The topic of discussion for today is the use of property tax collected by the City of Leon. I have provided the image below for your study. It is linked so that you can open it in a new tab in a larger format for further study.
Understanding city finance is a daunting task that I have learned gradually over the course of 13 years. Of course, the past couple of years as the city administrator has increased the intensity of the learning curve for me.
A city budget has multiple funding streams. Six of the funding streams come from the payment of property tax by property owners with the city limits of Leon. Before we get to a discussion on property tax, let's briefly talk about the funding streams that are not supported by property tax.
Those funding streams are:
1. Local Option Sales Tax (LOST)
This tax is a 1% sales tax that was voted for by the public on 2 occasions. The first ballot was for collecting money to construct a new swimming pool. The second vote was for continuing the tax to divert the money elsewhere since the loan for the swimming pool was paid off.
The language of the ballot is as follows:
"100% (to) be used for the construction and maintenance of street improvements including equipment, and the acquisition, demolition, and restoration of dangerous and dilapidated properties."
This is a consumption tax, so when you are purchasing taxable items within the city limits of Leon, you are helping support the effort to maintain the roads and the effort to remove old or dangerous buildings in the city.
2. Road Use Tax (RUT)
Road Use Tax is also a consumption tax. The state collects a tax on each gallon of fuel (gas or diesel) that is sold in the state. The state then distributes these funds to local governments for the upkeep of roads. The amount of money that each local government receives is population based. The dollar per resident has gone up slightly each year, but if a town is losing population, the total amount of money received may not keep pace. In the 2020 census, the population of Leon was reduced by 155.
3. Rental and Service Fees
The City of Leon rents the community center, sells cemetery lots, and sells small loads of driveway gravel.
The city provides water, sewer, and garbage removal service to its residents.
All of the monies generated from each of these activities is designated to support the department that provided the material or service.
4. Township Fire Protection
The Leon Volunteer Fire Department provides fire protection and rescue services. These rural townships surrounding Leon pay for this service through additional property tax. The city is limited to taxing for no more than $0.6075 per $1000 of valuation for each respective township.
Property Taxes
Now that those funding streams have been briefly addressed, we can get to the nuts and bolts of property tax. If you look at the six lines emanating from the property tax oval at the top of the diagram, you might notice that some lines have a maximum rate noted and other lines indicate that the rate is variable.
Maximum Rate Taxes
1. General Fund Tax
This is really two taxes bonded together in one funding stream. It is all property tax, yet is spilt in categories of residential and agricultural, and each category has a different maximum tax that can be levied on it.
The money collected from these taxes supports 6 of the city's departments. The fire department could be included under the same umbrella but is self-sustaining with the money that is collected for township fire protection.
Since these monies are limited by the maximum allowable levy rate, balancing the general fund is a crucial step in making the city's budget work each spring.
These 2 revenue streams have accounted for an average income of $277,406 over the past 8 budget cycles. For the upcoming year, the amount of income is $264,214, a $13,192 reduction for the 6 departments utilizing these funds.
2. Community Center Tax
Iowa code allows for cities to tax the pubic for the maintenance of a city owned community (civic) center. The maximum allowable tax is $0.135 per $1000 of valuation. For the past 8 budget cycles, the average amount of tax money available for the community center has been $4,602.38. For the upcoming year, that amount is $4,379.
3. Emergency Fund Tax
Another supplemental tax that Iowa allows is at tax for an emergency fund. This tax is limited to $0.27 per $1000 of valuation. The money that is collected each year is kept in a separate fund and can be used to supplement any department within the city that has a shortfall. The 8 year average collection is $9,204.75. The upcoming budget will collect $8,758.
Variable Rate Taxes
1. Insurance
When looking at the previous 8 budget cycles, as you might expect, the cost of ensuring the city for liability and replacement of infrastructure has been increasing. The minimum insurance premium for the time period was $83,665. The average has been $106,781, and this year's premium represents the maximum at $149,877.
Each time that the cost of insurance increases, decisions about the structure of payment need to be made. Some of the cost in recent years has been diverted to departments that are covered by the insurance policy but are not supported by property tax dollars. This helps reduce the burden on the tax payers.
Since the rate calculation for this tax item is variable, the amount of money that is needed to support the operation is "requested" from the tax payers. Then the levy rate that is necessary to raise the necessary funding is calculated based on the total valuation of the property within the city. If the valuation were to increase, then the levy rate would go down, and vice versa. Additionally, if cost were to fall, the levy rate would also fall.
2. Employee Benefits
The city requires employees with specific skills in order to operate in an efficient manor and produce quality work. Any employer has this same consideration when filling skilled labor positions. Likewise, an employer must remain competitive with wages and benefits so it can attract and retain quality employees.
If these 2 key concerns of any employee are not sufficient, then hiring and retaining quality employees is an uphill battle. Think of the best teacher that you have in school. Was this teacher new to teaching. All prospective teachers exit college with the same educational credentials that make them employable by a school district. Some will become excellent teachers in time, and the timeline will likely be different for each individual teacher. Unlikely is the situation where the first year teacher will be on par with their peers in the district that have decades of experience.
I can assure you from my experience obtaining a B.S. Ed and a B.S. Chemistry, college does not fully prepare students for the work world. Also, the education that I have from doing jobs in the construction industry, among many other industries, did not come from the classroom.
Many factors are in play when looking to attract a new employee with skills that have been learned from previous experiences. Many times, in Leon's situation, new employees do not possess specific previous experience that is ideally aligned to the job description for the vacant position. They will have to obtain that experience on the job in Leon. If the city cannot retain that employee, the time and money invested by the city to provide the learning opportunity is not providing the best return on investment.
3. Debt Service
Debts incurred by the city that are paid back with property tax are called General Obligation (GO) debts. A city can borrow money for larger projects that they cannot fund with the cash that is in the bank. The borrowing is limited to protect the tax payer from living in a community that gets upside down with debt.
Currently the city is paying back 2 loans that used tax dollars for principal and interest payments. The city owns half of the lake road that was repaved several years ago. This loan should be paid off in the summer of 2024.
The new fire truck that was purchased in 2021 was purchased with grant funds, donations, and a loan. That loan will continue until 2027.
The sum of the principal and interest for each outstanding loan is calculated for any given budget year to find the amount of money needed from the taxpayer.
I believe that we have covered all the regular funding streams that are used to calculate the city's budget each fiscal year (July 1 - June 30). There are many variables, including some estimations, that go into making the whole stew.
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