Understanding The New York Tax Cap Law
The tax cap concept is not new, as about 23 states already had similar measures in effect for various periods of time. A 2007 study conducted by the Center on Budget and Policy Priorities outlines problems related to such property tax revenue caps. Key findings are summarized in the blue shaded rectangle (to the right).
New York State instituted the tax cap law in June 2011 and it’s been in effect since 2012-13 school year. The municipalities and school districts have a slightly different formula. The tax cap formula takes two pages to describe, but the infographics below, borrowed from the Office of the State Comptroller, facilitates much easier understanding of the process that is also often called 2% tax cap formula. It depicts the formula as a two part process–base formula and exclusions (also called exemptions). I overlay the MUFSD numbers over it.
Certain pension costs, court judgments, and local capital expenses are exempt from the “tax levy limit.” These exemption items are then added to the “tax levy limit” to arrive at the “maximum allowable levy.” Because of the addition of these exemptions, school districts may actually propose a budget with a tax levy that is higher than its “tax levy limit” – but still be within its “cap” under the law. The tax cap guidelines state:
“If a school district is planning major new projects, this element can result in big increases in allowable levy growth.”
Let’s look at the NYS tax cap formula and insert the 2014-15 budget proposed by the Malverne Union Free School District administration and adopted by the board of education on April 8, 2014. The green values are transferred from the budget presentation. The zeros are entered just for illustration and were confirmed with Mr. Caputo, business administrator.
Displaying the proposed budget together with the formula reveals at first glance that the capital levy, thus capital fund does affect the tax levy. The 2014-15 adopted capital levy is $535,233 at 2.06% tax levy increase. Let’s consider two scenarios, one with zero for capital levy and another with $1M and observe the impact on tax levy. Should there be no capital expenditures (0 capital levy) in 2014-15, the tax levy limit would be $40,281,526, or an increase of 0.72% only. On the contrary, should the anticipated capital levy reach $1 million, the “maximum allowable levy” would be $41,281,526, or an increase of 3.22%.
Residents familiar with the budget review may recall the budget presentation. (pdf) The slide (15) entitled Establishment & Funding of Capital Reserve Fund II (Prop #3) stated:
“These expenditures will be at NO ADDITIONAL COST to taxpayers.”
But a month later, May 1st, the BOE public relations newsletter Malverne Pride (pdf) already used a more reserved language when describing the same capital fund (prop #3):
“Here are the key points you need to know when voting on this proposition:
• Will NOT impact the school budget or its tax levy.
That is also quite a different wording than how propositions #2 and #4 are described in the newsletter. It means that the act of establishing (voting on) the fund really doesn’t have the impact. Later, the expenditures will do. With the understanding of the tax cap formula application, residents may want to inquire further information from the administration or BOE.
Aside from the impact of the capital fund on tax levy, there is yet another aspect to consider. It’s the fact where the money comes from. The BOCES Questar III publication states:
“This exclusion [local capital expenditures] refers only to the portion paid with local tax dollars (i.e., does not include state building or transportation aid received).”
The Malverne Pride gives a hint where the funding will come from—the paragraph about capital fund II reads:
• Funding source includes annual transfers of surplus money in fund balance (if any).
And the BOE minutes dated March 11, 2014 give the full explanation under the headline Proposition No. 3 (Establishment and Funding of Capital Reserve Fund II):
… The source of the funding of the capital reserve fund shall include (1) an annual transfer of surplus money, if any, from the District’s General Fund’s unassigned fund balance, as may be available as of the end of each fiscal year from June 30, 2014 through and including June 30, 2024; (2) the transfer of $500,000, effective June 30, 2014, from the District’s existing Tax Certiorari Reserve Fund, heretofore established by the Board, which funds are no longer required to be reserved for their originally intended purpose; and (3) any other sources permitted by law, including transfers from existing reserves.
On June 30, 2014 the MUFSD will transfer a surplus of $500K to the capital fund, after the BOE has canceled programs, eliminated athletic teams, and FTEs. It’s clear that during the next 10 years (duration of the capital fund), the MUFSD plans to create a surplus of up to $10M to transfer to the capital fund. Once there, the money can’t be used to pay for instructional or operational expenditures.
What do you think are the pros or cons of this strategy from a long- and short- term standpoints?
Note: The 2014-15 budget line (A1420.401.00) for Tax Certiorari Reserve Fund lists the amount of $200,000 only, not $500,000. This fact will be addressed in other post.