Cities brace for revenue losses as property values continue to drop
Assessors in Los Angeles, Riverside and San Bernardino counties are forecasting the first drops in property tax collections in more than a decade, presaging reduced revenues for many cash-strapped local governments.
Until now, property tax revenues had been a relatively stable source of money for cities amid a recession that has dramatically reduced sales tax intake, particularly from car dealers.
Even with the decline in home values, the property tax base in five Southland counties grew last year thanks to continuing sales and the completion of construction begun during the 2003-2006 building boom. But assessors in those counties said they have reduced the value of more than half a million properties and expect to make deeper cuts to their rolls by the summer.
This is bad news for local governments that have been relying on property tax proceeds to help make up the shortfall from reduced incomes and spending in their areas. Already, cities and counties across California have been freezing jobs, imposing work furloughs and pay cuts, postponing repairs and reducing some public services.
“Cities are calling us almost weekly now trying to find out where we are at and what kind of effects the reduced assessment will have on their budgets,” said Larry Ward, Riverside County’s assessor, clerk and recorder.
He said he won’t make any predictions until the end of June, when the 2009 assessment roll is closed and submitted for audit.
But in Los Angeles County, Assessor Rick Auerbach is estimating a 1% reduction in the county’s $1.1 trillion property tax base. It would be the first time the assessment roll has dropped since 1996, when counties were struggling to adjust property values after a deep recession triggered by major cuts in the local aerospace industry. Auerbach said the losses could grow in coming months.
San Bernardino County Assistant Assessor Dennis Draeger is predicting a 5.7% drop in the county’s $182-billion roll. Orange County’s $424-billion property tax base is currently projected to grow slightly, but Assessor Webster Guillory said it would be by a historically slim margin of 0% to 2%.
Early indications were that the Ventura County roll would stay flat at about $107 billion, but Assessor Dan Goodwin cautioned, “It is so early that it is difficult to have high confidence in that.”
The reduced assessments mean counties collect less property tax, which was capped at 1% of assessed value when voters approved Proposition 13 in 1978.
Although this will force some municipalities to make deeper cuts, many homeowners believe counties have not gone far enough and are demanding their tax valuations be slashed even more.
L.A. County received appeals for 16,051 properties on the 2007 roll, said Khanh Nguyen, the county’s chief of assessment appeals. That figure jumped to 48,869 for 2008 and is still growing, she said. Her office has recruited 22 new hearing officers in anticipation of an even bigger workload when this year’s appeals start to arrive in July.
So far, most of the requests have come from owners of single-family homes who bought houses and condos when the property market was at its peak. But Auerbach said the value of commercial real estate is also starting to take a hit as vacancies spread in shopping malls and office buildings.
Located in the basement of the county administration building in downtown L.A., the Los Angeles Assessment Appeals Board is the front line in the fight over property values, where property owners make their last stand for lower assessments.
John Curulli, a USC lab manager who always tried to live within his means, never thought he would be among them. But he now owes more on his home than he figures it is worth.
Curulli and his girlfriend were planning to get married when they bought the compact, two-bedroom house in Altadena for $510,000 in 2006. The couple spent close to $100,000 on renovations before the relationship collapsed, leaving Curulli as the sole owner.
Curulli’s assessment was reduced in 2008 to $470,000 but he did not think that was enough. Late in February, he was invited to make his case at a hearing presided over by a retired real estate broker.
He waited in a narrow hallway jammed with anxious homeowners clutching files and jostling for position. He was then asked to show evidence of three comparable sales in his neighborhood to justify his claim that his house was worth about $385,000 on Jan. 1, 2008. The assessor’s representative countered with examples of three higher sales.
Curulli was partially successful -- the hearing officer recommended a value of $425,000. Both sides had the option to appeal the amount before the full assessment board, but Curulli decided to wait and try for a better deal on the 2009 roll. “You can just see what houses are selling for now,” he said. “It is significantly less than the assessed value today.”
Assessors point out that they don’t wait for such appeals before responding to market downturns. Last year, L.A. County reviewed the value of 318,000 properties purchased since July 2004 and reduced 128,000 of them. Even so, the 2008 roll grew 6.9% to $1.1 trillion, Auerbach said. This year, the automatic review has been extended to 500,000 properties purchased between July 2003 and June 2008. The reduction in property tax proceeds is expected to be steepest in areas that had experienced the most development, including the Inland Empire, assessors said. In Riverside County, the property tax base nearly doubled during a construction boom from 2003 to 2007, from $125 billion to $243 billion. Last year, the assessor’s office reduced the value of 200,000 homes, shaving more than $16 billion off the roll. Although the roll still posted a 1.45% gain, it was the lowest increase since 1996.
“There is no doubt in our mind that we are going to go negative. We just don’t know by how much,” Ward said.
One reason that property tax proceeds haven’t fallen faster is because of Proposition 13, which caps assessment increases at 2% a year, as long as a property does not change hands. The law permits the same increase in a downturn, provided a property’s value has not dropped below the amount assessed when it was purchased. Many homes were acquired long enough ago that they are still worth more than when they sold.
Even for a city with as diversified an economy as Ontario, any drop in property tax proceeds will mean service reductions, said City Manager Gregory Devereaux.
The city already trimmed costs by $4.3 million after taking a hit on sales tax revenue, the result of falling demand for cars and building material. Travel at Ontario airport is also down, bringing reductions in hotel tax revenue and parking proceeds. Most of the city’s property tax revenue comes from the commercial sector, which has been slower to feel the effect of the real estate downturn.
“We are starting to see that weakness now,” Devereaux said.
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Estimated drop in San Bernardino County’s property tax base for 2009.
Estimated drop in Los Angeles County’s property tax base for 2009.
The dollar amount of the L.A. County drop.
Source: County assessors’ offices