Groton — The Town Council on Tuesday delayed setting the tax rate for the coming fiscal year after learning revenues had fallen significantly and unexpectedly, and that the adopted budget could result in a substantial tax rate increase.

Finance Director Cindy R. Landry wrote in a May 21 memo that, due to revenue declines, the budget would require a tax rate of 21.68 mills for the coming fiscal year — a hike of 1.55 mills, or 7.7 percent.

But Town Manager Mark Oefinger told the council he had spoken to School Superintendent Michael Graner on Tuesday, and, based on that conversation, the tax rate increase required to fund the budget would be closer to 5.5 percent or 5.6 percent.

“People are going to go crazy when they see that,” Councilor Genevieve Cerf said, of the 7.7 percent figure. “It’s just too much.”

Councilors decided to wait until June 2 to set the rate so they could get more information and discuss whether to pull money from reserve funds such as the fleet reserve, capital reserve, parks and recreation and the solid waste funds to cushion the blow. The council must set a mill rate by June 9, Landry said.

The tax rate is based on a $125.7 million budget, a 2.4 percent increase over current year's spending. The Representative Town Meeting finished its review of the budget on May 18.

The budget would use about $3.4 million of the town’s unassigned fund balance to cover spending, including $1.8 million set aside earlier to prepare for revenue losses resulting from Pfizer Inc.’s demolition of its former research headquarters.

But the impact of proposed spending on the tax rate is greater than was previously thought.

When the Town Council received the budget proposal in March, then made cuts and submitted it to the RTM, the impact of a 2.4 percent spending increase was estimated at 0.82 mills, or a 4.1 percent tax rate increase.

The RTM restored some of the council’s cuts but made other changes, ending up with the same 2.4 percent increase in spending.

Oefinger said that, between the time he submitted the budget in March and this month, the revenue picture changed drastically.

The main culprit was a change in Federal Pupil Impact Aid, which provides money to assist communities that have children living on a large amount of tax-exempt federally owned properties. In Groton's case, it's mainly used to help educate the children of military families.

Landry said a federal audit of the school district’s fiscal year 2014 application for the aid found a large number of students were ineligible for it. The audit was finished in May 2014, but not brought to the Board of Education until this month, she said.

Based on the audit, Groton would see a $961,045 cut in aid this fiscal year and an $888,285 cut in fiscal year 2016, or about $1.8 million total, the May 21 memo said.

But Oefinger said he spoke to Graner on Tuesday and was told the loss would not be $1.8 million, but closer to $700,000. That would result in a tax rate hike of 5.5 percent or 5.6 percent.

Oefinger offered this explanation of what happened: Federal impact aid allows a community to apply for some assistance for the children of civilian parents who work in the military. But to qualify, a community must have at least 10 percent of its students — or in Groton’s case, 505 children — with civilian parents working in military jobs. If the figure falls below that, the community receives nothing for those students, Oefinger said.

The schools had 482 school-age children with civilian parents working in the military, he said.

The school board plans to appeal the audit findings, Landry said.

Groton also saw a $655,750 decline in general property tax revenue for the current fiscal year, according to Landry’s memo. She said this was due to an outdated formula used to estimate the revenue.

d.straszheim@theday.com

Twitter: @DStraszheim