When the city of Lakeway increased its fund balance this year from 25 percent to 30 percent of its fiscal year 2018-19 annual operating expenses, Lakeway City Manager Steve Jones said there was a specific reason behind the move.
The increase amounts to roughly $700,000 extra in the fund balance, which equates to unrestricted cash the city keeps in reserve. Jones said in light of recent property tax caps proposed by Texas Gov. Greg Abbott, having that extra amount of money seems like a prudent strategy.
“My understanding is the [Texas] government wants to put a 2.5 percent limit on [tax]revenue, and if that’s the case it could be devastating,” Jones said, adding while it is difficult to predict where the state Legislature will fall on Abbott’s proposal, city governments should take it seriously.
The city of Lakeway is not the only local government body making budgetary considerations in the wake of a recently ramped-up tax cap proposal from Abbott. Throughout the Lake Travis-Westlake area city officials have had to address potential drops in revenue and act or consider action, be it through increasing savings or increasing base tax rates.
Advocating for cities
Abbott’s most recent iteration of property tax reform policy establishes a property tax revenue growth cap of 2.5 percent per year. As the law stands now cities can adjust ad valorem tax rates that raise revenue up to 8 percent from the previous year.
Abbott’s proposal contains an exemption for new growth, which includes developments or improvements to existing property, exempt property returning to the rolls and new construction. Some exceptions to the cap are also factored into the proposal, such as compensation for emergency workers, law-enforcement officers and teachers.
There is precedent for this kind of policy, and Abbott’s proposal cites two caps implemented in Massachusetts and New Jersey as examples of successful property tax reform.
But on the whole many city officials in Texas and statewide city advocate groups such as the Texas Municipal League decry Abbott’s proposal as unnecessarily crippling.
According to its website the TML has more than 16,000 members consisting of mayors, council members, city managers, city attorneys and city department heads spread throughout more than 1,150 Texas cities. TML Executive Director Bennett Sandlin said it is important for groups such as his to advocate against proposed state laws that diminish city revenue streams.
“Of all the city concerns we work on behalf of our members for, this is probably the No. 1 issue,” Sandlin said.
Sandlin said the 2.5 percent cap is even more worrisome for city coffers than the previously proposed 4 percent cap for large cities in Senate Bill 2 that made the rounds but ultimately did not pass in the 2017 state Legislature.
Citing one of TML’s clients, Sandlin said the city of Rockport had a third of its property tax base wiped out by Hurricane Harvey. Abbott’s proposed cap would have been very destructive for Rockport in the wake of that disaster, he said.
Dealing with the cap
For 2018-19, West Lake Hills City Council ended up raising the city’s tax rate 7.9 percent. One of the main reasons for this is the looming threat of the cap, City Administrator Robert Wood said. He explained that compared with larger cities the West Lake Hills tax rate is low enough that a 2.5 percent cap could force some difficult decisions from City Council.
“[City Council] raised the tax rate about as much as they could… because they felt like they needed to prepare for the future because of this possibility of the rollback rate being dropped from 8 percent to 2.5 percent,” Wood said. “What you’ll see is City Council kept [the tax rate]pretty steady, and they’ve pretty much kept the same number except for the last couple of years, and this tax cap proposal is the main reason why.”
West Lake Hills Mayor Linda Anthony said even though the city’s tax rate raised this year, it is important to keep the numbers in perspective.
Raising to 7.9 percent may sound like a lot, but West Lake Hills is starting from such a low tax rate that even this year, the rate of $0.07 cents [per $100 valuation]is still one of the lowest in the state, Anthony said.
In Bee Cave the city draws substantially more money from sales taxes than property taxes, but that does not mean it is immune to Abbott’s proposal. City Manager Clint Garza said although the property tax rate in Bee Cave is at $0.02 per $100 valuation, the proposed cap still factors into revenue. Garza said revenue from property taxes from this year to last year, factoring out any new growth, was up about 16.17 percent.
“So I think we estimated $446,000 is what we would bring in this year,” Garza said. “FY 2017-18 would have been estimated at $384,000, so if we were limited to 2.5 percent of that $384,000, then we would only get $394,000 in revenue and not $446,000.”
That amounts to a difference of more than $50,000, which could have an impact on some budgetary considerations, he said.
Other budgetary considerations
Sandlin said most citizens do not realize about 60-70 percent of the average city’s budget goes to considerations related to police and fire departments. So even with the exemptions in Abbott’s most recent reform proposal for compensation for emergency responders, the cap potentially diminishes what can be collected and allocated for needed equipment.
In relation to essential city employee salaries and equipment Jones echoed Sandlin’s sentiment. Were it not for the state’s proposed cap Jones said he doesn’t think Lakeway would have raised its reserves by 5 percent.
“We’ve had this 25 percent level for a decade, and it has worked very well,” he said. “The only reason we went to 30 percent is we were afraid we could be hamstrung by this 2.5 percent cap, and then something could come up, [like needing to]hire police or replace equipment. Cars can get in accidents. You never know what might come up, and we would need money for it.”
Lakeway has had to put more money in its savings account as part of a strategy that otherwise might not have been necessary, Jones said.
“And that’s kind of the point with the state. They’re doing this to try to keep taxes down, but they’re forcing us to raise taxes unnecessarily,” he said. “I don’t think they’ve thought that through. I don’t think that’s their intention, but it’s certainly the outcome.”
Skyrocketing home valuations
Bee Cave resident and homeowner Andrea Willott says she is fine with the cap as long as the state can find the money somewhere for needed improvements and services.
One of the reasons she and her husband moved to Bee Cave is the low property taxes, she said.
“I feel that this cap would certainly help younger homeowners who are trying to maintain their expenses,” Willott said. “We’re wealthy enough to where it wouldn’t bother us, but I’m looking at everybody.”
In his Oct. 29 proposal framed around “improving student outcomes and maintaining affordability,” Abbott states his plan would cap property tax revenue growth year-to-year at 2.5 percent for cities, counties and school districts. Impacted taxpayers would have a right to vote on the matter if entities seek to exceed the allowable rate, according to the plan.
The proposal points out in Texas home valuations have increased faster than incomes, and property taxes are rising faster than the economy.
“People are being taxed out of their homes,” the proposal states. “Gentrification and an overall housing affordability crisis are significant problems across the state.”
The proposal cites several instances of taxing entities statewide that have risen beyond household incomes in a 10-year period from 2005-15, including county tax levies that have increased by more than 82 percent and city tax levies that have increased by almost 71 percent.
But according to Sandlin, the proposed tax cap on cities would have virtually no effect on the average homeowner. When factoring for what will dramatically change a property owner’s yearly tax bill, Sandlin said school districts make up the lion’s share.
While school districts account for between 55-60 percent of the average homeowner’s tax bill, cities only comprise an average of 16 percent, Sandlin said. Essentially cities and counties are being the most vocal about the tax cap because they have the most to lose, he said.
Johnny Hill, Lake Travis ISD assistant superintendent for business, financial and auxiliary Services said while he applauds Abbott for wanting to address property tax issues, he is concerned right now the state’s proposed policy is still vague, and he wishes the governor would bring more stakeholders into the discussion.
Hill said there are implications for LTISD, as Abbott’s cap does include school districts, but it is much more complicated and there are more revenue guarantees for school districts. For cities and counties, the math is potentially much more detrimental.
Hill said his concerns for school districts are warranted, but cities and counties will likely have to brace for a harder hit.
“They’re going to be cut on what they can actually bring into their coffers,” Hill said, regarding if the tax cap passes. “And for [cities and counties], what’s scary is they may have to go up more on the tax rate to compensate for that.”