Ferrara Fiorenza P.C.
 

The Property Tax Levy Limit -- A Primer and Some Facts

New York’s “property tax cap” became a law on June 26.  It likely will be a part of school districts’ (except the Big 5) and local governments’ (except New York City and its Counties) budget planning for many years. While there are some areas of uncertainty to be filled in over time, the main points are clear. This article discusses those points as an introduction and summary of the statute’s operation. 

Most of the provisions affecting school districts are set out in a new section of the Education Law – Section 2023-a (ominously similar to 3020-a).  Some facts from the statute: 

  • The law is effective now and creates a formula for determining the maximum tax levy which will first impact the school levy for the 2012-2013 fiscal year.
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  • The cap applies to the total tax levyand has no direct impact on tax rates, which will vary as assessments change.
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  • The law establishes an “Allowable Levy Growth Factor” which limits the inflationary percent of increase of the levy from year to year. In general and subject to various adjustments and exclusions discussed below, the levy may not increase by more than the lower of 2% or the percent change in the cost of living over the last year (January to January). The prior year’s levy, multiplied by this Allowable Levy Growth Factor and with adjustments discussed below is the “Tax Levy Limit” for the coming year.  The growth factor will never require a decrease in the levy from year to year.
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  • Assessment growth from new construction, etc. (but not simply from revaluation) as determined by the Commissioner of Taxation and Finance through ORPS, is factored into the formula and will allow a greater levy increase than would otherwise apply.  Reductions in the assessment base do not reduce the Tax Levy Limit.
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  • PILOT payments are factored into the formula to neutralize the effect of fluctuating PILOT amounts. 
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  • If a part of the Tax Levy Limit is not used in one year, up to 1.5% of the prior year’s Tax Levy Limit can be carried over and added to the limit for the next year.
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  • The taxes in support of certain types of expenditures are excluded from the cap; these exclusions are not part of the Tax Levy Limit and are added to the tax levy for the year they are budgeted to be paid.  The exclusions are:
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◊ taxes necessary to pay court orders or judgments in “tort” lawsuits (those for damage or injury to person or property) for the amount of the order/judgment that exceeds 5% of the prior year total levy; 

◊ taxes necessary to pay retirement contributions to ERS/TRS caused by rate increases of more than 2% from the prior year (the first 2% of a rate increase is not excluded from the cap); 

◊ taxes necessary to pay the local share of capital projects and capital equipment purchases as well as transportation capital debt service; these include amounts budgeted to pay debt service or lease payments (apparently such as lease-purchase agreements for energy performance projects), subject to voter approval where required. 

  • The Tax Levy Limit must be disclosed in the Property Tax Report Card and the Budget Notice distributed before the budget vote.
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  • A budget which requires a tax levy greater than the Tax Levy Limit (not considering the capital and other exclusions) can be adopted if approved by at least 60% of the persons voting on the budget.   If fewer than 60%, the budget is defeated.
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  • The same 60% rule applies to any Board- or Voter-presented propositions that require a tax which would result in a levy above the limit (excluding the capital and other items listed above).
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  • If the budget is defeated once, a revote may be scheduled or a final budget adopted by the Board.  If a revote is unsuccessful the Board must adopt a final budget.  In the case of a final budget adopted by the Board and not voter-approved, the Board may not levy a tax that is greater than the prior year’s tax levy.  The statute does not on its face allow adjustment of this levy for the exclusions (such as retirement payments and capital expenditures) nor for inflation or assessment growth.
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  • The Board-adopted final budget is also subject to the “contingency budget” limitation on the administrative component of the budget, but the other adjustments previously allowed in a contingency budget – such as 2% or CPI increase, capital expenditures, tax certiorari expenditures, etc. – have been repealed and replaced by the requirement that the levy may not be greater than the tax levied for the prior year. 
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  • The calculations of a District’s tax cap must be made by March 31 and filed with the Comptroller, SED and the Commissioner of Taxation and Finance (ORPS); the calculation will be reviewed by SED and ORPS and corrections may be made.
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  • If the tax actually levied is erroneously greater than the tax levy limit, the excess amount must be reserved and applied to the next year’s levy.
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These are the basic mechanics as stated in the legislation. We note several comments or questions that should be addressed before the law is fully implemented.  Chief among them is whether a defeated budget truly must result in a levy no greater than the prior year’s levy, or can be adjusted by voter approved capital expenditures and the other “exclusions” listed above.   If this is the true legislative intent, budgeting will indeed become the newest high stakes test for school districts.  Two “no” votes on the budget will limit the District to the amount of tax actually levied in the prior year and any capital expenditures coming on line after that will directly reduce the funds available for education. 

As a further comment, it seems curious that court orders or judgments in tort cases may be excluded if over 5% of the prior year’s levy, but that tax certiorari judgments and contract disputes or civil rights cases of that magnitude may not.  Tort lawsuits are typically covered by liability insurance, while contracts and tax certiorari claims are not, and damages paid because of civil rights lawsuits may also be outside of insurance coverage.  The policy reason for limiting this “exclusion” to personal injury or property damage lawsuits while excluding tax certiorari matters is not readily apparent.

We note too that limiting the “inflation factor” to no more than 2% per year has the potential for catastrophic results in the future if inflationary pressures set in.  A 5% or 10% rate of inflation for several years would potentially destroy a District’s ability to function unless the Legislature increases the inflation factor in the formula. 

Like it or not, New York has joined many other states in acting to reduce the rate at which property taxes increase.  The challenge for school administrators and school boards will be to maintain educational standards within the new financial limitations. 

If you have any questions regarding the foregoing, please feel free to contact us at 315-437-7600.

 

Excerpted from the August 2011 edition of "School Law Matters".  To view the entire newsletter, please click here.