Debt and taxes: Portland under financial pressure

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PORTLAND — In a world of complex budgets, some math is very simple for city Finance Director Brendan O’Connell.

Unless expenses are offset, every $70,000 of additional spending, or every $1 million of bonded debt, adds a penny to the property tax rate, he said last month.

In the next five years, the pennies could add up.

In the last three years, increases in property taxes in the municipal budget have approached 3 percent annually. In the three years before that, increases were never below 3 percent and spiked at 6.2 percent in fiscal year 2016.

Projecting needed tax revenues to rise 3 percent a year in the next five years takes the total from the current $89.6 million to nearly $101 million. In comparison, fiscal year 2014 tax revenues were $72.3 million.

O’Connell said the annual 3 percent increase is plausible because the city faces a variety of needs and demands, as well as increasing debt from a 2001 pension bond that will not be paid off until 2026.

Besides the bond, the city must consider how to pay salary and benefit increases for nine unions representing municipal employees, the cost of a new service center for the city’s homeless, and the potential cost of renovating or replacing five city fire stations, as recommended in an October 2017 report.

Bonded to it

In 2001, the city borrowed $112 million to cover obligations to the Maine State Retirement System.

“(The city) fixed the pension obligation bond to a credit swap, which really creates the problem,” O’Connell said in discussing the payments that increase over the 25-year life of the bond.

This year’s payment is $14.5 million, with $8.75 million in interest. In coming years, payments increase at least $900,000 annually. The final payment on June 1, 2026, will be $22.3 million, with $1.8 million in interest. 

Without the bond, the city would actually pay about $840,000 more annually for pension obligations, and refinancing the debt now would also require the city to pay $30 million-$40 million up front, O’Connell said.

And while debt service on a $64 million bond to upgrade and renovate four schools will be accounted for in future school budgets, a shift in borrowing practices for capital improvements will add to the tax tab.

In 2015 and 2016, the city kept new debt on par with debt being retired. There was no resulting tax increase, but the gap between spending and needs for vehicles, building repairs and roadwork widened to as much as $8 million annually.

In the last two years, the capital improvement budget, including schools,  addressed more needs. The new CIP budget borrows $15.5 million that will add 5 cents to next year’s property tax rate, O’Connell said, although he expects leaner CIP budgets after next year.

“Some assets needed help before failing,” he said. “… I don’t think it was ever planned on being done in perpetuity, it was something needed as the backlog grew.”

Other expense increases could follow from compliance with a new ordinance regulating pesticide use on public and private land. The city has estimated staffing, equipment and potential field replacements to cost $700,000.

Ironically, tax relief for residents 62 and older could also add costs, since the dollar-for-dollar match in state property tax relief has to be budgeted as a city expenditure of at least $250,000. 

While projections on needed property tax revenues are not unreasonable, the city is also moving in ways to reduce or rebalance the burden on taxpayers.

For what it’s worth

City Assessor Chris Huff makes it clear that fully revaluating city properties does not raise new city tax revenues or automatically reduce property tax bills.

He said a full revaluation due to be completed in spring 2020 should set the foundation for a better overall process.

“My goal in the next reval is a program and process that will allow incremental revals after that,” Huff said. “Maybe they can be done every two or three years instead of every dozen.”

The math, like O’Connell’s debt calculations, is simple. Here, the total value of city properties is divided by the total amount of budgeted property tax revenues councilors approve each year. Huff and his staff determine the value, the council determines the budget.

The city last conducted a full revaluation of properties in 2006, using data from 2003 and 2004, Huff said. Since then, the overall valuation has not kept pace with the state’s valuation because the state uses more recent sales data.

This year, that state valuation surpassed $9 billion, while the city’s is $7.9 billion. The gap does not violate state law, but bedevils the education funding formula for city schools and was a big contributor in the $3.5 million reduction in state subsidies this year.

Using city building permit applications as a guide, Huff increased the city valuation by $100 million this year, which translated into $1 million more for councilors to consider in revenues. The increased payment on the pension obligation bond absorbed most of that.

The increase did not fully measure Portland’s boom.

“I expect valuations to reach $11 billion,” Huff said.

The revaluation is a rebalancing, with a third of the property values expected to increase, a third remaining stable, and a third decreasing.

Huff said new programming will help keep pace with state valuations. Concurrent data may not improve state school subsidies, but the chances of a nasty surprise could be reduced, he said.

How would $11 billion in values affect the tax levy? The new overall city tax rate of $22.48 per $1,000 of assessed value would be $16.14, with $8.14 of that for municipal operations and obligations to Cumberland County. 

As projected by the School Board during recent discussions about the fiscal year 2019 budget, the anticipated tax revenue needs for education (including debt service on the $64 million school bond) in fiscal year 2021 is about $102 million.

At the current $7.9 million valuation, the school-side tax bite would be $12.92. Overall, the tax rate would be $24.95. With an $11 billion valuation, the school-side rate would be $9.28 of the overall $17.92.

Projections are just that, and city and school budgets contain enough variables to make the science inexact. New state budgets could alter education funding, and legislative candidates from the city have pledged to bring in more money from Augusta.

Take me to the PILOT

Of the current $7.9 billion worth of city properties, O’Connell and Huff estimate $2 billion is tax exempt. That may be a low estimate, with city-owned land comprising about 4 percent.

Maine Medical Center is by far the largest owner of tax-exempt properties, worth $301 million, according to data O’Connell provided June 19 to the City Council Economic Development Committee. The total does not reflect the increases in valuation coming from the $512 million expansion MMC is now undertaking.

Second on the list is the Portland Water District, at $135 million.

There are 53 entities on the list of tax-exempt property owners with holdings of more than $2 million, and a total valuation of $778 million. If taxed last year, the properties would have generated $16.85 million in revenue.

Last year, the city budgeted $570,000 in payments in lieu of taxes from owners of tax-exempt property, and received a little more than that the year before, O’Connell said in a Nov. 14, 2017, memo.

By the end of the council session this year, he expects to introduce a voluntary payment-in-lieu-of-taxes, or PILOT, program for the council to consider.

“A PILOT policy would provide clarity to exempt organizations who wish to locate in Portland and create a more even playing field within exempt property owners,” O’Connell said the memo.

The program would be applicable only to properties valued above $2 million, and would exempt the first $2 million of valuation before seeking a payment of 25 percent of what would otherwise be the annual property tax rate.

Tax-exempt property owners might also be allowed to deduct 50 percent of that voluntary payment in lieu of services provided in the community, including jobs, training and health care.

Let the good times roll

Right now, property tax revenues comprise 46 percent of the municipal budget. The city has also budgeted an additional $850,000 in excise taxes for the coming year, taking the total to more than $12 million.

The current budget also increases parking fees at meters and the city-owned lots on Spring and Elm streets. Fees in the Planning Department were also increased.

Yet, O’Connell noted, those increases rely on a strong economy to provide the revenues. A recession would be costly.

“We have to take the macro look,” he said. “Will we have $13 million in excise tax revenue, will we be at 8 million?”

Next week: School budget forecasting.

David Harry can be reached at 781-3661 ext. 110 or Follow him on Twitter: @DavidHarry8.

Portland Assessor Chris Huff expects the full revaluation of city properties to add about $3 billion in value while also providing the basis to stay closer to state measurements.City Finance Director Brendan O’Connell said bonded debt, including pension obligations, will be an increasing factor in city budgets for the next five years.

Portland City Hall reporter for The Forecaster. Baltimore native, lived in Maine since 1989. A journalist since 2005, covering much of Cumberland and York counties. I joined The Forecaster in 2012.