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20% property tax hike proposed by Kennett for 2023 is permanent.. and just the beginning

Updated: Dec 16, 2022

Increased property taxes raise only $1 out of every $4 Kennett will need in 2023 and 2024, primarily to cover Kennett Greenway costs.

With the posting of the proposed 2023 Kennett Township Budget, residents now realize that Kennett Township wants to hike property taxes by 20% in 2023. As we will summarize through this series of posts, the tax hike is just the beginning of other, much more significant capital expenses spiraling rapidly upward over the next 5 years to drain more than $3,000,000 from operating revenue and reserves in 2023 and 2024 alone for the 1.4 mile Chandler Mill Trail (CMT) section of the Greenway (see Figure 1 below).

In this post, we dig deeper to understand why taxpayers will bear the brunt of Kennett’s spending spree on the Kennett Greenway, to reveal that these tax hikes are not just permanent, but will likely increase regardless of Kennett’s success in getting other grants or in cutting other costs. This post focuses on the role of property tax hikes in the general operating fund, outlined in blue in Figure 1. These represent direct costs to Kennett taxpayers after state grant funding has been applied. In sum, even after its 20% tax hike, Kennett will have no “cash” available after covering other expenses. Kennett must “borrow” 99% of the cost of the Greenway from its various reserves, and cannot pay all of these debts off for a decade. Until then, no new major capital or open space improvements can begin.

Raising property taxes is the only reliable way for Kennett to significantly increase revenues year to year if savings cannot be achieved elsewhere. Most of Kennett’s budget is devoted to day-to-day or operating expenses (about $6,500,000 in 2022 - see. p. 4) associated with services that Kennett provides to its residents. These are largely covered by taxes (about $5,900,000 in 2022 - see p.4). About one-third of these represent real estate or property taxes (about $1,900,000 in 2022- see p.7).

Property taxes are the only taxes over which Kennett has any real control. The rate of Earned Income taxes (about 56% of 2022 taxes) is set by Pennsylvania, and real estate transfer taxes (about 8% of 2022 taxes) depend on the number and value of properties bought and sold in a given year, which can fluctuate significantly. If Kennett wants to ensure an increase in operating revenue to cover increased operating expenses, it really has no choice but to increase property taxes.

So it is no surprise that a property tax hike would be considered as one solution when Kennett’s 2023 budget included $708,000 in increased expenses for Fire/EMS ($224,000 representing a 30% increase - p.18) and police ($485,000, representing a 25% increase - p.16-17). Before concluding that a property tax increase is necessary, however, Kennett would consider other questions

  1. Are the increases warranted? As we will discuss elsewhere, the fact that Fire/EMS budgets are set through the regional commission complicates Kennett’s influence.

  2. Can savings in day-to-day expenses be achieved elsewhere? This is challenging, because Police/ Fire /EMS services constitute 53% of Kennett’s day-to-day expenses. Accommodating $708k in increased Police/ Fire /EMS expenses would require 24% in cuts elsewhere.

  3. Can sources of revenue other than taxes be increased? As we mentioned, about 80% of revenues come from taxes. But most of the other 20% of revenue comes from grants (which cannot be used to support these expenses) and other fees (which Kennett does not control and which generates relatively little income).

Another critical question: are these increases permanent? Our preliminary review suggests that even a major re-organization of Police or Fire / EMS services appears unlikely to significantly decrease expenses. In any case, supervisors have demonstrated little appetite so far for such a move.

Even a 20% property tax increase is a drop in the budget bucket - it does not cover the increase in Police / Fire / EMS expenses, let alone the much more significant capital expenses. The tax hike proposed for 2023 - however controversial - would actually generate only $410,000 in additional revenue. In fact, the tax hike represents only a 5% total increase in Kennett’s general operating revenue. And the tax hike will only cover about 57% of the $708,000 total increase in Police / Fire / EMS costs. Covering all of the $710,000 in increased expenses through property taxes would require a 35% property tax increase.

Kennett takes in additional revenue every year to cover capital and other costs: this is what will absorb the increase in Fire/EMS costs not covered by property tax increases. Between taxes and other revenue sources, Kennett projects bringing in at least 15-20% more than it collects to cover general operating expenses in recent years. This amounted to over $1,500,000 in 2022. This money covers other costs.

  • Capital expenses associated with tangible assets Kennett acquires, as opposed to services it provides.

    • This includes minor capital expenses (vehicles, equipment, road re-paving, and major building repairs). Kennett typically budgets for these annually, drawing from its operating revenue (see Infrastructure and Equipment on p.24-25).

    • This also includes major capital expenses (new buildings, roads, and trails). Kennett should be setting aside funds in a capital reserve to accumulate the more significant sums needed for projects like the Greenway or Five Points, but Kennett did not begin to fund a capital reserve until last year, and only after we began to raise concerns.

  • Maintaining an operating reserve to cover unexpected fluctuations in revenues and expenses.

  • Note that Open space and sewer expenses are covered through separate funding mechanisms.

Kennett spent most of the additional revenue on CMT in 2022.

  • Most of the additional revenue in 2022 went to pay for capital projects, with CMT absorbing more than 50%: After Kennett drained most of its remaining capital reserve to cover other capital projects in 2022, it had to draw $1,356,596 from general operating revenues. More than one-half of that ($754,000) was spent on CMT (see p.24). None of it was actually spent on construction - in fact almost $90,000 was spent on unplanned meetings.

  • Most of the rest helped to top up Kennett’s operating reserve: As described elsewhere, Kennett keeps money in the bank to cover cash flow (see p.25) - it operating reserve. The amount needed is described relative to the amount of expenses in a given year. Kennett was able to add another $595,000 in 2022, bringing the total to $4,395,810 (see p.25), a reserve that many would consider healthy because it represents about 70% of Kennett’s annual operating expenses… at least for now. The unexpected expenses and revenue shortfalls covered in 2022 included

    • About $280,000 in unexpected expenses for the Police

    • About $280,000 in unexpected administration expenses (most of which was due to the “ethics review” of concerns centered around the conflicts of interests of Township manager Eden Ratliff)

    • About $40,000 in unexpected Fire/EMS expenses (see p.13).

    • Kennett also took in about $40,000 less than it had budgeted for in 2022 (see p.4)

Kennett could cover increased Police / Fire / EMS costs without raising taxes, if CMT was not exorbitantly expensive. It is very clear: the dramatically increased costs in 2023 & 2024 associated with the proposed $7+M CMT make it impossible to cover increased Police / Fire / EMS costs without a tax increase. The local costs of CMT double in 2023 and 2024, even after almost $2,500,000 remaining in potential state funding is applied. Interestingly, the increased local costs for CMT in 2023 and 2024 relative to 2022 - more than $720,000 each year - is more than enough to cover the increased costs for Police / Fire / EMS services.

Property tax increases are a small fraction of the additional money Kennett will spend over the next five years on major capital projects, with more than one-half going to the Greenway. Consider the additional $708,000 for Police / Fire / EMS services and $1,482,000 needed for CMT in 2023 - the $410,000 raised through increased property taxes represents less than one-fifth of the total amount needed to cover the combined costs next year. It is no surprise that, as described in other posts, Kennett will have to not only drain its existing capital and open space maintenance reserves completely dry, but it must “borrow” $1,000,000 against future open space maintenance reserves, and then draw its operating reserves down to levels that even township officials are uncomfortable with. And this is just the beginning of the story: as illustrated in the figure above, township finances will not recover from these extraordinary expenditures until at least 2033.

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