Everything You Always Wanted to Know About Proposition 2 ½

Proposition 2 ½ was passed in 1980 and forced changes to the myriad ways Massachusetts residents were taxed. Known primarily for its limiting effect on property taxes, Prop 2 ½ also capped vehicle excise taxes and put the brakes on funding demands from local school committees created with little or no input from municipalities. The law also did away with the “unfunded mandate” whereby cities and towns were forced to implement policies promulgated by the state without the funds with which to do so.

Though most people are familiar with Prop 2 ½, many don’t entirely understand it. Indeed, comprehending all aspects of the law can pose a challenge to all but the most stalwart tax nerds. Though its precepts make financial sense, the multiple types of tax levies and exclusions are baffling and the ways the 2 ½ % increase is applied and used in taxation is commonly misunderstood.

Fear not. To simplify this important issue, I’ve put together this little post to clarify this somewhat complex--but extremely important--aspect of the property tax picture.

The Division of Local Services has a useful downloadable guide on Proposition 2 ½ that strives to explain the befuddling law to municipal officials. It truly is the best I’ve seen and I’ll refer back to it often as I plow through the ins and outs of Prop 2 ½. 

All About Levies

The Tax Levy

Before Prop 2 ½, there was only the good, old-fashioned tax levy--the amount in taxes raised by the town to help fund its annual budget. As discussed in an earlier post, residential taxes make up about 94% of Shutesbury’s tax levy and 73% of its annual budget.

In many communities, escalating tax levies helped fuel the Proposition 2 1/2 referendum vote famously put forward by the group Citizens for Limited Taxation. Among the changes made to the local taxation system were restrictions to the tax levy itself.

Levy Ceiling

The caps on tax levies brought about by Prop 2 ½ now meant that municipalities could only tax up to 2.5% of the “full and fair cash value” of the combined values of all real and personal property in the city or town. This amount is the levy ceiling. This is the absolute maximum a municipality can levy in any given year.

➤Total value of all real and personal property in town * 2.5% = Levy ceiling

For Shutesbury, the formula will look like this once state aid is known and personal and real property values are certified by the Commissioner of Revenue:

➤$227,578,443 * 2.5% = $5,689,461 

Levy ceilings can, and often do, change from year to year as property values increase (or decrease), the values of new properties are added to, and the value of demolished properties are subtracted from the tax base.

Levy Limit

Below the levy ceiling lurks the levy limit.

While the levy limit can never exceed the levy ceiling, cities and towns generally do not tax residents right up to the levy ceiling. The levy limit is the amount up to which municipalities are allowed to levy taxes each year. This amount also changes from year to year and is based on the previous fiscal year’s levy limit.

How does a levy limit increase, you ask? Start with the last fiscal year’s levy limit and multiply by 2.5%, the maximum allowed annual increase for every municipality. Add this amount to the prior levy limit. Add in the new growth, which is the amount of new development, additions to existing properties, new personal property, and tax-exempt properties being returned to the tax rolls (through a sale, for example).

➤Prior year’s levy limit  *  2.5% =  Maximum increase allowed each year

➤Maximum allowed increase + Prior FYlevy limit + New growth + Overrides (if applicable) = Current FY levy limit

Plugging in Shutesbury’s numbers from the revenue budget for fiscal year 2022:

$5,649,760 * 2.5% = $141,244

$141,244 + $5,649,760 + $10,000 (New Growth) = $5,801,004  (LEVY LIMIT)

The new levy limit of $5,801,004 is still not final; the town has a few more additions and subtractions to do.

$5,801,004 + $31,638 (Debt Exclusion) - $513,080 (Excess Levy Capacity) - $40,000 (Overlay) = $5,279,562 (TOTAL TAX LEVY)

In the FY 2022 Revenue Budget document, the Debt Exclusion (line 16) is for a 10-year Capital Plan for the Regional School system;

The Excess Levy Capacity (line 19) is the difference between line 17, Maximum Allowed Levy ($5,832,642), and line 20, the Tax Levy ($5,319,562);

The Overlay (line 22) is the amount of money set aside for the fiscal year to make up any revenue lost through tax abatements and exemptions.

Whew. Is your head spinning yet? 

This succinct graphic, courtesy of the Massachusetts Division of Local Services’ Levy Limits: A Primer on Proposition 2 ½, is helpful when trying to visualize how the levy types discussed relate to each other

Communities are not required to levy right up to the levy limit if their budgetary needs do not oblige them to do so. If the tax levy is below the levy limit, the amount not levied is called “excess levy capacity” and goes untapped for that particular budget year. Though this amount is not accessible after the tax rate is set, next year’s levy limit is still based on the prior year’s levy limit, not the actual tax levy. In other words, communities are not penalized the following year for fiscal conservatism.

Municipalities are also not restricted by a decision not to levy up to the levy limit in any given year. If a town or city chooses, it can levy taxes right up to its limit the next year and any subsequent year. It is a decision made on an annual basis and is not impacted by the prior years’ decision. 

Is excess levy capacity a good thing? Can cities and towns levy above the levy limit or levy ceiling? The answers to these and other burning questions will be answered as I continue to plumb the depths of Proposition 2 ½.

Weekly Factoids:

 

Despite the restrictions of Proposition 2 ½, Massachusetts ranks 34 out of the 50 states for the lowest effective tax rate.

 

Hawaii is No. 1 for the lowest effective tax rate and Alabama is No. 2; Hawaii’s median home value is the highest at $615,300 and Alabama’s is the third lowest at $142,700 (only Kentucky and Indiana are lower at $141,000 and $141,700).

 

Source: WalletHub

 

Is it Time to Axe Shutesbury’s CPA Tax?

The Community Preservation Act (M.G.L. 44B) was passed in September of 2000 and allowed municipalities to levy a property surcharge of up to 3% on real property and to create a Community Preservation Fund in which to deposit these funds. The money, which would be disbursed by the community’s CPA Committee, must be used for very specific purposes: to protect open space, preserve historic sites, and support outdoor recreation and affordable housing. 

Communities have the option of levying the surcharge in 0.5% increments up to the maximum of 3%; communities who enact the maximum 3% rate are eligible for up to 100% matching state funds. 

Those who levy between 1.5% and 2.5% qualify for an unspecified “match” from the state. The match rate varies from year to year as it is dependent upon “fees on filings at the registry of deeds and land court.” There are allowable exemptions for low-income persons and low- and moderate-income seniors. Veterans and their surviving spouses may also be eligible for an exemption. Municipalities can vote to exempt the first $100,000 of each taxpayer’s property. Shutesbury exempts the first $100,000.

A Fund Brimming with Unused Money

Shutesbury adopted the CPA by a sizable majority (75% for, 25% against) at its 2008 Town Meeting. The town elected to charge its taxpayers an additional 1.5% of their property value to be eligible for matching state funds.

Since 2009, Shutesbury has amassed $454,940 in its CPA fund. Subtracting this amount from the total amount raised over the last 12 years, $591,696, shows that Shutesbury has used only $136,756 from that account in that time. Tallying approved projects from 2011 through 2019 shows a total of $179,750. This reserve fund analysis prepared for the 2021 Town Meeting indicates that $44,774 has been set aside for unfinished projects--which is close to the difference between $179,750 and $136,756 ($42,994).

Limitations and Drawbacks of the CPA Tax

Though the CPA has helped Shutesbury save money, spending it has proven tricky. Over the years, the law’s downsides have become clearer. 

The most obvious is the restrictions placed on the use of the funds. Another is that, by relying on registry fees to feed the CPA Trust Fund, money available from the state match will ebb and flow depending upon the level of recording activity at the registry. Since 2012, state budget surpluses may be added to the trust fund but those are equally unreliable. 

Since the trust fund is the same size regardless of the number of cities and towns adopting the law, the payouts decline as the pool of adopters grows. When Boston began receiving CPA matching payouts in 2019, a big chunk--$3.6 million--of state money was removed from the pool distributed to all adopters.

Another problem: The law favors wealthy communities. For municipalities accepting the maximum 3% surcharge, the state match is much higher--up to 100%. 

All towns that adopted the CPA receive a  “round 1” distribution in matching state funds from the Massachusetts CPA Trust Fund, an amount which consists of 80% of the Trust Fund’s total by the end of October. For municipalities taxing below the 3% threshold, disbursements stop after round 1.

The remaining 20% of Trust Fund money is reserved for communities that opted for the full 3% surcharge, amounts that are disbursed in two additional funding rounds. A study by the Kennedy School of Government and Harvard University in 2007 noted that cities and towns with higher property values tend to adopt a 3% surcharge, noting that communities on Cape Cod and in Middlesex County were big winners when it came to CPA matching funds.

For Shutesbury, the average state payout over the past 12 years is 28% of the amount taxpayers paid through the CPA tax.

The CPA also disregards Proposition 2 ½, which was enacted by ballot vote in 1980. When accepting Sections 3 through 7 of the law, which municipalities must do to adopt the CPA, they agree that the surcharge “shall not be included in a calculation of total taxes assessed”. This essentially allows communities to tax beyond the limit of Prop. 2 ½. 

Can Shutesbury use more of the CPA funds it has on hand? 

Currently, both Town Halls have mold problems. These buildings have historical significance and qualify for CPA funding. 

The Old Town Hall has been a subject of concern for some time. The Select Board created a Records Storage Advisory Committee (RSAC) in June 2017 to make recommendations regarding the preservation of the town’s archival records. Discussions involved the conditions at Old Town Hall since that is where most records are stored. Moisture in the vault and main room where documents are kept were identified as major problems. 

Although a member of the Town Buildings Committee was appointed to the RSAC as requested by the chair of the Buildings Committee, a draft report of the RSAC says that person “did not attend” meetings. The document later mentions that the Building Committee had the bricks in the Old Vault sealed as a barrier against moisture and suggested installing mini-splits to control humidity. That suggestion “languished” despite the fact that funds are available.

In May 2019, Town Meeting approved a $34,000 CPA project that would perform maintenance and repairs to Old Town Hall. The mold problem persists and has been cited as a reason why the building is unsuitable for community use. Perhaps CPA funding--for Old Town Hall and Shutesbury Town Hall--should be utilized to remediate the mold issues once and for all.

The money might also come in handy if the town decides to forgo a new library building and renovate and expand the existing one. CPA funds could be used to refurbish the existing, historic building, fix the heating system, and possibly pay to hook up to Town Hall’s well and septic. The Massachusetts Board of Library Commissioners offers grants for library expansion “on an irregular basis”, covering 45% to 50% of eligible costs. 

Even without a state grant, Shutesbury could likely handle a library expansion project similar to the one proposed (and withdrawn) in 2001. Wendell borrowed $1.24 million in 2012 to build a new library and town hall. Assuming half that amount was dedicated to its 4,200 square foot library and using an inflation calculator, Shutesbury would need approximately $736,000 today to expand the current library by the same square footage. To date, the town has $514,000 earmarked for library construction.

It’s Time to Take a Break from the CPA Tax

It seems unreasonable to continue to tax Shutesbury property owners when the CPA fund is full of unspent money and there are no new projects on the horizon. The Old Town Hall project is the last on the state’s list and it appears there are no others on tap since the CPA Committee has not met since the spring of 2019.

The law requires a community that adopts the CPA to maintain adoption for five years, after which time it can revoke its acceptance by the same means it used to adopt the terms of the legislation. Until we can find eligible uses for the cash we have saved, perhaps we can consider repealing Shutesbury’s Community Preservation bylaw at the next Town Meeting.

Weekly Factoids:

 

Local governments in New England rely more heavily on property taxes as a revenue source than other U.S. states.

Source: The Lincoln Institute of Land Policy

 

Big-box stores have successfully used the “dark stores” assessment theory (the claim that the best comparable sales for chain stores are vacant or “dark stores”) in many U.S. states to significantly lower their property taxes, to the detriment of local governments.

Source: Bloomberg News

 

The Colorful History of Shutesbury’s Lot O-32

 

Garage on Lot O-32, Circa 2012 
Photo Credit: Larry Kelley, Only in the Republic of Amherst

There are two town-owned lots under consideration as locations for a proposed new Shutesbury library. One is the roughly 22-acre area behind the Town Hall, which voters at the 2021 Annual Town Meeting approved for use as community gardens. The second site, comprising about 21 acres, is located across the street from Shutesbury’s Public Works Department. Formerly street address 66 Leverett Road, lot O-32 is the favorite in the race to site a new town library.

Under the terms of the Small Library Pilot Program, a building site must be chosen by mid-October. Much activity has taken place on both these lots due to this timeline, such as targeted soil sampling, percolation tests, and water testing. 

For Lot O-32, environmental concerns are particularly important. Over the years, this land has been used as a vehicle repair shop and a landscaping business/gravel pit, as well as an unofficial dumping site. Acres of topsoil were removed and sold, and various items were buried on the property. Contamination issues have plagued this lot for years. The Town of Shutesbury inherited these problems when it bought the parcel in 2004.

The property has an interesting history, which I have put together from town documents, Registry of Deeds documents, a site feasibility study, and conversations with townsfolk familiar with the property.

2004: Shutesbury Gets to the Table a Bit Late

Lot O-32 was owned by the Kosuda family from the 1940s to the time of its sale to the Taylor family in 1972. The land stayed in the Taylor family until its sale to Amherst developer Barry Roberts on April 4, 2004, for $80,000.

On July 20, 2004, the Shutesbury Finance Committee and Select Board were discussing, in executive session, whether the town should buy the parcel. Emerging from this closed session, all members voted to purchase the lot “if it is proven affordable and feasible.”

By early August of 2004, FinCom discussed paying for testing of the soil surrounding a buried gasoline tank that Mr. Roberts had decided to unearth. While not yet knowing the extent of possible contamination on the site, the committee members discussed how to finance the $212,500 purchase price, which would include some borrowing and the use of some of the town’s reserve funds. 

The town proceeded with plans to ask taxpayers to fund this purchase, which would net Mr. Roberts a profit of $132,500 for merely owning this property for almost six months.

In the Autumn 2004 edition of Our Town, Shutesbury officials put their case to the voters, saying that the “parcel has recently changed hands” and inferring that only now is there an opportunity for the town to purchase this lot. Their reasoning was that the town was running out of storage space and, although there were no concrete plans for its use at the time, they were “certain that the land will be used to facilitate smart growth and enhanced services in the years ahead.”

As we now know, none of these things happened.

Contamination, Cleanup, and More Money

I wondered why Shutesbury did not purchase this parcel directly from the sellers in the spring of 2004, but I could find no documents on that subject. Nor could I find any evidence of a report on the results of the gas tank testing. One would expect that the tests were negative since the town proceeded to purchase the land.

This was not the case.

Within a few years of purchasing Lot O-32, the town was actively investigating contamination at the Fire Station. By mid-2009, the town had queried Cold Spring Environmental Consultants about evaluating the level of “Oil and Hazardous Materials” contamination at that site. A fresh leak from an underground tank had contaminated “neighboring wetlands”, prompting the town to consider a loan from the state to aid with cleanup costs.

By the spring of 2010, Shutesbury had met with the MA Department of Environmental Protection and hired a company called O’Reilly, Talbot & Okun Associates to do borings and other environmental tests. There is mention of a loan taken out by Shutesbury from the Leaking Underground Storage Tank Fund to finance cleanup work. Minutes from a November 2010 Finance Committee meeting identify the loan amount as $200,000.

The loan appears to be for the Fire Station cleanup only. Both the Fire Station and Lot O-32 had buried gas tanks, but I couldn’t find any information about the tank unearthed by Barry Roberts before the town purchased the land. There were actually two underground tanks, the other holding petroleum, as noted below. There was no mention of this tank at the aforementioned Fincom meeting, however.

By early 2012, problems at both properties were ongoing. Piles of debris, still present on Lot O-32, needed to be evaluated and soil testing was still needed where a “barrel” was unearthed. As for the Fire Station, the 2014 Shutesbury Multi-Hazard Mitigation Plan noted that the cleanup was continuing on a “fifty-year timetable”.

Also in 2012, the town was apprised of the presence of Polychlorinated Biphenyls (PCBs) on Lot O-32 in concentrations high enough to spark an Immediate Response Action due to the location within 500 feet of drinking water wells. The report speaks to work performed by Cold Spring Environmental Consultants from late 2011 to early 2012 as well as testing done by Oil Recovery, Inc. Also mentioned are “locations of one former underground fuel oil tank and one former underground gasoline tank that were removed from the property in 2004” as well as “a large debris pile to the south of the (garage) building which contained one 55 gallon drum partially filled with petroleum, metal, wood, tires, plastic and automotive parts.”

Photo Credit: Larry Kelley, Only in the Republic of Amherst

In 2019, the Town commissioned the Conway School of Landscape Design to perform a Site Feasibility Study to assess practical uses of Lot O-32, including a determination regarding which areas were developable. By then the issue of site contamination on Lot O-32 seemed to be resolved.

More testing has been done recently, for two reasons. One is the Small Library Pilot Program, to which Shutesbury has applied to be considered for a library construction grant. Town officials decided to do additional testing on Lot O-32 to convince Shutesbury residents that contamination problems were no longer a concern.

The other is due to the discovery of per- and polyfluoroalkyl substances (PFAS) in wells near and around the Fire Department on Leverett Road and a smaller number in the Wendell and Locks Pond Road area.

In addition to well testing, more cleanup work was done on Lot O-32 this summer. A 1,404 square foot garage building was demolished and the debris disposed of in anticipation of a site visit in August by the Massachusetts Board of Library Commissioners. At a Finance Committee meeting on July 20, the town was planning to use nearly $15,000 from the Waste Disposal account for this purpose--though our Town Administrator opined that the cost might be higher and she would likely have to draw money from “other accounts”.

Presently, there is lots of activity on Lot O-32. Two roll-offs are being filled with waste hitherto ignored, and there appears to be well-drilling apparatus on the property.

Were the wetlands on this parcel contaminated by the 2009 gasoline leak at the Fire Station? What will town officials find as they continue to load refuse into dumpsters to be hauled away? What is this activity costing us, the town’s taxpayers? And, the million-dollar question: Did anyone from the Town of Shutesbury walk this land and perform due diligence before closing on this property on September 28, 2004?

After spending $212,500 on the lot itself, plus known cleanup costs of at least $15,000 and unknown costs of years-long remediation efforts, we will be allowed by the Small Library Pilot Program to allocate an unknown portion of the lot’s assessed value of $99,000 “up to a defined maximum” toward the town’s 25% of eligible costs for a new library. Does this sound like a good deal for Shutesbury taxpayers? 

Weekly Factoids:

 

Number of new chemicals submitted to the Environmental Protection Agency’s New Chemical Review Program for review between fiscal years 1979 and 2016: 54,592

Source: United States Environmental Protection Agency

 

Number of known PFAS compounds: 9,000

Number used in the U.S.: 600

Dear MBLC: Please Don’t Compare Shutesbury to Erving

The Large and Lovely New Erving Library

The Boston-based Massachusetts Board of Library Commissioners (MBLC) has been spending a lot of time here in western Massachusetts lately. Library Building Specialists Lauren Stara and Andrea Bunker met with town officials and residents of Shutesbury and Otis, the two remaining towns applying for the Small Library Pilot Project. Florida and Chester have withdrawn from the program.

For Shutesbury, activities have consisted of a meeting on August 3 between the commissioners and various town officials and an August 17 meeting with residents at the Athletic Club. Both meetings were informational in nature.

On August 30, Ms. Stara and Ms. Bunker hosted a tour of the new library in Erving, an 8,300 square foot building that cost $4.9 million. According to the Shutesbury Library Trustees, this tour was required by the terms of the Pilot Project although there is no mention of this in the Program Notice. In 2010, Shutesbury’s plan for a new library was 5,800 square feet. Using such a large building as a guidepost for this new project seems like overkill.

MBLC’s paradigm is “bigger is better”. As I mentioned in a previous post, Ms. Stara was prodding the audience at the August 17 meeting to “dream big” regarding the design of a new library in Shutesbury.

Though the Library Trustees note that Shutesbury differs from Erving and our library will likely be smaller, it seems the MBLC may not be getting the message. Here are some facts they may be missing.

Erving’s Residential Tax Rate is Much Lower than Shutesbury’s

While Erving and Shutesbury have nearly identical populations, the two towns are very different financially. Commercial, Industrial, and Personal Property (CIP) make up 90.6% of Erving’s $11.3 million tax levy. CIP makes up 5.7% of Shutesbury’s $5.1 million tax levy.

Erving has a split tax rate, meaning that CIP pays a higher rate than residential. Shutesbury’s FY2021 residential tax rate, the sixth highest in the state, was 3 times that of Erving ($22.61 vs. $7.59)! When it comes to equalized values (EQV)--the total value of all classes of property in a municipality--Shutesbury’s $226 million cannot hold a candle to Erving’s $970 million. Most of that value is contained within Erving’s CIP classes.

Erving’s Library Financing Model is Not Feasible for Shutesbury

With its General Stabilization Fund balance of $10.3 million in fiscal year 2019, Erving used $2.5 million of those funds toward the building of its new, $4.9 million library. The town plans to partially pay itself back through an annual appropriation of $273,000 over five years and is expecting the last installment of more than $540,000 in reimbursement costs from the state Library Building Commission.

Notably, Erving was able to achieve all this while increasing its residential tax rate by only $0.24. The town was able to use a small portion of its hefty savings to fund its new library, thus averting debt payments for 10 to 20 years as well as attendant financing costs.

Shutesbury’s current tax rate of $22.61 will rise if we have to borrow to finance our portion of a new library’s cost. What we don’t know is how much we will be asked to spend this time around--until the very last minute. Hypothetically, assuming the same $273,000 annual appropriation that Erving had, this adds $1.21 to Shutesbury’s tax rate or $302.00 to the annual tax bill for a property valued at $250,000 for each of 5 years.

The Annual Increase in Shutesbury’s Library Budget May be HUGE

Erving’s annual budget for its new 8,300 square foot library increased by a whopping 266% compared to its former 1,600 square foot building --from $66,004 in fiscal year (FY) 2017 (the year before Erving was awarded the grant) to a request for $175,549 for FY 2022.

For Shutesbury, expenses for our 700 square foot library totaled nearly $70,000 in FY 2017 and $83,600 for FY 2022. If Shutesbury’s library budget increases similarly,  we can expect a large, ongoing annual expense. Multiplying $70,000 by 266% gives us $186,200. This increase will add another $0.45 to the tax rate, or $113.50 every year to the tax bill for a property valued at $250,000.

This is just an estimate, of course, but you get the idea. While its library is smaller, Shutesbury’s library budget was larger in 2017 than Erving’s, so it’s not unfathomable to think that costs associated with a new library will be much higher than they are with our current library.

One thing is for certain: Erving’s financial position is much better able to support new budget expenditures than Shutesbury's. Financially speaking, the two towns are not comparable. As this project moves forward, we need to remember that fact.