Budget Manager Jennie Knapp and City Manager Doug Miller open fiscal year 2020 budget hearings on Tuesday.

Conversation surrounding merits of constant tax rates and constant yield tax rates

(April 5, 2019) The Ocean City Council fiscal year 2020 budget hearings kicked off on Tuesday with discussions centering on avoiding higher property tax rates while addressing rising costs.

City Manager Doug Miller said the proposed fiscal 2020 operating budget totals more than $138 million, with about $86.3 million of that earmarked for the general fund.

Although real property tax rates are being set at the state-calculated constant yield rate of .4585 per $100 of assessed value, Miller said the practice is not a sound long-term fiscal approach.

“The constant yield tax rate is a downward spiral because you continue to maintain the same amount of tax revenue as you did the year before at the same time when your expenses go up,” he said.

The constant yield tax rate, which is the rate required to produce the same amount of revenue as the year before, is calculated by the Maryland Department of Assessments and Taxation. If property assessments rise or fall, the constant yield rate increases or declines in the same proportion to produce the same income.

“As long as we can raise revenue in other areas, we can keep to the constant yield tax rate,” he said. “Constant tax rates are not difficult to work with but constant yield tax rates are.”

Budget Manager Jennie Knapp said the fiscal 2020 general fund total of $86.3 million represents an increase of $1.2 million, or 1.46 percent, over the year now ending.

Knapp said the constant yield tax rate of .4585 is budgeted to yield more than $41 million in revenue during fiscal 2020, a nudge up from the $40.8 million netted in the current fiscal year with its rate of .4656.

Fiscal 2020 is the second of a three-year state assessment to calculate property tax rates based on fair market value, Knapp said.

During fiscal 2019, all real property was re-assessed, with the exception of commercial sites south of 25th Street, which will be assessed this year. Assessment increases are be phased in by one-third each year.

Property tax calculations involve two components: a state assessment done every three years based on fair market value and a tax rate set by the City Council. The formula used to calculate tax bills divides the assessed property value by 100 and multiplies that by the tax rate.

Knapp said for fiscal 2020 resident property owners could anticipate tax bills to decrease since rates were set lower than the prior year, while nonresident property owners would experience a drop if their assessment was lowered or remained consistent with the prior year. Commercial property owners tax bill will decrease if their assessment is lower or unaltered but would increase along with assessments.

Knapp also said resident property owners are afforded further protection against higher assessments through the Homestead Property Tax Credit, which was cut from three percent to zero by the City Council in 2014 and effectively delays assessment increases used to calculate tax bills for principal residences.

“The only way a resident owner would see an increase in their tax bill is if we increase the tax rate,” she said.

Knapp also noted the city has maintained spending at rates lower than the annual consumer price index.

“We’re still keeping our spending below the CPI level,” she said. “The town budget has increased 7.26 percent since 2009 and CPI has increased by 14.5 percent.”

Miller said the council’s previous decision to lower the Homestead Tax Credit to zero was an important step to provide financial stability for year-round residents.

“It’s been a goal of the strategic plan to make Ocean City a more livable place for full-time residents,” he said.

Councilman John Gehrig said the homestead credit amounted to a tax cut for residents.

“By doing that and then lowering the tax rate, we’re actually getting less revenue to pay the bills,” he said.

Gehrig said residents are being charged less but continue to demand city services at the same clip.

“The residents then vote for binding interest arbitration [that] winds up holding a hammer over our heads during [IAFF] negotiations,” he said. “A normal business can’t run by charging lower prices when the cost of everything else goes up.”

Council President Lloyd Martin reiterated Miller’s earlier sentiment that a constant tax rate enables easier budget calculations than the constant yield tax rate.

“The reality is we’re basically asking to pay less and get more,” Gehrig said.

Miller said a constant tax rate would be preferable if the Homestead Tax Credit rate remains at 0 percent.

“We could live with that because as inflation increases, basically, so does your tax base,” he said. “A constant yield tax rate makes it more challenging.”

Councilman Tony DeLuca said his goal has always been to either increase revenue without raising taxes or reduce costs.

“I don’t think that keeping taxes lower is part of being a politician,” he said. “I think it’s being a business person.”

Miller said the budget meeting on Tuesday was the launch of two-weeks of fiscal 2020 discussions.

“Many municipalities start with an unbalanced budget and try to balance it through the process,” he said. “We try to bring you a balanced budget on the front end.”

Miller said that intent appeared on track until last Friday when the Maryland Minimum Wage Act was passed after state lawmakers overrode Gov. Larry Hogan’s veto, which he estimated would cost the city up to an additional $150,000.

“We’ll have to deal with that at wrap-up,” he said.

Knapp said despite real property tax revenue decreasing by roughly $4.1 million during the last 10 years, taxes from other categories, such as highway user fees, admissions, casino and room taxes, have increased by $5.5 million, while charges for services have also grown by about $2 million.

Unreserved general fund balance, which is required to be at least 15 percent, is estimated at 20.5 percent for fiscal 2020, which leaves about $4.8 million above the minimum, Knapp said.

“We are utilizing fund balance for pay-as-you-go capital projects,” she said.

“When we have … residents say we need to return fund balance … this is where we are returning fund balance because we’re using it for pay-as-you-go projects.”

Miller said if the city paid for annual paving costs with tax revenue, rather than drawing from the fund balance, the expense would raise the tax rates two cents.

Knapp also highlighted revenue from other agencies that includes a Worcester County grant for $2.99 million, with additional funding for the Ocean City convention center and the park and ride in West Ocean City increasing the total to $4.4 million.

Miller said the following investments are included in the proposed fiscal 2020 budget: $36.6 million for public safety; $2.5 million in beach protection; $6.2 million for trash removal; $2.25 million investment in the beach and Boardwalk; $5.8 million for tourism and marketing; $2.3 million for special events, including $300,000 for the Tourism Advisory Board; $3.3 million for recreation and parks; and $1.5 million for transit services.

“For the last six fiscal years, we have [maintained] status quo budgets,” he said. “We’ve only increased operating expenses $6 million over the last 10 years.”

Miller said assuring the operating budget reflects current fiscal forecasts has involved numerous hard decisions regarding financial cuts.

“Every dollar has been stretched by our budget manager,” he said.

Highlighting the estimated variance of roughly $150,000 between spending and revenue based on the new state minimum wage law, DeLuca asked Knapp if two weeks would provide sufficient time to crunch the numbers, before Gehrig chimed in with an alternative solution to the funding dilemma.

“If we keep a constant tax rate [we] come up with $630,000 at a cost of less than $2 per month per $300,000 house,” he said. “I think it’s something we could talk about the next two weeks.”

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