As Baldwin City finance director Brad Smith prepared that city’s 2018 budget, he was under a city council direction to limit any tax increase to 1 mill, which was a near match to the limit the state’s tax lid legislation placed on any mill levy hike.
He prepared the city’s 2018 budget exactly as he had in the past, Smith said. His considerations were of the needs and responsibilities of the city and took no heed of the tax lid. The state’s tax lid legislation, which became effective this year, limits the spending increases of local governments to the rate of inflation as measured by the consumer price index, plus added valuation from new construction or annexation. Any spending increases beyond that require citizens to approve the added authority through a referendum.
The budget he would propose was a few hundred dollars shy of the city’s tax lid limit, Smith said.
With that, Smith made the precautionary move of increasing the city’s bond and interest fund by 1 mill. The change was revenue-neutral and cleaner from an accounting perspective because the city would have transferred an equal amount of money in 2018 from its general fund to the bond and interest fund, he said. But it had the added benefit of ensuring that no last-minute adjustment to the numbers would force the city to ask voters to approve additional mill levy authority. New bond and interest payments and public safety expenditures are exempt from the tax lid.
Although it's needed to ensure local governments have money available to meet bond and interest obligations, the exemption for bonds and interest could also promote bad public policy, Smith said.
“It’s the law of unintended consequences,” he said. “If you have a challenge of finding money for regular street maintenance or things, just bond the money. That’s just stupid, encouraging people to borrow money instead of paying for it out of operations.”
During legislative debates, supporters saw the tax lid as a way to rein in spending on the local level by making it more difficult to increase property taxes. Smith said he doubts that will happen because the legislation encourages local governments to use the additional taxing authority they have under the tax lid so they have added budget flexibility in future years.
In the tax lid’s first year in Douglas County, the trend was toward increasing taxes, but not by enough to force a referendum for added taxing authority. Baldwin City’s 2018 mill levy increase of 0.932 mills was just less than the lid allowed. Douglas County exceeded its allowable cushion of 1.76 mills under the lid, but much of that new spending is for exempt public safety expenditures. The Lawrence 2018 mill levy increase of 1.25 mills was well below the 3.6 mills the city had available. Eudora was the exception. The Eudora City Commission will consider Monday that city’s 2018 budget, which maintains the 2017 mill levy.
Those four local governments and nearly all municipalities in Kansas avoided asking their voters to approve added taxing authority this budget cycle, said Megan Gilliland, communications and education manager for the Kansas League of Municipalities.
“I only know of two or three cities that were considering going to a vote of their citizens,” she said. “They were all smaller cities. I think this being the first year, cities are trying hard to see what can be done within the parameters of the tax lid.”
With cities still working on or just completing their budgets, it’s too early to identify any trends in mill levies during the tax lid’s first year, Gilliland said. To bolster its lobbying effort against the tax lid, the league has asked members to share information on how the tax lid affected their budgets and what it prevented them from funding, she said. That data collection would include looking for possible increases in debt financing.
“It will probably be one of the data points we will be looking at,” she said. “I’m sure cities will look to be frugal with public dollars. I don’t think cities want to go (into) debt.”
Douglas County Administrator Craig Weinaug is among those who think the tax lid encourages local governments to go into debt to pay for projects, which is an approach that is in direct opposition of current county policy.
The county budgets 4 mills of revenue annually for its capital improvement fund, Weinaug said. The fund pays for future road and bridge projects, but money saved in the fund also paid for all but about $2 million of the recent $7.95 million fairgrounds renovations, he said. The county’s current policy saves tax dollars because the county earns interest on the money it is saving rather than paying interest on money it borrows for projects, he said.
Just like every other item in the county budget, the 4-mill capital improvement line item could be cut if a future commission faced difficulty crafting a budget under the limits of the tax lid, Weinaug said. A future commission might also conclude one way to resolve such a pinch would be to start debt financing some or all road and bridge projects, he said.
The tax lid’s limit was not a big concern as the city prepared its 2018 budget, said Bryan Kidney, finance director for the city of Lawrence. The city’s 2018 mill levy hike of 1.25 mills was well below the 3.6 mill levy authority the city had under the tax lid, he said. Unlike smaller cities or the county, property taxes are not the primary revenue source for Lawrence, but the third behind payments for city services and sales taxes, he said.
Nonetheless, the tax lid did influence the city’s 2018 budget, Kidney said.
“We did utilize the tax lid exemptions,” he said of the new spending in the 2018 budget. “The general obligation debt service was a $1.712 million exemption for 2018. We had almost $4 million in public safety exemptions.”
Patrick Vogelsberg, vice president of government affairs for the Kansas Association of Realtors, an organization that lobbied for the tax lid, said he expected local governments would make full use of exemptions in 2018 to avoid referendums for added sales tax authority.
“I think in the first year, you are starting to see some effect in that local governments are fully utilizing the exemptions and avoiding having to go to public votes,” he said. “We’ll see in the next couple of years if they get to the point that regardless of the exemptions, they still exceed the rate of inflation. We may see public votes (become) more prevalent.”
As for the use of debt financing to avoid busting the tax lid, Vogelsberg said voters would have the ultimate voice in that practice, too.
“I think those are all determinations that need to be made by local people,” he said. “I think local voters need to be educated and weigh whether debt financing is an appropriate way for cities and counties to provide for various costs.”