town of hanover · town of hanover review of 5-year ... employer rates for state and non-state...

Town of Hanover Review of 5-Year Projections and Discussion FY2017-2018 Tax Rate Preliminary Overview Board of Selectmen Meeting Monday, October 3, 2016

1. Selected Fiscal Indicators and Recent History a. CPI and MCI b. General Information c. Hanover data

2. 5-year Projections

a. Underlying Assumptions b. Summary of Projected “Blended” Municipal Tax Rate c. General Fund Projection d. Fire Fund Projection

3. BOS Budget Guidelines – Guiding Principles 4. Publication from NHMA: State Aid to Municipalities – History & Trends

2016-10-03 Selectboard Meeting

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Comparative Rolling 12-Month Average Month-to-MonthChanges in Northeast

Urban Size B/C Consumer Price Index and the Municipal Cost Index No-East Urban B/C - CPI Municipal Cost Index


FY Employer Rates* Member Rates**FiscalYear

Non-StateEmployees

StateEmployees Teachers Police Fire Group I Group II

1971 2.85% 2.85% 3.10% 8.30% 8.30% Variable Variable 1972 2.61% 2.61% 3.55% 8.49% 8.86% Variable Variable 1973 2.96% 2.96% 3.88% 8.80% 9.05% Variable Variable 1974 2.77% 2.77% 4.30% 8.82% 8.31% Variable Variable 1975 1.90% 1.90% 2.61% 7.31% 6.76% Variable Variable 1976 1.59% 1.59% 1.79% 9.69% 9.52% Variable Variable 1977 2.43% 2.43% 3.89% 10.89% 18.44% Variable Variable 1978 3.03% 3.03% 2.88% 11.98% 19.05% 4.6%/9.2% 9.3% 1979 3.01% 3.01% 2.88% 11.98% 18.61% 4.6%/9.2% 9.3% 1980 3.00% 3.00% 2.96% 11.77% 13.14% 4.6%/9.2% 9.3% 1981 2.74% 2.74% 2.96% 11.71% 12.86% 4.6%/9.2% 9.3% 1982 2.55% 2.55% 1.80% 21.69% 17.29% 4.6%/9.2% 9.3% 1983 2.56% 2.56% 2.20% 21.40% 17.83% 4.6%/9.2% 9.3% 1984 2.39% 2.39% 0.88% 21.51% 23.12% 4.6%/9.2% 9.3% 1985 2.07% 2.07% 0.92% 21.71% 22.80% 4.6%/9.2% 9.3% 1986 1.27% 1.27% 0.88% 13.00% 15.54% 4.6%/9.2% 9.3% 1987 1.01% 1.01% 0.88% 11.60% 14.70% 4.6%/9.2% 9.3% 1988 2.74% 2.74% 0.65% 7.07% 13.99% 4.6%/9.2% 9.3% 1989 2.47% 2.47% 0.79% 8.20% 13.98% 5.0% 9.3% 1990 2.30% 2.30% 1.37% 9.31% 12.23% 5.0% 9.3% 1991 2.02% 2.02% 1.37% 10.22% 12.65% 5.0% 9.3% 1992 2.33% 2.33% 2.09% 7.97% 7.95% 5.0% 9.3% 1993 2.65% 2.65% 2.79% 5.07% 10.20% 5.0% 9.3%

1994-95 2.65% 2.65% 2.79% 5.07% 10.20% 5.0% 9.3% 1996-97 3.14% 3.14% 3.35% 3.81% 7.49% 5.0% 9.3% 1998-99 3.86% 3.86% 4.05% 5.22% 8.30% 5.0% 9.3% 2000-01 3.94% 3.94% 4.11% 7.13% 8.30% 5.0% 9.3% 2002-03 4.14% 4.14% 3.97% 8.20% 10.17% 5.0% 9.3% 2004-05 5.90% 5.90% 4.06% 12.11% 20.68% 5.0% 9.3% 2006-07 6.81% 6.81% 5.70% 14.90% 22.09% 5.0% 9.3% 2008-09 8.74% 8.74% 8.93% 18.21% 24.49% 5.0% 9.3% 2010-11 9.16% 11.05% 10.70% 19.51% 24.69% 5.0%*** 9.3% 2012^ 11.09%/8.80% 12.31%/10.08% 13.95%/11.30% 25.57%/19.95% 30.90%/22.89% 7.0%~ 11.55%/11.8%~2013 8.80% 10.08% 11.30% 19.95% 22.89% 7.0% 11.55%/11.8%

2014-15 10.77% 12.13% 14.16% 25.40%/25.30% 27.85%/27.74% 7.0% 11.55%/11.8%2016-17 11.17% 12.50% 15.67% 26.38% 29.16% 7.0% 11.55%/11.8%2018-19 11.38% 12.15% 17.36% 29.43% 31.89% 7.0% 11.55%/11.8%

* Employer Rates: (1) The rates listed above are the total employer contribution rates. In 2008, legislation was passed to include both a pension and a Medical Subsidy portion as part of the total employer contribution rate, which may result in a difference in the employer rates for state and non-state Employee members. Visit the NHRS website at https://www.nhrs.org/employers/employer-contribution-rates to view a breakdown of the pension and Medical Subsidy percentages. (2) Group II employers do not pay the Social Security tax, currently 6.2% on earnings up to $118,500. ** Member Rates: (1) Group I includes Employee and Teacher members; Group II includes Police and Fire members. (2) Member rates are set by the New Hampshire Legislature. Prior to 1977, employee contribution rates were assessed on a sliding scale based on age, and, for Group I only, gender. Prior to 1989, Group I members contributed 4.60% up to the Social Security taxable wage limit and 9.20% on any excess. *** The member contribution rate for Group I state employees whose employment began on or after July 1, 2009, was 7.0%. ^ Employer rates were recertified effective Aug. 1, 2011, to reflect 2011 legislative changes. Employers paid the higher rate shown for July 2011 only. ~ Effective July 1, 2011, the member contribution rates increased to 7.0% for all Group I members, 11.55% for all Group II Police members, and 11.80% for all Group II Fire members.

The two rates listed in this column represent differing employer contribution rates for the state and political subdivisions, respectively. Group II employer contribution rates differed in this biennium only due to the timing of 2011 statutory changes in relation to the state payroll schedule.

Revised 9/2016

NHRS Employer and Member Contribution Rates since 1971


TOWN OF HANOVER POPULATION

YEAR 1970 1980 1990 2000 2010 2011* 2012* 2013* 2014* 2015* 2020^ 2025^ 2030^8,494 9,119 9,212 10,850 11,260 11,331 11,283 11,302 11,370 11,367 11,470 11,573 11,824

US CENSUS FIGURES NH OFFICE OF ENERGY PLANNING (OEP) POPULATION ESTIMATES* AND FORECASTS^

$759,480,700

$2,003,222,200

$0

$200,000,000

$400,000,000

$600,000,000

$800,000,000

$1,000,000,000

$1,200,000,000

$1,400,000,000

$1,600,000,000

$1,800,000,000

$2,000,000,000

Town of Hanover Net Property Valuation - used to compute Municipal, County and Local Education Taxes


TOWN OF HANOVER - TAX LIENING ACTIVITYTax Year 2006 Tax Year 2007 Tax Year 2008 Tax Year 2009 Tax Year 2010 Tax Year 2011 Tax Year 2012 Tax Year 2013 Tax Year 2014 Tax Year 2015

Number of Parcels 26 25 31 32 40 29 22 31 30 26Principal Liened $72,240 $80,068 $113,663 $131,019 $222,634 $145,760 $116,965 $153,997 $141,508 $180,674

$0

$50,000

$100,000

$150,000

$200,000

$250,000

Tax Year 2006 Tax Year 2007 Tax Year 2008 Tax Year 2009 Tax Year 2010 Tax Year 2011 Tax Year 2012 Tax Year 2013 Tax Year 2014 Tax Year 2015

Tax and Utility Commitment Liened

0

5

10

15

20

25

30

35

40

Tax Year 2006 Tax Year 2007 Tax Year 2008 Tax Year 2009 Tax Year 2010 Tax Year 2011 Tax Year 2012 Tax Year 2013 Tax Year 2014 Tax Year 2015

Number of Parcels Liened


Trends of Selected General Fund Non‐Tax Revenues

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

Short Term Interest

$0

$50,000

$100,000

$150,000

$200,000

Shared Revenue ‐ Block Grant

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

Building Permit and Related Revenues

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

Motor Vehicle Registration Fees


Town of Hanover – Five Year Tax Rate Projections FY2018 – FY2022

Initial Underlying Premise: Town services will continue to be provided at current levels with current staffing; no additional facilities.

Assumptions – for discussion and modeling purposes only:

General Fund Salaries and Benefits

• FY2018 total salaries incremented by 2.0% (2.0% Step Increase); FY2018-FY2021 total salaries incremented by 3.0%

• Flexible benefit program increased by 19.7% for FY2018 (Guaranteed Maximum Rate for Hanover recently provided by HealthTrust); 8.0% projected increases FY2019-FY2022

• NHRS employer contribution rates in FY2018 are increasing 1.8% for Group 1 (from 11.17% to 11.38%) and 11.56% for Group 2-Police (from 26.38% to 29.43%); FY2018 General Fund line-item projected to increase by 5.0% beyond increase in salaries. No rate increases projected for FY2019 and FY2021; but another 5.0% bump in rates anticipated in FY2020 and FY2022. (Note: NHRS Board sets rate bi-annually.)

• Other employee benefits incremented by 2.0% for FY2018 and 3.0% for all other projected years Other Operating Costs

• Road Maintenance, Paving and Reconstruction incremented by 2.0% for all projected years • Fuel and Electricity incremented by 2.0% for all projected years • Hanover Ambulance Services (the Town’s General Fund contribution to the Ambulance Fund)

projected to increase by 6.5% for FY2018; 5.0% for FY2019-FY2022 • Other Operating Costs assumed to increase by 1.0% for all projected years

Debt Service

• Projected based on existing debt service on: (a) 2003 RW Black Community and Senior Center bond ($1.5mm) to be paid off in FY2023; and (b) 2004 Dresden School District Note ($2.0mm) to be paid off in FY2024.

Transfers to Capital Reserve Funds

• Projected based on current information from the CIP dbase


State of New Hampshire Revenues • Assume (a) the Shared Revenues initially suspended by the State of New Hampshire in FY2010 and

their reneged pledge to cover 35% of public safety retirement system contributions will not be reinstated to the Town; (b) Rooms & Meals distribution assumed to remain level as the State keeps suspending the sharing formula restoration; and (c) projecting a 2.0% increase going forward in the Highway Block Grant. No further ‘take-backs’ are factored into the projections.

Motor Vehicle Registration Fees

• FY2018 projected at FY2016 actual level, and we are projecting a 1.0% increase for out years. Building Permit and Related Fees

• FY2018 projected at a reasonable level given recent actuals, and we are projecting a 2.0% increase for out years.

Short-Term Interest

• Interest earnings appear to have hit bottom; projecting 2.0% increase in FY2018 in anticipated move by Fed; 1.0% increases projected in out years to reflect greater cash flow volumes and more aggressive (i.e., some longer term) CD investment.

Payment from Water Utility Fund

• This payment is based on the annually adjusted value of the water service property that was on the Town’s tax rolls under its previous owner, the Hanover Water Works Company; this line-item is projected to increase by 1.0% each year

Other Revenues

• Projected at a steady 1.0% for FY2018 – FY2022 Net Assessed Valuation

• Assumes $18mm growth for FY2018 – FY2022


Fire Fund Salaries and Benefits – same assumptions as General Fund; except NHRS increase for Group 2 Fire = 9.36% (current rate of 29.16% increases to 31.89%) Hydrant System Costs (an internal charge from the Water Fund)

• No change foreseen for FY2018 – FY2022; staff will continue to work towards eliminating this charge altogether and assessing costs related to the water distribution system through the water utility rates.

Facilities Operating and Fleet Costs • Projected at a steady 2.0% for FY2017 – FY2021

Other Operating Costs • Projected at a steady 1.0% for FY2017 – FY2021

Transfers to Capital Reserve Funds

• Projected based on current information from the CIP dbase Transfers from Undesignated Fund Balance (UFB)

• No future UFB withdrawal factored into projection Other Revenues

• Projected at a steady 1.0% for FY2018 – FY2022 Net Assessed Valuation

• $18mm growth for FY2018-FY2022; ratio between Fire Districts #1, #2, and #3 assumed to remain constant from FY2017


Town of Hanover

Projected ʺBlendedʺ Property Tax Rate

TY2016 (FY2017) *Nearly Final* Tax Rates

% Increase from prior

year

TY2017 (FY2018) Projected Tax Rates

% Increase from prior year



year



year



year



year

6.20$ 1.37% 6.52$ 5.24% 6.67$ 2.24% 6.93$ 3.85% 7.13$ 3.00% 7.37$ 3.33%


TOWN OF HANOVER GENERAL FUND PROJECTION

Adopted FY17BUDG

Pro‐Forma FY18

Pro‐Forma FY19

Pro‐Forma FY20

Pro‐Forma FY21

Pro‐Forma FY22

Operating Costs Salaries (includes budgeted overtime) 7,450,521 7,599,531 7,827,517 8,062,343 8,304,213 8,553,340 Employee Benefits ‐ Flexible Benefits Plan 1,522,699 1,822,671 1,968,484 2,125,963 2,296,040 2,479,723 Employee Benefits ‐ Retirement 868,554 885,925 958,128 986,872 1,067,302 1,099,321 Employee Benefits ‐ FICA, Wkrs Comp, Other 454,271 463,356 477,257 491,575 506,322 521,512 Subtotal Salaries & Benefits 10,296,045 10,771,484 11,231,387 11,666,753 12,173,877 12,653,896

% Increase in Salaries & Benefits 2.58% 4.62% 4.27% 3.88% 4.35% 3.94%Road Mtce, Paving and Reconstruction 979,996 999,596 1,019,588 1,039,980 1,060,779 1,081,995 Utilities (includes fuel, electricity, telecom) 531,269 541,894 552,732 563,787 575,063 586,564 Ambulance Services ‐ Hanover Contribution 275,892 293,825 308,516 323,942 340,139 357,146 Other Operating Costs 860,254 868,857 877,545 886,321 895,184 904,136 Subtotal Other Operating Costs 2,647,411 2,704,172 2,758,381 2,814,029 2,871,165 2,929,840 Total Operating Costs 12,943,456 13,475,655 13,989,768 14,480,782 15,045,042 15,583,736

% Increase in Operating Costs 2.19% 4.11% 3.82% 3.51% 3.90% 3.58% Non‐Operating Costs Debt Service on Existing Debt 197,314 193,938 188,674 184,774 180,912 179,312

Transfers to Capital Reserve:

Highway Construction and Mtce. Eqpt. 392,000 511,500 348,000 405,000 348,000 338,000

Bridge Replacement and Renovation 15,000 57,500 65,000 58,000 65,000 65,000

Building Maintenance and Improvement 110,000 80,000 60,000 110,000 110,000 110,000

Road Construction and Improvement 24,000 35,000 35,000 35,000 35,000 45,000

Property Revaluation 10,000 10,000 10,000 ‐ ‐ ‐

Dispatch Equipment and Center Renovations 25,000 25,000 25,000 25,000 25,000 25,000

Police Vehicles and Equipment 84,000 58,000 103,000 103,000 103,000 103,000

Total Non‐Operating Costs 857,314 970,938 834,674 920,774 866,912 865,312 TOTAL GENERAL FUND COSTS 13,800,770 14,446,593 14,824,442 15,401,556 15,911,954 16,449,048

% Increase in Total General Fund Costs 1.66% 4.68% 2.62% 3.89% 3.31% 3.38%

Note: Purchases funded from Specific Reserve Sources (UFB, Cap Reserve, etc.) netted out and not presented


TOWN OF HANOVER GENERAL FUND PROJECTION

Adopted FY17BUDG

Pro‐Forma FY18

Pro‐Forma FY19

Pro‐Forma FY20

Pro‐Forma FY21

Pro‐Forma FY22

Less: Non‐Tax Revenues State of NH Shared Revenues (Rooms & Meals, Hwy Block Grant) (873,029) (878,734) (878,734) (878,734) (878,734) (873,029)

Motor Vehicle Registration Fees (1,314,565) (1,315,000) (1,328,150) (1,341,432) (1,354,846) (1,368,394)

Building Permit and Related Fees (361,000) (400,000) (408,000) (416,160) (424,483) (432,973)

Short Term Interest (35,000) (35,350) (35,704) (36,061) (36,421) (36,785)

Payment from Water Fund (75,420) (76,928) (78,467) (80,036) (81,637) (83,270)

Registration & User Fees and Other Revenues (1,739,373) (1,774,160) (1,809,644) (1,845,837) (1,882,753) (1,920,408) TOTAL GENʹL FUND MUNICIPAL TAX LEVY 9,402,383 9,966,421 10,285,744 10,803,297 11,253,080 11,734,188

% Increase in General Fund Municipal Tax Levy 2.03% 6.00% 3.20% 5.03% 4.16% 4.28%Net Assessed Valuation of Taxable Property 2,003,222,200 2,021,222,200 2,039,222,200 2,057,222,200 2,075,222,200 2,093,222,200

General Fund Municipal Rate 4.69 4.93 5.04 5.25 5.42 5.61 % Increase in General Fund Municipal Tax Rate 0.86% 5.12% 2.23% 4.17% 3.24% 3.51%

Note: Transfers in from Specific Reserve Sources netted out and not presented on this schedule


TOWN OF HANOVER FIRE FUND

Adopted FY17BUDG

Pro‐Forma FY18

Pro‐Forma FY19

Pro‐Forma FY20

Pro‐Forma FY21

Pro‐Forma FY22

Operating Costs

Salaries ‐ incl OT (net of charge to Ambulance) 1,158,382 1,181,550 1,216,996 1,253,506 1,291,111 1,329,845 Employee Benefits ‐ Flexible Benefits Plan 360,000 430,920 465,394 502,625 542,835 586,262 Employee Benefits ‐ Retirement 510,581 569,539 586,625 634,435 653,468 706,726 Employee Benefits ‐ FICA, Wkrs Comp 76,194 77,718 80,049 82,451 84,924 87,472 Subtotal Salaries & Benefits 2,105,157 2,259,726 2,349,064 2,473,017 2,572,339 2,710,304

% Increase in Salaries & Benefits 6.15% 7.34% 3.95% 5.28% 4.02% 5.36%

Hydrant System (net of private hydrants) 319,112 319,112 319,112 319,112 319,112 319,112 Facilities Operating Costs 133,521 136,191 138,915 141,694 144,527 147,418 Fleet Costs 68,972 70,351 71,758 73,194 74,658 76,151 Other Operating Costs 383,540 387,375 391,249 395,162 399,113 403,104 Subtotal Other Operating Costs 905,145 913,030 921,035 929,161 937,410 945,785 Total Operating Costs 3,010,302 3,172,757 3,270,099 3,402,178 3,509,749 3,656,089

% Increase in Operating Costs 3.16% 5.40% 3.07% 4.04% 3.16% 4.17% Non‐Operating Costs Transfers to Capital Reserve: Fire Vehicle and Eqpt Capital Reserve Fd 143,090 143,090 143,090 143,090 143,090 143,090 Total Non‐Operating Costs 143,090 143,090 143,090 143,090 143,090 143,090 TOTAL FIRE FUND COSTS 3,153,392 3,315,847 3,413,189 3,545,268 3,652,839 3,799,179

% Increase in Total Fire Fund Costs 1.61% 5.15% 2.94% 3.87% 3.03% 4.01% Less: Non‐Tax Revenues

Tsfr from Fire Fund Undesignated Fund Balance (42,975) ‐ ‐ ‐ ‐ ‐ Other Revenues (96,417) (97,381) (98,355) (99,339) (100,332) (101,335) TOTAL FIRE DISTRICT TAX LEVY 3,014,000 3,218,465 3,314,834 3,445,929 3,552,507 3,697,844

% Increase in Fire District Tax Levy 3.76% 6.78% 2.99% 3.95% 3.09% 4.09% Projected Tax Rate by Fire District Adopted Pro‐Forma Pro‐Forma Pro‐Forma Pro‐Forma Pro‐Forma Fire District #1 1.57 1.66 1.69 1.74 1.77 1.83 Fire District #2 1.36 1.44 1.47 1.53 1.56 1.62 Fire District #3 0.67 0.72 0.74 0.76 0.78 0.81 % Increase in Tax Rate by Fire District Adopted Pro‐Forma Pro‐Forma Pro‐Forma Pro‐Forma Pro‐Forma Fire District #1 2.61% 5.48% 1.98% 2.91% 2.10% 3.07% Fire District #2 3.03% 5.84% 2.42% 3.47% 2.52% 3.60% Fire District #3 1.52% 7.42% 2.42% 3.47% 2.52% 3.60%


Town of Hanover BOS Budget Guidelines Page 1 (rev. 11/2015)

Budget Guidelines for the Town of Hanover Board of Selectmen

Adopted by the Board of Selectmen: December 7, 2015

Introduction:

The Board of Selectmen’s primary responsibility as it relates to the fiscal management of the Town is to bring to Town Meeting each year a proposed budget for discussion and hopefully adoption.

Over the years the Board of Selectmen has been guided by a set of beliefs and objectives that have informed its decision making and are summarized below.

Definitions:

Grand List: Total assessed value of all taxable property in the Town of Hanover

Tax Levy: Total revenues raised from taxes

Tax Rate: Tax Levy ÷ (Grand List/1000)

Individual Tax Bill: Tax Rate x Individual Assessed Value

State Downshifting: Downshifting occurs when the State no longer shares revenues (i.e. rooms and meals tax), and /or no longer shares costs (i.e. retirement funding) as they have historically. Downshifting either lowers revenues or increases costs to the Town.

Consumer Price Index (CPI): An economic indicator published by the US government which measures the change in the cost of a hypothetical basket of goods (food, clothing, gas, electricity, insurance, etc.) consumed by the average household.

Municipal Cost Index (MCI): An economic indicator published by American City and County which measures the change in the cost of providing services to residents of municipalities and counties; to include the costs of labor, materials, and contracted services.

Objectives and Beliefs:

1. Our primary budget objective is to balance the needs/desires of our citizens with their willingness and ability to pay.

Discussion: Given the unique service provided by a municipal government, pegging projected increases to standard market indexes is problematic. Truly, the development of a municipal budget is more an art than a science. In addition to considering the CPI and the MCI as context for setting the targeted tax rate change for the proposed budget year, The Board of Selectmen will also heavily weigh the following factors:



• Anticipated change in Grand List • Anticipated impacts on the local property tax from the State’s downshifting of its budget

responsibilities • Projects of high community priority to be taken on in the upcoming budget year(s) • Known increases in employee wages and benefits previously negotiated as part of the

collective bargaining process

2. We appreciate Town staff as professionals and valued partners and want to provide a climate and culture that will attract and retain the best.

Discussion: Our goal is to pay in approximately the 75th percentile for towns of our size and complexity along with competitive benefits and a positive, long term work environment. We believe that this will allow the Town to attract and retain the best.

3. Before funding new initiatives, our goal is to maintain a high level of current services and to provide them cost effectively.

Discussion: Town staff is continually looking at ways to save money. Examples include implementing energy efficiency improvements and selectively contracting out some services (e.g. recycling) while bringing others in house (e.g. downtown trash pickup and highway line painting) . Hanover citizens expect a very high level of services (bare pavement plowing, rapid public safety response, paramedic-level EMS services, full range of recreational programs, etc.) which need to be met before new initiatives are funded.

4. Our goal is to adequately fund long term liabilities.

Discussion: We do not kick the can down the road. In difficult budget years, the least painful short term ways to balance a budget are to underfund ongoing operations (e.g. road paving) or to inadequately fund capital and / or operating reserves. Not adequately funding current operations inevitably costs more in the long run. Good fiscal management requires that we adequately fund capital reserves to meet future capital liabilities and operating reserves to meet unexpected expenses or shortfalls in revenues.

5. The Board of Selectmen does not use operating reserves to manage the tax rate.

Discussion: Our reserve management guideline is intended to assure this.

6. The Town invests for the long-term.

Discussion: We would prefer to do a project right rather than cheaply. This is reflected in our willingness to fund projects over several years so that there is adequate money to do the job well. Examples of investing for the long-term include the development of Dresden Village, the rebuilding of Reservoir Road after the flood, and bike lanes on Park Street.



7. The Board of Selectmen believes that spending by the Town on new initiatives can generate significant value to the tax payers.

Discussion: Spending requests come from many sources: Affordable Housing, Conservation Commission, Sustainable Hanover, Planning Board, and Recreation Department to name a few.

Recent examples of initiatives that the Board of Selectmen believes have added significantly to our collective quality of life (standard of living) or reduced future expenses include:

• The Richard W. Black Community and Senior Center; • Howe Library expansion of facility and hours; • Dresden Village improvements; • Bike Lanes on North and South Park Street; • Properly rebuilding Reservoir Road so that it hopefully will not wash out with every big

storm; • Etna Library/Hayes Farm Park project; • Sustainable Hanover initiatives; • Contributions to the Three Party Agreement that led to new and renovated schools.

These projects could not have been accomplished without some incremental spending beyond bare bones budgets.

8. We recognize that all of the above objectives may not be achievable in any given year.

Discussion: In years when not all of the above objectives are able to be met, the Board of Selectmen will address any deviation from these guidelines during the Budget Public Hearing process and at Town Meeting.

9. The Town will pass through State downshifting to the taxpayer.

Discussion: The State, without a broad based tax, has limited ways to deal with State budget issues such as the underfunded State retirement system. The State has solved its problem by downshifting, and thus, in essence, tapping into a broad based tax at the local level. Downshifting has been a very effective strategy for the State and we can expect even more in the future. Absorbing State downshifting is unsustainable to the Town and would quickly lead to a significant reduction of Town services.

The Town is sensitive to this added expense to the taxpayer. In years when down shifting is the most severe, the Board of Selectmen will do as much as is reasonable to limit the impact.


State Aid to MunicipalitiesH i s t o r y & T r e n d s

NEW HAMPSHIRE MUNICIPAL ASSOCIATION


1

STATE AID TO MUNICIPALITIESState Budget Decisions Affect Local Property Taxes

Prepared by the New Hampshire Municipal AssociationAugust, 2016

Understanding the various types of aid provided by the state to municipalities is critical to understanding the effect that state-level budgetary decisions have on local property taxes. With the property tax as the primary source of local revenue, reductions in any state aid program, or the shifting of state costs to municipalities, most often results in increased property taxes. This report explains the state aid programs relied upon by local governments as well as recent trends in funding those programs. As summarized on the schedule prepared by the Legislative Budget Assistant’s Offi ce (LBAO) and included on page 14, state aid to municipalities fall into the three categories:

General FundsMeals and Rooms DistributionState Revenue Sharing (Suspended 2010-2017)State Retirement Normal Contribution (Repealed 2013)Railroad Tax Distribution

Environmental Flood ControlLandfi ll Closure GrantsPublic Water System Grants (Moratorium since 2008)Pollution Control GrantsWater Supply Land Protection Grants

Highway Funds Block Grants State Highway Construction Aid Municipal Bridge Aid

A major category of state aid is educational funding to school districts. This is comprised of a number of programs, the most signifi cant of which are adequate education aid to meet the state’s constitutional obligation, building aid and catastrophic aid (special education). Education funding goes directly to school districts, not to cities or towns, except in the nine cities (Berlin, Dover, Franklin, Laconia, Manchester, Nashua, Portsmouth, Rochester and Somersworth) where the city council/board of mayor and aldermen function as the legislative body for the school district. Education funding received by school districts affects the local school property tax rate, not the municipal property tax rate.


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As illustrated in the following graph, overall there were signifi cant decreases in both state general fund assistance and state environmental assistance to municipalities in the 2010-2014 budgets, with slight increases in 2015 and budgeted in 2017.

The 2017 budget refl ects approximately 75% of the state aid provided to municipalities in 2009.

Meals and Rooms Distribution

One of the most signifi cant general state aid revenues to municipalities is the meals and rooms tax distribution under RSA 78-A:26. When the meals and rooms tax was fi rst enacted in 1967, the intent was to share the revenue with municipalities, with the state retaining 60% of the revenues generated from the tax and municipalities receiving 40%. The legislature decreased the municipal share several times (in 1977 and 1981) virtually freezing the funding below the 1976 level. It was not until 1993 that the meals and rooms tax statute was amended to provide a catch-up formula in order to reach the statutorily intended 60/40 split. The formula provided that 75% of the year-over-year increase in revenue from the meals and rooms tax (but not more than $5 million in any one year) be added to the previous year’s municipal distribution. The municipal share is distributed to cities and towns based on annual population estimates provided by the New Hampshire Offi ce of Energy and Planning.


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In 2001, the state/municipal share was 82%/18%. As the meals and rooms tax revenues gradually increased, so did the municipal share of those revenues. In 2010 the state/municipal split reached 71%/29%, which was based on the actual tax revenues received the prior state fi scal year (2009). However, the catch-up formula was suspended from fi scal years 2010 through 2014, freezing the distribution to municipalities at the 2009 level of $53.8 million, while annual revenues from the meals and rooms tax increased by nearly $50 million over that period. By freezing the municipal distribution at the 2009 level, the trend of gradually approaching the 60%/40% split was reversed, with the municipal percentage declining to 24% in 2014.

The catch-up formula was reinstated for fi scal year 2015, resulting in a distribution to municipalities in December, 2014 of $63.8 million, a $5 million increase, and approximately 25% of the revenues received in the prior state fi scal year. The catch-up formula was again suspended in fi scal year 2016 while revenue from the tax continued to come in strong, well in excess of the prior year, resulting in a drop in the municipal share to 23%. For fi scal year 2017, the catch-up formula is in effect and will provide an additional $5 million for a total of $68.8 million or 24% of the prior year’s revenue when the distribution is made in December, 2016. Had the catch-up formula continued rather than being suspended for six years, the December, 2016 distribution to cities and towns would have been approximately $81 million (30% of the meals and rooms tax revenues received the prior year) rather than $68.8 million (24%). Cumulatively, the suspension of the catch-up formula has resulted in a loss to municipalities of approximately $58 million from 2010 -2017.

Cumulatively, the suspension of the meals and rooms catch-up formula has resulted in a loss to municipalities of approximately $58 million from 2010 -2017.

Statutory Intent = 40% to Municipalities


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Revenue Sharing

In 1969, reform of the manner in which the state taxed businesses led to the implementation of the business profi ts tax (BPT). This necessitated the elimination of antiquated taxes which were more refl ective of an agricultural economy of the past. These taxes were assessed and collected by municipalities and were part of the property tax base for municipalities, school districts and counties (including the tax on stock in trade, taxes on studhorses, poultry, domestic rabbits, fuel pumps/tanks and other taxes). The initial intent of RSA 31-A was stated as follows:

In consideration of the removal of certain classes of property from taxation, which would otherwise have the effect of reducing the tax base of cities and towns of the state, it is hereby declared to be the policy of the state to return a certain portion of the general revenues of the state to the cities and towns for their unrestricted use…Chapter 5, Laws of 1970.

On March 31, 1970, in testimony on House Bill 1, then New Hampshire Attorney General Warren Rudman responded to concerns that future legislators may choose not to honor this commitment to municipalities to fund revenue sharing, stating:

…this bill creates a new chapter in the statutes of the state of New Hampshire which is specifi cally entitled “Return of Revenue to Cities and Towns”. And it says “there is hereby appropriated for each fi scal year a sum suffi cient to make the payments provided for by this section.” Now the charge has been leveled that future legislators might choose not to honor this pledge…It seems quite doubtful to me that once this bill is passed that any legislator would go back on its pledge to return revenue to cities and towns that originally belonged to those cities and towns. And I might also add, in passing, that I could hardly see a Governor signing a bill which would deprive cities and towns of the revenue which they once had.”

When enacted in 1970, RSA 31-A included a provision by which the funding of revenue sharing would increase by 10% each year. This 10% provision was short-lived, however, and was amended to 5% the following year with further reductions in subsequent years. In 1983, RSA 31-A was again amended to incorporate other revenue sharing formulae then in existence (such as the interest and dividend tax and the savings bank tax), thereby consolidating all such funding to municipalities under one statute.

Total revenue sharing in 1999 was $47 million. In 2000, as part of the statutory changes made to fund the state’s adequate education obligations, $22 million of revenue sharing that had been allocated to school districts became part of the adequate education aid funding. This left the balance of $25 million annually as general revenue sharing for municipalities and counties, which remained constant through fi scal year 2009. Since 2010, revenue sharing has been suspended resulting in a loss to municipalities and counties of $25 million per year. The impact of this loss varies among municipalities, with deferred maintenance, use of reserves or fund balance, budget reductions and/or property tax increases among the common reactions to the loss of revenue sharing funds from the state.

The loss of Revenue Sharing to municipalities totals $200 million from 2010-2017.


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Highway Block Grants

Twelve percent (12%) of the total road toll (gas tax) revenue and state motor vehicle fees collected in the preceding state fi scal year are distributed to municipalities through a local highway aid formula. This money comes from the state highway fund, not the state general fund, and provides funding to maintain and improve Class IV and Class V municipal roads and highways. Supplemental funds totaling $400,000 are distributed pursuant to a statute that provides additional funds to those municipalities with higher local roadway mileages and lower property valuations.

From fi scal years 2006 through 2010 the total amount of annual highway block grants ranged from $28.5 to $30.5 million. In 2009 the legislature enacted a temporary 2-year motor vehicle registration surcharge which increased both the amount of revenue in the state highway fund as well as the 12% share to municipalities in fi scal years 2011 and 2012, resulting in approximately $5 million more each year. The surcharge was repealed and block grant funding to municipalities returned to approximately $30 million per year from 2013 through 2015.

In 2014 the legislature raised the road toll for the fi rst time in 23 years, increasing the rate by approximately 4 cents from 18 to 22 cents per gallon of gasoline effective July 1, 2014. This increase was expected to raise an additional $33 million per year in highway funding of which 12%, or an additional $4 million per year, is refl ected in the highway block grant budget for cities and towns beginning in state fi scal year 2016.


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State Bridge Aid

Of the 1,685 municipally owned bridges in the state, 20% (338) were classifi ed as “red listed” meaning the bridge is in poor condition, critically defi cient and/or functionally obsolete. The State Bridge Aid program under RSA 234 provides that funding for construction or reconstruction of municipally owned bridges shall be borne 80% by the state and 20% by the municipality, subject to the available level of funding each year.

Historically, State Bridge Aid had been budgeted at approximately $6.8 million annually which typically funded about 10 bridge projects per year, and resulted in about a 10-year waiting list for state aid. Part of the revenue from the 2014 increase in the road toll discussed above was intended to double the amount of funding appropriated for municipal bridge aid, helping to reduce the 10-year waiting period to a more reasonable timeframe. The increase in State Bridge Aid in fi scal year 2015 refl ects funding from the road toll increase which allowed the replacement or repair of more than twice the number of bridges typically done in a year. However, this funding increase was short-lived with the fi scal year 2016-2017 budget appropriations dropping back down to the historic level of $6.8 million per year – with all of the appropriation coming from the 4 cent road toll increase, which was supposed to supplement, not supplant, the bridge aid provided through the highway fund.

In 2016, HB 2016, enacting the state 10-year transportation improvement program, was amended to provide an additional $2.5 million in municipal bridge aid for fi scal year 2017. Funding for this additional appropriation came from excess funds in the Department of Transportation’s winter maintenance budget due to the mild winter. The following Department of Transportation map shows the location of municipal red-listed bridges as of June, 2016.

338 municipally owned bridges were “red-listed” as of June, 2016.


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Environmental Grants

Municipalities receive grants for the construction, improvement and expansion of municipal wastewater and public drinking water facilities, and also for assistance with the cost of landfi ll closures. Under this program, municipalities fi nance the full cost of the project up-front, complete construction and then apply for payment of the state share, which is 20% to 30% of the eligible project costs, usually paid by the state over the amortization period of the municipal fi nancing (bonding or borrowing from the state revolving loan fund).

The amount of these grants began declining in 2008 with funding in 2013 less than 32% of the funding in 2005 ($5.6 million vs. $17.6 million). As part of the 2010-2013 budget reductions, the state only funded its obligations for grants approved through 2008. This left municipalities to pick up the anticipated state share ($53 million) for 127 previously approved and completed infrastructure projects - projects which were “sold” to property taxpayers based on fi nancial commitments from the state. These projects were placed on the Department of Environmental Services “Delayed and Deferred” list.

As part of the fi scal year 2014/2015 biennial budget, funding was restored for all projects on this Delayed and Deferred list. With the state making payments of this $53 million to municipalities over the amortization period of the municipal fi nancing, the net effect on the 2014 and 2015 state budgets compared to 2013 were increases of approximately $4 million and $4.4 million, respectively. However, also as part of the 2014/2015 biennial state budget, a moratorium was placed on funding any new infrastructure projects that did not have local fi nancing authorization by December 31, 2008. In 2016, HB 1428 provided funding for eight additional projects that received local fi nancing approval prior to the December 2008 moratorium. However, as of the end of 2016, there are nearly 50 wastewater projects that would qualify for state aid of $90 million over the next ten years if the moratorium was lifted.


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Flood Control. Also included under the environmental funding category is money for fl ood control reimbursements to those municipalities in interstate fl ood control compacts. Under these compacts and state law, municipalities receive a payment-in-lieu-of-taxes (PILOT) for taxable land that was taken to help mitigate downstream fl ooding from both the Merrimack and Connecticut rivers. Up until fi scal year 2012, municipalities were reimbursed by the State of New Hampshire for the full amount of the PILOT, even if the other states in the compacts (Massachusetts and Connecticut) did not make payments under the terms of the compact. In 2012 and 2013, the state only paid the New Hampshire share (approximately 30%) of the PILOT to municipalities when the other states did not make payments. However, in 2014 funding of $542,672 was provided to compensate municipalities for the PILOT shortfall in fi scal year 2012 and was paid to municipalities in state fi scal year 2015. Similarly, $163,285 was appropriated in 2016 to partially compensate for the shortfall in 2013. The 2014 - 2017 state budgets include full funding of the PILOT, and require payments to municipalities regardless of payments, or lack thereof, from other states.

New Hampshire Retirement System

The New Hampshire Retirement System (NHRS) was established in 1967 to consolidate and replace four separate pension plan systems: the New Hampshire Teachers Retirement System, the New Hampshire State Employees Retirement System, the New Hampshire Policemen’s Retirement System, and the New Hampshire Permanent Firemen’s Retirement System. NHRS is a public employee retirement system that administers one cost-sharing, multiple-employer pension plan providing a defi ned benefi t annuity basedupon a statutory formula, disability, and survivor benefi ts, for all full-time state employees, public school teachers and administration, permanent police offi cers, and permanent fi refi ghters. Full-time employees of political subdivisions (such as county, municipal or school district employees) are also eligible to become members of the NHRS if the local governing body elects participation, which most have. NHRS also administers cost-sharing multiple-employer healthcare plans, known as Other Post-Employment Benefi t (OPEB) plans, which provide a medical insurance subsidy to qualifi ed retired members.

Demographics. As of June 30, 2015 there were 468 participating employers (cities, towns, counties, school districts, special purpose districts and the State of New Hampshire), and 81,161 active, retired and terminated-vested members of the NHRS. Employees comprised 50% of the membership, teachers comprised 36%, police offi cers 10% and fi refi ghters 4%. For the medical subsidy plan, 10,265 retired members received the subsidy in 2015 while 3,056 active members (police and fi refi ghters hired before July 1, 2000) were eligible to receive the subsidy in the future. Together the retired and active members of the medical subsidy plans represent 16% of the NHRS membership.

Funding. Funding for the NHRS comes from three sources: investment earnings, employee contributions, and employer contributions. Investment earnings fl uctuate from year to year, with annual returns in the past 20 years reaching as high as 23% and as low as -18%. Over the long term, investment earnings provide anywhere from two thirds to three quarters of the funds needed to pay for pension benefi ts. For projection purposes, an “assumed rate” of investment return is adopted by the NHRS Board of Trustees. This assumed rate had been as high as 9.5%, was lowered to 8.5%, then to 7.75% in 2011, and was recently lowered to 7.25% for use in projecting future investment earnings.


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The employee contribution rates are set by statute and were 5% of compensation for Group I (employees and teachers) and 9.3% of compensation for Group II (police and fi refi ghters) until June 30, 2011. Legislation enacted in 2011 changed the employee contribution rates to 7% for employees and teachers, 11.55% for police and 11.8% for fi refi ghters effective July 1, 2011. (Note: new Group I state employees hired after July 1, 2009 were contributing 7%).

While employee rates are set by statute and have changed only once in the past 20 years, employer rates are adjusted every two years based upon an actuarial valuation to ensure adequate funding for future pension liabilities. Through these biennial rate adjustments, employers not only contribute toward their current employees’ retirement, but also bear the full fi nancial burden of any funding shortfalls in the system, whether those shortfalls are the result of poor investment returns, insuffi cient funding in the past, losses from actuarial assumptions regarding member demographics (such as when employees will retire, their age at retirement, how long they will live after retirement, and their earnable compensation), or increases in liabilities from statutory changes to the plan design.

State Contribution for Teachers, Police and Fire. The State of New Hampshire had funded a portion of the normal retirement costs for teachers, police and fi refi ghters, a practice that dated back to 1940 under the predecessor retirement systems. Since 1977, the state contribution had been set by statute at 35% of the cost, with municipalities, counties and school districts paying 65% of the cost for teachers, police and fi refi ghters. (Municipalities, counties and schools pay 100% of the cost of all other employees enrolled in the NHRS.)

In the 2010-2012 budgets, the state contribution rate was lowered to 30% in 2010, to 25% in 2011, to $3.5 million in 2012 and then eliminated in 2013. This resulted in local governments paying 100% of the retirement costs for teachers, police and fi refi ghters in 2013 and beyond. The following graph illustrates the local government employer contribution rates (percent of employer contribution on $100 of compensation) from 2002 through 2017, with estimated projected rates for 2018 and 2019.

If the state had continued the 35% contribution toward pension costs for teachers, police and fi refi ghters, then municipalities, school districts and counties would have paid approximately $80 million less in pension costs in 2016.


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Funding Status. A primary measure of the health of a public pension system is the funding ratio, which indicates the extent to which assets are available to cover current and future benefi ts. While a funding ratio of 100% or greater (meaning there are suffi cient assets to fund all liabilities) is desirable, it is not necessarily a practical benchmark since all the benefi ts are not immediately due and payable, but generally stretch over a 25- to 30-year horizon. Therefore, a more common benchmark to measure the health of a public pension system is a funding ratio of 80%. As reported in the NHRS comprehensive annual fi nancial report, the funded ratio for the pension plan as of June 30, 2015 was 63.4%.

A number of factors have contributed over the years to this low funding ratio including:signifi cant investment losses, most recently in 2008 and 2009, the practice of “gain-sharing” which diverted over $900 million from the corpus of the pension trust to fund additional benefi ts such as cost-of-living adjustments and medical subsidies, andan actuarial valuation methodology which masked the true fi nancial condition of the system, resulting in artifi cially low employer rates during the years it was in effect.


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Recent Statutory Changes. Regardless of these so-called “sins of the past” and despite increases in annual employer contributions from $88 million in 2003 to $381 million in 2015, the unfunded pension and OPEB liabilities continued to grow, resulting in signifi cant biennial increases in employer rates. As of June 30, 2015, the unfunded liability for the pension plan was $4.2 billion, and accounts for 65%-78% of the required employer contributions. Since 2010, many statutory changes to the NHRS laws have occurred in an effort to mitigate these unsustainable rate increases to employers. The more signifi cant changes include:

change in the actuarial methodology to shed a brighter light on the true fi nancial status of the system; elimination of the “gain-sharing” provision; increases in the employee contribution rates as noted above;increases in the retirement age and years of service;repeal of the automatic medical subsidy escalator; changes to the defi nition of “earnable compensation” to limit or eliminate provisions that allowed for pension spiking; andchanges in the composition and qualifi cations of NHRS Board members and establishment of an independent investment committee.


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The graph below shows the amount of annual NHRS contributions from all employers (including the State of New Hampshire as well as local government employers) from 2003-2015.

Questions regarding this report may be directed to NHMA at 603.224.7447 or [email protected].


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NOTES:1. Beginning in FY 2014, kindergarten aid is now included as part of adequate education aid.2. Kindergarten Construction Aid in FY 2012 includes $888,395 to pay for temporary kindergarten classrooms as

permanent classrooms are built and appropriates $3,700,000 in bonds for the biennium ending June 30, 2013 for kindergarten construction. $841,000 was appropriated in FY 2014 but not spent. This amount does not lapse and is expected to be spent in FY 2015.

3. Negative amount is result of three school districts returning unused portions of their reading recovery funds.4. The amount distributed in FY 2015 includes a distribution of $542,672 pursuant to Chapter 300, Laws of 2014 to

compensate communities for FY 2012.


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5. Amounts for FY 2016 and FY 2017 are estimated based on FY 2015 actual expenditure.6. Specifi c amounts distributed to school districts and municipalities are currently available for FY 2007 through FY

2012 only. For FY 2006, the teacher contribution is not distinguished from the police & fi re contribution.7. State aid construction includes $3.6 million that was bonded for FY 2008 and FY 2009.8. Beginning in FY 2015, bridge aid includes revenue resulting from the increase in the road toll ($954,867 in FY

2015).


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