Definitions:

                Structural Shift-When the economy changes the fundamental industries providing jobs, usually requiring retraining of the workforce.  I.e. when the economy shifted from agriculture to manufacturing, or manufacturing to service based.

                Back-Testing-The practice of taking predicted results of a model’s formula and comparing it to historical actual numbers in an effort to determine accuracy of the model.

                Sales tax-A tax levied by governments on consumption.  The breakdown of the sales tax rate for Georgetown can be found here.

History by economic category/segment

                The following sets of data and charts are based on the City’s 1% Sales Tax collections to the General Fund.  Once a quarter the State Comptroller’s office supplies data on the collections from various businesses and that data has been translated into the economic categories and segments as defined by their NACIS (North American Industry Classification System) codes.  Please note that these charts assume the City’s Fiscal Year, so Q409 means July 1st 2009-Sep. 30th 2009.  If the images appear small please click on them and they should pop up in a new window as larger files that you can zoom in on.

There are 7 different economic categories.  The City contribution has been added to the chart above to represent the sales tax money that the City retains from operations and does not send to the State Comptroller.

There are 30 different segments, and again the City’s contribution has been added to the above chart.  Additionally most of the segments were grouped together for readability and to highlight the best performing segments in Georgetown.  Considering the general decline in the All Other segments versus the stability in the rest of the chart, it is reasonable to question whether or not Georgetown is experiencing a structural shift in its economy.  By the time these charts reach a 10 year span we should be able to conclusively determine the answer to that question, but until then it is just as probable that the other economic segments are simply being disproportionally affected by the most recent economic downturn.

While these charts only go back a couple of years, the City’s Accounting department has been reporting sales tax collections in their CAFR for much longer.  This information can be found in the Statistical Section of the CAFR, which is found on the City website here.

Sales Tax modeling

                Modeling is ultimately used to project future values for use in planning.  There exists no perfect model, but by looking at a few possibilities we hope to be able to make reasonable estimations of future revenues so that we can plan accordingly as a City.  These methods range from the very simple to the complex.  The following 2 methods are in primary use by the City.

                Method 1) Linear Forecasting.  In its most basic form, this method is simply looking at the charts of total revenue from sales taxes (like the ones posted earlier) and drawing a best fit line through the points in time, and then extending that line into the future (or in math terms it’s called performing a linear regression).  The problem with linear forecasting is that it can change greatly depending on where you start drawing the line.

                If you started using just the above graphs, the future sales tax revenues projected for the City would be $6,800,000 in 2010, $6,670,000 in 2011, and $6,450,000 in 2012, and would continue downward for infinity.

                If you started say 10 years ago (using data from the CAFR) you could expect $7,700,000 in 2010, $8,500,000 in 2011, $9,400,000 in 2012 and upwards for infinity.

                Method 2) Econometric Modeling.  This method involves determining the possible variables that affect sales tax revenue, and then predicting what those variables will be in the future, and then summing them up to create a future figure for the sales tax revenues.  This will involve back-testing to help determine reasonableness.  There exists a plethora of variables to choose from, but the logic currently being used in this model is as follows:

Determine Disposable Income per capita (per person).  Subtract from that the percent of DPI that is saved.  Then subtract the percent that is spent on non-taxable items.  Then subtract the percent that is spent outside of the City’s taxable jurisdiction.  Multiply the remaining DPI (the amount that should be spent on taxable items in the City’s jurisdiction) by the 1% sales tax rate of collections, and you will have the expected sales tax revenue.

                The full model is much too large to push out to the website, but there are some interesting numbers that it presents.  The BEA (Bureau of Economic Analysis) routinely publishes a NAPIA table on national income and its distributions.  Using that table it would appear that for the last several years the average percent of national disposable income that is saved is between 2 and 3%.  Additionally, the average percent of national personal income spent on taxes is only between 11 and 13%.  The Dallas Federal Reserve branch tracks Personal Income and Disposable Personal Income for Texas as a whole, and assuming that the difference between the two is related to taxes only, the nTexas averages between 9 and 11% of personal income as being paid in taxes.

                Other data used in the model includes the population of Georgetown (based on staff reporting and CAMPO projections), Georgetown’s Unemployment rate (as reported by the TWC), per capita income comes from the Census, and historical sales tax revenues as reported in the City’s CAFR.  Additionally, by comparing the total retail sales reported by the Dallas Fed, to the total sales tax collected by the State Comptroller, we have determined that approximately 81% of sales are for taxable items.  We also assumed that because of the disproportionate demographic makeup of the City by virtue of having a large retirement population, we would have about 2% more savings than the national rate.  By taking the DPI of the City, adjusting for the savings rate and non-taxable spending, and comparing the left over figure to the historical sales tax collections, we then calculated the percent of our City’s DPI that was spent in our taxing jurisdiction.  This percent comes in artificially high as we strongly suspect that we have visitors also spending in our area, but because it never climbs above 73% over the last 10 years, we also know that we have a lot of DPI leaving the community.

                The back testing of the model will put the margin of error at less than 1%, but because the variables used in the calculation can change dramatically and quickly, it is highly doubtful that the future predictions are as accurate.  For what it is worth, the model predicts sales tax revenue of $7,258,000 in 2010, $7,884,000 in 2011 and $8,498,000 in 2012.  This is primarily due to projected population growth, and future expected inflation in prices.

So, how are we doing?

Through the first 3 months of the fiscal year (Oct-Dec of 09), the City has taken in almost the exact same sales tax revenue as last fiscal year’s first 3 months.  If that trend continues it will mean that the City will take in about $6,950,000 in sales tax revenue this year, slightly more than the 2 year linear forecast, but less than both the econometric model and the 10 year linear forecast.  But when looking at the variables of the econometric model it also tells us something more.  Since the population is growing, and you would expect those people to be spending at least some of their income in the community, then a stagnate growth in sales tax (or a negative one) would indicate that either we are experiencing deflation in the local community, we are losing a lot of customers to other jurisdictions, our citizens are saving even more, or the per capita disposable personal income is falling (job losses or higher taxes usually).

Further questions to consider:

If our population is growing, why isn’t our sales tax revenue?

Are the retail options in Georgetown meeting the demands of the community?

Do the citizen’s in Georgetown really save more than national averages?

Is there another variable that should be considered when forecasting?

Would you like to know more?

(and a little more information)

            Property Tax rates are usually presented in mills, or cents per every $100 in taxable valuation.  Below is the Average Value of a Home in Georgetown, minus the City Exemption, the City tax rate, and the calculated annual and monthly tax burdens due to the City over the last several years.

Year    Value             Less City        Rate                Annual           Monthly

2004   $163,751       $158,751       0.34626          $549.69          $45.81

2005   $166,458       $161,458       0.34626          $559.06          $46.59

2006   $167,557       $162,557       0.36728          $597.04          $49.75

2007   $183,970       $178,970       0.35659          $638.19          $53.18

2008   $193,263       $188,263       0.35622          $670.63          $55.89

2009   $188,684       $183,684       0.35622          $654.32          $54.53

How the Property Tax Rate is Determined:

            Every year Williamson County Appraisal District (WCAD) determines the taxable value of the properties that will be paying property tax to the City of Georgetown (as well as others).  For information relating to how they appraise homes, appeals process, etc. please refer to their website at www.wcad.org.  In 2009 WCAD determined that the assessed value of property in Georgetown is about $4.17 billion, a decrease from $4.24 billion from the previous year. This decrease in valuation resulted in the Effective Tax Rate (the tax rate required to generate the same amount of money from the property tax as the year before) to jump up to $0.418169.  The Georgetown City Council elected not to adopt the effective tax rate, but to instead hold it steady at $0.35622 for 2009.

How does Georgetown Compare?:

            All subjective comparisons are relative.  What you really want to know is, ‘do you get more value for the money you spend on Property Taxes relative to other communities?’  For people looking to live in the Georgetown area, they will be most likely looking to compare Georgetown to its surrounding communities.  For that reason these numbers focus on Georgetown, Round Rock, Austin, Cedar Park, Leander, Hutto, Taylor, Temple, and Pflugerville.

            In a purely hypothetical world where any and all information was available a potential resident would want to compare the $/Sq.ft of home/land and the property tax rate in each community (they also would be considering the utility rates, but that is being held for another discussion).  Thusly the potential resident uses a simple formula to compare communities:

($/Sq.ft) * Square feet of house/land * Annual Tax Rate = Annual Tax burden

            While the above formula will work for houses that are listed for sale, the $/Sq.ft of value and the average Sq.ft of home/land are not available on a city wide comparison basis that would include homes not up for sale.  The formula also doesn’t consider the relative difference in quality of service provided by the communities, nor does it give a value to any intangibles.  All of those things would likely be considered by the potential resident.  Instead, this is the information that we do know for 2010:

City                           Total Tax rate            City Tax Rate                I/S                   O/M

Georgetown              2.10622                      0.35622                      0.15230          0.20392

Austin                        2.20640                      0.42090                      0.12590          0.29500

Round Rock                2.33121                      0.39661                      0.14753          0.24908

Leander                     2.57736                      0.60042                      0.24566          0.35476

Cedar Park                 2.46594                      0.48900                      0.24020          0.24880

Pfugerville                  2.55790                      0.60900                      0.19760          0.41140

Hutto                          2.44415                      0.49915                      0.05747          0.44168

Taylor                         2.74000                      0.79000                      0.21204          0.57796

Temple                       2.39000                      0.56460                      0.24730          0.31730

            As of 12/16/2009 the WCAD measured the average home value in Georgetown to be $188,684.  With a homestead exemption that would make the annual taxes on such a home for 2010 $3,693.79.  This is found by multiplying the City tax rate by $183,684 ($5,000 exemption) and adding it to the multiplication of the rest of the tax rate (composed of all other taxing districts, i.e. County, Schools, Hospitals,etc.) by $173,684 ($15,000 exemption).  How does Georgetown Compare? 

Overall Georgetown has the lowest total and the lowest City property tax rate of these communities.  They have the 3^rd lowest Interest/Sinking (I/S) rate (designed to pay for tax supported bonds) and the lowest Operations/Maintenance (pays of ongoing expenses).  Another way to compare is to look at the average home value in each community and the taxes that house could pay.  The average values listed were provided by the various county appraisal districts as of 12/16/09.

In Georgetown the average home is valued at $188,684 and pays $3,693.79 in annual property taxes.

In Austin the average home is valued at $250,879 and pays $5,246.54 in annual property taxes.

In Round Rock the average home is valued at $180,949.96 and pays $3.908.30 in annual property taxes.

In Pflugerville the average home is valued at $168,167.80 and pays $3,978.78 in annual property taxes.

In Leander the average home is valued at $165,271.66 and pays $3,933.08 in annual property taxes.

In Cedar Park the average home is valued at $187,695.66 and pays $4,307.47 in annual property taxes.

In Hutto the average home is valued at $132,213 and pays $2,914.78 in annual property taxes.

In Taylor the average home is valued at $87,901 and pays $2,076.49 in annual property taxes.

In Temple the average home is valued at $93,371 and pays $1,929.53 in annual property taxes.

            In no way is this meant to suggest that all of the example houses would be equal in every way.  It is ultimately up to the potential resident to account for house/land size, community profile, and intangibles, and even individual financing when comparing places to live.  This exercise hopefully just adds a unique way of thinking about the value you receive for the taxes you pay in comparison to your neighbors.

What the Property Tax is used for:

            Property Tax revenues are one of the major components that provide funding to the City’s General Fund.  This fund is used to pay for everything from police and fire protection, to salaries of the City Manager and most employees.  Any basic service not supplied by the City owned utility, are potentially funded with property taxes.  As of 2009 the property tax was expected to fund about 22% of the General Fund operations.  The Georgetown property tax rate breaks down into two smaller rates, $0.15230 is slated for paying on tax supported bonds (I&S rate) and the other $0.20392 is for ongoing operations and maintenance (O&M rate).

Important Note:

The City of Georgetown has elected to allow their citizens to freeze their property tax amount if they are 65 and older or disabled.  In the valuation for 2009 the amount of property with a “frozen” status for the City rose from $843 million to about $1.1 billion, or almost 33%.  Combined with the overall decrease in the total valuation, this pushes the Effective Rate up (but the City Council is not required to adopt the Effective Rate).  Below is a look at “frozen” versus “non-frozen” properties over the last few years.

Looking into the Future:

            Georgetown is one of the communities in Central Texas that is expected to continue growing, even if at reduced rates.  A basic expectation would then be that as Georgetown grows, they will continue to see increases in total valuation, and their revenue will then also increase.  Additionally, as prices generally inflate over the long term Georgetown would expect to see greater property tax revenues.  History certainly indicates that there is almost constant upward momentum for property tax revenues as the actual revenue collected for Georgetown has grown from about $7,234,000 in 2004 to a projected $14,700,000 for 2010.  Much of this is attributed to new growth, but some is also due to increased property values; averaging $163,751 in 2004 and $188,684 in 2009 (a decrease from $193,263 in 2008).

Discussion Questions:

1)    Given the tax figures above, how do you feel about the ‘value’ of Georgetown’s City services in comparison to surrounding communities?

2)    How would you feel about tax increases to add or improve services?

3)    Did the property tax rate figure into your decision to when choosing a residence?

4)    What else would you like to know?

Impact Fees are one method the City uses to pay for new infrastructure.  Essentially they are a tax usually levied at the time a building permit or utility connection is made for a platted piece of land.  The fee is often assessed at the time of plat recordation.  Once assessed the fee cannot be changed for that plat.  For details on specific regulation regarding Impact Fees, please refer to the Local Government Code.

Impact Fees are designed to recover the cost of building the new infrastructure that the City needs to grow in population.  In theory, the cost of the new infrastructure is to be paid by the new users to that system.   

How are they calculated? 

Impact Fees are derived from several assumptions about the City.  The first of these are called the Land Use Assumptions.  In the case of the City of Georgetown, previous City Councils have devised long term growth plans for the City, and elected to zone certain areas to fit those plans.  The City then contracted out with a vendor to provide analysis on how quickly the City was expected to grow in several different areas, what that growth consisted of, and what level of service was needed to meet that growth.  In order to make those projections they used the assumptions inherent in the growth plan for the City, as well as economic assumptions about inflation, demographic shifts, and some known building projects coming to town.  These assumptions reflect the expected change in the City’s development over the next 10 years.

Once the assumptions are made, a Capital Improvement Plan (CIP) is designed to meet the expected increase in service demand associated with the new development.  This plan is a detailed listing of all capital projects, including Water Treatment Plants, pipelines, etc., that either will need to be built or that currently have existing capacity to serve new customers.  All of the projects have both their capacity to serve customers, and their costs to build estimated for the 10 year window of the plan.  In simple theory, the Impact Fee would just be the costs associated with building the infrastructure, divided by the people expected to be served by it.  For example, a $1 million dollar pipe expected to serve 10,000 customers might contribute $100 towards the Impact Fee, but the final Impact Fee assessed is not that simple.

There is a difference in costs from old infrastructure to new infrastructure.  Sometimes that difference is substantial.  Hypothetically, a water plant built in 1995 at a cost of $5 million dollars, and expected to serve 10,000 customers, would generate $500 towards the maximum Impact Fee.  In 2005, a new water plant is added to the CIP for the next 10 years to serve another 10,000 customers.  This plant, mostly concrete, will probably cost $10 million dollars because of the rise in prices since 1995 (still hypothetical).  It would be simple to conclude that the new plant now contributes $1000 towards the Impact Fee, but because of customer growth patterns, that will not be the case.  If the City averaged only 900 new customers a year, the old plant would still have 1000 units of capacity left, and the new plant would only serve 9000 people in the next 10 years.  So contribution to the Impact Fee is weighted between them by the formula:

((1000)($500)+(9000)($1000))/(9000+1000)=$950

In this case the contribution to the Impact Fee from the water plants is now $950.

Every project in the CIP is broken down to this level and then added together to form an overall Impact Fee.  However, the Local Government Code mandates that a credit against the Fee also be calculated in recognition the fact that rate payers cover some of the costs associated with the CIP projects.  This credit is subtracted from the Impact Fee.  Additionally, the City has opted to separate out a section called the South Fork Basin, and develop a separate Impact Fee for that area.  This decision is based on the high cost of developing that specific area.

What are Council’s Choices?

At the time the Impact Fee presentation is made to the City Council, they are left with a few choices.  They can opt to reject the findings in the presentation.  This would result in appointing a new committee to go through the process of determining the Impact Fee calculation again.  They can accept the findings.  Once accepted the Council can then choose to set the Impact Fees at their desired level, providing that the Impact Fee chosen does not exceed the Maximum Impact Fee calculated.  Council is given leeway to accept anywhere from 0-100% of the maximum fee.  The appointed Advisory Committee will make a recommendation on where to set the fee and for what timeframe, but the Council is not bound by that recommendation.

According to the Local Government Code, the land use assumptions and Capital Improvement Plans for the City must be updated every 5 years in regards to the Impact Fees.  In Georgetown, previous Council directive to staff members has been to review this process every 3 years.  The Impact Fees for Georgetown were last updated in 2005, and in 2008 an Advisory Committee was selected by the City Council to begin reviewing them again.

On Jun 23, 2009, the Advisory Committee’s recommendation and the presentation regarding the calculation of the Impact Fees for the Water/Wastewater Utility were presented to the City Council.  The full presentation can be found at http://agendas.georgetown.org/  It is attached to the Jun 23^rd agenda under item N.  The presentation set the new Maximum Impact Fees at a total of $6,692 for the City with the South Fork Basin at $8,280.  Currently the Impact Fees as set in 2005 are $5,205 for the City with $6,438 for the South Fork Basin.

The Advisory Committee unanimously voted to approve the calculation of the Maximum Fee.  By a split vote they voted to recommend to Council to adopt the Maximum Fee, but to delay implementation for one year.  The City Council decided not to adopt a new fee and to look at it again in one year, effectively leaving the Impact Fee at the level set in 2005.

Looking Forward

Georgetown is still a growing community.  Couple that knowledge with the prediction that inflation and not deflation will occur over the long term, and the general assumption can be made that Impact Fees will rise until the City is close to full build out.  The only scenarios in which Impact Fees are likely to decrease, are a prolonged period of deflation of the 10 year projection the fee is calculated on, or a change in land use resulting in the total dollar amount needed for infrastructure to serve new customers being less per customer than before.  While specific projections of future Impact Fees are difficult to determine due to changing economic conditions, it is expected that impact fees will generally hold steady for a period of time, and then make significant changes when high dollar projects are added to the CIP.

Do they work? 

Theoretically, yes.  Practically, Impact Fees do not match up to the projects they are intended to pay for.  This is a result of both the nature of the law and the changing conditions associated with determining Impact Fees.  The fee is assessed at the time a plat is recorded for the City, but it is not collected until the Building Permit is issued.  The time lapse between those two events can cause collected Impact Fees to be different than what the City truly needs to pay for infrastructure because actual data reflecting actual costs of projects, and whether or not projects were really needed, will replace the projections originally estimated when the Impact Fee was first calculated.  In short, the Impact Fees collected are usually only as good as the original projects were.

Another thing to consider is that the Utility or City will be paying for the infrastructure upgrades up front as they grow.  The Impact Fees are not collected until later in the process.  The Local Government Code doesn’t allow for the lost time value of money to be added to the fee, and so that is naturally subsidized by the rate or tax payers.

Discussion/Feedback:

1)      What is your opinion of the Impact Fee process?

2)      How do you feel about the Impact Fee calculation?

3)      Are there changes you would like to see?

4)     Would you like to know more?