Long-Term Financial Management Challenges2Long-Term Financial Management
Challenges & Opportunities
Current Environmental Scan
•Citizen Expectations are high for both infrastructure and Facilities
•High per capita wealth, income and growth
•Strong financial management and conservative budgeting
•Total tax rate (including HS Exemption) is moderate relative to area
•Planned facilities will have a dramatic impact on future staffing levels
•Debt Levels are very high and pushing maximum policy target for DS tax rate
•Senate Bill 2 limits will have an increasing influence as new construction
relative to increases in existing base become smaller
•Ratio of Commercial to Residential values at 25/75 is relatively low but will
go much higher as Preston, US 380 and DNT corridors develop. Tax
incentives will affect relative benefit.
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Citizen Expectations are High
•November 2020 Bond Election approved $210 million in new debt
issuance to address both facility and infrastructure needs.
•With 2021 issuance $190.2 is still unissued
•Major Facilities including Recreation Center, Library, Senior Center and Parks and
Public Works Service Center are not included in current authorization.
•With a 2020 population of 28,380, voters approved new debt of $7,400 per capita
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High Per Capita Wealth, Income and Growth
•Median family income as a percentage of U.S. median is 199.6 %
•Per Capita Assessed Valuation is 160% of median per capita for cities
20,000-50,000.
•Assessed Valuation has grown 74% since 2015.
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Strong Financial Management & Budgeting
•Conservative budgeting and monthly monitoring
•Multi-year capital projections
•Strong financial policies
•Charter requirement for 20% of prior year expenditures to remain in
reserve resulting in strong liquidity
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Effective SF Tax Rate Including Homestead
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Planned Facilities and Future Staffing Levels
•Initial five-year staffing requests are 232 or a 75% increase over FY 2022 307
authorized positions.
•Many facilities driving staffing levels are not in the current bond package and are
likely to not be complete until after new growth plateaus and is a much smaller
percentage of total AV and additions must be funded from other sources such as
M & O rate increase, increases in existing AV (capped at 3.5%), Sales Tax
increases, user fees etc.
•Fire Station 5
•Library
•Recreation Center
•Senior Center
•Public Works and Parks Maintenance Service Center
•This natural mismatch between when the growth occurs and when the related
infrastructure, facilities and staffing impact the budget creates major financial
strains for rapidly growing municipalities.
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High Debt Levels & DS Rate at Maximum
Slightly above DS rate policy target of 35% of total rate
Debt burdens high relative to national medians
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Per Capita Direct Debt Direct Debt as a % of AV Direct Debt/Operating
Revenues
Moody’s Medians for Aa1 Cities
Prosper Moody's
0.78X
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$5300
$1600
3.2%
1.0%
3.2X
Senate Bill 2 Limitations & Implications
•New construction does not count towards the SB 2 cap of 3.5% property
tax growth, increases in existing base does. As the town’s total AV base
grows, changes in exiting values will eclipse new construction and more
of each year’s revenue increase will be capped.
•Section 380 property tax rebates count towards the 3.5% caps,
Abatements recorded with the CAD do not.
•The 3.5% cap was developed during a long period of low inflation and is
not adjustable
•There is often a significant lag between when growth occurs and the
related staff or improvements are made and paid for.
•Unused increment only carries over for three years.
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Tax Rate by Category
Fiscal Year M & O Debt Service Total DS as % of Total
2016 36.1074 15.8926 52.0 cents 30.56
2017 36.75 15.25 52.0 cents 29.32
2018 36.75 15.25 52.0 cents 29.32
2019 36.75 15.25 52.0 cents 29.32
2020 36.75 15.25 52.0 cents 29.32%
2021 36.75 15.25 52.0 cents 29.32%
2022 32.8 18.2 51.0 cents 35.68%
The M & O rate available to fund General Fund operations was lowered 3.95 cents or 10.7 % in 2022.
This lower rate now becomes the new base for the SB 2 calculation for FY 2023.
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New Construction as a % of AV Increase
0
20
40
60
80
100
120
2019 2020 2021 2022
% AV from Growth
% AV from Growth
78%
113%
56%
Note: 2021 values are skewed as
they were based on certified
estimates due to pandemic.
59%
General Fund property tax revenue growth has been funded primarily from new construction but as the Town’s
existing base gets larger this will naturally decrease over time. 11
SB 2 Impact-Four Examples
•Assessed Valuation increase 10% for the year. The amount of the
increase due to new construction vs. existing base affects how much
GF property tax revenue is allowed to increase:
•100% new construction-10% GF property tax revenue increase
•75/25 new construction to existing values 8.375% GF PT revenue increase
•50/50 new construction to existing value-6.75% GF PT revenue increase
•25/75 new construction to existing value-5.125% GF PT revenue increase
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Commercial vs. Residential Tax Base
•Commercial property values including Business Personal Property (BPP)
often subsidize residential services as taxes paid typically exceed the
related service demands. These businesses can also generate significant
sales tax revenue dependent on their activity.
•As a result, those municipalities with large commercial bases will have
much higher per capita AV and sales tax revenue and often (but not always)
lower overall tax rates.
•Currently the Town has an approximately 75/25 split between residential
and commercial but that should shift as the U.S. 380, DNT and Preston
Road corridors fully develop.
•A cautionary note, Section 380 incentives have become increasingly
common in recent years among Texas cities and can reduce the related
benefit significantly for many years.
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Staff Observations & Recommendations
•Debt Service Policy target of 35% of total tax rate should be raised to 40% but should be managed to
be no more than 38-39% to avoid exceeding the target in the future and to demonstrate financial
discipline to the rating agencies and creditors.
•The total tax rate should not be lowered in the foreseeable future unless it exceeds the SB 2 voter
approval rate. Even without lowering the M & O rate, with $190 million of authorized but unissued
debt and current debt issuance plans it may not be possible to issue planned debt without
exceeding the 40% or raising the M & O rate.
•Strong consideration should also be given to utilizing the current unused increment to avoid a forced
lowering of the M & O rate by SB 2 caps. Unused increments must be used within three years before
expiring. If all unused increment does not maintain the M & O rate, also increase HS exemption
•Given SB 2 caps limiting revenue growth from existing base, high inflation, planned staffing increases,
the reduction in M & O rate in FY 2022 and prior year recurring expenditures exceeding recurring
revenues by $3.8 million, General Fund budgets will be tight and need to be carefully managed.
•In the future, staff recommends that fund balance drawdowns only be used for non-recurring one-
time uses so as not to create a “budget hangover” for future years.
•If in the future, M & O tax rate not needed immediately for operations should be levied as Capital
Dedicated thereby reducing the need for new debt and creating a reserve for future facility staffing.
•Just in time debt issuance that focuses on reducing unspent proceeds and therefore overall debt
should be utilized as much as possible.
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