"Three hundred million here, two billion there, soon you’re talking about real money."
           - U.S. Senator Everett Dirksen

The early settlers of New England had a reputation for frugality. People were very careful with their money. Luxuries were avoided, necessities were made to last and bargains praised. Much of this old attitude has carried over into the operation of today’s local governments. This is reinforced by local residents. Citizens at the local level have the opportunity to closely examine budget proposals and have a voice in decisions of where and how much their local government spends. This is in contrast to federal and even state spending efforts, which are seen by many to be too large-scale and too inaccessible to capture the attention of individual taxpayers or voters.

The municipal budget is an important legal document. It serves as the official plan for setting the municipality’s direction and policies. Around the budget revolves a variety of issues, such as the number of police officers to hire, which recreation programs to run, what senior citizen services to provide, how often trash will be picked up, what municipal jobs will be cut, if a wilderness program should be considered, whether computers should be purchased for the elementary schools, and how long the library should be kept open each day. Discussions over foreign and domestic policy issues in Washington, although tremendously more expansive, often will not create the level of intensity generated by local citizens debating municipal issues at budget time.

Municipal budgets generally operate on a Fiscal Year that runs from July 1 to June 30, and not the calendar year. In Connecticut, this is referred to as the Uniform Fiscal Year. It is said that the budget, which covers 12 months, takes six months to prepare, 12 months to spend, and six months to analyze what was spent. By law, municipalities have until December 31 to complete an independent audit of the fiscal year that closed the previous June 30.

The process of creating the general government budget usually starts around late December, about the same time the previous year’s audit is being completed. However, the local board of education may start preparing its budget as early as September. During a municipality’s budget process, which will last for months, decisions are made involving program cuts and additions. At the end of the process, the local decision-making body — the municipal council, town meeting, or municipal referendum — decides the exact amount and level of services that will be provided in the coming fiscal year. At the same time, the level of local taxation that is needed to support these services also is decided.

The preceding chapters in this book have detailed the major services and programs provided by local government to its citizens and businesses. Each program has its own followers and supporters, so when a change has to be made, a group may be there at the local meetings to support or oppose it. For example, it is not uncommon to hear people speak against the increases in specific programs, such as the education budget, especially if they have no children in the education system. On the other hand, there may be as large a group protesting the cuts in these programs.

The local budgetary process involves two steps. First, it includes the estimation of revenue receipts from all sources. Also, department heads prepare their budget expenditure requests based on their needs and then submit them to the town or city manager, mayor, or board of finance. Second, after modifications are made, which usually involve expenditure cuts, the municipal council or the town meeting votes on the budget’s adoption or rejection. In some cases, this process is passed through a town-wide referendum.

Once a budget is adopted, its expenditures have to be matched by revenues. There was a time when both federal and state funds would help pay for some of a municipality’s spending. However, today, very little money comes to local government from the federal government. During the 1980s federal aid to municipalities was drastically reduced. Revenue Sharing, once a popular federal program whereby the cities and towns received federal aid with no strings attached, was eliminated. Some federal aid still comes to local level governments, but this is generally reserved for cities, which have larger populations and more services to provide.

The State provides $2.3 billion statewide in grants for local governments, of which $1.8 billion is education aid and some funds for local budgets. There are specific grants, such as the Payment in Lieu of Taxes (PILOT). PILOT grants are given to help compensate for the loss of tax revenue a municipality does not get because a college, hospital, or state facility within the municipality does not pay local property taxes because of a State-mandated tax exemption. As discussed in Chapter 7, the State also provides funds for maintenance of town roads, commonly referred to as Town Aid for Roads (TAR). There may also be other selected grants for education or social programs, provided a municipality qualifies. On average, Connecticut municipalities obtain 64.2% of their revenue from property tax, 24.6% from state aid, 8.6% from local fees, and 2.6% from federal grants.

A local government has to face the task of balancing its budget. Because there is little

outside aid — unless your community is needy and qualifies for significant State aid — this means local taxes will be the main source of revenue for expenditures. If local services are to be provided, taxes have to be there to support the services. This balanced budget forces the towns to make the tough decisions each year on services vs. taxes. If taxpayers want something, they must be prepared to pay for it.

Municipalities cannot tax anything they want. Local taxing authority is limited by the State. For instance, the State does not allow local taxes on a farmer’s cow. Some states (not Connecticut) allow their municipalities to have local income taxes or to levy a local sales tax, such as on liquor sold. A few states even allow municipalities to own and operate liquor stores in order to raise money.

The Property Tax is the primary funding source used by local governments to respond to their residents’ needs. Statewide, the property tax raises almost $6 billion. The property tax is figured as a percentage of the property’s market value. There are two classes of property:

Real Property: Land and improvements permanently attached to the land, such as houses and buildings.

Personal Property: All other property not classified as real property, such as machinery, equipment, and motor vehicles.

These two categories are tied directly into the Mill Rate set each year by the town or city. A mill is one one-thousandth of a dollar. Simply put, this means 1 dollar of taxes is owed to the city or town for every 1,000 dollars of the property’s assessed value. The taxes on a house is an example of a real property tax. If a home is assessed at $100,000 and the mill rate is 30 mills, the Property Tax would be $3,000 (100,000 x .03). Often one hears the question, "What is the mill rate of the city or town?" Pick up any newspaper in the months of March, April, or May, and there will be an article on local government involving the proposed mill rate of the municipality.

The Assessed Value is the value of the property against which the mill rate is applied. It is not the market value or the value of what someone would be willing to pay for the property if it was for sale. The municipal assessor determines the assessed value based on the market value in conjunction with a uniform set of guidelines and formulas. In Connecticut, 70 percent of the market value is used throughout the state to determine assessed value. This rate is called the Assessment Ratio.

Every 12 years municipalities have to examine and reappraise all the real property in the town to bring the values up to date. Every 4 years they have to do a statistical revaluation, which does not require a physical inspection of each property. This process is called Revaluation. In effect, the revaluation puts on the official record the increased or decreased values that real estate has gained since the last revaluation. Motor vehicles and personal property are appraised every year. Revaluation is a long and difficult process, but by law it must be done.

If a property was revaluated last year and was determined to have a market value of $252,200 at a tax rate of 29.62 mills, the taxes would be calculated as follows:

$252,200 x 70% = $176,540 (assessed value)

$176,540 x .02962 = $5229.10 (assessed value x mill rate)

$5,229 = Tax Due

However, when a town goes through revaluation, typically the mill rate goes down since the value of everything goes up. In recent years, it has not been unusual to see the mill rate cut in half, i.e., from 30 mills down to 15 mills.

The Grand List comprises all of a municipality’s taxable property — real estate, personal, and motor vehicles. The larger the grand list, the larger the taxable base against which the taxes are set. Therefore, after a municipality revaluates its properties, it picks up the increased values of all the properties, and its new grand list jumps in size. The mill rate can then generally be reduced. As more revenue is needed, the mill rate, or rate of taxation, goes up to raise more money. The amount of tax collected on properties will be directly dependent on the services needed by municipal residents and businesses. The presence of business and industry in a municipality may assist the tax burden because they pay property taxes too. Unfortunately when the economy is not good and people have less money, they don’t buy vehicles or real estate. This means less revenue for the municipality since the older motor vehicles values are lower and property is not being developed. Consequently, the mill rate must be raised to compensate — all at a time when lower taxes would provide relief to the property owner. Older municipalities may have decaying infrastructures (roads, sewers), and face high annual maintenance costs, which also will contribute to raising property tax rates.

Homeowners generally receive two different tax bills: one for the home or condominium, and another for their vehicles. Figure 13-1 illustrates a typical tax bill. Some people prefer to put their real estate tax money into a special account — escrow — with the bank each month, and then have the bank pay the tax bill when it comes due. This is usually twice a year, in January and in July.

The Motor Vehicle Tax is based on the value of the car, truck, or motorcycle, and is an example of tax on personal property. The more expensive the vehicle, the higher the tax. It is important to note that although the tax is collected by the municipality based on the mill rate, the actual value of the vehicle is set by the state. If the car has a market value of $11,614, and is registered in a municipality with a mill rate of 29.62 mills, the tax on it would be:

$11,614 x 70% = $8,130 (market value x assessment ratio)

$8,130 x .02962 = $240.82 (assessed value x local mill rate)

If this same vehicle is registered in a town or city with a higher mill rate of 50 mills, it would be taxed more, even though its assessment (set by the State) is the same.

$11,614 x 70% = $8,130

$8,130 x .05 = $406.50

It is for this reason that some companies or people will try to register their vehicle or vehicles in another municipality to obtain lower taxes. They try this if they have another residence or a branch of their business in another town. A sample Motor Vehicle car tax bill due in July 2000 for a 1997 Mercury Sable is shown in Figure 13.2.

If a person is going to buy a new car, the best time to do it, from the tax point of view, is immediately after revaluation, since the mill rate will drop but the car assessment (set by the state based on NADA values) does not change. For example, using the earlier tax rate of 29.62 mills, the mill rate might drop to 15 mills. Thus, if a person were to buy a $20,000 car, the savings would be as follows:

$20,000 x 70% = $14,000 Assessment

$14,000 x .02962 = $414.68 Before revaluation

$14,000 x .015 = $210.00 After revaluation

TAX SAVINGS = $204.68

In this example, the value or assessment (set by the State) of the car remains the same while the mill rate (set by the town), goes down. Because the taxes are the result of the assessment times the mill rate, there is a tax savings of $204.68.

Since property taxes do not fluctuate with income, many people view them as unfair. In 1998, the Center for Research & Public Policy conducted a survey of Connecticut residents and found that the local property tax was the tax most residents would like to reduce:

The attitudes towards the property tax are understandable because of the way property taxes are structured. For example, in poor economic times when people may be unemployed or not making a lot of money, the local property tax continues at its assessed rate, regardless of the family’s income. Senior citizens, who may be living on a fixed income, could be living in a large home and therefore have high property taxes. A person with a large family who buys a large house would also be faced with a larger property tax bill. The same applies to a business with declining sales and a large physical plant.

It is important to note that 100 percent of the taxes due are not usually collected for a variety of reasons. Firms go out of business and can’t pay, people lose their jobs and don’t have the money, and some people move out of town and don’t pay their car taxes. Municipalities do collect the tax on real estate because real estate cannot be sold and transferred to the new owner until the taxes on it are paid.

Generally larger cities have a lower collection rate than smaller towns. It is common in middle-size towns to estimate a collection rate of 97-99 percent. Whereas, in the cities the collection rate is lower. For example, the city of Bridgeport faced severe financial problems in the late 1980s and early 1990s and only had an average collection rate of between 91-93 percent. The lower the tax collection rate, the higher the mill (tax) rate that has to be set to make up the difference. In other words, those people who pay their taxes have to pay more to make up for the ones that don’t pay.

Municipalities also raise revenue by user fees and licenses. Fees to obtain a swim pass to the town’s pool, beach, or lake, or fees to play on the town’s soccer or basketball team are examples of user fees.

Examples of license fees include the cost of dog, fishing, hunting, and marriage licenses. Permit fees cover such items as building permits, zoning permits, or pool permits. The amount of the building permit fee generally depends on the value of the construction. This amount is not large in comparison to property taxes and state aid, but it does provide some financial help for cities and towns.

Cities and towns start to provide more and more services as they get bigger. Table 13-1 shows the many levels of services provided by Ellington, Windsor, and New Haven. The pie graphs below illustrate a breakdown of expenses

for the various municipal services for three different size municipalities. Note the decrease in

the percent for education as the community grows, although the actual expenses increase. Table 13-2 shows the sources of revenue for the three municipalities.

If a town or city collects property taxes twice a year, the bulk comes in during January and July. Some municipalities collect only once a year, and others four times a year. Since all the money is not needed immediately, but over a twelve-month period, the municipality can invest some money and earn interest on the investments. This can be an important source of revenue if it is done properly and in a timely fashion. It is important to realize that the State regulates municipalities’ ability to invest their money, since it involves public money and there is a public trust. For example, monies cannot be invested in the stock market.

Today, municipalities generally use computers to keep track of their taxes, and to make electronic transfers of money between bank accounts. The amounts are so large, even the loss of interest for one day can represent substantial sums. All of the functions in revenue collection and investments require close coordination among the municipal assessor, revenue (tax) collector, and finance director.

The budgetary process is a complex and lengthy one which requires much effort by all members of local government and the people themselves. A town or city’s budget is a legal document which determines how much money will be spent on certain programs, positions, and equipment. The budget operates on a fiscal year, from July 1 to June 30. The chief executive of the municipality will require all town departments to submit a budget proposal. He or she will then modify this proposal, usually by cutting some items and changing others. Then this budget is presented to the local legislative body, such as the council, for deliberation. The council will deliberate and hold hearings on the proposed budget. Just prior to the budget preparation, the municipal assessor develops a grand list of all taxable property in the town. The total value of this grand list will determine what mill or tax rate will be required to finance the budget. The

people of the municipality may register their input through public hearings, town meetings and ultimately a budget referendum may be required. The final result is the adopted operating budget for the new fiscal year. Collecting money to run local government is important. If not handled efficiently and properly, it can cost the municipality a lot of money, and eventually, result in a higher tax rate on its citizens and businesses.