The Budget, Revaluation & ARPA

By
Skip Dickson, Chairman
Board of Finance


Adopting a Salem budget is more involved this year because of revaluation and the American Rescue Plan Act (“ARPA”). Revaluation is required by Connecticut law once every 5 years and the federal ARPA legislation provides additional one-time funding to Salem.
 

Revaluation requires a reassessment, or update, of all property: real estate, personal property and motor vehicles. Connecticut further mandates that property values be based on fair market value and that a uniform tax rate be applied to all property classes. Besides a normal 5 year increase in property values, COVID and the highest inflation in 40 years have increased property values further.

Overall, Salem’s Net Grand List increased 15.77%: real estate by 15.4%, personal property by 7.9% and motor vehicles by 23.7%. The large motor vehicle increase represents the dramatic increase in the cost of both new and used vehicles.  Remember that assessed values are based on significantly higher fair market values.

The new Grand List represents Salem’s tax base for revenue purposes. The Grand List multiplied by the mil rate (a mil is $.001) determines how much revenue Salem generates. Our mil rate for the last several years has been 32.2. If the old mil rate were to remain constant and be applied to the new Grand List, it would result in an additional $2,009,337 in tax revenue to the town.  But that would increase residents’ tax bills of more than an average 15%! 

Thus, the initial issue for the Board of Finance (“BOF”) is: how much more revenue does the town need to pay for requests for increased spending? By law, the mil rate must be applied uniformly and does not reflect ability to pay. Salem cannot tax people at different rates. Consequently, the BOF must balance spending needs and wants with the ability of all Salem residents to pay for any spending.

The smaller the amount of increased spending, the more the mil rate can be reduced and still provide the necessary revenue. The smaller the spending increase, the smaller will be any necessary tax increase. Consider that if the mil rate is reduced from 32.2 to 27.8 it would be revenue neutral; but there would be no tax revenue to fund additional necessary spending.
 

ARPA funds complicate the process. They provide Salem with one-time assistance. Over the next two years Salem will receive approximately $1.2 million in ARPA funds. The Board of Education (“BOE”), separately, will receive another $800 thousand in ARPA funds. These funds will be put to good use; however, these one-time funds should not be used to pay for ongoing expenditures. That would require a significant tax increase when the funding ends, like a balloon payment coming due on a mortgage.

So, the second issue Salem faces is what Town needs should ARPA funds be spent on?  Similarly, the BOE has to decide what educational needs it should spend its ARPA funding on. To the extent that Salem uses ARPA funds for one-time expenses in this year’s budget and the next, it will reduce the necessary amount of the mil rate, or more plainly, the amount of resident’s tax bills.  Similarly, the BOE’s use of its ARPA funds can reduce the amount of its budget request that it sends to the BOF.  (Approximately 78% of Salem’s spending funds education. This includes spending for operations, capital, debt, interest and in-kind services that the Town provides to the BOE.)

The BOF, the BOE and Salem as a whole must balance what spending is needed with the ability of residents to pay for higher taxes for those services. COVID’s blows to our economy and the problem of rising inflation challenge our ability to continue to make Salem the wonderful place to live that it is. Revaluation and ARPA further complicate the process.

Everyone should feel free to discuss these issues with any member of the Board of Finance.  We need and welcome your input