Real Estate Tax Setting Problem

There has been some growing public attention to a significant financial issue discussed at the finance subcommittee last week.   The city will release more information soon, but here is my view of what happened and why.

Each year, when the City Council votes on a tax levy increase, we have maintained a maximum of 2.5%. This is the limit set by law, but since in many past years we have not even reached that, we have what is called “excess capacity." This means we could raise it each year by more than 2.5%, using previous years’ savings, if we chose to. The administration has never proposed this, nor has it been part of any budget plan.

One thing that frustrates me is that the average tax bill always increases by more than 2.5%, despite the appropriation limit. There are legitimate reasons for this, including the shift between residential and commercial properties, variations in residential and commercial growth, the effects of new development, changes in average home values, and other factors. This year, it seemed a bit higher than usual, so I decided to investigate.

I quickly realized that the tax recap sheet submitted to the State by the city increased the levy by 3.15%, about $1.6 million more than the 2.5% we thought we had voted.   This is the same information used by the City Council for setting the tax rate.

The obvious question is: how did this happen? It is quite complicated, but to simplify, the city reports its total appropriations (over $400 million), lists all non-real estate tax revenues it receives for the year, and subtracts those amounts from the total appropriations. The remaining amount is what is allocated to real estate taxes. This is the final calculated number in the process. The state then certifies this number as being within the total levy for Proposition 2 ½.

In the spring, when we begin the budget process, one of the very first numbers we determine for revenue is the real estate tax. This is done by taking last year's total levy (excluding capital-related debt costs) and adding a 2.5% increase, along with our estimate of the taxes from new growth.   

After doing some research, I found a state report indicating that $1.6 million of our excess capacity was used in setting the levy this year, and I knew that was incorrect.  Again, this may be a nuance, but about a decade ago or more, when we had no excess capacity, the state would have rejected our recap sheet for exceeding the allowable levy increase, making the mistake obvious. However, since we had over $40 million of tax levy that we had not used, the state allowed the 3.15% increase and simply reduced our excess capacity to pay for it.  Essentially, use a portion of past years' savings.

Once this was clear, it was not too difficult to determine what happened. Over the last two years, the CFO's office has calculated the revenue figure for real estate taxes incorrectly at the start of the budget process. Both years, it was overstated by about $3 million. Last year, it didn't matter because other unanticipated revenue was available to cover the $3 million overestimate. This year, only about $1.5 million of additional revenue was available, and the $1.6 million shortfall was automatically offset by the excess levy capacity.

As soon as I realized what had happened, I notified the Mayor, as I knew he did not intend to raise the levy over 2.5%.   He began an immediate review of the process. The Mayor has convinced the State to allow us to re-certify the tax levy at the 2.5% level. Additional local revenue has been identified to replace the $1.6 million. As a result, the average tax bill will decrease by about $50.

Once I realized the mistake in the estimated revenue for real estate taxes this year, I recognized it was a recurring error from the previous year. The issue occurred because debt-exclusion taxation was double-counted. As a city councilor reviewing the budget, if I had looked more closely at the detailed year-over-year differences on the revenue estimate sheet, I could have identified the problem. So, although anyone could have theoretically seen it, everyone else, and I too, have relied on the CFO to provide the correct numbers for basic revenue. That is a reasonable expectation.  No one noticed this for two years.

We should expect our well-compensated CFO’s to avoid mistakes like this, or if they occur, to quickly notice them. When working with numbers, mistakes often stand out because they don't fit within the overall budget picture. Any experienced and capable municipal financial professional who manages the budget should see this. However, two years ago, the former CFO made a similar multi-million-dollar mistake when presenting the tax rate to the City Council. That problem was identified earlier in the process and corrected, but it remains equally unacceptable.  Although the same error as this year was made last year, it ultimately had no financial impact; once the year closed out, it was balanced despite the initial overestimate.

Politically, there is a small group of people who will enjoy blaming the Mayor for this. As I mentioned, it’s not reasonable to expect the Mayor personally to have found this error, and he was able to quickly resolve the issue. The area where the Mayor has responsibility—and I am confident he will handle it—is the need to thoroughly review the financial department processes, starting with the Chief Financial Officer.  I look forward to hearing about his approach.

The presentation to the Finance Subcommittee last week was the first notice of an issue that had only been known for a couple of days. The Mayor’s desire was to be immediately transparent with the City Council and the public, rather than wait for written reports. There will be a much more in-depth explanation of the problem and the solution at meetings over the next couple of weeks.  There will be plenty of written background material provided I am sure.

A Defense of Proposition 2 1/2

         For nearly 45 years, Proposition 2 1/2 has shaped the financial landscape of Massachusetts municipalities. Enacted in 1980, this landmark law restricts how much cities and towns can raise property taxes each year. Critics have often debated its merits, but the simple truth is this: Proposition 2 1/2 has proven highly effective. It has given residents predictable property tax bills, maintained local control, and promoted responsible budgeting. The enduring presence of this law, with no significant changes, reflects its success and the balanced approach it provides to municipal finance.

Boston Mayor Wu disagrees.  She recently suggested that it be repealed.  This law has often been seen as a political third rail, and few notable politicians have suggested tinkering with it.  Wu, however, has nothing to worry about, as she runs unopposed, and her suggestion aligns with her high-tax philosophy.  I doubt her position will gain much traction, and frankly, it should not.  But it is still worth talking about.

At the beginning, let’s recognize the obvious: the 2.5 percent cap is arbitrary. There’s nothing special about the number itself; economists or actuaries didn’t set it. But sometimes, policies succeed not because they are perfectly crafted, but because they strike a practical balance. Whether by luck or foresight, the 2.5 percent cap has kept property tax growth in check, ensuring communities can fund essential services without overburdening homeowners. The cap has introduced at least some discipline into municipal budgeting.

A common critique is that the cap doesn’t keep up with inflation. While this point deserves consideration, it overlooks several essential realities. Property taxes are not the only source of municipal revenue in Massachusetts. Cities and towns benefit from state aid, local fees, and other income streams, which help cushion the impact of rising costs. Moreover, the 2.5 percent limit applies only to the prior year’s levy. Revenue from new growth, such as new homes, businesses, and improvements, is not capped. This means communities almost always expand their tax base by well more than 2.5% annually, often by 4 to 5% in reality.

Wu and sometimes others suggest raising, eliminating, or tying the cap to inflation. While these ideas may seem reasonable at first glance, they come with serious risks. It is almost certain that any adjustment would be upward rather than downward. Sudden increases in property taxes would disproportionately affect those who can least afford it, namely seniors, working families, and residents on fixed incomes. We know this because real estate taxes are inherently regressive; they do not consider a taxpayer’s ability to pay. Removing or weakening the cap could cause unpredictable spikes in tax bills, jeopardizing the financial stability of households across the Commonwealth.

It’s easy to forget that not everyone can absorb higher taxes. For many, their home is not just a place to live, it is also their most significant financial asset. Proposition 2 1/2 protects vulnerable residents from being priced out of their communities by runaway property tax increases. By keeping growth predictable, the law helps ensure a wide variety of residents can continue to make Massachusetts home.

It is important to remember, Proposition 2 1/2 is not a straitjacket. The law allows for voter-approved overrides, giving communities the power to increase taxes when necessary and justified. This safeguard ensures that local priorities are respected and that residents have a direct say in major fiscal decisions. Overrides are not granted lightly, nor should they be.  They require clear public support and open debate, providing both flexibility and accountability in municipal finance.

After nearly 45 years, Proposition 2 1/2 remains in effect because it works. The 2.5 percent cap may be arbitrary, but its effectiveness is undeniable. It promotes prudent budgeting, safeguards vulnerable residents, and honors the voters' choice. While no policy is flawless, the alternatives carry much greater risks. Proposition 2 1/2 has, in many ways, established a stable basis for real estate taxation. It remains a practical law that should not be altered to satisfy the political desires of Mayor Wu and others. Any modifications should be carefully evaluated before they are enacted.

 

Myths of a Would Be Mayor

I agree with Geoff Epstein, the keyboard warrior and fledgling mayoral candidate, on a single point: financial support for public education is critical to a community's health. However, a budget is only as impactful as the precision with which it is deployed.  Epstein disagrees; he believes we should throw all our money and then some at the problem without considering the results. He has advocated raising taxes as high as possible and suggests people who cannot afford it should take out home equity loans.

His rambling blog posts constantly try to argue that the Framingham mayor and city council have not been fiscally supportive of the schools. He discounts all seven budgets we have adopted as a city provide the school department with the amount requested.

Epstein loves twisting facts like pretzels to make his points.  One of his favorites is to talk about what he calls the “local contribution.”   To get to that number, he takes the state aid to education revenue we receive and subtracts that from the total school budget and gets to his number.   He never acknowledged that the education aid figure is part of the local contribution.  So, if state aid goes up, making a larger portion of the budget, he says the local contribution goes down, indicating a lack of support in his mind.  He ignores the schools are funded by their own budget, plus over $40M from other aspects of the city budget.

He should examine “net school spending” to see how well Framingham supports the school department. This state-generated figure shows the total municipal spending on education, including the items not directly in the school budget, such as health insurance and retirement. The state requires every municipality to spend a minimum amount in net school spending. In FY 2024, Framingham was REQUIRED to spend $159M.  We spent $201M. Yet Epstein says we do not adequately support education.

I looked at other municipalities and their net school spending to test his theories.  I looked at annual increases in some area towns, the communities along Route 9 between Worcester and Boston, and some similar cities to Framingham.   I tried to get a good mixed bag.  The results do not show what Epstein espouses at all.  It poses the question why do we spend so much and get so little?

The average annual increase in Net School Spending in the selected communities over the last five years:

Community	5 yr Avg Increase
Natick	6.14%
Framingham	5.76%
Quincy	5.43%
Shrewsbury	5.14%
Westborough	5.11%
Holliston	4.44%
Brookline	4.29%
Newton	4.25%
Wayland	4.21%
Braintree	4.21%
Weymouth	3.97%
Wellesley	3.83%
Sudbury	3.66%
Marlborough	2.92%

Despite Epstein’s criticisms, we are second among 14 diverse communities in spending increases over the last five years.

Epstein does not want to face the problems; he wants to throw money at them. The data shows that we spend the money—plenty of money—we need to get results. Compared to other communities and the state as a whole, our achievement results have dropped substantially over the last decade.  

Public sector resources are not unlimited. We must use our resources well to provide the excellent services our children and residents deserve while remaining affordable and accessible. To do this, we must operate efficiently and intelligently.

He delineates all the problems in our education system, and his solution is predictable: more money and higher taxes. He does not question why the Superintendent received a six-year contract extension after overseeing this downturn. Instead, he wants to offer more money despite already providing more than most of our neighbors, which does not seem to work.

If he emerges from behind the keyboard and runs for mayor, as he threatens, hold on to your wallets and let him know that his solutions are too expensive and lack substance.  Untwist the facts, and the picture is much different than he wants us to believe.