Incorporation Financial Model

www.thewoodlandstownship-tx.gov The Woodlands Township • 2801 Technology Forest Boulevard • The Woodlands, Texas 77381

Incorporation Financial ModelSeptember 30, 2021

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Outside entities routinely monitor The Woodlands Township’s financial information including:• Credit rating agencies• Bond holders• Bond disclosure counsel• Banking and other financial institutions• Auditors• Government Finance Officers Association (GFOA)

The Township works diligently with these entities to maintain positive working relationships based on the provision of transparent, timely and accurate financial information prepared in compliance with generally accepted accounting principles, the governmental accounting standards board, and best practices advocated by the GFOA.

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This information is from the original Incorporation Study developed in 2019. The data has been updated to reflect current revenue and expense estimates, has been presented multiple times in public meetings, and is available on the Township’s website.

Source:

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• The property tax ceiling freezes the amount of taxes paid in the year of qualification.

• Higher tax rates or increases in taxable value have no effect on the frozen tax amount.

• Lower tax rates or decreases in taxable value will decrease the amount of tax levy.

• The tax freeze cannot be rescinded once enacted.

Source:

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Source:

• The tax rate referenced above is based on outdated 2019/2020 financial data. • The updated incorporation model is based on the 2022 budget and reflects a

maximum initial tax rate of 22.31 cents, which is the same as the current rate.• The Township Board of Directors approved a tax rate of 22.31 cents for the rate

required to be listed on the incorporation ballot. By law, this is the maximum tax rate that can be levied in 2022 if voters approve incorporation.

• Financial projections show the tax rate of 22.31 cents is sufficient to fund the net expenses of the new city through at least year 2026.

• By law, any increase in the property tax rate is limited to 3.5% of the current year’s no-new-revenue maintenance and operations rate unless voter approval is obtained.

• Currently, this equates to a maximum increase in the tax rate of approximately 0.7 cents, or $32 on an average value home of $459,000.

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Source:

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Has the growth in taxable property values created a “windfall” in property tax revenue?

42.00

32.80 32.74 32.5031.73

29.40

25.0023.00 23.00 23.00 22.73 22.40 22.31

11.412.0

13.013.2

14.3

16.2

18.4

19.819.9

20.4 20.8 21.1

11.0

13.0

15.0

17.0

19.0

21.0

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00Co

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Adopted Tax Rate Property Tax Value10

No-New-Revenue Tax Rate

The no-new-revenue tax rate is the rate that

would produce the same amount of property

tax revenue as the previous tax year if applied

to the same properties taxed in both years.

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42.00

32.80 32.74 32.50

31.7329.40

25.0023.00 23.00 23.00 22.73 22.40 22.31

32.80 32.50 32.00

32.0229.60

27.21

23.0022.00

23.1022.73 22.40 22.31

11.412.0

13.0 13.214.3

16.2

18.4

19.8 19.920.4

20.8 21.1

$11.0

$13.0

$15.0

$17.0

$19.0

$21.0

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Adopted Tax Rate No-New-Revenue Rate Property Tax Value

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Sales and Use Tax Growth Rate 2012 - 2022

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20.0%

13.8%

9.4%

4.3%

-2.3%

5.7%2.6% 3.1%

-13.1%

15.6%

3.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Property Tax Revenues Per Capita

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$392 $391 $368 $374 $388 $386 $387 $389 $391 $393

200.00

300.00

400.00

500.00

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Has the Township accumulated $107 million in reserves for incorporation? $50 million? NO.

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Per report from “outside developer”

Reserves/Fund Balance 2016 2022 Change

Operating Reserve $16.1m $30.1m $14.0m

Capital Replacement Reserve $23.9m $38.9m $15.0m

Incorporation Reserve $2.5m $20.8m $18.3m

Non-Discretionary/Other Reserves $33.4m $15.5m ($17.9m)

Total Reserves/Fund Balance $75.9m $105.3m $29.4m

Per Township audited financial statements (excluding GASB 33 entries) and adopted budgets

$49.7 million increase

What makes up the $105 million in Township Fund Balance?

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Operating Reserve$30 million

Capital Replacement Reserve

$39 million

Incorporation Reserve$21 million

Other (Non-Discretionary) Reserves

$15 million

$105 million

What is the purpose of the Operating Reserve?

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Operating Reserve$30 million

$105 million

Balance is maintained at 20% - 25% of general fund operating expenses by policy, which is a common standard

Represents about three months of Township general fund expenses

Considered favorably by credit rating agencies – assists in obtaining better credit ratings

What is the purpose of the Capital Replacement Reserve?

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Capital Replacement Reserve

$39 million

$105 million

Ensures the timely replacement of assets in a 30-year capital plan; examples public safety vehicles and equipment, park and pathway renovations, and information technology projects

Reduces the reliance on debt financing of capital assets

Considered favorably by credit rating agencies – assists in obtaining better credit ratings

What makes up the $15 million in Other (Non-Discretionary) Reserves?

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Other (Non-Discretionary) Reserves

$15 million

$105 million

Transportation - $3.8 million

Debt Service - $3.3 million

Flood/Drainage Reserve - $0.2 million

Undesignated Hotel Tax - $3.1 million

Visit the Woodlands - $1.4 million

Cultural Education - $1.0 million

Health Insurance Reserve - $0.8 million

CCSA Developer Reserve - $1.0 million

Undesignated Balance - $0.9 million

How was the Incorporation Reserve fundedand how will it be used?

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Incorporation Reserve$21 million

$105 million

The reserve was funded by favorable sales tax revenue and expense variances in previous budgets. Property tax revenues were not used to fund this reserve.

** Reserve funds cannot be used to reduce the tax rate or fund ongoing operating expenses because reserves are considered a “one-time” funding source

If voters approve incorporation, the funds will be used for Police Dept. and Public Works capital expenses

Favorable Budget Variances are “One-Time” Funding Sources

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$100,000,000$102,000,000

$100,000,000$96,000,000

Favorable Variance,

$2,000,000

Favorable Variance,

$4,000,000

REVENUE BUDGET

REVENUE ACTUAL

- EXPENSE BUDGET

EXPENSE ACTUAL

“One-Time” Uses of Favorable Budget

Variances

Retire Debt

Fund Budget Initiatives

Fund Capital Projects

Fund Reserves: OperatingCapital ReplacementNon-DiscretionaryIncorporation

Q: How was the Incorporation Reserve funded?A: Favorable budget variances due to sales tax revenues being greater than budget and expenses being less than budget

2016 2017 2018 2019 2020 2021 2022

Beginning Balance $0 $0 $2,500,000 $16,201,239 $15,786,217 $15,586,890 $20,782,356

Favorable Budget Variances $0 $2,500,000

$12,598,299transfer of

favorable sales tax revenue

and operating expense budget

variances accumulated from 2013 -

2017

$0 $0 $0 $0

Road and Bridge Reserve $0 $0 $1,900,000 $0 $0 $0 $0

Consolidate Property Site Plan Reserve

$0 $0 $0 $0 $0 $5,195,466 $0

Expenses $0 $0 ($797,060) ($415,022) ($199,327) $0 $0

Ending Balance $2,500,000 $2,500,000 $16,201,239 $15,786,217 $15,586,890 $20,782,356 $20,782,356

No additional funding beyond 2018No property tax revenues were used to fund the Incorporation Reserve

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Source: The Woodlands Township Adopted 2018 Budget


Favorable 2017 budget variances from sales tax revenues and expenses were greater than projected.

A portion of these favorable budget variances was used to fund the Incorporation Reserve.The 2017 Township Board

“inherited” accumulated funds generated by favorable budget variances from 2014–2016.

Favorable Budget Variances

2016 2017 2018 2019

Sales Tax Revenue ($2,117,901) $3,916,936 $2,846,021 $944,031

Property Tax Revenue $246,618 $218,462 $218,692 $340,207

Operating Expenses $4,803,791 $6,138,012 $3,736,815 $3,573,195

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The Board of Directors paid off debt, saving taxpayers $1.7 million in interest expense.

Outstanding Debt

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$112.5$107.3

$87.7$82.9

$77.9$72.7

$67.4

$55.5

$45.0$40.7

$0

$200

$400

$600

$800

$1,000

$1,200

$0.0

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

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Total Debt Debt Per Capita

$71.2 million, 64% reduction in debt


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32.80 32.74 32.50

31.7329.40

25.0023.00

23.00

23.00 22.73 22.40 22.31

32.80 32.50 32.00

32.0229.60

27.21

23.00

22.00

23.1022.73 22.40 22.31

11.412.0

13.0 13.214.3

16.2

18.4

19.8 19.920.4

20.8 21.1

$11.0

$13.0

$15.0

$17.0

$19.0

$21.0

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Adopted Tax Rate No-New-Revenue Rate Property Tax Value

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The Board of Directors set the tax rate below the no-new revenue rate.

The Board of Directors Funded Major Budget Initiatives

• Additional Law Enforcement staffing – Harris County Precinct #4

• Creekside YMCA Facility Feasibility

• The Recreation Center at Rob Fleming Park

• Texas TreeVentures

• Flooding/Drainage improvements/monitoring equipment

• Small cul-de-sac maintenance program

• Bear Branch Park Master Plan (Phase II and IV)

• Spring Creek Greenway Trails

• Town Green Park improvements

• Cultural Arts feasibility study

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Favorable 2018 budget variances from sales tax revenues and expenses were greater than projected.

However, no portion of these favorable budget variances were allocated to the Incorporation Reserve.

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A true structurally balanced budget is one that supports financial sustainability for multiple years into the future.

If reserves are maintained at their desired levels, it is an indication that the organization is maintaining a structurally balanced budget. If reserves are declining, it may indicate an imbalance in the budget (e.g., if reserves are being used to fund on-going expenditures).

Year-end surpluses are an appropriate source for replenishing fund balance.

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Source:

Why can’t “one-time” funding sources such as reserves be used to lower the property tax rate?

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Revenue, $100,000,000

Expenses, $121,000,000

Incorporation Reserve Funding,

$21,000,000

REVENUE EXPENSES

Year 1 – Lower Property Tax Rate and Use Incorporation Reserve to Fund Operating Expenses

Year 2 – Incorporation Reserve depleted and funding shortfall exists

Revenue, $100,000,000

Expenses, $120,000,000

Available funding from incorporation reserve = $0,

REVENUE EXPENSES

?Where is the funding going to come from to pay expenses?

GFOA Best Practice and Board Policy have been violated.Violation reported to credit agency.

Not using ongoing revenues to fund ongoing expenses

Tax rate has been lowered 9.9 cents

Why can’t “one-time” funding sources such as reserves be used to lower the property tax rate?

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Revenue, $100,000,000

Expenses, $121,000,000

Incorporation Reserve Funding,

$21,000,000

REVENUE EXPENSES

Year 1 – Lower Property Tax Rate and Use Incorporation Reserve to Fund Operating Expenses

Year 2 – Incorporation Reserve depleted and funding shortfall exists

Revenue, $100,000,000

Expenses, $120,000,000

Available funding from incorporation reserve = $0,

REVENUE EXPENSES

? Where is the funding going to come from to pay expenses?

GFOA Best Practice and Board Policy have been violated.Violation reported to credit agency.

Not using ongoing revenue to fund ongoing expenses

Tax rate has been lowered 9.9 cents

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Source:

35-$11,831,634 -$11,511,536

-$11,079,013 -$11,203,013 -$11,536,975 $(13,000,000)

$(11,000,000)

$(9,000,000)

$(7,000,000)

$(5,000,000)

$(3,000,000)

$(1,000,000) 2018 2019 2020 2021 2022

2018 - 2022 Annual Revenue Impact if Property Tax Rate Adjusted to $0.1700

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The impact to Fund Balance if the property tax rate was lowered to $0.1700 from 2018 - 2022

$30.1

$38.9

$20.8

$15.5

$30.1

$3.5$0.0

$14.6

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

Operating Reserve Capital Reserve Incorporation Reserve Non-Discretionary Reserves

Mill

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2022 Current Fund Balance at $0.2231 2022 Revised Fund Balance at $0.1700

Negative impact on credit ratingRequires financing of capital assets Debt service component of the tax rate would increase

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The impact to Fund Balance if the property tax rate was lowered to $0.1700 from 2018 - 2026

$30.1$28.6

$26.6

$0

$5

$10

$15

$20

$25

$30

$35

Operating Reserve Non-Discretionary Reserves

Mill

ions

2026 Current Fund Balance at $0.2231 2026 Revised Fund Balance at $0.1700

Operating Reserve= $0

Decrease in non-discretionary reserve

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0.0000

0.0200

0.0400

0.0600

0.0800

0.1000

0.1200

0.1400

0.1600

0.1800

$-

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

$70,000,000

$80,000,000

$90,000,000

2018 2019 2020 2021 2022 2023 2024 2025 2026

Impact to Fund Balance“An Outside Developer Analysis”

compared to the Township Budget Model

Outside Developer Analysis Fund Balance Township Model at $0.1700 Property Tax Rate

Property tax rate of 17.0 cents

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Source:

The outside developer’s financial plan:• Violates GFOA and GASB

standards• Violates Board fiscal policy• Negatively impacts credit

rating• Results in a structurally

unbalanced budget• Depletes the Operating

Reserve and Capital Reserve• Requires large increases in

debt to finance capital• Is not sustainable, resulting in

decline in services

The

Documents

Incorporation Financial Model