In a specially called meetng Monday and in a regular meeting Tuesday evening the DeSoto City Council held initial discussions that will lead to tax rates, budget approval, and citizen public hearings next month.
Monday’s meeting was to present and discuss the city’s tax rate and debt issuance information related to the FY 2024 Proposed Budget. Background information for this meeting included a mention of the recent changes to State requirements for how authorized tax rates are calculated and how it relates to changes to how DeSoto typically structures its Maintenance & Operations (M&O) tax rate and its Interest & Sinking Fund (I&S) tax rate.
This item was a discussion for the council and will be revisited for a vote in an early September meeting.
City notes read, “The Texas Legislature, in 2019, set an artificial cap on what tax rate the City of DeSoto can adopt. This would be based on revenues that would be 3.5% higher than the previous fiscal year. In previous years, the Dallas County Tax Office has allowed unused increments from previous years to be utilized in that calculation to allow cities to take advantage of previous tax dollars that were not captured under this formula. In FY 2024, the tax forms received from the Dallas County Tax Office set the unused increment amounts to $0.”
Moving Capital Costs To I&S Tax Levy
Because of these changes, the city is now unable to maintain certain costs in the M&O tax levy and must move certain eligible capital costs over to the I&S tax levy. This change will allow the City of DeSoto to maintain a similar tax rate in FY 2024 and continue to fund operations from the General Fund without significant disruptions to services.
With all that said, the FY 2024 proposed budget will reflect an M&O tax rate of $0.503485 per $100 of taxable valuation and an I&S tax rate of $0.181607 per $100 of taxable valuation. The overall tax rate is $0.006462 lower than the current year’s tax rate. To maintain the desired I&S tax rate, the City of DeSoto must therefore issue a short-term debt instrument (recommended one-year term) to fund equipment purchases from the I&S tax rate.
Staff indicated the financial impact of making these changes is that the City of DeSoto will be able to secure approximately $3.4 million in tax dollars that it would otherwise lose due to SB2. This change continues to effectively maintain the existing tax rate in FY 2024.
Place 4 Councilmember Andre Byrd asked if the city could only do this for one year.
DeSoto City Manager Brandon Wright said the benefit of it only helps the city one year because next year, there will still be equipment that needs to be replaced, and there will not be any additional items moving from the M&O.
Discussing M&O and I&S Budgets
Place 3 Councilmember Nicole Raphiel asked about the other cities in the area that had gone this route. She was told 44 cities had decided to do this last calendar year, with 21 being utilized as a standard annual practice. These cities are from 40,000 to 200,000 in population. Raphiel also wanted more information regarding the bond market’s volatility, being told where the rates are today and where those rates are leading up to the September meeting, in which a vote will be necessary regarding this item.
At the previous budget workshop, a discussion included M&O at $38,447,500 General and I&S at $9,961,350 Debt Service for a total of $48,408,850. At Monday night’s meeting, that changed to $47,956,440 with the M&O General at $35,243,950 and the I&S Debt Service at $12,712,490.
One item mentioned at the meeting was to consider for the 2025 fiscal year sales tax proposition in May 2024 that will ask voters to approve shifting the 0.5% sales tax dedicated to property tax reduction to a new purpose, such as supporting public safety. There was also the idea to shift the dedication of sales tax to allow DeSoto to recapture approximately $0.05 on the overall tax levy.
It was presented that because DeSoto’s sales tax is dedicated to property tax reduction, the Dallas County Tax Office removes this amount from DeSoto’s authorized VAR tax levy. Moving the dedicated purpose of the sales tax will remove the “sales tax deduction” from the City’s tax rate calculation. Still, it might be necessary for future years to have voter elections to provide additional tax rate authority to add new services or personnel.
The preliminary tax note statistics presented to the council during the special meeting was the idea of a plan coming back to the council determining what needs to be tackled during the regular council meeting on September 5, with an ordinance presented on September 19 to the council for approval of a final bid fixed interest rate authorizing the issuance of a tax note with a final goal to pay this off by February 15 of the following fiscal year.
DeSoto Has a Double A Rating
Place 5 council member Dinah Marks inquired about how the city’s bond rating might be able to attract investors. The city has a double A rating in place, which lowers the cost of borrowing, which is positive for lending as a low risk.
Wright also mentioned to the council that the reality in the general fund is that almost all costs are personnel costs, so you can’t “get there by making cuts to supplies and services, so you will have to get into personnel. The reality is taking a look at public safety, police, and fire, and those make up about 60 to 70% of those costs, and those are the departments where there would be impacts. You can do other things like not making equipment purchases for a year, and there is short term that always catches back up to you. So, the reality is, while you didn’t spend that money right now, that payment is coming at some time in the future; it is just a delay to get to that point.”
Finally, Raphiel asked what moving forward looks like regarding these items. Wright concluded, “Many other cities are doing what we are doing, and some of it started a year or two ago depending on how much increment they had, how much flexibility. Where we are right now, by shifting some of the operating over to the debt part of it, we can maintain revenue even though we have to shift those things.
At some point, if you lose the items, you can move over to debt. Then you are facing the element of trying to live within that 3.5%, and at that point, you are in a world of existing service levels in your budget next year. There is no adding to it because when you add something new to it, you are going to exceed that 3.5% and that is going to set you up in a failure within the next few years if you don’t address that part.”
Wright said at that point, you can go to voters and ask for additional approval, or you can cut other areas from your city to make up for the additional things you want to do.
“We have a city that 5% sales tax number that goes into the general fund, we have a second-year flexibility as if we are to go to voters and ask for that to shift from property tax reduction to something else like Public Safety and it allows us to put that amount of money back into play in the tax rates, which allows us to address our services. So that is another year of potential solution we have, and that would need to be approved by council to set that on the May 2024 ballot for next year,” Wright said.
Regarding ongoing budget items from Tuesday night’s regularly scheduled meeting, a vote passed unanimously regarding the Dallas Central Appraisal District (DCAD) appraisal roll to the City of DeSoto for the 2023 tax year with the Certified Estimated Taxable Value (CTV) provided by DCAD at $7,375,137,761. This does not include the $222,930,491 under protest as claimed by property owners or estimated by DCAD. The CTV is the appraised value of property minus exemptions and abatements, such as the over-65 exemption. The taxable value utilized to build the Fiscal Year 2023-24 budget is $7,000,000,000, which, when multiplied by the tax rate, equals the amount of property taxes the City is projecting to collect during Fiscal Year 2023-24.
DeSoto Passed proposed tax rate of $0.685092
The second item that passed unanimously regarding the budget was a record vote on the proposed tax rate of $0.685092 (68.5092 cents per $100 of valuation) for FY 2023-2024. A date for the Public Hearing on the Budget for September 5 and a Public Hearing on the Tax Rate to be held on September 19 was set.
Raphiel asked how these numbers affect the conversation from Monday night’s special meeting. Wright responded, “In order to equalize the amount of revenue we discussed in our budget workshops, we needed to shift some of the tax rate over from our M&O general fund over to I&S Debt Service Fund, and by doing so, we took about $3.4 million worth of equipment and vehicles out of the general fund and put it in a debt category. We will be bringing that to you on September 5 with a vote on September 19 on that $3.4 million one-year tax note.”
Wright concluded essentially the presented rate is essential so the city can “get the revenue we need to pay for the budgets we presented to the city council during the budget workshops in July.”