4 Tips Local Government Can Take from Personal Finance

Courtesy of Clipart Library

 Why can’t the government be run more like a household?

Perhaps you have heard of the Government-Household analogy which purports that government could run more efficiently if it was forced to abide by the rules of household finance:  spend within your means, limit debt, and “tighten your belt” during times of economic hardship.

Usually, this argument is made regarding the federal government, where comparisons between federal debt and household debt are spurious, and living within your means is irrelevant when you are able to print money and increase taxes at will. The reality is that this idea is bandied about to make political hay and not as an attempt to make “big government” less wasteful.

Local government is another matter. Small towns with Annual Town Meetings answer to the voters, who, in theory, have a direct say in financial matters. Town finances, being simpler than state and federal finances, are more easily understood by taxpayers who see their tax bills increase with every new expense. Although small towns sometimes take on debt, the terms are less favorable for them than for the federal government and they must get approval directly from the voters before borrowing.

These differences make local government more amenable to the precepts of personal finance. I used articles from the following personal finance websites to inform this post, condensing and combining concepts that are applicable to both personal and public finances.

7 Money Management Tips to Improve Your Finances

Money Management: 4 Tips for Mastering Your Finances

The 5 Principles of Personal Finance Everyone Must Follow

Personal Finance

The Difference Between Wants and Needs

Without further ado, here are four principles that can be applied to both municipal and personal finances:

Create a Budget and Spend Less than your Income/Revenue

Knowing how much money you have coming in over a certain span of time and spending below that threshold is a primary tenet of personal finance. This practice allows you to save money and keeps you out of debt. A budget is a popular tool to achieve this goal.

The primary source of revenue for small towns is the property tax, which is set in response to the size of the town’s proposed budget. In practice, this usually means that an increased budget is not a problem for a small town since the tax levy (and tax rate) simply increases to cover higher expenses. 

This doesn’t mean that rising taxes are inevitable. Towns can opt for level-funded budgets to keep a lid on tax rates. If there are unavoidable increases in either household or municipal budgets, cuts are made elsewhere to keep the budget in balance.

Save with Explicit Goals in Mind

Personal finance sites exhort readers to create funds for several important financial goals: an emergency fund for use during economic downturns, an account to fund big purchases, and a retirement fund. While the last objective applies to households only, the other two can apply to municipalities as well.

Emergency Fund

For households, this generally entails putting aside enough money to cover expenses for three to six months in the case of job loss. This money could also be used to pay for things such as unexpected medical bills.

Municipalities have their own mechanisms for setting aside money. Town cash reserves are usually in the form of Free Cash, which is leftover money from the previous year’s budget, and Stabilization, described by the state’s Division of Local Services as a municipality’s “rainy day fund”. After Free Cash levels are certified by the state, some of that money can be moved into Stabilization with a vote at Town Meeting. Free Cash and the total of all Stabilization accounts (communities can set up several if they so choose) make up the town’s cash reserves. Some towns return a portion of free cash to the taxpayer in the form of a reduced tax levy.

Saving to Fund Large Expenditures

Creating an account to save money for future purchases makes sense for households and local governments alike. 

Putting away money each week for planned expenditures like the eventual replacement of household appliances, maintenance and repair of the family car, and other planned expenses can spare a family’s emergency fund and make budgeting more consistent. 

Towns have similar concerns, such as the costs of maintenance and repair of their buildings and vehicles, as well as soaring employee healthcare costs. Planning ahead for large expenditures such as roof replacement projects on town-owned properties can help keep town budgets from escalating every year, burdening taxpayers.

Is there such a thing as too much saving? For households, probably not–unless hoarding cash is turning you into a miser. For local governments, socking away tax money with no spending plan in place increases tax bills for residents with no benefit. 

I’ve written previously about Shutesbury’s tendency to save vast sums of money each year–much more than neighboring towns–while using very little of this cash hoard to fund necessary expenses such as replacing the roof on the elementary school and funding the Locks Pond Road culvert project without borrowing.

Prioritize Needs over “Wants” 

Balancing a household budget often requires deciding which expenses are necessary and which are not. If food costs increase, for example, it makes more sense to cancel cable service than to buy less food. The cost of some necessary items can often be trimmed, as well–such as purchasing a less pricey phone and contract to cut expenses.

Local governments should follow this rule as well. Does it make sense to buy new town vehicles now, simply because they were requested by retiring department heads, or wait until the new employee can have a say in the matter? Is it responsible to move a large amount of money that could be used to fund the school roof replacement and apply it instead to the construction of an $8,300,000 library? These issues were discussed on April 14 at a joint meeting of the Finance Committee, Personnel Board, and the Capital Planning Committee (Zoom link is available from the Shutesbury Town Clerk). I attended that meeting and I found the logic behind these decisions to be very puzzling.

Avoid Debt Whenever Possible

Mortgage debt aside, personal finance gurus warn against incurring too much debt. By creating a budget, learning to save, and prioritizing budgetary needs, households are better able to avoid taking on debt.

Municipalities can acquire debt more easily and inexpensively than households, but that doesn’t mean they should. Borrowing costs add to residents’ tax burden when cash reserves are available to use. If the town wants to replace the reserve money by raising and appropriating money for that purpose, it will be less burdensome for taxpayers since no borrowing costs will be included and the town can levy the amount over a period of time that fits the needs of the town, not those of the bank.

The pandemic, supply chain shortages, record inflation, and a new war in Eastern Europe have all contributed to escalating costs and an uncertain future. Meanwhile, the Shutesbury school roof continues to need replacement. Households are feeling the pinch, prioritizing spending, and tightening their belts. Shouldn’t our local government do the same?

Affordability: How Shutesbury Ranks Compared to All MA Communities

Last year, I compared Shutesbury’s tax rate, average single-family tax bill, and cash reserves with those of other Franklin County towns with similar populations. I found that our tax rate was lower than Wendell’s though our average tax bill was higher. I also discovered that Leverett was much wealthier than Shutesbury, with Leverett taxpayers dedicating a mere 13.4% of household income to the payment of property tax bills compared to Shutesbury’s 21.1%.

How does Shutesbury’s affordability compare to the rest of the state? To find out, I compared our town’s fiscal year 2021 and 2022 tax rates, average tax bills, tax burden, and level of Free Cash to all 351 Massachusetts municipalities to see how we stack up. Here are the results.

Tax Rate

Shutesbury’s tax rate of $21.83 is the fourth-highest in Massachusetts–only the Western Massachusetts municipalities of Greenfield ($22.32), Wendell ($23.24), and Longmeadow ($24.64) have steeper rates. Last year, we were in sixth place, with Adams and Wilbraham joining the small group of communities with a higher tax rate than Shutesbury.

Note that this tax rate comparison reflects only the municipalities’ residential tax rate (and, in some cases, open space) and doesn’t include other classes such as commercial, industrial, and personal property. For communities with a split tax rate, some of the tax levy is shifted from residential to commercial properties, which usually pay a higher rate. Like many small towns in the state, Shutesbury has a single tax rate.

Average Tax Bill

Shutesbury’s average single-family tax bill edged up to $5,876 in FY2022 from the prior year’s $5,662. Our ranking changed as well: Shutesbury placed at No. 167 out of 351 communities for the highest average tax bill in FY 2022, a drop from its 2021 rank of 153.

How did that happen? Pandemic-induced real estate sales boosted values across Massachusetts, pushing the median home sale price statewide to an all-time high of $510,000. Cities and towns adjusted their total single-family values to reflect this change, which lowered tax rates. For Shutesbury, the value of all single-family properties rose from $187,324,770 in FY2021 to $201,594,118 in 2022, which produced a tax rate of $21.83 compared to the previous year’s $22.61.

This is a perfect example of how a lower tax rate does not necessarily reflect a reduced tax burden, as evidenced by the uptick in the average single-family tax bill. The average single-family value rose to $269,151 in FY2022 from $250,434, a value that produced a higher average tax bill despite a drop in the tax rate:

269,151 ✕ 21.83 /1,000 = $5,875.56

Some bills will be higher and some will be lower; on average, however, the tax burden increases.

Single-Family Tax Bill as a Percent of Value

Shutesbury ranks fourth in the state when it comes to the percentage of a property’s value our tax bills represent. For FY2022, the average tax bill of $5,876 represents 2.18% of the average single-family value of $269,151. Compare this to Leverett, where households pay, on average, 1.88% of value in taxes ($6,515 average bill on $345,831 average value). 

In 2021, Shutesbury ranked sixth (2.26%) for this metric, with Adams and Wilbraham again showing a higher or equal (in the case of Adams) percentage of property value reflected in residents’ tax bills.

Wealth Indicators

An important metric to consider is the wealth of a community’s residents and how much of the average household’s income is needed to satisfy the annual tax burden.

With 20.49% of the average household’s income dedicated to paying property taxes, Shutesbury’s FY2022 ranking stands at No.19–meaning that only 18 other communities in Massachusetts pay a higher percentage. That’s a small improvement over our 2021 ranking of 16 and 21.10%. 

Per capita income for Shutesbury was reported as $26,831 last year, compared to $28,682 for this fiscal year, a decrease from last year.

Comparing per capita income with the Massachusetts average, Shutesbury falls short. According to the U.S. Census, Massachusetts's per capita income is $45,555 (in 2020 dollars).  

Shutesbury households do better when it comes to median annual income, which the U.S. Census reports as $85,000–slightly higher than the state-wide value of $84,385.   

Free Cash

Shutesbury’s Free Cash levels have dropped over the past fiscal year, from 19.73% of the operating budget in 2021 to 14.58% in 2022. The fund itself has decreased only slightly, however, from $1.4 million in FY2021 to $1.2 million in FY2022. 

This stash places Shutesbury well beyond the Division of Local Services’ suggested reserve level of 3% to 5% of a municipality’s operating budget. For FY2021, Shutesbury ranked No. 17 (click link, export to Excel, sort), for the highest percentage of Free Cash as a percent of its annual budget. This year, we ranked No. 36–though 29 communities have not yet had their Free Cash reserves certified by the state.

Tying it All Together

Compared to all municipalities, Shutesbury gets low marks for affordability based on its exceptionally high tax rate and single-family tax bills. Our town also requires taxpayers to fork over a larger percentage of their income than most other communities to satisfy their local tax obligations. Lastly, our high tax rate results in residents paying a higher percentage of their property’s value, resulting in a heftier tax bill.

Why is Shutesbury such an expensive place to live? As this Shutesbury.org document shows, the annual budget has slowly crept upwards over the past two decades, as has the tax rate. Property values have not kept pace, however, which means comparably less value is funding higher budgets. Beginning around 2010, values began to languish while annual budgets did not. It was around that time that the tax rate began to rise in earnest as stagnant property values struggled to prop up budgets that continued to climb.

The town has developed some financial policies that have seriously exacerbated this problem. One, which I have written about before, concerns the tendency to stockpile cash with no clear goal in sight. Over the years, Shutesbury has postponed work on the town’s infrastructure despite having more than adequate reserves. This practice increases taxpayer costs due to inflation and a worsening of the issues affecting the neglected structures.

Instead of using reserves as necessary and creating a plan to replenish those reserves over time, relatively small amounts of the town’s savings are applied to various capital outlays, with the balance being borrowed, incurring unnecessary interest costs. In addition, there are line items built into the budget specifically to pad reserve accounts, resulting in overcharging taxpayers without benefit to them. These items include previously paid-off debts and funds set aside for a specific building project, which may or may not occur. 

Shutesbury officials often lament that we need additional revenue to lower residents’ tax burden and make the town more affordable. That scenario seems absurd since the town has no business presence to lighten the tax load. A more reasonable approach would be to limit Shutesbury’s spending within the parameters of a town with slow-growing property values and a dwindling population.

Weekly Factoids:

 

How Did You Fare During 2021?

 

Profits Soar as U.S. Corporations Have Best Year Since 1950

Source: Bloomberg Quint

 

Corporate Tax Rates on Taxable Income, Then and Now

 

1950:  First $25,000 = 23%

Over $25,000 = 42%

 

2021: All Taxable Income: 21%

Source: The Tax Foundation