June 27, 2012

The Real Context for Woonsocket's Supplemental Tax

Carroll Andrew Morse

Woonsocket's Mayor and City Council have proposed a 13% supplemental tax as an immediate solution to their city's short-term fiscal crisis. They have also proposed building the supplemental amount into the city's revenue baseline to help address longer term structural deficits. At the behest of the Woonsocket's state representatives, the Rhode Island legislature rejected this plan. The state legislators would prefer to see elected municipal government in Woonsocket suspended and a state-appointed "receiver", unaccountable to local voters, address the fiscal crisis. But anyone believing that submission to a "receiver" is an easy and automatic way to avoid a supplemental tax increase needs to look more closely at what happened after a receiver took over in Central Falls.

Central Falls' first receiver under the state's 2010 "fiscal stabilization law" (Mark Pfeiffer, the 2nd Central Falls receiver overall) increased the city's tax-levy by 19%, with a combination of property tax-increases and increases in Rhode Island's infamous car-tax. The levy increased another 4.25% the year after that, and the five-year plan initiated by Central Falls' second receiver under state law (Robert Flanders, the 3rd Central Falls receiver overall) projects that property taxes will "grow at the maximum allowed according to R.I. Gen. Laws", which is four percent, for the next four years.

A 19% levy increase, followed quickly by five years of the maximum tax increases permitted by law is hardly an "austerity" strategy. Central Falls' finances were so out of whack, both large tax-increases and the widely publicized cuts in public-employee benefits were needed to achieve any kind of balance. The question for advocates of a Woonsocket receiver is why they think they will be immune from similar treatment if municipal democracy is suspended. This question needs a more in-depth answer than "whatever is the will of the heroic receiver".

* * *

Though conditions in Central Falls and Woonsocket are not identical, there are important structural similarities. As is the case with many of Rhode Island's "distressed" communities, continuing states of fiscal emergency are partially attributable to decisions repeated over the years to apply state aid and commercial property taxes towards a primary purpose of keeping residential property taxes low. Indeed, Woonsocket and Central Falls (prior to receivership, at least), according to local taxation data compiled by the state and Census bureau figures on income, have recently collected some of the lowest percentages of community income in property taxes in the state. Central Falls prior to the arrival of the receiver was the only community in Rhode Island to collect less than 4% of community income in residential property tax. Woonsocket collected 4.8% of aggregate community income in residential property taxes in 2011, the fourth lowest total in the state.

This fact is masked by the way that Rhode Islanders frequently look at community tax data, which is without differentiation between residential commercial levies. When residential tax levies are examined in terms of community income, who pays a lot versus who pays less bears little resemblance to the conventional RI wisdom regarding regressive tax burdens. As an example, consider North Providence. North Providence residents pay over 6% of their income in local property taxes, in the upper half of rates in the state. Despite this, North Providence only has slightly more revenue per-resident to work with than Woonsocket does, mainly because they don't receive as much per-capita state-aid. A case could be made that North Providence is one of RI's communities most deserving of extra assistance (and also that municipal employees should cut North Providence Mayor Charles Lombardi a little more slack) since the town government there is working with as many resources drawn directly from residents as might reasonably be expected. Yet for reasons more political than fiscal, North Providence is rarely included on the list of small-footprint, densely-populated communities that should be sent to the front of the line for more more more from the rest of Rhode Island.

Standing in contrast to North Providence is a cluster of Rhode Island's officially and unofficially "distressed" communities, including Central Falls and Woonsocket, plus East Providence (currently under a budget commission), West Warwick (wrestling with its own potential shortfall) and Pawtucket. These communities are all in the bottom quarter of residential property tax collections as a percentage of community income, with rates of 5% or below. That these communities have "suddenly" run into fiscal trouble is actually the result of their having pushed the philosophy of using commercial property taxes and state aid to replace rather than supplement residential property-tax revenue as far as it can go -- and in the case of Central Falls, maybe a little beyond. Central Falls used the extra fiscal freedom that came from having the state pay for a major chunk of their city services (i.e., the education part) not to bolster other city services, but to keep their property taxes as a percentage of community income at the lowest rate in the state.

Unfortunately, the Woonsocket delegation to the state House of Representatives seems to think Central Falls has been a model to emulate. They were happy in their original five-point plan to call for an increase in state-aid while insisting on a limited, one-time tax-increase. Being on Smith Hill for too long has apparently led one-time “fiscal conservatives” to absorb the worst-aspects of Rhode Island political culture, where the preferred option is to use backroom dealing to get someone else to pay for your problems -- but it is not fiscal conservatism of any form to say we’re OK with spending more, as long it all comes from someone else.

* * *

Economic and fiscal realities continue to make their impacts, for better or for worse, despite the politics, and even when they are obscured in the presentation of the numbers. Money isn't there in Woonsocket, at least in part, because previous Woonsocket governments made a choice to not raise the same amount of revenue from their own residents as a percentage of income that other communities chose to. This problem was compounded by the raising of commercial property tax rates as an alternate source of revenue, which has in turn made the city an unattractive place to do business and reduced the number of commercial property tax payers available to supplement the residential levy. This is not the sole factor that has created fiscal problems for Woonsocket (Mayor Leo Fontaine can be heard here, giving one set of explanations for Woonsocket's long-term troubles), but short-sighted tax policy made a difficult situation worse.

To begin to remedy the overlapping problems facing Woonsocket, the City Council and Mayor have proposed the same initial steps that a "receiver" put in charge of the situation would almost certainly implement. Woonsocket City Council President John Ward has told WPRO's Dan Yorke that passage of the supplemental would allow the City to balance next-year’s budget while staying under the state's legally mandated tax-levy increase limit of 4%. If Woonsocket’s elected government could stick to such a plan, and come in under the maximum local tax-levy allowed under the state' law for the next several years after that, they would be at least on par with and maybe ahead of the Central Falls receivership plan, especially if they could do it in such a way that achieves better residential/commercial balance.

There is nothing about such a plan being formulated by a receiver that would make it inherently superior to one formulated by the regular government. Ultimately, the only plans that will stand the test of time are ones based upon a community coming together to make reasonable decisions about its future (on both the local level, and with regards to how the state should apportion its aid), realistic decisions about what they are willing to pay for, and what is reasonable to expect in return. Anything else is just the latest version of a one-time fix.

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This ain't rocket science
1. State law limits tax increases to 4%.
2. 90% of muni budgets go to employee wages and benefits.
THEREFORE-if a muni can't meet its expenses one of two things must happen:
1. The unions can voluntary cut their compensation such that the muni can meet the 4% cap OR
2. The city files for bankruptcy and the court orders the employees compensation cut such as to meet the 4% cap.

End of subject.
Wasn't that an easy lesson?

Posted by: Tommy Cranston at June 27, 2012 1:22 PM

Just think. If Central Falls took back their school department and ran it as cost efficiently as the state has run it, I heard the city would have to contribute around $11 million according to the fair funding formula. That means all they would have to do is raise their tax levy by another 80%!

Yeah, that'll teach those bastards.

Posted by: John at June 27, 2012 8:44 PM

Woonsocket does not make sense even though I lived there for 35 years and worked in City Hall. I sold my house in 2006 just before the market crash and moved to Hawaii. I was able to sell it at the average neighborhood inflated price. Looking at the Woonsocket property taxes now I find my property has been devalued $100,000 which Woonsocket city-wide loss a lot of property tax income during this market bubble and recession.

What I don’t understand is the following logic; during 2003 to 2005 the Homestead Exemption was 45% assessed value. Just prior to the bubble and during the recession 2006 to 2008 the Homestead Exemption was 25%. Then 2009 to 2011 the Homestead exemption shot back up to 42% and the mayor is now asking for a 13% supplemental tax increase!

The mayor controls the Homestead Exemption and can lower it without going to Smith Hill asking for permission! The Homestead Exemption should have stayed at 25% assessed value till there was full recovery from the recession.

Posted by: KenW at June 27, 2012 10:24 PM


The reason the homestead exemption went back up to 42% was because of the extreme increase in market values during a full revaluation (just prior to the crash). Even after increasing the homestead exemption to 42%, the average homeowner saw their bill increase by 11% that year. That adjustment also allowed the city to keep the commercial tax rate at a level where the average business tax bill went down by about 4%.

Now we have the market values collapsing on residential property far faster than commercial property. The budget commission will be lowering the homestead exemption in a proposal to phase it out over 15 years as was done in East Providence.

I will be proposing a further decrease in the commercial share of the levy such that the rate will remain the same which should reduce their bill (average value decrease of 2.1% in statistical revaluation) while the homeowner will see an increase of between 8% and 9%.

The largest source for revenue is the single family homeowner and they have to make this investment to help make the city more affordable for business.

The meeting to settle this question will be today at 3:00 pm.

Posted by: John at June 28, 2012 8:59 AM

My 130k property in woonsocket is now assessed at 90k yet Im supposed to pay more in taxes for it now than when I bought it. Im not real estate guru, but how does whacking people like me who cant move without loosing a ton of money HELP the city to "recover". Shouldnt we be concentrating on attracting folks from Mass and RI to us and the massive glut of Condos on the market in this town? Some of which are actually quite nice.

Why, John, do all the solutions being disucssed always involve taking more from residents. And by the way, whatever happened to the discussion of the public employee contracts Justin brought up in the currant a few months back?

Posted by: PeteC at June 28, 2012 1:45 PM

The budget is still $7 million out of balance. THat will have to be made up by employee and retiree concessions.

Posted by: John at June 28, 2012 1:53 PM

Andrew -
Your analysis in interesting, but it is misleading and flawed.

You imply that Woonsocket's fiscal problems are the result of not having higher residential taxes. That's crap.

New Shoreham, Westerly, Charlestown, Barrington, etc. have a much higher residential tax burden as compared to Woonsocket simply because they have far less commercial/industrial property ...they don't want to spoil their quaint residential lifestyle, which is common among many of the municipalities that you point to as having a higher residential tax as compared to Woonsocket.

It is not because they are doing something smart or heroic, it is simply the reality of their tax base.

If Woonsocket shifted a big chunk of their tax burden from Commercial to Residential, they too could report a high residential rate and be included in the top 10 along with Barrington & Co..

But guess what, that does not mean their levy would be any higher. It just reallocates it.

The City's levy has consistently gone up. You can debate over how it is allocated accross property classes, but the levy is the levy.

I can assure you that if Barrington had more Commercial property to tax, the residential portion would be lower.

Woonsocket can fiddle with the rates on the various property classes, but the real issue they need to address is the same issue that is killing all the urban communities ...unaffordable cost structures driven by union contracts that don't reflect the community's ability to pay.

Until they deal with that, they will continue to circle the toilet bowl.

They are a bit slow up in Woonsocket. They don't yet understand the concept or need for austerity. They still think they can tax their way out of the hole they are in.

Their grand plan is to punish the single-family homeowner, who puts the least burden on the City. Brilliant.

Then, when they drive out those homeowners and are left with nothing but tenements ala Central Falls, they'll want the rest of us accross the state to bail them out.

Posted by: Leo at June 29, 2012 6:33 PM
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