Frequently Asked Questions Regarding the Operating Override Release 2, 2003-03-26

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What is an "override"

An override is a local vote authorizing that city or town to raise its annual property tax levy by more than 2.5%. Under a Massachusetts law called Proposition 2 1/2 municipalities cannot raise their tax levy on existing properties by more than 2.5% per year unless the residents vote to approve a larger increase. This vote is called an override because it overrides the limit imposed by Proposition 2 1/2.

Why do we need an override?

Reading needs an override now because the town is facing a severe financial crisis. The cuts necessary to balance next year's budget would be so severe that we would have to compromise the health and safety of our residents and eliminate some of the most basic elements of our children's education.

How did we end up in this situation?

When the town passed its last operating override in 1993 it put the town's finances on a sound footing. Since that time, however, expenses have risen by more than the combination of new growth and the 2.5% per year increase allowed under Prop 2 1/2. The rapid increase in the expense of municipal services is largely due to spiraling health care benefit costs and state mandated education programs. In addition, during the 1990s Reading's new growth slowed and our demographics began to change. Over the last decade, our population and number of housing units grew by only 5% while our public school enrollment rose by more than 18%.

For a number of years in the 1990's increased local aid from the state made up the difference. This spared local taxpayers the pain of an override but it also made us more dependent on the state and therefore more vulnerable to any state cutbacks. From 1993 to 2002 state aid has risen from 14% of Reading's total revenues to 23%.

Over the last several years, however, Reading's total revenues have not kept up with its expenses. Beginning in 2000, the town was forced to draw on our reserves and make significant cuts every year in order to live within the limits of Proposition 2½. In that period, we have cut 21 positions on the town side (Police, Fire, DPW, Library, and Town Hall) and 23 from the schools. That is close to a 9% reduction in staff for the town and 5% for the schools.

Now the state government is facing its own financial crisis. In order to balance the state budget without raising state taxes, Beacon Hill reduced State Aid in the current fiscal year by $371,000, and is reducing Reading's local aid for 2004 by another$1.4 million. In addition, the state has eliminated a number of categorical grants that helped fund local school, health, and public safety programs.

The town's 2004 budget calls for total cost increases of about $3.7 million. Increases include $600,000 in health insurance premiums, $800,000 in mandatory education programs and approximately $2.3 million for our union labor contracts. The only new revenue to offset these items is an additional $1 million in property taxes permitted by Prop 2 1/2. The net projected shortfall from these items alone is $4.2 million. The Board of Selectmen added an additional $300,000 to this amount for roadwork which has been postponed for an unacceptably long time already.

Why is Reading's situation so dire?

There are three major factors that make Reading's position particularly bad:

1. State aid is being slashed. The final blow for Reading comes from the current crisis at the state level. The state has already cut our local aid and grants by over $1 million through 2003. In 2004, state aid will be reduced by an additional $1.4 million. Beacon Hill, however, has provided no relief from the many mandates they have imposed on us. Reading must come up with the money to pay for these programs. This is particularly devastating for Reading because we derive almost 25% of our revenues from state aid. That is a higher percentage than any of our neighboring or comparable communities.
2. We have already cut to the bone. Over the past three years, the town of Reading has already made substantial cuts, eliminating 17% of town hall staff, 15% of DPW, 12% at the library, 10% in police/dispatch, and 11% at the schools. We have completely eliminated capital expenditures. No department has been spared. We are therefore starting this crisis in a more vulnerable position than towns that are just starting to make cuts. As of 2003, Reading ranks 26 out of 29 comparable communities in suburban Boston in per capita spending. In other words, only 3 communities out of this list spend less than Reading does.
3. We have spent our reserves. Reading has spent nearly all of our reserves, over $4 million, in an effort to maintain services while living within the limits of Proposition 2½. We now have no sale of real estate money and only $1 million in free cash in case of emergency. Generally, guidelines suggest that towns should maintain a reserve of 5% of the operating budget. Reading’s reserve is less than 2%, ranking us 322 out of 351 communities in the state. Reading is also one of only 19 communities in the state which has not been able to establish a stabilization fund to cushion the impact of a downturn such as the one we are facing right now.

Why have we spent more than allowed under Prop 2 1/2?

While the town has done its best to keep costs down and live within the limits of Prop 2 1/2, there are some areas of the budget where the town has limited control, in particular, special education and health insurance. They are beyond our control because state law mandates the level of special education benefits we must provide, and health insurance rates are determined by outside insurance providers. The impact of these two line items alone explains most of why we need an override.

Here is a table that shows how these two items have grown since 1998:

It is worth noting that the 51% increase in the cost of benefits shown above occurred even as Reading was reducing the number of employees on the payroll. The cost per employee increased by more than 51%.

The assumption underlying Proposition 2 1/2 is that costs should rise by less than 16% over this six-year period. That is how much the town can raise property taxes over that time. The "Excess" listed on the right side of the chart shows that these costs would be $4.1 million lower if they had grown at the 2.5% rate anticipated by Prop 2 1/2. Without this $4.1 million in excess costs our budget situation would be a lot less daunting.

One aspect of benefits is within the town's control - the percentage of health care benefits paid by our employees. Reading makes its employees pay 30% of this cost, more than the comparable municipal employees in any of our neighboring communities.

It is also worth noting the size of these items in relation to the total budget. In 1998 special education and benefits combined were 21.8% of the total town budget, now they are over 27%. In order to keep the overall budget under control while these two items spiral upward, we have allowed these costs to crowd out other areas of the budget.

Even the most ardent supporters of Prop 2 1/2 acknowledged that towns would probably need revenues in excess of the 2.5% allowed from time to time. That is why the override provision is built into the law. The tax increase limit imposed by Prop 2 1/2 works as long as the cost of providing government services rises at the same 2.5% rate that the law allows revenues to rise. When costs rise more rapidly than the 2.5% limit the town has to choose between cutting services or passing an override to raise additional revenue. This is the case in Reading today. Despite the best efforts of our town government to limit costs, the rapid rise in benefits and special education costs outside our control has pushed us to the point where we can no longer provide an acceptable level of services without additional revenue.

How does Reading's spending compare to other communities?

Out of 25 similar communities that reported detailed data, Reading's per capita spending ranked:

In another sample of 29 similar suburban Boston communities, Reading ranked 25th in spending per resident. Among school districts considered similar by the state, we rank 11^th out of 14 in per pupil spending. Statewide, our per pupil spending ranks 242 out of 351 communities.

The conclusion is that Reading has a revenue problem, not a spending problem. Our schools rank close to 20^th on the MCAS, we just won the state science olympiad for the 11^th year in a row, and our police, fire, library and other town services are all top notch. In every category we spend significantly less than the average of our neighboring and comparable communities. State aid has been cut drastically, our financial reserves are depleted, and we have already made substantial cuts.

If Reading's spending is so low, why do my taxes seem high?

There are two primary factors that make Reading's property taxes relatively high - our low commercial tax base and our relatively large number of students.

Reading gets more than 93% of its property tax revenues from residential properties. Out of 29 similar suburban towns only Belmont, Winchester and Marblehead have a lower commercial tax base. If we had more commercial development we would be able to share more of the cost of our services with businesses, lowering the cost to homeowners. Here are the percentages from some of our neighboring towns:

Reading also has a very high number of students in our local schools relative to our population. This means that there are fewer taxpayers supporting each student in the schools. We have managed to limit the impact of this ratio by keeping our per pupil costs low relative to other towns, but the high number of students is still a force which puts pressure on our taxes. Here are the ratios for a number of neighboring towns and towns with similar populations:

What is the effect of these factors on my tax bill?

The following table shows how our low commercial tax base and high ratio of students to residents affect our tax bills. This table assumes that all towns listed pay the same amount per pupil for education (the amount shown is the statewide average).

This shows that if Reading spent the same amount as other towns we would have higher tax bills. It is not a matter of Reading being inefficient or wasteful, it is a fact of our low commercial base and our student-heavy demographics. No matter how little Reading spends, these two factors will always tend to make our residential taxes higher. The obvious long-term solution is to increase our commercial tax base.

Has this crisis affected our ability to borrow money?

Yes. Wall Street has already lowered our bond rating once this year. This means we will pay a higher interest rate on the money we borrow for capital projects. This is an independent, outside observer confirming that the town is facing a financial crisis. The factors cited in reducing our bond rating are the fact that we have spent our reserves to unacceptably low levels and have not maintained a responsible level of capital spending.

Does the override have to be so big?

The override is actually a conservative solution. The town is not trying to add back positions or services that were cut in previous years. The override is set at the amount necessary to maintain the current level of services. As discussed above, increases in special education and benefits alone have been $4.2 million greater than the 2.5% increases anticipated by Prop 2 1/2, and that is only since 1998.

Why don't we use the money from the landfill and other new developments?

The Jordans/Home Depot, Spence Farm and Longwood Farm developments will not solve this crisis. The cash from the sale of the landfill will not be available to the town until the landfill is capped, and even then the money is restricted by law and cannot be used to fund operating (day-to-day) expenses. In addition, tax revenues from all these projects will not come in time for this fiscal year.

While any prediction of future events is speculative and subject to change, the town's best forecast of when we could see revenue from various development projects is as follows (in thousands of dollars):

Is this override forever?

Yes. The tax increase authorized by this vote does not have an automatic expiration date so it will be permanent unless the town takes action in the future to reverse it.

Will this override help the fall 2003 budget problem - i.e. will there still be layoffs this fall?

The override would help this fall. The town's finances are managed on a fiscal year running from July 1 to June 30. This override would provide revenues for the year beginning on July 1. The amount of the override was set at a level that should allow us to avoid any layoffs this year.

Will this override pay for additional staff for the new elementary school?

No. There will be no new staff for the school until the next fiscal year. Beyond that these funds are part of the town's general revenues and cannot really be tracked to a particular use.

How does this tax increase effect folks on a fixed income?

Folks on a limited income may avail themselves of the MA "Circuit Breaker" program which provides property tax relief to low and moderate income senior citizens. There is more information regarding this program elsewhere on the Reading Pride website under Tax Relief for Seniors. You can also call Brad Jones at 617-722-2100 or visit:
www.dor.state.ma.us/help/guides/Abate_Amend/personal/issues/realestate.htm

How much will this cost?

For an average home in Reading with an assessed value of $355,000 taxes will increase by $562.

How am I supposed to afford this?

While the amount of the override is significant it is important to put it in perspective. Federal taxes were cut in 2001 by at least $600 per year for a married couple, $300 for single taxpayers. For families 2001 also saw an increase in the per child tax credit of $100 per child. Most Reading taxpayers also saw additional reductions in their state and federal tax. While individual cases will all differ, the total savings for the median income household in Reading could easily be $1,000 or more. And that is every year. State income taxes also fell from 5.95% to 5.3% over the last few years, and the Bush administration is pushing for even more tax cuts this year. Among his proposals are an increase in the per child tax credit of $400 per child, as well as rate and marriage penalty relief which could save the median household in Reading at least $1,000 more per year.

Another thing to consider is how much you have saved by refinancing your mortgage, as many in Reading have done lately. Even a 1/2% decrease in rate on a $200,000 mortgage yields $1,000 in savings per year.

What will be cut if the override fails?

The following is a brief summary of the proposed cuts if the override fails and what they will mean for the town. There is more detailed information elsewhere in the Reading Pride website.

The town has recommended the following cuts to balance the budget if the override fails:

• Eliminate more fire, police and dispatch positions
• Remove the fire department's ladder truck from service almost 90% of the time
• Reduce library hours another 11%, and reduce staff and books
• Eliminate 15% of public works positions as well as seasonal labor
• Layoff 60 teachers
• Abolish middle school foreign language program
• Increase athletic fee to as much as $400 per sport for school teams
• Layoff 9 crossing guards
• Eliminate mosquito control spraying
• Eliminate the entire K-12 remedial reading program

How will these cuts affect Public Safety?

With the proposed cuts to the fire department, Reading may forfeit its right to mutual aid from neighboring towns. Mutual aid is a system in which surrounding towns provide fire and ambulance support for each other in the event of multiple emergencies. If we don't have adequate manpower to help them, they will no longer have to help us. In addition, our emergency preparedness will be compromised as police officers and firefighters become ill equipped and understaffed to respond adequately to homeland security requirements. With fewer crossing guards there will be greater risk to children at busy intersections.

How will the proposed cuts to Public Works affect Reading?

There will not be enough manpower or materials to repair potholes, cracks and crumbling pavement. Streets and sidewalks may not be plowed for days after winter snowstorms, slowing emergency vehicles and stranding cars in times of heavy snow. Park maintenance will be minimal; the town will no longer collect trash at public parks and the trash barrels will be removed. Cuts to mosquito control will increase the danger of encephalitis, West Nile Virus and other mosquito-born diseases.

How will the proposed cuts affect the schools?

The reduction in teachers would drive class sizes up to as many as 40 children per classroom. Sixth graders would receive only one half year each of science and social studies. This will have a direct impact on our MCAS performance. We would also eliminate the entire middle school foreign language program and the entire K-12 remedial reading program.

How will the library be affected?

The proposed cuts would cause the library to lose state certification. Loss of certification would cost the town an additional $30,000 per year in state grants and preclude our residents from participating in interlibrary lending.

What other impacts will there be if the override fails?

The proposed cuts will have many far-reaching affects that are difficult to quantify, however some likely outcomes are:

• Increased liability insurance for the town - as police, fire and road maintenance are cut we may face additional claims for liability in auto accidents and other emergency situations.
• Increased homeowner's insurance for residents - There is a company called Insurance Services Organization (ISO) which rates fire services in cities and towns. One is the best rating and ten the worst. Reading is currently rated a four. Insurance companies use this rating as a benchmark in determining local insurance rates for homeowners and businesses. The proposed cuts to the fire department could well lead to a lower rating and thus higher insurance rates for the entire town.
• Higher interest costs - Our bond rating has already been lowered once this year, and if the override fails it is very possible that it will be lowered again. This would lead to higher interest costs for all of the town's new debt, including the entire high school project.