California revenues have seen significant voliatatity over the past ten years. Most of the revenue swings were atributed to reliance on income taxes that would swing wildly when the stock market roller coasted up and down. The standard wisdom to provide more stable revenue was to tax things like property since the values increased a slower but steadier pace. However the housing bubble of that 2004 accelerated property revenues significantly. Since California was trying to dig out of the 2003 budget crisis, no one questioned the property tax revenue sustainability. All that changed in 2008 when the housing bubble burst. Look significant revenue losses for years to come.
Where property tax goes
Kathleen Pender, San Francisco Chronicle, February 27, 2005
The explosion in housing sales and prices is producing a healthy boost of new tax revenue in many California counties.
"Total property tax revenues statewide are up 8 to 9 percent a year over the last three years," says Brad Williams, a senior economist with the California Legislative Analyst's Office.
"That's a lot compared to most of the 1990s, but less than the '70s and '80s," he adds. The only thing holding it back now is commercial property, which makes up about one-third of the property tax roll and has not been as vibrant as residential property.
Williams says his office is forecasting an 11 percent gain in total assessed value for fiscal 2005-06.
Where is all that property tax money going, and why don't we hear much about it?
Although the state government does not receive property tax revenue, it is one of the biggest beneficiaries of rising property values.
Although schools receive a large share of property taxes, most don't get any more money when taxes rise. The only ones that may benefit are about five dozen "basic aid" districts, more than half of which are in the Bay Area.
Cities and counties also benefit from rising property taxes, but "you don't hear them talking about it because they are also experiencing rapid growth in their expenditures," especially for health care and pensions, says Eric Hoffmann, a municipal analyst with Moody's Investors Service.
Rising property taxes have helped offset declines in more economically sensitive local revenue sources such as sales and hotel taxes. "Were it not for the property-tax boom, you'd be hearing a lot more screaming from local governments," says Hoffman.
Proposition 13, passed by voters in 1978, sharply reduced property tax rates and set strict assessment rules. Most property in the state is assessed when it is sold or when there is new construction. The tax is initially levied at 1 percent of the sales price or value of the improvement, plus any rate needed to cover debt approved by voters at the local level. The average tax rate in 2002-03 was 1.08 percent.
Where taxes go
Each county collects tax on property in its boundaries. It keeps some money for county government and divides the rest among the county's cities, public schools and special districts, such as water and transportation districts.
In 2002-03, cities received 11 cents of each property tax dollar on average, county governments got 19 cents, schools got 52 cents and other districts got 18 cents, according to the California Board of Equalization.
Those allocations, however, vary widely from county to county, city to city and year to year. Even within one city, the distribution can differ depending on which schools and other districts serve a certain address.
The allocation formulas were based on local tax rates before Prop. 13 took effect and have changed so often they make little sense today.
In San Francisco, 65 cents of each property tax dollar went to city/county government, 29 cents went to schools and six-tenths of a penny to other districts in 2002-03.
This year, the allocation will be 75 cents to city/county government, 20 cents to schools and the same six-tenths of a cent to districts.
Impact on schools
Although state government does not receive property taxes, it benefits from rising property taxes because of California's school-funding mechanism.
School districts are financed mainly by local property taxes and money from the state's general fund. Each district gets a base amount per student, known as the revenue limit. This amount, set by the state, is based on the district's average daily attendance and other factors.
The average revenue limit this school year is about $5,735 for high school districts, $4,760 for elementary districts and $4,970 for unified (K- 12) districts.
The revenue limit is often compared to a bucket that is filled with local property taxes first, and topped off by state revenues. (The amount each county must give its schools is based on the aforementioned allocation formula. )
If property values rise and a school district gets more local tax revenue, the state simply cuts back its funding, so the overall funding does not change. This helps the state, but not the school district.
There is an exception: Out of California's nearly 1,000 school districts, five or six dozen typically get enough property taxes to meet 100 percent of their revenue limit. These schools get no state contribution toward their revenue limit, although they are entitled to a small sum, up to $120 per student, known as basic aid.
If a basic aid district gets more property tax revenue, it gets to keep it.
At one point in 2003-04, there were 65 basic aid districts, including 35 in five Bay Area counties. Most are in wealthy areas, although a few are in rural areas with few students and a big commercial business, such as oil wells.
A school can come in and out of basic aid -- even during the same school year -- as its property tax revenues change.
Any district, basic aid or not, can attempt to raise additional money with voter-approved parcel taxes.
Santa Clara Unified was a basic aid district in 2002-03, but now it's not. The district faced a sharp drop in commercial property tax revenue when many high-tech businesses sought and received lower assessments for their buildings and equipment.
Big hit to programs
"It had an enormous impact on their budget," says Bob Blattner, a vice president with School Services of California, an education consulting and advocacy firm.
"Any school district, regardless of its revenue sources, is going to endeavor to spend today's dollars on today's kids. When today's dollars take a big hit, there is going to be dramatic impact on educational programs. That's what Santa Clara is facing," he said. The district's superintendent did not return phone calls.
Palo Alto Unified also saw a big drop in commercial property tax revenue, but thanks to rising residential assessments, its total revenue increased by a slight 0.92 percent last year, says Mary Frances Callan, the district's superintendent.
Palo Alto Unified remains one of the wealthier basic aid districts. It generates $2,000 to $3,000 over its revenue limit, says Callan.
Even so, the district is asking voters to approve a tax of $493 per parcel this summer. It would replace a $293 parcel tax that expires next year and provide additional money for programs such as class-size reduction and building its reserve fund.
The basic aid districts doing best today are ones like Saratoga Union, which has many expensive homes and very little commercial property. It got a 4. 2 percent increase in property tax revenue last year and is expecting an extra 6 to 7 percent, or roughly $1 million, this year.
The extra revenue has helped the district cover rising expenses, bring back a gardener half time and restore some secretarial and nursing services, says Lane Weiss, district superintendent.
Although districts like Palo Alto and Saratoga are doing better than most in California, "it's pretty difficult to find any California school district that stacks up well against a national standard of funding. We're talking about shades of poverty here," says Blattner.
All California districts have faced cuts in "categorical" funding, which is additional money they get for special programs and varies depending on a district's student population and its basic revenue limits.
Basic aid districts lost an additional $120 per student in categorical funding, which mostly eliminated their basic aid.
Cities and counties
Cities and counties have also been benefiting from property tax increases, but the net impact is difficult to measure because the state has the authority to shift the allocation of property taxes between schools and local governments. Recently, the state has been increasing the share going to education so it can reduce its contribution to schools and help balance its budget.
On the other hand, the state has shifted some money back to local governments to make up for revenue they lost when the state cut the vehicle license fee.
In San Francisco, property tax revenue totaled $1.16 billion in 2003-04, up 4.6 percent from the year before.
"The one area of relative calm or bright news is property taxes," says Todd Rydstrom, director of budget and analysis in the city controller's office.
Although "every major business" with property in the city has requested a property tax reduction, "the residential side of the house has held up quite well," he says.
Basic aid districts
At one point in 2003-04, there were 65 basic aid school districts in California, including 35 in the Bay Area. Basic aid districts, which get almost all of their basic funding from local property taxes and very little from the state, stand to benefit when property taxes rise. Some districts on this list from last year, such as Santa Clara Unified, are no longer basic aid districts.
Elementary: Bolinas-Stinson, Larkspur, Mill Valley, Nicasio, Reed Union, Ross, Sausalito. Unified: Shoreline. High: San Rafael City, Tamalpais Union.
Elementary: Howell Mountain, Pope Valley Union. Unified: Calistoga Joint, St. Helena.
San Mateo County
Elementary: Belmont-Redwood Shores, Hillsborough City, Las Lomitas, Menlo Park City, Portola Valley, Woodside. High: San Mateo Union, Sequoia Union.
Santa Clara County
Elementary: Lakeside Joint, Los Altos, Los Gatos Union, Mountain View-Los Altos, Saratoga Union, Sunnyvale. Unified: Palo Alto, Santa Clara. High: Fremont, Los Gatos-Saratoga.
Elementary: Alexander Valley, Horicon, Kenwood.
Source: California Department of Education
Property tax revenue plummets with home values
San Francisco Chronicle, Carolyn Said, January 25, 2009
California could pay the price for the foreclosure crisis for years to come, thanks to Proposition 13, the 1978 voter initiative that caps property taxes.
As banks feverishly dump foreclosed homes at cut-rate prices, and as neighboring homes change hands at similar bargain-basement rates, those amounts are enshrined as the new basis for determining property tax until the homes are sold again. Under Prop. 13, that basis can rise a maximum of just 2 percent a year, even if the home is worth significantly more. The consequence is likely to be a revenue crunch for the public services funded by property tax revenues.
"This is going to have a long-term impact on the state budget and on local budgets," said Jean Ross, executive director of the nonpartisan California Budget Project in Sacramento. "It means that even after the economy recovers, state and local government budgets will not recover fully."
Gus Kramer, Contra Costa assessor, puts it in stark terms. "It's going to be an absolute economic disaster in Contra Costa County and surrounding areas," he said. "Everyone thinks this is like the last recession with values going down and that when they come back there will be a resurgence - but it's not going to be like that. It will be years before (the tax roll) recovers because all these people are selling (distressed) homes, banks are selling at deep discounts, values are going down from 50 percent to 75 percent. The people buying them will hold onto them for five, six, seven years. The tax base is not going to recover anytime soon."
Here's an example: A four-bedroom home in Antioch sold for $700,000 in 2005. Annual property taxes were $7,000, or 1 percent of the purchase price. If the home goes into foreclosure and sells for $400,000, a common scenario in a county where values have plummeted, the new tax would be $4,000 - or $3,000 less.
Consider that almost 250,000 homes in California were repossessed by lenders last year, according to ForeclosureRadar.com, and you get a sense of the mega dollars lost to the cities, counties, K-12 schools, community colleges and special districts that rely on property tax revenue.
$377 million bite
Loans on those properties amount to $107.8 billion, ForeclosureRadar said. Assume the loans roughly equaled the previous purchase prices, and make a conservative estimate that the foreclosed properties got resold for 35 percent less than those previous prices. That means $37.7 billion in property values has been wiped out - which amounts to a $377 million bite out of annual property taxes that will persist until the properties are resold.
In the 31 years since Prop. 13 was enacted, property tax revenue has increased every year - until now.
During the real estate boom, property taxes soared as homes changed hands at ever-increasing prices. But in the current fiscal year, property tax collections around the state are falling short of projections, although they are up slightly or unchanged in many counties. Current property taxes are based on homes' assessed value as of Jan. 1, 2008. Since then, values have plunged more, which will be reflected in the bills to be paid starting in November. Those taxes will be based on homes' values as of Jan. 1 this year.
"With property taxes, it's a slow-motion reaction," said Marianne O'Malley, an analyst in the California Legislative Analyst's Office.
A forecast from consulting firm Beacon Economics predicts that property tax revenue in the state will fall 6.1 percent in the next fiscal year, which runs from July 1 to June 30, 2010. The following year will see a 3.6 percent decline, followed by a more modest 0.8 percent drop, it predicts. Only in 2012-13 will property tax revenues rise again and then only by 1 percent, Beacon projects.
Even when homes do not change hands, their property taxes can fall. Proposition 8, approved in 1978 as an amendment to Prop. 13, allows for assessed values to decline when market values fall. With prices plunging around the state, hundreds of thousands of property owners will pay lower property taxes in coming months. But as values recover, Prop. 8 allows the assessed values to rise back to the previous amount.
Property taxes are divvied up according to complex formulas that vary for each municipality. The basic 1 percent tax is split among K-12 schools, community colleges, counties, towns and special districts. On top of that, many areas have additional, voter-approved assessments for bonds and special districts.
State has to cover shortfall
A drop in property tax revenue wallops the state, because it is obligated to make up any significant loss to the schools. The Legislative Analyst's Office projects the state will have to pony up almost $1.5 billion to K-14 schools over the next three years to compensate for declining property taxes. Gov. Arnold Schwarzenegger has already said the state will have to make up $430 million this year for school funding because property taxes have lagged projections.
"That $430 million in essence will get built into every year going forward," Ross said. "More school costs will shift onto the state."
Unlike schools, counties and communities have no backstop when property tax revenue falls short.
"Property tax is the bread and butter of our discretionary revenues - it's how counties provide libraries, sheriff's patrols, maintain the jails, district attorneys, prosecution, all the countywide services are funded through the property tax," said Paul McIntosh, executive director of the California State Association of Counties, the advocacy group for the state's 58 counties. "When you see a decline in that, without a decline in demand for those services, it will have a tremendous impact."
Prop. 13 means "there is going to be a long-term hangover from this for quite some time," McIntosh said. "You're resetting the (valuation) bar low; it will take quite a while for those properties to turn over and those values to grow back to what they were just a few years ago."
Alameda County Supervisor Keith Carson thinks the cash crunch may be what it takes for voters to reconsider how government services are funded - including Prop. 13, long considered an untouchable "third rail" of California politics.
"Maybe we need to revisit not just Prop. 13 but our entire funding formula for local government," he said. "As bad as it gets, that's when it forces people to think and to move outside their comfort level and outside the box to address the crisis. Maybe we need to revisit these antiquated ways in which we deal with revenue streams to local government. At some point, it's going to take an initiative, and it would have to be one from the people. It took an initiative for Prop. 13, and it's going to take one again."
Who gets property taxes?
Each county and town has its own formula for allocating property taxes.
Here is how the basic 1% tax is divvied up in Contra Costa County. On top of the 1%, many areas have voter-approved additional assessments for bonds and special districts.
Under Proposition 13, real estate is reappraised only when ownership changes hands or new construction is completed. Otherwise, property assessments cannot be increased by more than 2% annually, based on the California Consumer Price Index. The tax rate is 1% plus any voter-approved bonds, fees or special charges.
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