Budget Overview

A proposed FY22 General Fund Municipal Appropriation of $270,088,117 was submitted by Mayor Joseph Curtatone to Somerville’s City Council on June 3, 2021. Reductions of $406,768 were made by the City Council during the budget review process, and $355,511 in reinvestments were submitted as part of the amended appropriation totaling $270,179,919.

$138,281 in supplemental appropriations were approved for a final General Fund Municipal Appropriation of $270,318,200

Below are explanations and details concerning the FY2022 revenue collection assumptions and spending appropriations. Following the appropriations overview, each department’s detailed budget is presented along with goals for FY22 and measures of progress towards those goals.

REVENUE INTRODUCTION

The City of Somerville anticipates raising a total of $286,881,109 in FY22 to finance General Fund Operations.

The following is a summary of major revenue sources to the City budget, including highlights of significant changes. The operating budget is financed with funds generated from property taxes, local motor vehicle excise taxes, local option meals tax, local option hotel/motel excise tax, state aid, transfers from other local sources, investment earnings, and other local fees and charges. Taxes account for 73.96% of the City’s revenue base, state aid 17.58%, local receipts 7.44%, and other funding sources 1.02%.

In FY2022, the property tax will fund 70.70% of the General Fund Budget.

REVENUE ASSUMPTIONS AND PROJECTIONS

The City’s policy is to budget revenues conservatively. Revenue projections for FY2022 are based on FY2019 and FY2020 actual collections, FY2021 projected collections, other historical trends, the macro-level economy, and anticipated changes that impact the revenue source.

1. TAXES

FY2022 tax revenues are projected to be $211,849,703. The components of this revenue category are Property Taxes (real estate and personal property), Motor Vehicle Excise, Local Option Room and Meals, and Payments In Lieu of Taxes. As noted earlier, 73.96% of the operating budget is funded from this revenue category.

Real Estate and Personal Property Taxes

The property tax levy is the City’s largest and most dependable source of revenue. Within the tax category, real and personal property taxes are the largest at $200,839,916 and represent 70.70% of the total general fund operating revenues.

Real and personal property taxes are based on values assessed as of January 1 each year. By law, all taxable property must be assessed at 100% of fair cash value and property taxes must be levied at least 30 days prior to their due date. Once levied, these taxes are recorded as receivables, net of estimated uncollectible balances. Property taxes that remain unpaid after the respective due dates are subject to penalties and interest charges. The City successfully completed a state-mandated interim valuation process of property values in FY21. While the DOR reviews and approves any adjustment by the Board, the standards are not quite as rigorous and as comprehensive as those in a certification or revaluation year.

Based on the City’s experience, most property taxes (approximately 99%) are collected during the year in which they are assessed. The lien of properties on which taxes remain unpaid occurs annually. The City ultimately has the right to foreclose on all properties where the taxes remain unpaid.

The total property tax levy is impacted by Proposition 2½, which was voted into state law in 1980. Proposition 2½ limits the property tax levy in a city or town to no more than 2.5% of the total fair market value of all taxable real and personal property. In addition, it limits the total property tax levy increase to no more than 2.5% over the prior year’s total levy limit plus new construction, known as “new growth.”

The City has promoted economic development over the past several years to generate new growth. These efforts have been fruitful. The certified value of new growth in FY2022 was $10,724,320. The City adopted an innovative financing tool known as District Improvement Financing (DIF) to fund infrastructure improvements in the Assembly Square Area, which in turn helped to stimulate new business development. In the fall of 2017, the Board of Aldermen approved a new District Improvement Financing District in Union Square.

The Proposition 2 ½ Levy Limit for FY2022 is projected to be $198,051,137. This calculation is based on the FY2021 Levy Limit ($182,757,870) plus the allowable 2.5% increase ($4,564,397) plus new growth ($10,724,320).

In November 2016, Somerville voters overwhelmingly approved a Proposition 2 ½ Debt Exclusion to help pay for the construction of the new $257 million Somerville High School Project. The Proposition 2 ½ Law allows a City or Town to increase property tax revenues above the Property Tax Levy Limit with voter approval in order to fund a specific capital project for a limited or temporary period of time. The debt exclusion exempts the annual debt service to pay the $130.3 million in bonds for the Somerville High School construction from the annual levy limit. Under debt exclusion, a time-limited tax increase equivalent to the revenue needed to pay off the annual debt service payments would be levied on property taxpayers each year.

In FY2022, the City will exclude $6,033,610 in debt service payments for the Somerville High School Construction Project from the Proposition 2 ½ Levy Limit.

Motor Vehicle Excise Tax

Motor vehicle excise taxes are assessed annually for each vehicle registered in the City and are recorded as receivables in the fiscal year of the levy. The Commonwealth is responsible for reporting the number of vehicles registered and the fair values of those vehicles. The tax calculation is the fair value of the vehicle multiplied by $25 per $1,000 of value. The allowance for uncollectible accounts is estimated based on historical trends and specific account analysis. The low-interest rate environment and lower gasoline prices spurred new car sales. Increased new car sales generate new excise tax revenue based on higher valuations. We see higher interest rates, higher gasoline prices, and slightly lower car registrations as factors mitigating this trend. The projection for FY2022 is $5,907,240, a 7.6% increase when compared to the final FY2021 budgeted amount.

Hotel/Motel Excise Taxes

A city or town may impose a local excise of up to 6% on the rental of rooms in hotels, motels, lodging houses and bed and breakfast establishments. The local excise applies to all room occupancies subject to the state room occupancy excise. Local Hotel/Motel excise tax revenues are collected by the State and distributed to the cities and towns on a quarterly basis. Currently, the City has three hotels and several Bed and Breakfast establishments. In July 2018, a new 158-unit Marriot Hotel opened in Assembly Square Block 5. The new hotel provided significant expansion of this revenue source in FY2019 and beyond. Projected Hotel/Motel tax revenues decreased significantly with the onset of the pandemic in FY2021 and rebounded in FY22 to $627,279.

Local Option Meals Excise

In August of 2009 the State legislature allowed cities and towns to add a .75% local option excise to the state’s 6.25% meals tax. The restaurant sector continues to experience strong success. We expect this revenue source to continue to be a mainstay as the City’s reputation for fine dining and entertainment is now well established in the Metropolitan Boston area. During the FY2021 budget process, estimates were lowered as an expected consequence of the pandemic but have since rebounded and are now projected at $1,710,339 for an increase of 77% over the final FY2021 budget estimates.

Payments in Lieu of Taxes

The largest participant in the City’s Payment In Lieu of Taxes (PILOT) program is now Partners Healthcare with the development of a new administrative headquarters located in Assembly Square. Projected PILOT Payment from Partners in FY2020 total $983,404. At present, Tufts University contributes $275,000. A total of $200,000 of the $275,000 is budgeted as a revenue source for the Operating Budget; a total of $75,000 is budgeted in a gift account for educational, recreational, and cultural uses. The existing 5 year PILOT Agreement with Tufts University expired on June 30, 2018. At the time of publication of this document, a new Agreement with Tufts has yet to be executed. The City will budget the current Agreement amount on an ongoing basis and amend once a new Agreement is reached. The remaining PILOT payments are received from several private non-profit social service agencies. The total FY2022 budgeted PILOT amount includes Partners, Tufts, and the non-profits and is anticipated to be $1,595,911.

2. PENALTIES AND DELINQUENT INTEREST

The City receives interest and penalties on overdue taxes and excise taxes. This revenue is budgeted at $512,737 in FY2022, an increase of 2%. The City will continue to emphasize collection of outstanding real estate, personal property and excise taxes. More taxpayers are complying with deadlines. These revenues are budgeted conservatively since there is great volatility from year to year in these revenues, based on the number of outstanding accounts.

3. LICENSES AND PERMITS

The City issues over 50 types of licenses and permits. Most are business or construction related. Licenses and Permits are primarily issued by the Inspectional Services Department, the Licensing Commission, and the City Clerk.

Estimated FY2022 License and Permit revenue totals $12,758,856. The largest revenue source in this category is for building permits, which was budgeted at $8,501,270 in FY2022. The increase is 35% over budgeted FY2021 numbers.

4. FINES AND FORFEITS

Budgeted FY2022 revenue from Fines and Forfeits totals $4,879,753 from 112 different categories. Some fine revenue is distributed to the City by the State (Moving Violations, Court Fines) but most result from violations of city ordinances. The largest revenue source for this category is parking fines, which is projected at $5,602,543. The overall revenue category is budgeted 13% higher than FY2020 levels.

5. FEES

By law, fee levels cannot exceed the cost of delivering the service. The cost includes both direct service and administrative costs. The “Fees” category totals $1,911,615. This is 21% above the budgeted amount in FY2020. The City is not budgeting Cable Franchise Fee Revenue from the two cable TV providers in FY2020 and beyond.

6. STATE AID

The Estimated FY2022 State Aid amount totals $51,777,587 broken down as follows: $50,642,096 from the State Cherry Sheet and $1,135,491 as reimbursement from School Building Assistance Bureau (SBAB) funds.

Named for the cherry colored paper on which it was originally printed, the Cherry Sheet is the official notification from the Commissioner of Revenue of the next fiscal year’s state aid and assessments to communities and regional school districts. State aid to municipalities and regional school districts consists of two major types – distributions and reimbursements. Distributions provide funds based on formulas, while reimbursements provide funds for costs incurred during a prior period for certain programs or services. In addition, communities may receive “offset items” which must be spent on specific programs. Cherry Sheet Assessments are advance estimates of state assessments and charges and county tax assessments. Local assessors are required to use these figures in setting the local tax rate. Local aid refers primarily to distributions from the Commonwealth to municipal general revenue for Chapter 70 education aid and Unrestricted General Government Aid. The amount of these funds to be distributed is listed on each community’s Cherry Sheet along with other, relatively smaller commonwealth programs such as library aid, veteran’s benefits, police career incentive, school lunch and other reimbursements. School building reimbursements, which were once part of the Cherry Sheet, were removed when a new authority (School Building Authority) was created to administer the program under the control of the State Treasurer’s Office. The City anticipates $1,135,491 in School Building Authority funds as reimbursement for the construction of the Capuano School.

7. MISCELLANOUS RECURRING AND OTHER FINANCING SOURCES

These categories include reimbursements from vendors, Medicaid, recycling, rental income, settlement of claims, indirect cost reimbursements from Enterprise Funds, interest earnings, reserves appropriated to balance the budget, Overlay Surplus and sale of City Assets. Miscellaneous and Other Revenue categories total $4,359,8760 in FY2022.