Worcester Research Bureau Raises Questions About Worcester’s Budget

Wednesday, June 29, 2016

The analysis by Worcester Research Bureau educates and raises warning flags over issues ranging from the percentage of the City's property that is exempt because it is held by non-profits to the threat of unfunded liabilities -- the long-term pension and healthcare costs tied to city workers.

According to the rating agencies, Worcester financial situation is stable, but their are long-term costs that need further address. Moreover, the Research Bureau raises questions about the present structure for funding Worcester Schools.

Read the key issues in the SLIDES BELOW.

Related Slideshow: Budget Breakdown by Worcester Research Bureau

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Non-Taxable Property

Cornerns About Non-Profit's Land Holdings in Worcester

The City of Worcester relies heavily on the local property tax as a source of revenue, however a significant portion of Worcester’s land area—28.3%—and a significant portion of its property value—30.6%—are exempt from local taxes. As a result, the remaining taxable properties must generate sufficient revenue to maintain the general operations of government. To recoup some of that lost revenue, the City has asked certain larger not-for-profits in Worcester to make payments in lieu of taxes, also known as PILOTs. While some institutions have complied, many not-for-profits argue that they contribute significantly to Worcester through jobs and educational and cultural benefits. Five Worcester colleges have made PILOT agreements or similar financial arrangements with the City.

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Education

Is the City of Worcester investing enough?

Required local education spending and State aid are considered “Net School Spending” and totaled $303.8 million in Worcester in FY17. In addition to Chapter 70 requirements, however, the City must address certain noneducational costs to support Worcester Public Schools operations including transportation, crossing guards, adult education, leases, and debt service for the WPS capital budget. This additional “Non Net School Spending” equaled $19.1 million in FY17. Therefore, the total FY17 City of Worcester allocation for the Worcester Public Schools is $322.9 million. The Worcester Public Schools, with a budget of $377.1 million in FY17, receives funding beyond that allocated by the City, from Federal and State grant sources.

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Credit Ratings

Recommendations from the Credit Rating Agencies

Credit rating agencies have cited ways for Worcester to improve its financial position. Specifically, credit scores are likely to improve if Worcester continues to operate surpluses, has a significant expansion of the tax base, reduces its sizeable debt burden, and reduces unfunded liabilities for pension and other post employment benefits (OPEB). Worcester’s current OPEB liability is approximately $728 million and its pension liability is approximately $832 million. While the City is engaged on a program for fully funding pension obligations by 2032, there is no reliable funding plan for the City’s OPEB liability. Without an effort to address OPEB liabilities, these obligations will continue to expand reaching $1 billion by 2023 and $2 billion by 2042.

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Over Taxed?

Research Bureau numbers show the Worcester is highly taxed

The City Council sets the tax rate each fall. During this process, tax classification (i.e., the dual tax rate) and its effect on property owners is a key topic. Since 1984 through FY15, CIP property owners have paid $653,739,560 in taxes that would have been paid by residential property owners under a single tax rate. On average, CIP property owners have paid more than $20 million per year in additional taxes as a result of the dual tax rate, yet during this same period the relative portion of CIP property in Worcester has declined. In 2015, residential property made up 71.08% of the assessed value in Worcester while CIP property made up 28.92%. In 1984, at the initiation of tax classification, residential property made up 64.58% of the assessed value in Worcester while CIP property made up 35.42%. Worcester’s CIP tax rate is the highest in the region while its residential rate is second highest.

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Discretionary Funding

Little budget flexibility on some of the most important segments

Public safety, street and sidewalk maintenance, public parks, economic development, and the public library are all funded from the discretionary 22.6% of the budget. While potholes, crime, traffic, and trash often rouse significant debate, these items directly compete with each other for the limited funding remaining after education and fixed costs are covered.