SOUTH PORTLAND — City Manager Scott Morelli and his staff are racing to address a $4 million budget shortfall after mistakenly inflating the amount of state reimbursements for property tax exemptions in the fiscal year ending June 30.

The $4 million gap represents about 3% of the $127.5 million combined municipal and school budget that the City Council approved last June, Morelli said in a statement issued Wednesday.

Rather than send out higher tax bills to make up the difference, Morelli said he and his staff are working to close the gap by looking for surplus revenue in various areas of the budget and cutting spending where it won’t impact city services.

“This error is significant, and we want to be transparent with the public and own up to this mistake,” Morelli said. “Fortunately, the city has capable problem solvers in our finance and other departments who have responded quickly to help resolve the issue and prevent it from repeating.”

The problem started when staff filled out the state Municipal Valuation Return form that all municipalities use to determine tax rates, Morelli said. The amount of state reimbursement revenue for the Homestead and Business Equipment Tax exemption programs was mistakenly doubled.

As a result, the tax rate was set too low and the amount collected from taxpayers was $4 million less than needed to cover the 2023-24 budget.

“This is of course a very unfortunate thing to have happened,” City Finance Director Ellen Sanborn said. “We have put additional checks and balances in place so that something like this is very unlikely to happen in the future.”

South Portland’s current tax rate is $14.14, but it should have been set at $14.69 this past summer after the City Council approved the budget, Morelli said. Billing at the correct rate would have added $163 to the annual tax bill of the average residential property owner.

Mayor Misha Pride, who heads the council, said he was pleased that when Morelli informed him of the shortfall he already had found some solutions.

“The City Council will support City Manager Morelli in his efforts to prevent a mistake like this from happening again, and do its best to fill any budget gaps without decreasing services to constituents or raising taxes,” Pride said.

The finance department has reviewed non-tax revenues that the city expected this year and identified areas where revenues may come in higher than anticipated, Morelli said. Department heads also were asked to review budgets for anticipated savings, to identify and defer noncritical spending, and to apply eligible costs to grants and reserve funds.

“While staff is confident that this process will be successful, it is possible that the city may need to utilize some amount of fund balance to finish out the year,” Morelli said.

Fortunately, he said, the city has a healthy fund balance that is at the top of the range called for by city financial policy, which requires that the balance be between 9% and 12% of the city’s annual operating costs.

Morelli also said South Portland has a strong fiscal standing and remains one of only two communities in Maine to receive the highest bond ratings from both Moody’s and S&P Global, two leading credit rating firms.

“Tax revenue that was not collected but should have been will be part of next fiscal year’s budget,” Morelli said. “This will be one piece of a fuller budget discussion, which will occur over the next several months.”

The fiscal 2025 municipal budget will be posted on the city’s website on March 19. The city manager and school officials will present their proposed budgets on April 2.

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