From the Division of Local Services Newsletter

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: