We need to hold ourselves to the same critical thinking standards we seek to cultivate in our children: what does the evidence show?

In this installment of Topics of Interest: Taxes, we will lay out the likely tax implications of HCA compliance via Article 3 Option (a.k.a. Option C) in its current form with a particular focus on increased school costs and our taxes.

It is essential for residents to understand that the town is mostly self-reliant when it comes to its finances. If we look at the current fiscal year’s budget, 95% of our revenue comes from our own funds, and only 5% from the Commonwealth. While the laws are dictated by the State, if we decide to be compliant, the financial burden of compliance would be shouldered by local taxpayers. When looking at our budget, we need to separate fixed and variable costs. By far the biggest variable cost of any Massachusetts town has is education. 

• The cost of educating a high-school student is very straightforward. Our annual bill from Lincoln-Sudbury is derived from a linear formula tied to our enrollment and comes up to a bit over $23,000 per student. The cost of educating an additional student at the Lincoln Public School is a bit more difficult to derive, but we can make some reasonable estimation if we split the cost structure between fixed and variable. Small fluctuations in student count can be absorbed without changes in the cost structure (e.g. teacher salaries). However,  large fluctuations—such as the potential increase in the student population that comes along with HCA compliance—cannot.

• Adding up town appropriations and state grants, the FY23 budget is just over $30,000 per LPS student, not including debt service costs tied to the school building. Less than 3% of those funds come from state grants tied to our student enrollment. Approximately 78% of those costs consist of personnel expenses (including benefits). There are 128 FTEs working in our school. Looking at the school budget’s detailed FTE table, we can easily see that the vast majority of those FTEs (110 out of 128 by my count) are teachers, content specialists, teacher assistants and tutors, which would by necessity grow if we added hundreds of students to our student body like compliance with HCA would require. If we assume that those personnel costs would grow at the same pace as enrollment, and also assume that 30% of non-personnel costs are variable in nature, we get an incremental ~$22,000 per LPS student, net of state grants.

• As to other town expenses (General Government, Public Safety, Public Works, Human Services, Culture & Recreation and the rest of Pension & Insurance), we assume 30% are variable and tied to our population. We can refine this a lot more, but we should keep in mind that combined, they amount to less than 1/5 of the education costs in my model. We would also note that we are not contemplating any capital expenses, which is not realistic. To begin with, if we added 615 units (the maximum possible under the rezoning) and the corresponding number of children, we most likely would have to expand our school, which was designed to accommodate up to 650 children—we have space for another 100 based on today’s enrollment.

• In terms of incremental revenues, we have assumed new properties are assessed at $500k on average, which is slightly higher than the assessment per unit for a typical condo association in Lincoln Station today. We have also budgeted other local receipts at the same percentage of property taxes as budgeted for FY23 (2%) and increased our pro-forma state aid in line with our population increase.

• We have assumed that the incremental 563 units (this is the new number of units as per Select Board meeting) would be in-line with average household size in Middlesex County (2.56) and have an average of 0.89 children. The child-count derivation is detailed in the table. This is not an aggressive assumption: Hanscom has 1.80 children per household according to the US Census.

• The main takeaway of our analysis is that under the assumptions discussed above, property taxes for existing owners would need to climb 17% in order to balance our future budget (an average of ~$3,250 per year per household), most of which would go to pay for high-school students at L-S and hire more staff at LPS. The actual figure would be dependent on the number of units that are eventually developed, their average assessed value, and the number of children per unit. We would also note that the average unit would have to be assessed at $1.3M (which is just $100k less than our current average assessed value) for the rezoning not to have negative fiscal consequences, which is of course far from a realistic or desirable value, given the goal is to increase overall housing affordability.

• Non-compliance with HCA would cause the town to lose access to some state grants. We have never collected any money from any of those programs, though, and the total amount disbursed through them is a tiny portion of the Commonwealth's budget. As to the recent threat of the State forcing towns to become compliant, we would just note that most of our neighbors are still below the 10% statutory limit on subsidized housing inventory, 54 years after Chapter 40B’s passing.

• The tax increase would also have a material price impact across all properties. As a first-order effect, it would depress the demand curve (fewer potential buyers at lower prices to account for higher property taxes) and shift the supply curve upwards as affordability decreases and residents exit, reaching a new-lower price equilibrium and driving a property tax rate increase greater than the headline 17%. For rezoned areas, property owners would be the big winners given potential for adding units would increase value of land, and renters would risk displacement as properties are torn down to build those new units. We would not be able to determine how fast or how many of those units would be developed, but potential buyers of existing housing would not be appreciative of the cloud of uncertainty.

The following worksheet explains the calculations for estimating cost per pupil and related tax implications. There is a housing shortage we need to solve for—however, we must make informed decisions based on accurate data. We must hold ourselves to the same critical thinking standards we seek to cultivate in our children. Let's start with getting the cost of their schooling clarified so we understand the real tax impacts we can expect from development allowed by Article 3 (aka Option C).