A Surprise in Your Tax Bill

Nov. 20, 2018
Jan. 11, 2019 (see underlined content)

As you saw on your December 2018 tax bill, there was a sort of Christmas present to you taxpayers. The New Hampshire Dept. of Revenue Administration (DRA) had determined that the year-end tax rate would be $30.15, almost a $2 per $1,000 drop from the previous rate of $32.11. How this came about is an intriguing tale of DRA rules and regulations and a wise decision on the part of the Allenstown Selectmen.

The DRA and the Unassigned Fund Balance

The DRA examined town operating expenses which included spending by the town, plus the county, local education, and state education payments. They came up with a total of $9,912,441 for the year.

The DRA also identified the anticipated unspent revenue, which they called Retained Earnings but also called it the Unassigned Fund Balance. Retained Earnings is a poor choice of words here since we're talking about taxes that were not spent, not business revenues.

The money in the Unassigned Fund Balance is tax money that was appropriated but not spent. This fund persists from year to year and can also vary from year to year. It totaled $1,977,406 for 2018.

The DRA also has issued guidelines that the town could choose to retain funds in the suggested range of 5 to 17% for emergency expenditures and to prevent going into a deficit. Any excess funds could either be returned to taxpayers, held over if encumbered, or expended via warrant articles. This year the DRA calculated that the Unassigned Fund Balance ($1,977,406) was a whopping 19.95%, or $292,291, above the 17% mark.

Using the the Unassigned Fund Balance to Reduce the Tax Rate

In October 2018,the DRA recalculated the tax rate breakdown and notified the town officials. The breakdown showed a rate of $30.34, a drop from the previous rate of $32.11.

The Selectmen, the Town Administrator, and the Finance Director discussed the situation and decided to use about $56,000 of the unassigned funds to reduce the 2018 property tax rate to $30.15. This left $1,921,406 of your tax money in the Unassigned Fund Balance. What to do next?

Using the Unassigned Fund Balance to Fill Capital Reserve Funds

At their Nov. 19 meeting, the Selectmen reviewed the 2019 warrant articles. These included several articles asking the town to put money from that fund balance into capital reserve funds, which are savings funds for big ticket items like a fire engine or dump truck. These amounts totaled about $185,100. If voters approve all of them in March 2019, the fund balance would be reduced to $1,736,306 or 17.5% of operating expenses. This would still be at the high end of the DRA's recommendations.

The other use for the Unassigned Fund Balance is for a short-term emergency expense. For example, if property tax bills are not paid in a timely manner, the town could draw on the fund to cover expenses and then pay it back, thus avoiding the need to borrow money.

It seemed that a target of 12-15% ($1,189,493-1,486,866) would have been a more reasonable amount to keep in the Unassigned Fund Balance. Even after deducting for capital reserve funds, there would still be over $1 million left. It would be worth requesting that the Selectmen work toward that target in the future.

What You Can Do

For a $200,000 home, the new tax rate yields a saving of about $400, which may cover most of the cost of that new laptop you need, cover a good chunk of the cost of those new tires you need, or pay for new clothes for the kids.

You should thank the Selectmen for the tax rate reduction, but you should also attend the Budget Committee meetings and insist that they cut or trim some of the large increase in budgets like the Police and Fire Departments.

For more details on the tax rate and the Unassigned Fund Balance, read the following section.

Q&A with the DRA

A recent question and answer session with Bruce Kneuer, a supervisor at the DRA, brought out some interesting facts. Some answers included excerpts from various RSAs (state laws) and were quite lengthy. Read on if you want to get into the budgetary weeds.

Question:
Does the DRA determine what each town's tax rate should be?

DRA Answer:
Yes, pursuant to RSA 21-J:35, I, the DRA determines the tax rate for Allenstown:

21-J:35 Setting of Tax Rates by Commissioner.
I. The commissioner of revenue administration shall compute and establish the tax rate of each town, city, or unincorporated place. Any assessments report issued by the commissioner pursuant to RSA 21-J:11-a shall not delay or otherwise affect the setting of the tax rate for that municipality.

Question:
What percentage of unspent revenues are considered the maximum to be held over, and what is this called?

DRA Answer:
The unspent year-end tax revenue is called the Unassigned Fund Balance (UFB).

The amount of the Unassigned Fund Balance (UFB) will be impacted by both the amount of annual appropriations which were not expended, and by the amount of non-property tax revenue which exceeded the forecasted amount. The DRA provides a range of recommended UFB retention percentages (5% to 17%), this percentage being determined by the amount of the UFB divided by the "General Fund Operating Expenditures".

Question:
Is a town allowed to hold onto this unspent revenue rather than return it all to the taxpayers?

DRA Answer:
The statutes do not call for such action. (See opening of RSA 32:7 below).

32:7 Lapse of Appropriations.

Annual meeting appropriations shall cover anticipated expenditures for one fiscal year. All appropriations shall lapse at the end of the fiscal year and any unexpended portion thereof shall not be expended without further appropriation, unless:

I. The amount has, prior to the end of that fiscal year, become encumbered by a legally-enforceable obligation, created by contract or otherwise, to any person for the expenditure of that amount; or

II. The amount is legally placed in any nonlapsing fund properly created pursuant to statute, including but not limited to a capital reserve fund under RSA 35, or a town-created trust fund under RSA 31:19-a; or

II-a. The amount is appropriated to a capital reserve fund pursuant to RSA 35:5.

III. The amount is to be raised, in whole or in part, through the issuance of bonds or notes pursuant to RSA 33, in which case the appropriation, unless rescinded, shall not lapse until the fulfillment of the purpose or completion of the project being financed by the bonds or notes; or

IV. The amount is appropriated from moneys anticipated to be received from a state, federal or other governmental or private grant, in which case the appropriation shall remain nonlapsing for as long as the money remains available under the rules or practice of the granting entity; or

V. The amount is appropriated under a special warrant article, in which case the local governing body may, at any properly noticed meeting held prior to the end of the fiscal year for which the appropriation is made, vote to treat that appropriation as encumbered for a maximum of one additional fiscal year; or

VI. The amount is appropriated under a special warrant article and is explicitly designated in the article and by vote of the meeting as nonlapsing, in which case the meeting shall designate the time at which the appropriation shall lapse, which in no case shall be later than 5 years after the end of the fiscal year for which the appropriation is made.

Source. 1993, 332:1, eff. Aug. 28, 1993. 2017, 127:3, eff. Aug. 15, 2017.

Question:
Is there a law or policy that governs what a town can do with this unspent revenue?

DRA Answer:
The UFB remains a part of the town's equity (on its balance sheet) until either the legislative body votes to utilize it and/or the governing body votes to use it either as a funding source for an emergency expenditure under RSA 32:11 or votes to use it to reduce the tax rate under the governing body's "manage the prudential affairs of the town" authority in RSA 41:8.

Question:
Allenstown has a town government, school dept., and sewer dept. Do each of those entities have an unassigned fund balance at the end of the year?

DRA Answer:
School districts may adopt RSA 198:4-b, II, as shown below.

198:4-b Contingency Fund.

I. A school district annually by an article separate from the budget and all other articles in the warrant, or the governing body of a city upon recommendation of the school board, when the operation of the schools is by a department of the city, may establish a contingency fund to meet the cost of unanticipated expenses that may arise during the year. A detailed report of all expenditures from the contingency fund shall be made annually by the school board and published with their report.

II. Notwithstanding any other provision of law, a school district by a vote of the legislative body may authorize, indefinitely until specific rescission, the school district to retain year-end unassigned general funds in an amount not to exceed, in any fiscal year, 2.5 percent of the current fiscal year's net assessment pursuant to RSA 198:5, for the purpose of having funds on hand to use as a revenue source for emergency expenditures and overexpenditures under RSA 32:11, or to be used as a revenue source to reduce the tax rate.

III. The legislative body of the city of Manchester, upon recommendation of the school committee, may authorize, indefinitely until specific rescission, the school district to retain year-end unassigned general funds.

Source. 1965, 123:4. 1998, 389:12, eff. Oct. 1, 1998. 2012, 221:1, eff. Aug. 12, 2012. 2014, 190:6, eff. Sept. 9, 2014.

A Sewer Department will operate under RSA 149:10. Section indicates that funds shall be allowed to accumulate (thus creating a sewer fund balance).

149-I:10 Sewer Funds.
I. The funds received from the collection of sewer rentals shall be kept as a separate and distinct fund to be known as the sewer fund. Such fund shall be allowed to accumulate from year to year, shall not be commingled with town or city tax revenues, and shall not be deemed part of the municipality's general fund accumulated surplus. Such fund may be expended only for the purposes specified in RSA 149-I:8, or for the previous expansion or replacement of sewage lines or sewage treatment facilities.

II. Except when a capital reserve fund is established pursuant to paragraph III. all sewer funds shall be held in the custody of the municipal treasurer. Estimates of anticipated sewer rental revenues and anticipated expenditures from the sewer fund shall be submitted to the governing body as set forth in RSA 32:4 if applicable, and shall be included either as part of the municipal operating budget or as a separate warrant article submitted to the local legislative body for approval. In a town or district that has adopted the official ballot referendum form of meeting, any such separate warrant article shall include a default amount as provided in RSA 40:13, XI-a. If the municipality has a properly-established board of sewer commissioners, then notwithstanding RSA 41:29 or RSA 48:16, the treasurer shall pay out amounts from the sewer fund only upon order of the board of sewer commissioners. Expenditures shall be within amounts appropriated by the local legislative body. The sewer commission shall also remit to the municipality those costs incurred by the municipality in support of sewer operations, including but not limited to financial audit, facility insurance, treasurer compensation, and office support.

III. At the option of the local governing body, or of the board of sewer commissioners if any, all or part of any surplus in the sewer fund may be placed in one or more capital reserve funds and held in the custody of the trustees of trust funds pursuant to RSA 35:7. If such a reserve fund is created, then the governing body, or board of sewer commissioners if any, may expend such funds pursuant to RSA 35:15 without prior approval or appropriation by the local legislative body, but all such expenditures shall be reported to the municipality pursuant to RSA 149-I:25. This section shall not be construed to prohibit the establishment of other capital reserve funds for any lawful purpose relating to municipal water systems.

IV. The sewer fund may be used for the repayment of the costs of design, construction, and funding provided for by contract under RSA 149-I:4-a.

Source. 1933, 98:2. RL 111:8. 1945, 188, part 22:9. RSA 252:11. 1973, 483:2. 1979, 492:1. 1981, 87:2. 1994, 95:5, eff. July 8, 1994. 2012, 138:1, eff. Aug. 4, 2012. 2013, 191:1, eff. Aug. 31, 2013. 2014, 4:3, eff. April 11, 2014.

Sources for this article included Bruce Kneuer, a supervisor at the NH DRA, and Debbie Bender, Finance Director for Allenstown.