the cost of borrowing.

City Auditor Thomas Kelly has also built a financing model for the Methuen High School renovation that, beginning in two years, relies heavily on the stabilization fund.

In late 2011, the previous council used $1.4 million in free cash and stabilization money to limit tax increases. Kelly told The Eagle-Tribune last week that he is worried the practice is becoming an annual occurrence. “They’re setting precedent,” said Kelly. “What’s going to stop the next council from doing it?”

The city has $2,156,819 in cash reserves, with an additional $550,000 expected by year’s end. The reserves are made up of the stabilization fund and general fund, which is also often referred to as free cash.

There is $901,146 in the stabilization fund, which will continue to grow this year with additional meals tax revenue. The city already collected $189,000 from the local meals tax during the first quarter and anticipates $550,000 more by the close of the fiscal year, bringing the stabilization fund to $1.5 million. The city also has $1,255,673 in free cash, Kelly said.

Kelly said the council can transfer money from the stabilization fund without the mayor’s approval. By contrast, opening up the operating budget to make cuts will require Zanni’s approval, Kelly said.

At the meeting Wednesday, Councilor Jeanne Pappalardo was the first councilor to suggest taking $200,000 from the stabilization fund to defray tax increases on residents and businesses.

Pappalardo also proposed cutting $100,000 each from the police and fire overtime budgets. In response, Zanni warned that such a move could put great strain on the departments and possibly lead to the closure of a fire station.

Five and a half months into the fiscal year, the police department has spent $390,000 out of $806,000 budgeted for overtime. The fire department has already spent $729,000 out of its $1.1 million overtime budget.

Rather than cut the budget, Zanni said councilors would be better off drawing from the stabilization fund.

City Council Chairman Sean Fountain agreed, stating that he would rather see $400,000 drawn from the stabilization fund before cutting public safety overtime. “Those departments need the staffing,” Fountain said.

Councilor Jennifer Kannan also expressed support for tapping into the stabilization fund. When the budget was passed in June, Kannan said Zanni told councilors the average residential increase would be $100 — not $136.

“We just can’t pass that on to the residents,” said Kannan. “That’s just not fair. We put (money in the stabilization fund) for an event like this.”

A request by the council’s Finance Committee last month to potentially reduce the average residential tax increase to $100 was met with a proposal by Zanni to cut $705,500, or 3.7 percent, from each department. Such cuts will result in the layoff of seven firefighters, eight police patrolmen and nine public works laborers, according to the mayor.

The council approved the local meals tax last year. Patrons of Methuen restaurants, eateries and coffee shops now pay a .75 percent local surcharge in addition to a pre-existing 6.25 percent state sales tax on meals.

The average single-family homeowner in Methuen already pays $3,666 annually in property taxes, an increase of $297 over the last two years. The average commercial property owner now pays $9,380 annually in property taxes.

The city currently taxes $14.40 for every $1,000 of assessed value on residential properties and $24.12 per $1,000 on commercial properties. In all, 84 percent of Methuen’s tax base comes from residential properties.

In 2013, the average single-family home in Methuen was assessed at $254,170. Under the city’s latest property assessments, the average single-family home value rose .6 percent to $255,624, an increase of $1,454.

The council was expected to set tax rates last Wednesday night, but an unintentional vote by Councilor Joyce Campagnone cut the meeting short. A motion to adjust the $145 million operating budget — which was supposed to be a precursor to a second vote on tax rates — was defeated, 5-4. After the tally, Campagnone said she mistakenly voted in the majority and will propose a motion to reconsider her decision on Monday night.

Campagnone’s mistake will leave the city little time to mail tax bills by Jan. 1. If the city fails to mail out property tax bills by that date, Kelly said residents and business owners will have until May 1 before they face interest penalties for failure to pay taxes, raising the prospect of a serious cash flow problem at City Hall over the first four months of 2014.

But if tomorrow the operating budget is adjusted and new tax rates are set, Kelly said he will move quickly to send out the required financial information to the state Department of Revenue (DOR).

Kelly said DOR officials will then likely certify the city’s financials sometime around Christmas, leaving the city with less than a week to send out tax bills before the Jan. 1 deadline.