Once we settle on an expense budget, we have to be absolutely certain we collect enough in taxes to cover those expenses.  But some property owners will not pay their taxes, or won't pay them on time.  If some don't pay, then the town's checkbook will come up short at the end of the year.

The way we make certain to collect enough to cover expenses is to tax the honest taxpayers a little more than their fair share.  We measure the Collection Ratio, and in Long Hill it is generally over 98%.  That means the uncollectible rate is 2%.  Then we ask the honest taxpayers to cover the 2% shortage.  That means we have to inflate the tax rate for EVERYBODY by 2% before the tax bills are mailed.

The mechanism we use is to artificially increase expenses and thus artificially increase the tax rate for everybody.  This fictitious expense account is called the Reserve for Uncollectibles.  It isn't really an expense. It's just a fudge factor added on top of the REAL expenses, to increase taxes for the honest taxpayers and thus cover the shortfall that will be created by the "deadbeats".

Currently, our TOTAL annual tax collection in Long Hill (including collecting taxes for the schools and the county) is about $30,000,000, and the Reserve for Uncollectibles is about 2% of that, or about $600,000.

Then what happens?

• Some taxpayers, who we didn't expect to pay, actually DO pay.  This means the Collection Ratio is greater than expected, and it means we overestimated the amount the honest taxpayers had to cover.  Since the expense budget was already approved, and we fudged in enough "Reserve" to cover all the expenses, these unexpected tax payments are gravy.  And since the expense budget was already approved and the expected shortfall has been covered by the Reserve, we don't have any place to spend this unanticipated tax revenue.  So we put it in the bank, in a separate account we call "Surplus".
• Other taxpayers, who didn't pay LAST YEAR (or the years before that), decide to get caught up.  Maybe they hit the Lottery or they got a better job.  Maybe they sell their house, and the town gets first crack at the money the buyer pays, because the town holds a Tax Lien for the past due tax amount.  Since we already balanced the books in the prior year, and closed those books, then this money obviously can't be spent in the prior year, and isn't needed to cover expenses in the current year.  So again, we deposit it into the "Surplus" account.
• Some tax bills have to be cancelled.  Perhaps the property is bought by the Great Swamp Wildlife Refuge, after the tax bills are issued.  The federal government does not pay local taxes, so that tax collection is lost.  Or perhaps the owner is successful in appealing his assessment.  We must restate his tax bill downward, and again, we must cancel the difference.
• Finally, there are a few who never pay.  We never give up, but we might have to foreclose, then sell the property in order to recover the back taxes.  If the property is undevelopable wetland, foreclosure and resale may not be practical, either.

Now back to the Uncollectible Reserve.

Every year, we inflate the budget by about $600,000 to create the Uncollectible Reserve.  The exact amount is determined by state formula and by prudent financial judgment.  Some years, the Tax Collection ratio is better than expected.  Some years, it is MUCH better.  Some years, the back taxes come in strong, other years, they don't.

All the unexpected tax payments that come in are put into Surplus.  Then, at the beginning of the NEXT budget cycle, we take that money out of Surplus and use it to "seed" the revenue side of our budget.  In other words, the Surplus we accumulate this year goes toward meeting the NEXT budget's revenue requirement, and thus reducing taxes NEXT year.  And the cycle repeats itself.

We can never be sure how much money will be at stake in any given year, but AVERAGED OVER THE PAST SIX YEARS, 90% of the money that the honest taxpayers have chipped into the Uncollectible Reserve has come back to them the following year by flushing the late tax paymrnts out Surplus.  Specifically, over the past six years, the sum total of uncollected taxes that were NEVER (or at least, not yet) recovered totalled $305,000, or an average of $50,000 per year.

That means that the PERMANENT Uncollectible Rate is less than 10% of the annual Uncollectible Reserve (2%). The other 90% of the anticipated Uncollectible Reserve IS recaptured, and IS credited to our wallets the following year.  ON AVERAGE.  That works out to a NET Uncollectible Ratio of less than 2/10 of 1%, which isn't bad for any business.

If you want to follow the math involved, you can see it all worked out in the table below.

• At line "B", note that the Actual Collection Ratio gets a little better every year.
• At line "E" and "E2", note that Collection Ratio used to set the Uncollectible Reserve in the budget ALSO gets better every year, and is conservatively about 3/4 of 1% lower than the actual experience.  Not that it matters, since we "get the money back" out of Surplus in the next budget year.
• At line "C", note that the total taxes billed has increased by 50% over the six year period, while the Uncollectible Reserve (line "D") is consistently budgetted at a constant level of about $600,000.  This is possible because the Collection Ratio improves every year.  But we know it won't get too much better, because it can't possibly go over 100%.

• REASSESSMENT does not change the BUDGETS, and it does not change the total TAX DOLLARS that are collected.
• When the total ASSESSMENTS go up, the TAX RATES go down by the same factor.