Phoenix Funding Sinks as Assessments Catch Up to Collapse

Home prices are soaring in metropolitan Phoenix. Yet for local governments that depend on property taxes, the bottom of the market has just arrived.

The net assessed value of property in Maricopa County, Arizona’s largest by population, plunged to $32 billion for fiscal year 2014 -- the lowest level since 2006 and down from the peak of $49.7 billion in 2010, county figures show.

The drop, which comes as Phoenix posted the highest annual home price growth of the 20 cities on the S&P/Case-Shiller index at 22.5 percent in March, reflects market conditions in the county more than two and a half years ago when the state had the nation’s second-highest foreclosure rate. It’s impacting the bonding capacity of some school districts and leading to further cuts to government budgets already reduced during the recession.

“It becomes harder and harder as you begin to cut into bone,” said Sandi Wilson, deputy Maricopa County manager, referring to $82.4 million in cuts tentatively approved by county supervisors last month as part of a $2.2 billion budget for fiscal 2014.

Property taxes, one of the main sources of local government operating revenue, are generally more stable than sales and income taxes, which can quickly plunge during a downturn. Still, the lag between changes in the market and when those are reflected in assessments and tax collections means some local governments are feeling the housing crisis more even as conditions improve.

‘Doesn’t Translate’

“All the good news we are hearing doesn’t necessarily translate into immediate budget relief,” said Rachel Cortez, a vice president on the local government team for Moody’s Investors Service in Chicago. The improving housing market “won’t necessarily translate into increased property tax revenue or halt declining property taxes.”

The way taxes are calculated and how often properties are assessed varies significantly jurisdiction by jurisdiction, as does the ability to raise rates to offset the drop in values. In places where assessments are closely tied to market dynamics, falling valuations “accentuated the downturn,” said Donald Boyd, senior fellow at the Nelson A. Rockefeller Institute of Government in Albany, New York. Elsewhere, the lag in the impact of the market on tax bills has prolonged the pain, he said.

“What is happening in Arizona is happening in other places around the country,” Boyd said. “It is widespread.”

In Hazel Park, Michigan, where the population is about 16,600, taxable property values have fallen 44 percent since 2008. Though voters increased the property tax rate in 2011, collections still plummeted.

Revenue Falls

General fund property tax revenue in Hazel Park for the upcoming fiscal year is estimated to fall to $4.5 million from a peak of $6.7 million in 2009 when the tax rate was lower. Along with cuts to state aid, the decline has reduced the city’s general fund to $12.3 million from $14.4 million in 2010, said city manager Edward Klobucher.

“It’s a staggering hit,” Klobucher said. The city’s workforce was reduced to less than 90 from 120 and employee salaries were cut 5 percent, among other measures. “This is a systemic problem that’s just beating us up.”

Several states, including Michigan, have caps on how much assessments or property tax bills can rise annually, meaning it can take a lot longer for local governments to recover revenue.

In Clark County, Nevada, which includes Las Vegas, the taxable value of property is up slightly to $144 billion for fiscal 2014 from $142 billion, according to county assessor Michele Shafe. Still, the amount of taxes billed is expected to fall about $23 million or 1.6 percent county wide, treasurer Laura Fitzpatrick said.

Increases Capped

The taxes aren’t rising proportionately to assessments in part because of caps on annual increases in tax bills, which for owner-occupied homes is 3 percent, Fitzpatrick said.

In Arizona, the loss of property values has cost some school districts their ability to issue bonds already approved by voters. The Higley Unified School District in Gilbert, east of Phoenix, recently had to turn to a private non-profit to finance two new schools even though voters had authorized more than $70 million in new bonds to pay for them.

The decline in property values sapped the district’s bonding capacity, which is limited to a percentage of its tax base. Higley has about $63.5 million in outstanding debt.

“The kids didn’t stop coming and the state didn’t have money to fund new schools,” said Kevin Hegarty, chief financial officer for the district, which has 11,000 students, up from just 900 in 2000 and growing at a rate of 400 to 500 students per year. “It’s left us in a really bad spot.”

Facing Backlash

In Maricopa County, the board of supervisors faced a political backlash two years ago for raising the tax rate to offset falling assessments -- even though the total levy still declined by $21.6 million. Since then, the Republican-controlled board has kept the rate about the same, taking in $62.4 million less last year and expecting $32.8 million less for fiscal 2014.

Budget cuts over the past five years included reductions to funding for the Maricopa County Sheriff’s Office, leading to legal disputes with nationally known Sheriff Joe Arpaio, who complained the cuts were politically motivated. The ranks of county government employees across the board have been slimmed 9 percent since fiscal year 2007 and pay has been frozen.

The budget for the coming fiscal year includes merit-based raises, the first pay increases for employees in six years, intended to stem high turnover, Wilson said. Costs were reduced by eliminating the county’s contingency fund, reducing spending on capital projects and finding other savings, she said.

There’s not much more room to cut, she said. And a voter-approved cap on levies that goes into effect in fiscal 2016 could extend the recovery even more.

“The comeback is going to be slow,” she said.

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