By John Nichols, Place 4 Councilmember
The City of College Station has proposed a property tax rate increase as part of its Fiscal Year 2015 budget plan. I’ve been asked by several citizens to provide further background on this proposal and the rationale for such an increase. This blog reflects only this council member’s analysis and views.
In College Station, property taxes ─ after covering debt service ─ account for about 27 percent of our general revenue income, which will total about $61.9 million this coming fiscal year. General revenue provides the funds for public safety (police, fire, and EMS), street maintenance and reconstruction, parks, library and other general administration. Sales tax revenue is expected to contribute 41 percent of general revenue in the coming year. Other sources are franchise fees, fines, licenses, transfers from utilities, etc.
The FY 2014 property tax rate is $0.425958 per $100 of assessed valuation. The proposed rate is $0.4525, an increase of about 2.6 cents that is expected to generate about $1.6 million in new revenue to the general fund. For the owner of a $200,000 home, this would mean an increase of about $53 per year, or $4.42 per month.
Keeping up with growth, inflation
Several main drivers led to the proposed tax rate increase. The city endeavored to maintain or reduce the property tax rate during the recent recessionary period. Since 2010, the effective tax rate has been adopted each year, reducing it from $0.4394 in FY 2010 to $0.425958 in FY 2014. The effective tax rate is the rate needed to raise the same amount of revenue from the same properties in the current year compared to the past year.
New property brought onto the tax rolls helps account for the increase in city expenditures associated with growth. While it’s recognized that appraisal value for existing properties increased enough to just offset the reduction to the effective tax rate, no consideration is given to inflation in the cost of doing city business during this time.
To better understand this trend, I’ve analyzed the property tax income to our general fund since 2010, the last time the tax rate was held constant. Since then, total property tax revenues to the city have increased by 7.75 percent — from $24.523 million to $26.423 million — including revenue from new and existing properties.
During this time, the cost of police cars, fire equipment, street paving materials, and everything else the city purchases has increased moderately. Inflation has eaten away the purchasing power by more than 7 percent in that time period.
In addition, our August population estimate of 101,648 marks an 8.3 percent increase since 2010. The addition of almost 8,000 people has increased demands on city services ─ from public safety to streets and traffic management to parks ─ all of which are funded by the general fund.
When evaluating inflation and population growth together, the net result is that the purchasing power per capita of the property tax revenue stream has declined by 5.3 percent.
Utility and sales tax revenue
The most important change in general revenue income over the past several years is the decline of about $3 million per year in transfers from our utility enterprise funds, primarily the electric utility and our water and wastewater utilities. This transfer is common in most cities that operate their own utility enterprises. The council made a strategic decision to reduce this transfer amount from 10 percent of gross revenue to a formula-based calculation that reflects a franchise fee assessment comparable to that charged to a private utility entity.
This was implemented in stages over three years and was done for good reason. The policy change has allowed the city to avoid electric rate increases for several years. However, the loss of $3 million per year to the general revenue fund ─ nearly 5 percent of the total fund ─ is obvious and has had a significant impact on our ability to address the pressing needs of a rapidly growing city.
Sales tax growth is often cited as a good offset to the city’s income from property taxes. Sales taxes have grown substantially and are a blessing to the community. They are an ever increasing share of our general revenue budget, but they can’t be counted on to replace the declining purchasing power of our property taxes or the loss of $3 million per year from utility fund transfers, and at the same time provide for growing demands on city services. Sales tax income streams are likely to be more volatile than property tax income, so the risk factor also needs to be considered if the portfolio of income sources gets too far out of balance.
Addressing real needs
Before I joined the council, College Station’s leaders had to make many tough choices during the recession. Although the city was growing modestly at that time, tax revenues were uncertain at best. From 2009 to 2014, $7.6 million was removed from the overall budget and the city’s workforce was reduced by 63 positions. At the same time, 48 public safety positions were added.
We’re now past that most difficult period, and the proposed budget addresses needs arising from our growth and begins to reinvest in our infrastructure. The budget calls for six new positions in the Police Department, five in the Fire Department, additional code enforcement to address neighborhood integrity needs, and funding to attract and retain great employees.
We also have to address the effects of deferred expenditures that accrued during the recession. City staff recently completed a study that identified more than $3 million in deferred facility maintenance. The new budget includes the first year of a 10-year plan to address those needs at the cost of $350,000 this year. We’re also addressing deferred maintenance with a significant one-time investment in our neighborhood parks and playgrounds.
In addition, street repair and traffic and congestion management are receiving a significant boost in the proposed budget. Over the next three years, the city will be making a major investment in the replacement of our aging traffic light control system and the introduction of an Intelligent Traffic Management System, which will provide real-time monitoring of intersections during peak rush hour periods.
Tax rate still among state’s lowest
The proposed property tax increase will allow the city to recover from cuts during the recession, address growth, regain purchasing power in our general revenue stream, and partially replace the reduction incurred when transfers from the utility funds were reduced.
It’s also important to note that, even with the proposed increase, College Station’s property tax rate will remain among the lowest in Texas.
Budgets and tax rates are complicated topics to cover in the limited space afforded in a blog. These links provide additional details about the FY2015 budget:
- FY2015 Proposed Budget
- Blog: Notes from budget workshop No. 1
- Blog: Notes from budget workshop No. 2
- Blog: Notes from budget workshop No. 3
Public hearing on Thursday
I welcome your inquiries and concerns, either in response to this blog, by email at jnichols@cstx.gov or by phone at 979-764-3541.
You also have an opportunity to provide feedback to the entire city council on Thursday, when the final public hearing on the proposed tax rate and budget will be part of our regular meeting, which is set for 7 p.m. at city hall.
About the author
John Nichols was elected to Place 4 on the College Station City Council seat in 2012. After retiring from Texas A&M in 2013, he was named professor emeritus in the Department of Agricultural Economics. Nichols is a member of the Business and Community Advisory Council for the Dallas Federal Reserve Bank and serves as a senior fellow at the Norman Borlaug Institute for International Agriculture.
Good information, but it isn’t satisfying given that if this passes there is no recourse for property owners.
Comparing tax-based services to cell phone service or recognizing that we have a lower-than-average tax rate is nice to cool hotheads, but is of little value in explaining tax increases. Are such comparison supposed to satisfy us right up until we reach the average tax rate, or until we subjectively feel that our community services are on par with cell phone service? Nobody wants to pay more for a loaf of bread just because the gallon of milk next to it costs more. It’s a false comparison meant to appease us using our subjective sense of what something is worth.
College Station is supposedly one of the most educated cities. Although we’re not all city planners and economists, trust us that we can understand more details and don’t patronize with colorful but shallow infographics.
Perhaps continue this blog by giving more information about how population growth effects tax rate. Explain why an increasing population doesn’t generate tax revenue commensurate with that growth. It is certainly reasonable that new services and infrastructure initially costs more than the maintenance of existing services, but why can’t we expect an eventual decrease in future tax rates (in a few years perhaps) after new infrastructure is in place and more property owners are paying into the system? That would never happen, but why not if all this is implemented properly?
Some services certainly increase as the population increases, but all services should not necessarily scale up proportionally, especially if they are implemented most efficiently.
Perhaps comment on permanent vs student population fluctuations.
These are the least of what you could summarize for us, but please give us more.
Thank you for your comments!
Councilmember Nichols replies:
Your main question is: Why is an increase in the property tax rate being proposed? I agree that the infographic does not directly answer this question. It was intended to provide a brief overview of a few of the key points and some comparative background. Also, I agree that growth brings new property onto the tax rolls and additional sales taxes, which certainly help to meet growing needs and plan for the future.
The answer to your main question is not explained directly in the infographic but is found in the text of my blog where I discuss two different things that have reduced the general fund revenue stream significantly. First is the impact of adopting the effective tax rate over consecutive years. Second is the changes made in the transfer of funds from our utility enterprises into the general fund.
Since 2010, the council has adopted the effective tax rate each year, which means the property tax rate was adjusted to reflect the change in appraisal values for properties that were on the tax roll the previous year. So, when appraisal values went up for existing properties, the tax rate was reduced. This was done each year from 2011 through 2014, resulting in an overall reduction in the rate. The problem with this is that no consideration is given to the effects of inflation on the city’s purchasing power. As I noted, when adjusted for moderate inflation and population growth, the real value of the property tax revenue per capita has declined by more than five percent since 2010.
The other main driver is the reduction of the transfer amount from our utility enterprises, which is sometimes referred to as a return on investment to the city for owning and operating these activities. This reduction in transfers now amounts to about $3 million per year, which represents five percent of the entire general revenue fund.
When you see the effects of these two factors, it becomes apparent what is behind the proposed tax rate increase. If adopted, it will generate about $1.6 million in new revenue per year for the general fund. Increasing revenues from growth, including new development and greater sales taxes, is positive for the city. But we cannot expect revenue growth alone to pay for the impacts of that growth and at the same time replace significant losses in revenue from decisions that were made regarding adoption of the effective tax rate during the recession and reduction of return on investment from our utility enterprises.
Regarding your point about the permanent and student population fluctuations, I’m not sure it makes much difference. Most students live in the community for at least nine months a year, and many stay through the summer. While different population sub-groups probably have different needs for city services, we all use the streets and parks and depend on public safety to the same degree. Demographic data for College Station indicates that we are seeing growth in both students and permanent residents, including more retired citizens. For more detail on the demographic patterns, you can find them in the 2013 update of the Existing Conditions Appendix of the Comprehensive Plan. To read the report, click here.
I hope my additional comments help to better explain what is behind the proposed tax rate increase. I welcome continued discussion of this and other topics related to our proposed budget and property tax rate.