The key to a good budget process is a well-structured, organized and executed budget plan implemented through a team effort. While this approach is time consuming, it can greatly improve the efficiency and effectiveness of the budget process and ensure the town complies with state mandates and uses best budgeting practices.
Legal Mandates for Budget Process
- All municipalities, regardless of size, must adopt by ordinance a balanced annual budget. Revenues must equal expenditures.
- All budget meetings are public meetings, and the municipality must provide written notice of the meeting. Written notice includes, but need not be limited to, posting a copy of the meeting agenda(s) at least 24 hours before the meeting at the town/city hall or at the building in which the meeting is to be held and notifying the press and anyone who has requested individual notice.
- General budget discussions do not qualify for executive session.
- Before adopting an annual budget, council must conduct a public hearing giving at least a 15-day public notice of the hearing in a newspaper of general circulation in the municipality. SC Code of Laws, Section 6-1-80, gives specific details of what the notice must include.
- State law requires a public hearing and ordinance, approved by a positive majority vote of the municipal council, to impose new service fees. SC Code of Laws, Section 6-1-330, gives specific details of what the notice must include. A positive majority is a majority of the total members of the council, not a simple majority of a quorum of council members present at a meeting.
Legal Mandates for Budget Calculations
- State law caps the annual increase in municipal property tax millage. A municipality may increase millage for general operating purposes in one year by the prior calendar year's average Consumer Price Index increase and the percentage increase in the town's previous year population, plus the increase allowed in millage as similarly calculated for each of the three previous years but not imposed by council. The Office of Research and Statistics of the State Budget and Control Board furnishes population numbers.
- Municipalities with the local option sales tax must reconcile prior year LOST collections with the revenue estimate used to calculate the tax credit factor. Any shortage in credit given in the current budget year must be rolled over into the calculation of the credit factor for the next year. The municipality should calculate a new local option sales tax credit factor every year as part of the budget process.
- In reassessment years, municipalities must adjust the millage rate to account for the change in the assessed value after reassessment, excluding the increase in value associated with new construction, the renovation of existing structures and in the resale of a property. This is referred to as the rollback millage calculation.
The council is responsible for ensuring the municipality is submitting required financial information and payments to the appropriate agencies. The start of the budget process is a good time to confirm that your municipality has completed the following tasks:
- Submit an annual audit to the State Treasurer's Office by the 13th month after the end of the town's fiscal year end or state funds may be withheld.
- Submit Local Government Finance Report to the Budget and Control Board by January 15 (Sec. 6-1-50). State funds can be withheld for failing to submit this report on time.
- Confirm that your municipality is current on submission of state court fines and victim assistance assessments to the State Treasurer's Office.
- Submit annual audit to creditors, grant agencies and local banking institution(s) with which you conduct business.
What is a mill, how is it calculated and how does it affect a property tax bill?
For newly elected officials and residents, the jargon and technical processes referenced in council meetings can sometimes be difficult to understand. Calculating and applying the municipal tax rate are particularly confusing.
In South Carolina, municipalities can levy taxes on personal property and real property. Real property includes land and the improvements on the land, while personal property includes items such as automobiles, boats, aircraft and recreational vehicles.
The town calculates a property owner's tax bill by multiplying the market value of property by an assessment ratio to determine the assessed value of the property. The county assessor's office establishes the market value of residential and commercial property, while the Department of Revenue establishes personal property and industrial market values.
In South Carolina, the assessment ratios are 4% for owner-occupied residential property; 6% for non-owner-occupied residential property, commercial property and personal vehicles; and 10.5% for industrial properties, business personal property, watercraft, aircraft and motor homes/campers.
Example of millage rate calculation
- Total assessed value of all property in the town: $59 million
- Amount of revenue Town needs to generate from property tax revenues: $1.03 million
- Average delinquent tax rate: 8.5%
($1,030,000 x 1.085)/$59,910,443= .01865 or a 18.65 millage property tax rate
Example of Rollback millage calculation
- Total assessed value of all property in the town: $54,631,400
- Prior Property Tax Revenue per Tax Roll: $1,066,981
($1,066,981/$54,631,400)= .01953 or a 19.53 millage property tax rate
Example of tax bill calculation
Once the millage rate is determined, calculating the tax bill for a single piece of property is quite simple.
- Owner-occupied residential property with a $300,000 market value
- Assessment ratio for owner-occupied residential property: 4% and 6%
- Municipality's tax rate: 19.53 mills
($300,000 x 0.04) x 0.01953 = $234.36 municipal tax bill 4%
($300,000 x 0.06) x 0.01953 = $351.54 municipal tax bill 6%
The tax rate set by the municipality is expressed in mills. One mill equals one dollar of tax on every $1000 of taxable value
After the assessed value (market value multiplied by assessment ratio) is calculated, the figure is multiplied by the millage rate, or tax rate, set by the municipality. The millage rate is determined by dividing the dollars the municipality must generate to meet its budgeted property tax revenue by the total assessed value of all taxable property in the municipality.
The resulting millage rate must be checked to ensure that the annual increase complies with the millage cap imposed by Section 6-1-320 of the South Carolina Code of Laws that was amended in 2011.
The millage rate estimate also must be adjusted upward to account for delinquent taxes that will not be collected. For example, in a municipality with a 95% collection rate, budgeted revenue is multiplied by 105% to offset the fact that only 95% of the billed property tax revenue is projected to be collected.
To determine the tax bill on other classifications of property, the market value of the property and applicable assessment ratio would be substituted in the formula.
Because the millage rate is determined by the total assessed value of taxable property in the municipality, the amount of tax revenue generated by one mill varies greatly among local governments. In municipalities with highly valued real and personal property, a single mill may generate more than $500,000 in revenue.
Alternatively, in small rural communities, a mill may generate as little as $5,000. Therefore the comparison of millage rates among communities is not an effective evaluation tool. Smaller communities with moderately valued properties will almost always have a higher millage rate when compared to larger municipalities or coastal areas with higher property values.
Accurate tax credit factors critical for Local Option Sales Tax entities
Since its enactment, nearly two decades ago, the Local Option Sales Tax has become a widely used revenue source for many South Carolina local governments. Thirty-one of the state's 46 counties have enacted the LOST, which provides property tax relief to hundreds of thousands of homeowners. While the LOST is a valuable revenue tool, municipal elected officials and staff must pay close attention to the fund to ensure the town is properly calculating and administering it.
State law requires a county to allocate at least 71% of its LOST revenue to the Property Tax Credit Fund. Then, the credit fund is divided between the county and the municipalities. The county receives 67% and the municipalities divide 33 % based on their percentage of municipal population. This is the minimum which is applied as a credit against property tax bills. The remaining 29% is allocated to the Municipal Revenue Fund and may be used for general fund purposes. If a council chooses, it can credit a portion or the entire amount for additional property tax relief.
To help segregate the funds allocated to the two accounts and calculate the tax credit factor, the SC State Treasurer's Office issues two checks monthly to municipalities participating in LOST. The larger of the two checks is the Property Tax Credit Fund allocation. The smaller check represents the Municipal Revenue Fund allocation.
Determining the tax credit factor
A town determines the amount of annual property tax relief by calculating the town's "tax credit factor," the single-most important number for towns that collect the LOST. The first step is to determine the total amount of money to be credited against property tax bills. At a minimum, this amount must equal the total projected collections in the Property Tax Credit Fund. Second, the sum of the projected Property Tax Credit Fund revenue plus the amount of additional LOST revenue that town council may wish to be credited as property tax relief (the numerator) is divided by the total appraised value of all taxable property (the denominator). The resulting six-digit figure is the tax credit factor.
To translate the tax credit factor into a dollar amount that will be credited against the property taxes for a single parcel, the tax credit factor is multiplied by the appraised (market) value of the individual property for tax purposes. This credit is deducted on the tax bill from the gross amount of taxes due. If calculated properly and economic conditions remain stable, a town's LOST revenues typically remain steady from year to year. If the tax credit factor is miscalculated or economic conditions change, a town could find itself in one of two situations.
- If a town collects more in LOST revenues than it provided in property tax relief, the town has a liability. State law requires the town hold the additional revenue in an interest-bearing bank account until the next fiscal year. When calculating the next fiscal year's tax credit factor, the town must add the surplus funds, which include the original overage plus accrued interest, to the total projected Property Tax Credit Fund collections and the amount of additional LOST revenue that town council may wish to be credited as property tax relief.
- If a town collects less in LOST revenues than it provided in property tax relief, the town must absorb the shortfall. State law does not allow a town to recoup unrealized revenues granted as a LOST credit.
These two scenarios underscore the tremendous importance for town officials to monitor LOST revenue closely. Monthly tracking allows a town to adjust its budget more quickly to changing economic conditions. A good starting point for calculating the tax credit factor is to pay particular attention to the history of LOST revenue figures reported in the town's annual audit. In addition, confirming the county auditor's appraised value figures will ensure a more accurate tax credit factor calculation.
Used together, these tips will help keep the town's revenue stream moving in the right direction and ensure town residents get the property tax relief prescribed by law.