Paul working for you.

Tuesday, November 22, 2016

Into debt we go...

Debt and Borrowing Limits

Bill Arrigal - Bureau of Accounts Public Finance Section and Susan Whouley - Bureau of Accounts Analyst

The sky is not the limit when it comes to borrowing for certain purposes for every city, town, and special purpose district in Massachusetts. In this case, it's not just a matter of affordability or restriction based on a levy limit. In this article, we're focusing on the debt authorization limit.

Background

The concept of an authorization limit can be traced as far as the mid-19th century and is discussed in Tony Rassias' "A Sketch of the History of the Massachusetts Bureau of Accounts and Related Matters in the Growth and Development of Municipal Finance."

Passage of the Municipal Indebtedness Act was an attempt to control the use and rise of debt after the Civil War. The increase in municipal debt was unbridled. A municipality was allowed to borrow in anticipation of the current fiscal year's tax revenues as well as for the next. Borrowing was allowed for ordinary operating expenses, could be incurred to meet other loans at maturity, was allowed with no limit and did not require proper provision for payment when due.

The Municipal Indebtedness Act of 1875 contained an indebtedness limit of 2.5% for cities and 3% for towns of their last preceding assessed valuation of taxable property. The current debt limit law has its roots in that legislation.
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Templeton's 5% Debt Limit $28,574,135:
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Current Debt Limit Law

MGL c. 44 sec. 10 requires that debt authorized by cities and towns under certain sections of law, primarily MGL c. 44, sec. 7, cannot be authorized in total in excess of 5% of their most recent Equalized Valuation (EQV) or in excess of 10% of the EQV if approved by the Municipal Finance Oversight Board (MFOB).

The current law also authorizes special purpose districts to incur debt. This is done by  determining the percentage of the district's previous fiscal year's total assessed value as it relates to the municipality's previous fiscal year's total assessed value.

Regional school districts are not governed by MGL c. 44, sec. 10 and therefore have no debt authorization limit.

Special legislation or a specific general law, of course, could authorize a debt limit to an amount or percentage other than that allowed by MGL c. 44, sec. 10.

Debt Authorization

Cities, towns, and special purpose districts may authorize indebtedness by a two-thirds approval vote of their respective legislative bodies. Three particular general laws are most often referenced: MGL c. 44, sec. 7 (within the debt limit), MGL c. 44, sec. 8, (outside the debt limit), and MGL c. 70B (outside the debt limit for school construction). The sections of Chapter 44 provide multiple purposes for which borrowing may be authorized.

Equalized Valuation

Equalized Valuations (EQVs) represent the estimated full and fair cash value of all taxable property in each governmental entity and are determined by the Bureau of Local Assessment (BLA) by:

applying a statistical analysis to arms-length sales,

adding projected new construction value developed through a review of past four years' new growth, and

adding the Urban Redevelopment Corporation excise tax under MGL c. 121A.

EQVs are determined every two years by BLA, and after an appeal period through the Appellate Tax Board, become effective as of the following January 1. EQVs represent the full and fair cash value of all taxable real and personal property as of January 1, including each municipality's 121A urban redevelopment property. EQVs are a basis of comparison among cities and towns for certain state and local purposes.

The Municipal Finance Oversight Board
The MFOB was created by Chapter 46 of the Acts of 2003, the so-called "2003 Municipal Relief Act," after the elimination of the Emergency Finance Board (EFB), which provided state oversight over certain city, town, or district borrowings, appropriations and other actions. The MFOB consists of the attorney general, treasurer, auditor and director of accounts, or their designees.

Special Purpose Districts

These districts are defined in MGL c. 44, sec. 1 as "fire, water, sewer, water pollution abatement, refuse disposal, light, or improvement district, or any other district, howsoever named, formed for the purpose of carrying out any of the aforementioned functions, whether established under general law or special act."

Calculating the Debt Limit

For a municipality, the debt authorization limit is calculated by multiplying the current, official EQV by 5%.




To calculate the debt authorization limit for a special purpose district in a municipality,  confirm the district's total assessed value from the previous fiscal year. Next, confirm the municipality's total assessed value from the previous fiscal year.  Determine the percentage of the district's total assessed value within the municipality. Multiply  that percentage by the municipality's EQV, then  multiply the result  by 5%. That is the district's debt authorization limit.





To calculate the debt authorization limit for a special purpose district in multiple municipalities, confirm the district's total assessed value from the previous fiscal year within each municipality. Next, confirm each municipality's total assessed value from the previous fiscal year. Determine the percentage of the district's total assessed value within each municipality. Multiply that percentage by each municipality's EQV. Sum the totals for all municipalities and multiply that sum by 5%. That is the district's debt authorization limit.







(To view a larger version of this image, click here.)

The "Double Debt" Limit

The borrowing authorization limit for cities, towns, and special purpose districts may be increased from 5% of their official EQV up to 10% if approved by the MFOB.

Using the calculation methodology for a municipality, the "double debt" limit is calculated simply by taking the city's or town's most recent EQV and multiplying it by up to 10%.

For special purpose districts, the calculation methodology as shown above is the same, except that the 5% factor is replaced by up to 10%.



Cities, towns and special purpose districts contemplating any additional debt authorization that will exceed the debt limit should request a meeting with the MFOB prior to their legislative body's debt authorization vote. For more information about the MFOB, contact Marissa Szabo at marissa.szabo@massmail.state.ma.us or (617) 727-2075.

To view the debt limits for all 351 municipalities using the most recent EQVs effective as of January 1, 2015, click here.



Templeton's 5% Debt Limit $28,574,135:

11 comments:

  1. How boring is all this money stuff?

    BTW an important bit of information:

    "Cities, towns and special purpose districts contemplating any additional debt authorization that will exceed the debt limit should request a meeting with the MFOB prior to their legislative body's debt authorization vote. For more information about the MFOB, contact Marissa Szabo at marissa.szabo@massmail.state.ma.us or (617) 727-2075."

    AGAIN: "...AUTHORIZATION THAT WILL EXCEED THE DEBT LIMIT SHOULD REQUEST A MEETING WITH THE MFOB "PRIOR TO" GET IT? "PRIOR TO" THEIR LEGISLATIVE BODY'S DEBT AUTHORIZATION VOTE."

    So how legal is it to have the legislative body vote on the debt authorization for the school BEFORE the debt is approved by the MFOB?

    So if Article 8 at the STM was "illegal", how legal is it to take on more debt without MFOB approval? Without a Bond rating?

    Anyone want to answer that one?

    So let's keep on keeping on!

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  2. It makes one wonder if the vote for the fifty million dollar school was legal in the first place. Has that question been asked to town attorney?

    ReplyDelete
  3. Paul,

    I brought this very issue up on this blog back prior to the STM vote. It seems to me (regular Joe) that this entire vote was done improperly.

    When the townspeople voted did we know our present debt total?
    According to my understanding Templeton is actually borrowing 47+ million dollars initially. If this is true your point about the MFOB is more valid as this would take us over the 10% with present debt.

    The MFOB application requires in question 9,10 a bond rating.

    Now, just for "sh**s and giggles" what happens if the MFOB says NO? I mean we are going to them with no bond rating, no audits for 4 past years and less than $100k in our stabilization fund.
    With the recent project history in Templeton I wouldn't loan us a penny!

    Again, can anyone name one project that has gone off successfully in Templeton in the past 10 years?

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  4. This comment has been removed by the author.

    ReplyDelete
  5. Reclamation of East Templeton Elementary School as Templeton Town Hall

    ReplyDelete
  6. 23skidoo,

    More successful anyway..........but even the "town Hall"
    issue was ongoing problems...........remember where it was and all the issues about it.

    What was up with the vault at the town hall? Weren't gifts, or donations used to complete?

    Please remember that the Town Hall "reclamation" was not contracted out and was covered by miles of volunteer work which covers a poorly managed project.

    ReplyDelete
  7. Todays Gardner News..............The Board of Selectmen is working on ways to eliminate a $200,000 shortfall in this fiscal year’s budget, prompting members to take a close look at a possible restructuring of departmental administration as one of the ways to lower costs enough to meet the current gap, and continue the savings into fiscal 2018 and beyond.

    This would appear to suggest our BOS is planning regionalization as a way to cover the mismanaged budgeting process.........

    How about we merge all the "islands" we've created. We've broken out our income producing departments and created multiple administrations, commissions. Why can we not have one overall administration eliminating duplicity in personal, equipment and space.

    ReplyDelete
  8. SUPPORT!!!

    Templeton Fire Department
    9 hrs ·
    Due to recent town budget shortfalls , It is being recommended to remove the Chief and Deputy Chief of the department, and replace them with a Public Safety administrator ( The police Chief). living in town all my live and after 36+ years service to the town as a Fire Fighter, EMT-B. Working my way up through the ranks, Lieutenant, Captain, Deputy Chief and now the Acting Chief of the department. I have given over 110% to the towns people, as most all of us do in public safety. Missing holidays, weddings, cookouts, birthdays! I have Seen men, women, children, friends and family hurt, sick and injured, saving many and loosing many. I feel betrayed, let down, stabbed in the back. The Fire dept. and equipment is in a deplorable state. Not from lack of management skills, but a lack of the required funding. Removing 30% of the budget in past years, Keeping old equipment and having no funds to repair it is a major disaster waiting to happen. Miss management at a higher level than the department should not be placed on the solder in the trenches! Help support Your Fire Fighters and EMTs, Monday November 28 @6:30 Pm. Thank You!
    Everyone have a safe and wonderful holiday.
    Acting Chief
    Denis Hamel

    ReplyDelete
  9. Do,

    You point out the problem exactly. Our BOS favors Short term savings that will actually over time cost us more.

    How many cities or town have a "Public safety administrator" and dont have a Police Chief, Fire Chief. Or they will create this position, then pile on responsibilities to Captains who will get raises to the point of being a Chief because they are doing the work.........1 Town employee added to the bureaucracy is all we'll get............




    How much could the excess $300k we've spent on audits have helped

    ReplyDelete
  10. the "quick, short term fix" has never worked, and never will. js was an expert in "short term quick fix". that's why we have 40 year notes!! that's part of why we are where we are!!!! FIX, is not popular, hurts, and doesn't get you re-elected. but it is needed!!!!

    ReplyDelete
  11. If approved by the Municipal Finance Oversight Board (MFOB).
    The question will remain and it is. "IF"

    If not then what will Templeton do.
    If yes what will Templeton be able to do if there is another need for borrowing?
    Alot of IFS with no answers to other questions like audit results,bond rates and the like.

    ReplyDelete