City leaders got their first look this week at next year’s budget numbers, and another drop in Denton’s property tax rate could be in the offing.
Next month, City Manager Todd Hileman will present his third annual city budget built from the bottom up with the “effective tax rate,” the rate needed to collect the same dollars on the same properties from last year to next. Then he’ll present the City Council with about $5.6 million in possible new spending — both one-time and recurring expenses for homelessness initiatives, public safety improvements, parks maintenance costs and more.
At that point, council members will decide how much of that new spending they want to bite off for the coming year.
David Gaines, Denton’s director of finance, said the city expects to add about $430 million to the tax rolls next year from new homes and businesses. That new value should bring about $2.6 million in new revenue and boost the general fund to more than $131 million next year and help pay for the needs of that growth, such as three more firefighters at the city’s eighth fire station.
The city’s total budget, however, will likely exceed $1.2 billion or more. Denton also operates a landfill, an electric utility, and water and wastewater treatment plants and is making millions in capital improvements to roads and utilities.
Here are five key takeaways from the finance staff’s presentation to the City Council this week:
The effective tax rate should drop again
Denton’s effective rate — what the Texas Legislature rechristened as the “no new taxes” rate — should be about 59.5 cents per $100 valuation next year.
“We’re projecting about 2.5 cents less than our current rate, which has been happening for the past few years as assessed values have been increasing,” Gaines said.
The effective tax rate is a complicated calculation that shows what a city would assess to collect the same amount from the same properties from one year to the next. But in practice, property values often go up and individual home and business owners end up paying a little more each year, even when the city adopts the effective rate — as Denton has done for the past two years.
Before 2017, Denton disclosed the effective tax rate in its budget documents as required by law but didn’t build a budget using it. Beginning next year, that option may never return, thanks to a new cap on property taxes imposed by the Texas Legislature.
While not fully in effect until next year, Gaines showed Denton’s cap calculation, also known as the rollback rate, to city leaders this week. Currently, it stands at about 61 cents per $100 valuation.
That’s a penny lower than this year’s property tax rate.
Spending decisions to be organized by the penny
Each penny of the tax rate raises about $1.1 million for the general fund. Hileman said he would present new spending requests — sometimes called “supplementals” for short — in tiers that would take another penny on the tax rate to fund.
Hileman told council members that most of the first tier of spending, primarily homeless initiatives, would be covered by a surplus in the general fund. The second tier, which would likely increase the tax rate from 59 cents to 60 cents, would fund new public safety measures.
There could be as many as six tiers for the council to consider.
The general fund is subsidizing development services and some recreation programs
Hileman also advised council members this week that two departments are spending about $4.5 million more than they were taking in. He estimated the general fund was subsidizing about $3.9 million of expenses in development services and another $600,000 for some recreation programs run by the parks department.
The city staff is working on better cost recovery for both those departments, Hileman said. Permit and inspection fees are supposed to cover the cost of reviewing new development projects. Recreation programs are supposed to charge appropriate fees, too.
If the city staff can improve their cost recovery sooner rather than later, it will improve the bottom line for next year’s budget, Hileman said.
“We’ll be able to fund more supplementals,” he said.
In other words, the city could potentially pay for additional tiers of spending without raising the tax rate.
Sales tax growth is getting recalibrated
Both the city of Denton and Denton County Transportation Authority noted a significant drop in sales tax revenue this year.
The city finance staff isolated the loss to the oil and gas sector and eventually to a single taxpayer. Gaines told the City Council they didn’t expect sales tax revenue from that sector, which was down $5 million this year, to return.
Instead, the finance staff conservatively projects 4% annual growth in sales tax — most from the retail sector — for the next five years, Gaines said.
The city cannot disclose the taxpayer’s identity because of confidentiality laws, but there are only a handful of operators left in the city as oil companies have moved out of the Barnett Shale and back to the Permian Basin. Most oilfield service companies that remain locally are based in Wise County. Of the handful still based in Denton, Schlumberger is considered the largest.
Gainesville and Denton got into a bidding war for a Barnett Shale field office of Schlumberger, the world’s largest oilfield services company, several years ago. A Denton developer, Granite Properties, secured the deal and transferred its property tax incentive agreement with the city to Schlumberger when the company bought the property, located along Interstate 35W, in 2012.
Schlumberger’s Houston-based media office declined to comment.
The homestead exemption will get yet another look
Council member Keely Briggs has been pushing for a another kind of recalibration — increasing the homestead exemption for all homeowners.
Through additional exemptions and the property tax freeze, Denton gives big property tax breaks to homeowners with disabilities and those age 65 and older. While some older homeowners and people with disabilities may have lower incomes, not all do. The general homestead exemption is widely considered the best opportunity for a local taxing entity to provide tax relief to lower-income homeowners because they tend to own lower-value homes.
Denton’s current homestead exemption maxes out for most homeowners at $5,000. Because most Denton’s single-family homes are not owner-occupied, the tax break costs the city about $500,000 annually. Exemptions for homeowners with disabilities or age 65 and up cost the city more than $2 million annually.
City Council members must decide about the exemption before July 1, if they expect to make any changes.