Three major hotel projects in downtown Portland are driving the largest bump in real estate tax value since before the Great Recession.

But the infusion of new taxable value and new tax revenue will only reduce – not erase – a tax increase facing residents in the latter half of the year, city officials say.

Portland’s total assessed property value jumped $87 million in the past year. Although just a 1.1 percent increase, the figure is more than double the previous year’s gain and highlights the economic boom underway in Portland’s hotel and real estate markets even as other segments of the economy continue to lag.

Portland is benefiting from the influx of both tourists and would-be residents drawn by the city’s thriving food and cultural scenes, said City Manager Mark Rees.

“That (hotel and real estate development) is good, but we can’t ignore the fact that we need to build our manufacturing and technology economies as well,” Rees said. “That will provide a more stable future.”

The new developments will limit the size of any tax rate increase this year, but rising costs to run Portland’s schools and to pay down the city’s debts will outweigh the added tax revenue, officials said.

On Monday, the Portland City Council is expected to approve a $221 million budget for fiscal year 2015 that, when combined with the recently adopted $101.6 million school budget, would increase the city’s tax rate by 3 percent. The change from $19.41 per $1,000 of assessed value to $20.00 translates into a $134 annual increase for a home valued at $227,000. The owner of that average-valued home will pay $4,540 a year in property taxes under the proposed rate.

Three downtown hotel projects account for the bulk of the $87 million in new assessed value. The hotels are the soon-to-open Hyatt Place on Fore Street, Courtyard by Marriott on Commercial Street, and the renovated Westin Portland Harborview, formerly known as the Eastland Park Hotel.

Under the proposed tax rate, the $87 million in new development will generate $1.7 million in tax revenue for the city during the fiscal year that starts in July.

The combination of rising property tax revenues and a rising tax rate came up repeatedly as City Council members worked on the budget in recent weeks.

“If we had $80 million in new value, why don’t we use that money to reduce the tax rate?” City Councilor Cheryl Leeman asked during a budget workshop last week.

“The tax rate increase would have been higher if we did not have these new revenues,” Rees responded.

City officials are hoping expansion of the tax base will continue to offset rising expenses in the coming years.

Several major construction projects are at various stages of development, including a $110 million mixed-used complex on Thompson’s Point, a $105 million high-rise residential development in Bayside, and renovations of the former Portland Press Herald building across Congress Street from City Hall. Construction crews also broke ground recently on an upscale, 39-unit complex in the West End that represents the city’s first apartment complex in two decades catering exclusively to tenants able to pay “market rate” for housing.

Developers will find it more expensive to do business with the city next year, too, because of higher building permit fees contained in the proposed budget. The higher fees, which were opposed by the Portland Regional Chamber, are expected to generate an additional $200,000 for the city next year.

Portland’s debt obligations are also growing, however, and will continue to put pressure on city finances. Rising costs related to education and social services, as well as a $325,000 reduction in revenue sharing from the state, will also affect next year’s budget.

Payments on the city’s debts account for roughly 20 percent of the proposed $176.4 million general fund budget. Those debt payments accounted for more than one-third of the increased expenditures – or $1.8 million – in the proposed budget for the coming year.

The amount of the city’s debt payments generates criticism from some citizen budget-watchers but does not appear to concern financial analysts, who cite the city’s relatively strong tax base.

The major debt ratings agencies, Moody’s and Standard and Poor’s, both rated Portland’s general obligation bond as AA – the second-highest rating, signaling high quality and low risks.

“The stable outlook reflects the city’s position as the largest economic center in the state and recently stabilized reserve position,” Moody’s wrote in the firm’s January 2014 credit rating for Portland.

The growing debt costs in Portland’s budget are largely the result of pension obligations to former city employees and sewer and wastewater treatment investments.

In 2001, the city refinanced its $111 million in unfunded liabilities to the Maine State Retirement System by essentially buying back the debt and then taking out lower-interest municipal bonds to make the payments.

The refinancing was expected to save the city $21 million over the 25-year repayment schedule. The decision also is helping to insulate Portland from the growing pension liabilities facing other major cities in the Northeast, according to Moody’s.

However, the cost of paying the old pension debt is still growing.

Next fiscal year, the city will make $11.3 million in principal and interest payments for the bonds used to pay the unfunded pension liability. Payments will grow by about 6 percent annually, reaching $22.3 million by the time the city makes the final scheduled payment in 2026.

Meanwhile, the amount that Portland and other communities pay into the Maine Public Employees Retirement System, or MainePERS, to cover the pension costs of current employees continues to rise as well. During the past five years, the employer contribution to MainePERS has increased by 25 percent annually in response to the turbulent financial markets and flat contributions in earlier years, according to a city analysis.

Additionally, Portland is beginning a 15-year, $170 million push – financed with bonds repaid through sewer fees – to upgrade the city’s sewer and stormwater infrastructure to reduce the amount of raw sewage that flows into Back Cove and other local waterways after heavy storms. The work is, in part, a response to pressure from the U.S. Environmental Protection Agency over Clean Water Act violations stemming from the overflows of untreated sewage.

While new development helped the city limit the tax rate increase for the coming year, Councilor Ed Suslovic warned that next year could pose an even bigger financial challenge.

Along with rising education costs, the city continues to pay millions of dollars in overtime, particularly to the fire department, he said. Portland is also poised to lose federal grants that helped pay for a dozen positions in the fire department, meaning the city will have to either cut those positions or come up with the money itself.

“After we pass this budget, we can’t pat ourselves on the back for too long because we have to address these other challenges,” Suslovic said. “The challenge is going to be next year.”

Kevin Miller can be contacted at 791-6312 or at:

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