August 10th, 2008
Bill Peterson’s Blog: Taxing times in Buda and Kyle

Many newcomers who complain that Buda and Kyle didn’t prepare for growth are finding out what accommodating growth really means.

Buda and Kyle are both in line for significant property tax rate increases on the next budget, largely because the two cities both are borrowing against future revenues for infrastructure to service growing populations.

In the past, both cities could tap fund balances to lower property taxes here and there, but that option appears to be off the table, especially in Kyle, which has cut its property tax rate for 11 straight years and now is bracing for a proposed increase from 27.07 cents per $100 of value all the way up to 35 cents.

Though Kyle has a projected fund balance of $29.5 million on the next budget, almost all of it is borrowed money encumbered by capital improvement projects. The rest is barely enough to maintain the minimum balance required in the city charter.

The charter says the city must keep an amount matching 25 percent of its operating budget in the bank. Operations include the general fund and the utility fund. Kyle has budgeted $8.5 million for the next general fund, with $2.1 million in the final balance. So, Kyle can’t borrow from that balance to buy down the tax rate without dipping way beneath its 25-percent balance requirement.

The budget proposal anticipates a $3.1 million balance in the utility fund, against an expenditure budget of $5.7 million. Maybe Kyle could take about $1 million out of that balance to buy down taxes, especially since City Manager Tom Mattis has often said that Texas cities routinely run profit-making water operations so they can keep taxes low.

But the city staff insists that none of the fund balance should be expended to reduce taxes. Theoretically, the city could spend some of that balance thusly, but officials say that would just mean the city would have to take a bigger tax bite later.

A penny of tax rate in Kyle generates about $140,000, meaning the city would have to scrub about $1.1 million from its proposed $15.8 million operating budget to wipe out the entire eight-cent tax rate increase.

In Buda, the budget cutters already were hard at work just to propose a 6.3-cents property tax rate increase (from 18.7 cents to 25 cents) on the next budget. The Buda City Council told Interim City Manager Sarah Mangham to go back and find more cuts.

A week later, the council voted to suspend capital spending for the rest of this budget year, adding $124,000 to the fund balance and bringing it up to near $3 million.

As the city’s ideal fund balance is $1.2 million, based on 3.5 months of operations, it would seem Buda has plenty of room to use its money to buy down the property tax rate, which costs about $45,000 per penny. As it turns out, Buda is in no such position.

A little more than $1.4 million of Buda’s fund balance already is designated for projects. Add that to Buda’s requirement for a $1.2 million fund balance and Buda’s $3 million in the bank suddenly turns into only $300,000 available for buying down the tax rate.

At a little more than $45,000 per penny, that 6.3-cent tax rate increase could go away for right about $300,000. But that puts the city in a very dangerous position.

It would mean, in effect, that property owners are paying none of the city’s operating costs, because the proposed budget calls for only $300,000 in property taxes to pay for operations. Therefore, the city’s operations would be entirely reliant on sales taxes. And if sales taxes decline again, then the city faces an even more serious budget problem.

One might wonder why neither city redirects funds already borrowed and designated for capital projects to pay general operating costs and keep taxes down that way. The simplest reason is that the cities are going to be paying on those borrowed funds for 20 years or more and it’s considered unsound to spend 20 years paying for money that’s only going to get a year of use. If you’re going to pay for 20 years, it’s smart to spend that money on facilities that are going to be useful for 20 years or more.