The Sherman City Council discussed the possibility of raising property taxes ahead of proposed, statewide reforms to property taxes in coming years. The talks come as city officials are wrestling competing needs for debt service and city services amid a future clamp down on how much revenue a city can generate from property taxes.
City officials said the city should consider adjustments ahead of the proposed changes now or risk losing that flexibility in years to come.
“There are a couple points I want you to get from this whole thing,” City Manager Robby Hefton said Friday during a budget meeting with city leaders. “Number one is because of the effect of this three-and-a-half percent cap that is going to begin this year, we’ve got the year 2020 to make any changes to our rate or we’ve lost that opportunity.”
As a part of proposed reforms to property taxes, state legislators have proposed multiple options that would put a cap on how much new revenue a city can earn from existing property over the previous year without taking the resolution to voters. The current cap is at about 8 percent, but competing proposals from the state house and senate could drop this to 2.5 percent or 3.5 percent.
Hefton said the ongoing debate may focus on property taxes, but is part of a greater discussion on how best to fund schools throughout the state. While property taxes are assessed by cities, counties and school district, he said the majority of the expense comes from the districts.
“What they are struggling with in Austin is how to fix school finance reform in a way that makes sense, thus why they are struggling,” he said. “Secondly, what impact does that have on cities and counties.”
The city’s tax rate currently sits at about 42.7 cents and is made up of two separate rates that finance the city’s operations and expenses and the percentage of its bonds that are tax supported. As one rate goes up, the other will go down within the total imposed tax rate, he said.
Sherman Director of Finance Mary Lawrence said the reforms and caps are focused on the city’s maintenance and operations rate and have less influence on the city’s debt rate.
Currently, the city’s bond rate sits at about 11 percent, but is expected to increase by about five cents in the next budget due to recent bonds, including $20 million for road infrastructure and assisting with Texas Department of Transportation projects on U.S. Highway 75. As such, Hefton said this would send the city’s operations rate down into the high 20s, he said. This could force the city to find revenue elsewhere or risk reducing the levels of service it offers.
Hefton said legislators have talked about ideas on how to soften the blow to cities, but these ideas have not made much traction. One idea would reduce the fee that the state assesses Sherman for collecting its sales taxes, but Hefton said this would only result in about $175,000 in savings.
Another proposal would increase the maximum sales tax to 9.25 percent, but Hefton noted that this would not affect the city’s sales tax revenue and would only increase the state’s revenue.
Hefton noted that the proposed reforms would not affect new development, adding that the city’s current growth could help soften the blow. However, it could still hamper cities, like Sherman, that are in a period of growth, and could hinder this progress, he said.
“They are saying for new property, you can grow all you want and that isn’t going to be held against you. … They don’t want cities, through the appraisal districts, jacking up their values so that they can make more revenue,” Hefton said.
Hefton said sales taxes could also soften the blow, but noted that these revenues could also impact the city’s property taxes due to the city’s tax policies.
City officials presented ideas on how to adjust the city’s tax rate that included adjusting it for 2020 enough to cover the city’s bond payments. Another would bring the rate closer to 52 cents while the city still has the ability to adjust.
“We are never, except with a change in law, going to get to 60, 65, 70 cents,” Hefton said. “We would literally never be able to get there, and might not need to with the growth we have.”
Members of the council spoke against the proposed reforms, stating that they would serve as a deterrent for cities to grow. Council member Josh Stevenson said the proposals could affect the city’s ability to issue debt in the future. Stevenson said if the city issued more debt, it could throw the funding of other projects and services out of balance.
“What are the chances that we issue zero more debt? Zero,” Stevenson said.
Council member Willie Steele said the proposal seems to punish cities like Sherman that have worked to keep their tax rate in check and have been responsible stewards of public funds.
“We believe we are going to continue to be able to issue debt to build roads, parks and those things,” Hefton said. “Where are going to struggle is how we fund the people who mow the grass, how do we fund the people who fill the potholes and repair the streets in five to ten years.”
Hefton said the city could still issue debt, but it would likely require a rollback election to adjust for operating expenses. Hefton said this comes with its own hazards, as voters could deny a major city project through a vote.
As an example, Hefton presented a scenario in which the city had to ask voters for permission to expand West Travis Street. If denied, this could affect work on the adjacent new Sherman High School site, he said.
“It would have the effect of potentially stifling development because we no longer have control over when we issue debt,” Hefton said. “They (voters) already have that say, and it is through seven people. They already have the effect of that through seven people, but giving them the direct effect is what the state is contemplating and that would be very, very, very difficult.”
Council Member Pam Howeth said the city was in a hard position. While raising taxes is never popular, she said the city has little choice in the matter if it wants to maintain the current level of services.
“We do not want to raise our rates, but it is going to be difficult to explain to the voters that the state is forcing us,” she said. “If we want to continue to have the kind of services that we have, we have to do this and some kind of rate increase. That is not even including extra services that might come about from the growth. The state is forcing our hand.”