The House Ways and Means version of the Municipal Relief Act that we will take up on Monday includes provisions changing how the overlay account is handled. This measure has turned out to be controversial — opposed by Citizens for Limited Taxation and much discussed on Blue Mass Group. Click here for the House Ways and Means response to CLT. All three gubernatorial candidates have lined up against it.
Background — the overlay
As explained in the glossary of the state agency that oversees local finances, the Division of Local Services, the overlay reserve is:
An account established annually to fund anticipated property tax abatements, exemptions and uncollected taxes in that year. The overlay reserve is not established by the normal appropriation process, but rather is raised on the tax rate recapitulation sheet.
The amount of the overlay reserve is determined by the board of assessors, not by any other municipal officer. The tax recapitulation sheet is the key municipal financial document which summarizes the assessors’ computation of the tax rate. They add up all the money that the town has to spend in the coming year (mostly appropriated amounts), back out money coming from other sources (state aid, fees, etc.) and figure out how much the town will need to raise from property taxes. They add the overlay to that and set a tax rate which, based on the property values in the town, will raise the required amount. Chapter 5 of the Assessment Administration Handbook explains the tax rate setting process in more depth.
The overlay amount reflects the judgment of the assessors as to how much they are going to lose in abatements, exemptions and uncollected taxes. The overlay amount will vary from community to community and depend on economic conditions, but will typically approximate 1 or 2% of taxes raised. It is subject to review by the Division of Local Services for “reasonability”.
As the various deadlines for abatements and exemptions pass and as any appeals are exhausted, the exact amount of abatements, exemptions and uncollected taxes for a given fiscal year become known. Pursuant to a defined process, the assessors certify the amount of any overlay surplus to the other municipal officers and transfer it to free cash. This procedure is defined by statute and explained further by guidance from DLS; see also this guidance.
Background — the overlay and Proposition 2.5
Part of the tax rate setting process is to assure that the amount to be raised by property taxes is under the limit established by Proposition 2.5. Each year, in the budgeting process, municipalities work with their assessors to assure that their total appropriations will not lead to a violation of Proposition 2.5 which would make the assessors unable to set the tax rate.
The overlay amount has been historically understood to sit below the levy limit — in other words, it looks like an expense and competes with other expenses. The rule that overlay surpluses, once known, become available for general expenditure is consistent with this positioning.
The proposed changes
The main idea of the overlay changes is to move the overlay amount above the levy limit. Consistent with this change, overlay surpluses would no longer revert to availability for general spending (“free cash”). When found to be surplus, rather than reverting for general spending, overlay amounts for a given fiscal year would be available for application against abatements for other fiscal years.
This is a perfectly logical change to make and probably amounts to a better system. Assessors, would, in practice still need to account for overlays separately for each fiscal year, but they would not need to formally segregate the funds so that if in one year they had under-reserved, they could cover the deficit from years in which they had over-reserved. That flexiblity would allow them to reserve somewhat less.
What makes it controversial is that the amount raised by taxation would go up permanently — instead of sitting below the levy limit, the overlay would now be an add-on to it. So taxes would go up by the amount of the overlay and would remain elevated by that amount and that amount would be subject to annual inflation.
As a Selectman, I was more than once willing to put tax increases on the ballot and to campaign for them. I did not resent the process created by Proposition 2.5. I think it increases accountability and empowers citizens to take responsibility for municipal spending. I would support this law change if it were subject to a vote of the people consistent with the spirit of Proposition 2.5. As written right now, there is no such provision for a local electoral vote and I expect to vote against the change. I will make my final decision after listening to debate on the floor.