We’ve had a handful of folks ask for our take on the school strike and asking for us to explain what’s going on, how we got here, and how we can get out of it. And while we’re low on time (because of the kids we gotta watch all day now), we figured everyone has a point. We aren’t getting an easily digestible, truthful breakdown of our current situation. So here we are, in as factual language as possible. First we’ll start with our budget, then how our school committee functions, and finally an analysis on where both sides are. We are definitely having fun and not during this under duress, while screaming into the void. It’s fine, this is fine.
I have insomnia. Explain how city budgets work so I can get back to sleep.
Like most businesses, the city’s budget runs on an annual basis, from July 1 to June 30. The budget process starts months in advance of that date – taking nearly a year overall from start to finish. The process kicks off with the mayor consulting with department heads on their needs to build the budget. The Mayor then submits this budget to the City Council. There are 9 City Council members, and 3 are on the Budget and Finance Committee. Budget and Finance are tasked with doing the Mayor’s proposed budget review before it is presented to the full Council for a vote, but other councilors should, and do, keep an eye on things at all times. From there, the full city council reviews the proposed budget in a series of public meetings. The city council can only amend the budget by keeping it balanced – they cannot add to a specific department’s budget without taking the same amount of cash from another department. State law requires municipalities run balanced budgets.
While the city council can request the mayor take a look at increasing revenue projections to bridge the gap, it’s not often prudent to overestimate as a shortfall can be extremely problematic, and the funds can’t materialize out of thin air. The final budget is voted on and becomes effective on July 1st.
This year, the difference in what the Superintendent requested from the mayor and what was allocated in the budget was roughly $6M, due to spiraling special education costs (we will get into this later, if we can drink enough to make ourselves). The superintendent’s budget overview is here for reference. After going back to the drawing board, using non-permanent ARPA funds, and creating a $750k special education stabilization fund, as well as cuts to other parts of the budget to bridge the shortfall, the remaining gap ended up at $2.2M out of the total $165M budget. Despite the efforts of the Budget and Finance committee, there was no way to fund the level services budget that the superintendent had requested.
The UGE is saying we have the free cash available, so why can’t we use it?
First off, let’s dig into the concept of “Free Cash.” Much like a household budget, it’s the bits leftover at the end of the year, after the city has balanced their budget to account for their expected revenue. For example, if a municipality projects $1m in revenue, and has $1m in expenses, the budget is balanced like mentioned above, But, a few months in, Steve at the DPW decides to retire six months earlier than expected, and a few expected capital expenses came in at lower cost than budgeted for. You have an additional $100,000 at the beginning of the next fiscal year. Hooray, free cash! The state says, “Awesome job, you smart, good looking people of Gloucester! You can hang onto it in a special account and choose what to use it for.” A good city budget does not leave too much or too little in the free cash accounts. Some is used for stabilization funds, to cover for future budget instability.
It’s not free real estate.
Free cash sounds great, but there are expenses that it’s good for, like one-time purchases that avoid accumulating debt, and expenses that are a very bad idea to use free cash for. Recurring, annual, contracted salary expenses are that bad idea. It’s discretionary and not guaranteed, and each year expenses change. While we have had several years in a row of favorable beach receipts thanks to a post Covid boom and low expenses for winter storm plowing, that is not guaranteed to continue, and those are big variables in our city’s budget. The one exception to the “no deficit” rule we mentioned above is the snow budget. Communities can set a baseline prediction and then if they blow through that they can use free cash to patch it up after the fact. Next year, we could run very short and rely on that money to bridge that gap. In that case if the money’s gone to payroll, more layoffs occur. Relying solely on “free cash” to fund the shortfall as the UGE has called for isn’t sustainable when we’re talking about salaries for the most massive department in the city. However, as we mentioned above, $750k from the free cash was earmarked to stabilize the special education costs, which does alleviate some of the downward pressure on the school budget.
Why does Free Cash impact anything if it’s leftover money? Doesn’t having extra money mean the mayor can’t budget?
First off, the city’s available free cash has a large impact on bond rating. All cities and towns in MA have interest bond rates. Ours is currently AA. We got there after 13 years of hard work on the part of several city administrations. We could do a whole other article on this topic, but one thing at a time here.
If we have no free cash, our bond rating will fall. Having no free cash is a signal to those lending us money that we may not be able to make good on our debt obligations. In that event, it becomes more expensive to borrow for capital expenditures. We are fortunate to have a good rating because when the City Council votes to borrow money, we can do so at a lower interest rate. Think of Free Cash and a bond rating like equity and credit. If you don’t have a good credit score or a down payment to buy what you need, you’re going to end up paying much more over the course of a loan. While we’d love to pay everything in cash, it’s not feasible to do so. The city relies on borrowing funds to pay for long-range capital expenses.
Can’t the city administration just figure out how to get the school budget paid for by finding the money? It’s their job, right?
Let’s talk about how budgets actually get made and how revenues work. The vast majority of the revenue in the city’s budget comes from property taxes, though there’s also state-supplied funding for schools, road repairs, and other areas. There’s services that are paid directly by user fees like water, sewer, and trash called “Enterprise Funds” and are reset each year. Our property taxes are set by a formula established in 1978 with the passing of Proposition 2 ½ – which basically says that the maximum tax revenue is limited to 2.5% of the total taxable property, plus any new growth revenue.
So that new 6-unit condo that went up down the street on an empty lot? That’s new growth, as is the old empty plant that was converted to a restaurant and function hall.
The total amount of property tax you can assess is called the levy limit. And ideally, you want your community to be well under that limit if possible, in case of unforeseen needs down the road. Like a better teacher’s contract, for instance. Let’s compare to our neighbors up the line. Salem has a total levy capacity of $130,115,164. Beverly has a capacity of $130,560,261 (these are FY2025 numbers from the Mass. DOR). Gloucester’s is $105,847,014.
Now, to look at the actual amount of property tax raised, Salem’s budget projects $122,077,395 raised. Leaving approximately $8 million in excess levy capacity. Without Beverly’s FY2025 numbers, we turn to their 2024 numbers as certified by the state. In FY2024, Beverly had a maximum levy of $125,928,475. They taxed $124,470,712 – so last year they only had $1.45 million in excess capacity. Not nearly as much of a cushion.
Using FY2024 numbers, Gloucester had a total levy capacity $101,671,528. And the taxes that were assessed were $101,622,847.
That leaves us with an excess levy capacity of $48,681. That’s FORTY-EIGHT THOUSAND dollars. We are a sensible midsized sedan away from disaster.
When cities bump up against this limit, they have two options. They can either cut line items from department budgets to get down to that limit, or they can ask the voters for permission to raise the tax to a higher level (usually for a time), and that is called a “Prop. 2 ½ Override.” If the city government can persuade the voters that the money ask is for a good reason, a “yes” vote enables that reason to be funded. Usually overrides are asked for things like major capital expenses (new water plant, new high school building, and the like). It all depends on the community and the budget practices. Having excess capacity allows you to raise taxes more to handle these things without having to go to a vote.
Salem can afford about $8m in increased costs before they’d have to ask for an override. Beverly can afford about $1.5m. Gloucester needs an override to pick up a few scratchies at the corner store.
We have a second, looming problem that is going to cause havoc in our budget: the 3A referendum. Tracy O’Neil garnered enough petition signatures to call the recent 3A MBTA housing initiative to a ballot referendum. Unfortunately, this move means that Gloucester is immediately out of compliance with state law, putting our access to state funds at risk. Right now, the state is not giving anyone a pass on this. Grants we banked on since the city council had approved the 3A zoning district may be pulled out from under us – take the library, for example. The City is on the hook for that project unless the library can raise the funds, which they’ve thankfully been steadily doing. (We can still help with that, and we need a library now more than ever.)
We’re also on the hook for our secondary wastewater treatment plant. We’ve been kicking this can down the road since the early 80’s. For forty years, we’ve been on a compliance waiver because our sewage plant does not adequately treat outflow to the level requires. It’s important to note that this secondary treatment does not have anything to do with capacity, it’s entirely the type of sanitation our sewage gets. Therefore, adding new housing units is not the cause of this expenditure.
So we’re in a real pickle on how to pay for the school budget as it is, let alone our educators’ new contract.
We can’t just take funds from other departments, months ago B&F went through the budget to find anything that could be re-allocated. We still need other departments funded adequately as well. Other departments like the police and fire have union contracts too, so we can’t claw back salary we’ve already promised. And salary is the big spend – roughly 85% of the budget. We can’t save enough reams of paper to solve the problem.
So where are we now?
The most likely outcome is that if we hammer out an agreement near what the teachers want, there will be cuts to staffing to balance the budget, unless we can find more budget. A Prop 2 ½ override has been our only option and we have failed to do it for so long. In reality, most cities we are looking towards as the beacon of how we want our schools to be funded rely on overrides. Looking locally, Boxford has voted for six overrides in ten years, all to fund schools. Groveland, Ipswich, Manchester, Merrimac, Salisbury, Melrose, Georgetown and Rockport have all voted for one or more overrides to funds schools in the past few years.
Gloucester has not put forth an override question since 1991, to fund firefighter salaries. It did not pass.
