RevenueDeclinein MartinSchoolofPublicPolicy&Administration,UniversityofKentucky
PropertyTax theStateofCalifornia andtheImplications
AnexaminationofSelectedLocalGovernmentsintheStateofCalifornia
RyanM.Mauldin 4/10/2008
Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
Acknowledgements: I would like to thank Dr. Dwight Denison and Dr. Edward Jennings of the Martin School of Public Policy & Administration My panel- Dr. Merl Hackbart; Dr. David Wildasin In addition, each individual who devoted their time and effort to ensure the successful completion of this project.
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Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
TableofContents
Executive Summary ...................................................................................................................................... 4 Background ................................................................................................................................................... 5 The Impact of Subprime Mortgages on Californias Economy .................................................................. 7 Property Taxes in California its Role & Key Legislation .......................................................................... 11 SB 154 (Chapter 292, Statutes of 1978).............................................................................................. 14 AB 8 (Chapter 282, Statutes of 1979).................................................................................................. 14 Proposition 98 ...................................................................................................................................... 14 Creation of the Educational Revenue Augmentation Fund (ERAF) .................................................... 15 (Chapters 699, 700, and 1369, Statutes of 1992, and Chapters 68, 904, 905, 906, and 1279, Statutes of 1993) ................................................................................................................................................ 15 AB 1290 (Chapter 942, Statutes of 1993) ........................................................................................... 16 State-Local Agreements in FY 2003-04 and FY 2004-05.................................................................... 16 Data ......................................................................................................................................................... 19 Methodology................................................................................................................................................ 21 Conclusion .................................................................................................................................................. 25 Works Cited ... 26 Appendix
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ExecutiveSummary
The Center for Responsible Lending projects California local governments to experience a $107 billion dollar decrease in home values and taxable property rolls as a result of subprime mortgage related foreclosures [Lending, 2008]. Due to Proposition 13, property taxes do not account for a substantial portion of local government revenue 1 . They do, however, constitute 53% 2 of statewide K-14 funding, as stipulated by Proposition 98 (Education Revenue Augmentation Fund or ERAF). As a result of ERAF, local governments (defined as counties, cities, schools, and special districts) receive less money through a complex fund shifting process that offsets statewide general fund spending. If property tax revenues decline, the state will have to take a greater share of responsibility to fund K-14 schools[Lin,BeeCapitalBureau,2007]. There is a major problem associated with this: The state has already proposed to cut $4 billion in education spending to offset a major $16 billion 3 budget shortfall [Lin, Emergency cuts likely today, 2008]. The goal of this research, though limited in scope and nature, was to examine the property tax revenue decline as it relates to property tax delinquency (defined as percentage of property tax levied but uncollected within a given year) in the state of California. For this research, I proposed to measure the property tax delinquency rate as property tax delinquencies serve as local government economic fiscal health indicators and display the lack of ability and obstacles of short-term financial management for governments [Denison, Yan, & Zhao, 2007]. Therefore, the property tax delinquency rates of 11 California counties were examined to see if there was a statistically significant relationship between the dependent variablecounty property tax delinquency rateand a host of independent variables under the classifications of Race, Age, and Socioeconomic Indicators. It is important to understand this relationship to gain further insight into the complexities associated with the effects of the subprime market and resulting soft-housing market on Californias local government to see if certain criteria make counties more susceptible to experiencing property tax revenue decline. This is all done with hope that if local governments are aware of these factors, then they can prepare and plan accordingly as to mitigate these effects. Through an analysis of the variables at the 95% confidence level it was determined that the following specific variables median home price, percent of population Black or AfricanAmerican, percent of population with Bachelors degree age 25+ or higher, and change in population were statistically significant. In other words, it was found that higher median home values, higher black or African-American communities, or a greater change in population can increase property tax revenue decline. In contrast, the presence of educated adults age 25+ with a Bachelors degree or higher decreases the property tax delinquency rate by 0.088%.
1 2
, Figure Taken from California Property Tax: An Overview Publication 29September 2005, California State Board of Equalization www.boe.ca.gov
Figure taken from California Legislative Analyst Office Report, Highlights of the 2008-09 Analysis, Chief Analyst Elizabeth Hill http://www.lao.ca.gov/analysis_2008/highlights/pandi_highlights_022108.pdf
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Background
The economic turmoil associated with the subprime market fallout and overall soft-housing market has had a direct impact on property values and local governments property tax rolls. Many Californians are finding it difficult to live the American Dream and make ends meet as is illustrated by the mounting rates of foreclosures and declines in home sales. In 2007, California had a total of 250,000 foreclosure filings1.9% of California homes were in foreclosure which is nearly twice the national average of 1% (Christie, 2008) Additionally, Californias existing home market has plummeted. Sales of existing single-family homes dropped nearly 15 percent from August through September 2007, and were down nearly 39 percent from one year earlier, according to the California Association of Realtors. (Finance, 2007) The Center for Responsible Lending projects California local governments to experience a $107 billion dollar decrease in home values and taxable property rolls as a result [Lending, 2008]. Due to Proposition 13, property taxes do not account for a substantial portion of local government revenue 4 . They do however constitute 53% 5 of statewide K-14 funding as stipulated by Proposition 98 (Education Revenue Augmentation Fund or ERAF) to offset statewide general fund spending. If the property tax revenue of local governments (here defined as counties, cities, schools, and special districts) generate declines, the state will have to take a greater share of responsibility to fund K-14 schools[Lin,BeeCapitalBureau,2007]. The major
, Figure Taken from California Property Tax: An Overview Publication 29September 2005, California State Board of Equalization www.boe.ca.gov
4 5
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Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
problem associated with this is that the state has proposed to cut $4 billion in education spending in order to offset a major $16 billion 6 budget shortfall [Lin, Emergency cuts likely today, 2008]. The goal of this research, though limited in scope and nature, was to explore some of the underlying factors that make certain counties more susceptible to property tax revenue delinquency in the state of California. I proposed to measure property tax delinquency because property tax delinquencies serve as local government economic fiscal health indicators and display the lack of ability and obstacles of short-term financial management for governments [Denison, Yan, & Zhao, 2007]. Therefore, the property tax delinquency rates of 11 California 7 counties were examined to see if there was a statistically significant relationship between the dependent variablecounty property tax delinquency rateand a host of independent variables: percent of population Black or African-American and percent of population Hispanic(the Race variables); percent of population 21+ and percent of population 65+(the Age variables); unemployment rate, annual change in population, median income, median home price, and educational attainment levels of population 25+(the Socioeconomic Indicator variables). It is important to understand this relationship to gain further insight into the complexities associated with the effects of the subprime market and resulting soft-housing market on Californias local government and to see if certain criteria make counties more susceptible to experiencing property tax revenue decline.
6
Figure taken from California Legislative Analyst Office Report, Highlights of the 2008-09 Analysis, Chief Analyst Elizabeth Hill http://www.lao.ca.gov/analysis_2008/highlights/pandi_highlights_022108.pdf 7 For this particular research, a comprehensive data set from 2000-2006 was only available on these 11 counties: Alameda, Contra Costa, Los Angeles, Orange, Riverside, Sacramento, San Bernardino, San Diego, San Francisco, Santa Clara, and Tulare Mauldin 6
Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
TheImpactofSubprimeMortgagesonCaliforniasEconomy
In the wake of mounting financial distress and recessionary threat looming on the national and regional economy, everyone from Wall Street to Main Street is finding it difficult to make ends meet: Californias low home affordability rate led to an unusually high use of subprime loansThe percentage of households that could afford to buy an entry-level home in California stood at 25 percent in the first quarter of 2007. According to the Wall Street Journal, 28 percent of all subprime mortgage loans originated nationally in 2006 were in California. Over $100 billion of subprime mortgages have been originated in the state since 2005 [Finance C. C., 2007].
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Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
Figure 1 Obtained from (Finance C. C., 2007)
Subprime mortgages are a class of mortgages used by borrowers with low credit ratings. The average subprime borrowers credit score is 620 or below, which reflects a very poor credit history. About a fifth of all U.S. consumers have a credit rating of 620 or below, [Finance C. C., 2007]. Borrowers with this credit score typically do not qualify for prime mortgages with lower interest rates because they have damaged credit or no credit history and are considered posing a greater risk to lending institutions. A study conducted by the Center for Responsible Lending estimated that one out of every five subprime mortgages originated since 2006 will end in foreclosure, [Schloemer, Li, Ernst, & Keest, 2006]. Due to this inherently increased risk of default for this class of credit borrowers, interest rates are usually higher: Normally, high interest rates would lead to higher monthly payments that would disqualify, or at least dissuade, all but the most credit-worthy home buyersA critical component of the subprime phenomenon was the unconventional use of mortgage instruments [Finance C. C., 2007], such as an adjustable rate mortgage instrument. Adjustable rate mortgages (ARMs) typically feature an introductory period where the interest rate is relatively low and comparable to one found with a prime mortgage loan. However, after this introductory period the mortgage typically resets to an interest rate tied to the market rate or higher. Hundreds of billions of dollars were lent through a vast array of adjustable rate mortgages that offered low introductory teaser rates, no money down, and interest-only payments options. In 2006, subprime loans accounted for 20 percent of the national loan flow and 15 percent of the stock of the $8 trillion mortgage securities, [Finance C. C., 2007].
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Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
The safety of this new financial market was totally dependent on rising home prices. The typical subprime mortgage is a 2/28 adjustable rate mortgage, which means it has an initial low 2-year fixed rate that is then adjusted based on an interest rate index and an added margin [Finance C. C., 2007]. In many cases, borrowers were qualified for loans based on monthly payments under the initial teaser rate even though they likely wouldnt qualify for, nor likely could afford, payments due when the mortgages reset to higher interest rates. However, it was these higher, unaffordable interest rates that attracted investors seeking high returns from mortgage-backed securities into lending to these borrowers [Finance C. C., 2007]. The popularity of adjustable rate mortgages was based on the assumption that the borrower would not have to live with the higher payments for long. Given strong home price appreciation in the early 2000s, especially in California, it was often taken for granted that by the time interest rate resets were triggered, borrowers would qualify for a better mortgage based on their newly acquired home equity or they could sell the property and buy something else. Even if this did not work out, the lenders and investors could foreclose on properties potentially worth more than the balance of the loan. As long as home prices continued to spiral upward, subprime lending appeared to pose minimal risks to investors or borrowers [Finance C. C., 2007]. The upward home price trend displayed double digit gains in early 2002 but slowed quickly in the second quarter of 2006.The annual rise in the median sales price of an existing single-family detached home in Californias dropped from 16.6 percent in 2005 to 6.4 percent in 2006. The median price rose only 4.1 percent during the first five months of 2007 compared to the same months of 2006, [Finance C. C., 2007]. The decrease in price increases can be attributed to increased home inventories and increased interest rates. Californias existing single-family, unsold home inventory index rose to
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Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
10.7 months in May 2007, as calculated by the California Association of Realtors [Finance C. C., 2007]. The sluggish rate of price increase left many subprime mortgage holders with limited options to afford their mortgages as a result. At the local government level, this inability to pay mortgages is captured in the rising rates of foreclosure and increased rates of property tax delinquency. As market researcher Robert Martinez, director of research for MarketPointe Realty Advisors, pointed out about this phenomenon, Anyone that's not making their house payment is probably not going to make their tax payment, either," [Fox, 2008]. For 2007, the county of San Diego reported a 20% increase in delinquent tax bills, leaving the county with $143.9 million missing in property tax revenue [Fox, 2008]. A rise in property tax delinquency is often observed as interest rates rise above penalty rates, leading taxpayers to delay payments thus, in effect, using their local governments as a source of credit [Deboer & Conrad, 1988]. Under current California law, homeowners have up to 5 years to repay any delinquent property taxes before it becomes government property and moves into foreclosure proceedings. [The] constant tax liabilities in the face of declining abilities to pay have led to increases in property tax delinquency, [Conrad & DeBoer, 1988]. Tax delinquency is defined as the percent of property taxes levied by a city and uncollected in a given year, [Sternleib & Lake, 1976]. It is important to note that local governments anticipate a portion of property tax revenue to be uncollectible. Uncollectible taxes measure the lack of ability and obstacles of short-term financial management for governments, [Denison, Yan, & Zhao, 2007]. Normally property tax delinquency rates are very smallon average less than 3%, [Deboer & Conrad, 1988]. The property tax delinquency rate is an indicator that can be used to measure the fiscal health of a local government. Groves determined a delinquency rate above 5% is an indication of fiscal problems [Groves, 1980].
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Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
PropertyTaxesinCaliforniaitsRole&KeyLegislation
While mentioned that property taxes are not the main source of revenue for a locality, it is still a significant form of revenue for counties, cities, schools, and special districts in the State of California. The 2007 property tax roll was estimated to be worth $4.4 trillion [Walters, 2007]. Property tax revenue in California was observed to be allocated in the following manner: Counties accounted for 18 percent, cities 11 percent, schools (school districts and community colleges) 53 percent, and special districts 18 percent [Equilization, 2005]. On January 10, 2008, Governor Schwarzenegger declared a fiscal emergency for the state of California as it was facing a reported $16 billion 8 deficit for the 2008-09 fiscal year. Due to legislation that requires the state budget to be balanced, there will have to be reductions in spending and allocations to offset the deficit and revenue decline at the state level. According to McNichol, states tend to cut services, such as education, or increase local taxes [McNichol & Lav, 2008]. However, due to Proposition 13, in California caps are set that determine how much local property taxes can be raised. Both the legislature and governor have proposed cuts in education as part of their solutions to close the gap. Under the current system, education is funded primarily by local government property tax revenue, and the difference in mandatory spending determined by Proposition 98 (ERAF) is supplemented by the state general fund. However, due to legislation that established the Education Revenue Allocation Fund (ERAF), the state is able to offset increased funding responsibility to local governments by reducing their share of property tax funds through
8
Figure taken from California Legislative Analyst Office Report, Highlights of the 2008-09 Analysis, Chief Analyst Elizabeth Hill http://www.lao.ca.gov/analysis_2008/highlights/pandi_highlights_022108.pdf Mauldin 11
Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
redistribution. The local government is limited in what it can do to raise funds due to Proposition 13 and the property tax roll is projected to decline by $107 billion dollars [Lending 2008] due to increased foreclosures and reassessed home values. Essentially, the existence of Proposition 13 renders local governments unable to offset property tax revenue declines through a substantial increase in property tax rates due to the caps in place. This is why Tax Deliquency Rates are relevant to this research: It is imperative that local governments minimize their property tax delinquencyor uncollectible revenuein order to maximize their revenue earning capabilities. In addition, the states plans to further redistribute property tax revenue away from counties, cities, and special districts to assist in funding the gap in education spending further supports why counties need to decrease their rates of uncollectible property taxes. Some of the serious implications that may occur when uncollectible/delinquent property tax rates increase, is a local governments inability to provide services such as libraries and parks, infrastructure maintenance, and a decrease in administrative services. This was seen in the 1990s when some California local governments, such as San Diego County, experienced hiring freezes and reductions in the services they could provide [Fox, 2008].
What will follow is a brief chronology of the events and legislation that are significant or relevant to the issues surrounding property taxation in California. It is important to have an understanding of these issues in order to fully understand the limitations that local governments face in increasing property taxes and why it is necessary to mitigate the rate of uncollectible property taxes. Key Property Tax Legislation Proposition13
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Property taxes in the state of California have been the subject of controversy for as long as the state has assessed taxes. Before Proposition 13 passed in 1978, property taxes could increase dramatically from year to year based on the assessed value of the home. During the seventies, the real estate market experienced dramatic growth and the values of homes increased substantially [Data, 2002]. Because assessors were required to keep assessed values current, property taxes increased at a substantial rate. However, increases in the assessed value of the home were not made every year, thus resulting in a major tax increase for homeowners every few years. Proposition 13 was introduced as a way to provide effective tax relief and protect taxpayers from unanticipated increases in property taxes. The passage of Proposition 13 introduced a 1% cap that restricts the amount to be paid in property taxes at 1% of the assessed value of the home. The assessed value of homes cannot exceed the 1975-76 assessed value and can increase based on the Consumer Price Index (CPI) by no more than 2% per year. If a transfer of ownership takes place or improvements are made, the property then becomes subject to a reassessment at the current market value. The newly assessed value will then increase on a yearly basis not to exceed 2% per year. For FY 1977-78, statewide property tax revenues totaled $10.3 billion and represented 57% of combined city and county general-purpose revenues [Chiang, 2007]. Proposition 13 reduced property taxes by $7 billion in the first year of its implementation [Chiang, 2007]. The decrease in property taxes as a gross percentage of the assessed value of homes has forced local agencies (cities, counties, and other special districts) to find other sources of funding [Data, 2002]. Immediately after the passage of Proposition 13, the State enacted numerous statutes to implement it and to provide state relief to mitigate the impact of the reduction in property tax
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Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
revenues on local governments. Over the years, additional measures were adopted to refine the system and to address State budget shortfalls through various fund shifts. Approval by the voters of Proposition 98 in 1988, which set a minimum annual funding level for K-12 school districts and community colleges, also significantly affected the way property tax revenues are allocated among the local entities.
SB154(Chapter292,Statutesof1978) 9
SB 154 was enacted immediately after Proposition 13s passage to provide direction over how the 1% property tax revenue was to be allocated among all local governments and provide for the distribution of State assistance to make up, in part, for local property tax losses.
AB8(Chapter282,Statutesof1979) 10
AB 8 prescribed the methodology for a one-time adjustment that would permanently establish the property tax base for each local agency for distribution of state assistance and growth in assessed valuation. The statute also prescribed the methodology for redistributing property tax revenues resulting from changes in jurisdictional boundaries and/or services.
Proposition98 i
Proposition 98 establishes a minimum annual funding level for K-12 school districts and community colleges. The goal of Proposition 98 is to provide schools with a guaranteed funding level that grows each year with the economy and the number of students. The guaranteed funding is provided through a combination of state general fund and local property tax revenues. For K12 school districts, if available property tax revenues are insufficient to meet the minimum annual funding level, state law provides for a continuous appropriation from the general fund to backfill any shortfall. For the community colleges, legislative action is needed to appropriate
This portion can be found in the Distribution of Property Tax Revenue Review November 2007, John Chiang Controllers Report (Chiang, 2007) 10 The following portion of legislation information can be found in the Distribution of Property Tax Revenue Review November 2007, John Chiang Controllers Report (Chiang, 2007) Mauldin 14
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Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
funding for any shortfall. Proposition 98 originally mandated funding at the greater of two calculations or tests (Test 1 or Test 2). In 1990, Proposition 111 was adopted to allow for a third funding test in low-revenue years (Test 3). Test 3 was designed so that education is treated no worse in low-revenue years than other segments of the State budget. In years following a Test 3 year, the State is required to return school funding to the long-term Test 1 or Test 2 level, using a mechanism referred to as the maintenance factor.
CreationoftheEducationalRevenueAugmentationFund(ERAF) 11 (Chapters699,700,and1369,Statutesof1992,andChapters68,904,905,906,and1279,Statutesof 1993)
In FY 1992-93 and FY 1993-94, the state permanently shifted $3.6 billion of property tax revenues from counties, cities, and special districts to the newly created Education Revenue Augmentation Fund (ERAF) to fund the schools. The shifts are commonly referred to as ERAF I and ERAF II. The ERAF also receives its share of each years annual tax increment growth based on growth in assessed value. The state general fund benefits from this funding shift because California schools are guaranteed a minimum amount of funding under Proposition 98. For example, if a school district is identified as being basic aid, then it is not entitled to any State funding because its guaranteed minimum funding is fully met with local property tax revenues. As a result of ERAF legislation since 1992, over $65 billion dollars has been redirected to schools from local government property tax revenue funds [Coleman, 2006]. To the extent that property tax revenues do not meet the minimum requirement, the state must fund the difference from its general fund revenues. Therefore, when property tax revenues
The following portion of legislation information can be found in the Distribution of Property Tax Revenue Review November 2007, John Chiang Controllers Report (Chiang, 2007) Mauldin 15
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Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
are redirected from counties, cities, and special districts to fund schools, the states obligation to schools is generally reduced.
AB1290(Chapter942,Statutesof1993) 12
The State enacted the Community Redevelopment Law Reform Act of 1993 (AB 1290), which requires redevelopment agencies to return a portion of their tax revenues to affected taxing jurisdictions in the form of a mandatory pass-through funds for redevelopment projects adopted or amended on or after January 1, 1994. Prior to January 1, 1994, taxing jurisdictions could either negotiate pass-through payments with a redevelopment agency or elect to receive the annual inflationary increases in assessed valuation (up to 2%) before a project is adopted. For redevelopment projects adopted before January 1, 1994, the pass-through funds have no effect on the States obligation to schools. An Attorney General opinion, dated October 25, 1990, states that pass-through agreement payments do not constitute an allocation of property tax revenue because the redevelopment agency revenues are collected under the Health and Safety Code rather than the Revenue and Taxation Code. For projects adopted or amended on or after January 1, 1994, the amount of passthrough funds redirected from the redevelopment agencies to the schools counts in satisfaction of the States funding obligation to schools. This is because of a provision of AB 1290 that specifies that a portion of such funds are to be used for calculation of the schools revenue limits.
StateLocalAgreementsinFY200304andFY200405 13
In FY 2003-04 and FY 2004-05, the State reached agreements with the local governments in a series of financial arrangements, some of which involved complex fund shifts or fund
The portion following of legislation information can be found in the Distribution of Property Tax Revenue Review November 2007, John Chiang Controllers Report (Chiang, 2007) The following portion of legislation information can be found in the Distribution of Property Tax Revenue Review November 2007, John Chiang Controllers Report (Chiang, 2007) Mauldin 16
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Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
transfers. Following are the state local financial arrangements that are relevant to the issues identified in this report. Triple Flip (Chapters 211 and 610, Statutes of 2004) The Triple Flip was a funding mechanism devised to free up an existing revenue stream and establish a dedicated funding source to pay for the deficit-financing, or economic recovery, bonds authorized by the voters in 2004. The Triple Flip allowed the State to provide a funding stream for repayment of the loans without raising the overall level of taxes. Ultimately, the state General Fund pays for the bond repayments. The Triple Flip entailed the following financial transactions: 1. Flip 1: A -cent reduction in the city and county share of the local sales tax with the simultaneous establishment of a new -cent state sales tax dedicated to deficit-bond repayments. 2. Flip 2: A shift of property taxes from the support of schools to cities and counties to offset their sales tax loss. 3. Flip 3: The state General Fund is to backfill the property tax revenues diverted from K-12 school districts and community colleges. Review of Distribution and Reporting of Local Property Tax Revenues Property Tax Allocation Program Vehicle License Fee (VLF) Swap (Chapters 211 and 610, Statutes of 2004) The Budget Act of 2004 prescribed a swap of city and county Vehicle License Fee (VLF) revenues for property tax revenues, effective for FY 2004-05. Beginning in 1999, the VLF rate for taxpayers was reduced from 2% to 0.65%. The Legislature authorized appropriations from the General Fund to make up for the reduction in VLF revenues to the local governments. During budget negotiations on the 2004-05 Budget, the State and local governments agreed to the VLF Swap, which consisted of the following:
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1. Reduction of the VLF rate from 2% to 0.65%. 2. Replacement of reduced VLF revenues by a shift of school district and community college property tax revenues beginning with each countys ERAF, thus providing the local governments with a stable funding source. 3. If the ERAF contains insufficient funds, a shift of the AB 8 allocation of property tax revenues from non-basic aid K-12 school districts and community colleges to local governments. A nonbasic aid school district receives State funding when its property tax revenue is insufficient to meet the guaranteed minimum funding level. A basic aid school district is a district that is not entitled to any State funding because its guaranteed minimum funding is fully met with local property tax revenues. 4. Backfill by the state General Fund of the property tax revenues diverted from K-12 school districts and community colleges. The State enacted SB 1096 (Chapter 211, Statutes of 2004) to accomplish the objectives listed above. In the November 2004 election, voters approved Proposition 1A, which set the VLF rate at 0.65% as a revenue source for counties and cities. ERAF III (Chapters 211 and 610, Statutes of 2004) In 2004, the State reached an agreement with counties, cities, redevelopment agencies, and special districts in which the local governments agreed to contribute an additional $1.3 billion per year in FY 2004-05 and FY 2005-06 into the ERAF, an agreement commonly referred to as ERAF III. In exchange, Proposition 1A was placed on the November 2004 ballot by the Legislature to protect local revenues from additional reallocations. The voters approved the proposition. Although Proposition 1A was passed, ultimately, it would fail to provide additional
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sources of revenue or funding for local governments, nor would it reduce previous ERAF I and II legislation (Coleman, 2006). ERAF III shifts ended in FY 2006-2007. The total annual impact of all ERAF shifts of revenue away from counties, cities, and special districts, for FY 2006-2007 was estimated to be $6.7 billion (Coleman, 2006.) In light of the recent announcement of education spending cuts at the state level, local governments have an even greater impetus to reduce the rate of uncollectible property taxes and assume a proactive approach in understanding what factors may leave their communities at a greater risk for property tax revenue decline. In an effort, to prepare for the future events that may arise as local governments may be expected to shift funds back into ERAF, to offset the state general fund spending cuts.
Data
Annual data on current year secured property tax revenue collection from 1993-2007 was collected from the California State Controllers Office: http://www.sco.ca.gov/col/taxinfo/tcs/index.shtml. It is important to note that only the secured property tax roll was used. 14 The demographic information for this research was obtained from U.S. Census Data, American Community Surveys annual and multi-year information from 2000-2006. Due to limitations in obtaining comprehensive American Community Survey information for all 58 California Counties the data set includes 77 observations from 2000-2006 of the following 11 counties: Alameda, Contra Costa, Los Angeles, Orange, Riverside, Sacramento, San Bernardino, San Diego, San Francisco, Santa Clara, and Tulare. These 11 counties account for 74% of the states property tax base 2000-2006.
The term "Secured" simply means taxes that are assessed against real property, (e.g., land or structures). vs. "Unsecured" which refers to property that can be relocated and is not real estate Mauldin 19
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Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
Chart 1
They account for $179,884,865,658 of the total $ 243,480,478,713 property tax charges issued. Furthermore, the total population estimate within these counties is 27,241,934 of the total California population of 37,662, 518. These 11 counties are among the most populous and diverse within the state. It is important to note this because the variables represented in this analysis are most reflective of the greater macroeconomic conditions associated with property tax delinquency rate in contrast to microeconomic factors that may weigh heavier on the variables as in smaller communities. Based on this information one can assume that the data and variables obtained for this analysis are fairly comprehensive and will provide a fair and meaningful representation for these counties.
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Chart2.DataobtainedfromAmericanCommunitySurvey,USCensus
Total California Population 2007 Estimate
28%
11 Counties 58 Counties
72%
Methodology
The property tax delinquency rate was selected as an indicator because it is likely to vary with macroeconomic conditions [Deboer & Conrad, 1988] and is positively correlated with an increase in foreclosure [Sternleib & Lake, 1976]. To determine the percentage of property tax revenue uncollectible which served as the property tax rate of delinquency, the actual percentage of revenues collected provided in the table was subtracted from 100. The resulting difference elicited the percentage of property tax uncollected. The goal of this analysis was to determine if there was a statistically significant relationship between the dependent variablepercentage of property tax uncollectedand the following independent variables: percent of population Black or African-American only, percent of population Hispanic, unemployment rate, annual percent change in population, median household income, median home price, Educational Attainment levels of population 25+ (percent high school graduates or higher), and the percent Bachelors degree or higher. This information was obtained for each of the 11 counties from the American Community Surveys & US Census Data for 2000-2006. The information was then put into an
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Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
Excel spreadsheet and sorted alphabetically by county and listed in descending order by year from 2006-2000. For each of the independent variables a prediction (increase or decrease) was made about their projected affects on the percentage of tax revenue that is uncollectible (Appendix III). The data was then imported into STATA IC 10 into the Data Editor and loaded for the following analysis. The first analysis performed on the data was a correlation study to verify and confirm that correlations among variables made sense. 15 A variable was determined to be correlated if it elicited an absolute value of greater than 0. The following items were positively correlated: Median household income was positively correlated to median home price, percent high school graduates or higher, and percent Bachelors degree or higher. Median home price was positively correlated to percent Bachelors degree or higher. The percent Bachelors degree or higher was positively correlated with change in population. These correlations confirm the following ideas: As income increases, the amount of home one can afford also increases. In addition, it is widely known that those with more education tend to make more in their lifetime on average than those without an educational degree. It also supports the idea that the state of California tends to attract a growing population of college degree holders. The following variables were negatively correlated: The percent Hispanic population was negatively correlated with percent of high school graduates or higher and percent Bachelors degree or higher. This was rather interesting as it suggests that the Hispanic population age 25+ is less likely to obtain formal education degrees (high school diplomas or Bachelors degrees).
15
Please see Appendix 1 for Table of Uncollectible Correlation Analysis. Mauldin 22
Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
After this step, a simple linear regression model was performed on the data, as well as a general statistical information summary. This information can be seen below.
Table1LinearRegressionofUncollectiblePropertyTaxes
Dependent Uncollectible Independent Variable Rate of unemployment Median Household Income Median Home Price % of Population Black or African % of Population Hispanic Percent of Population with High School Degree or higher Percent of Population with Bachelors Degree or Higher Annual % Change in Population Coefficient Std. Err. t P>t
-0.00021 1.94E-05 3.56E-06 0.117606 0.008306
0.056927 1.55E-05 1.07E-06 0.030652 0.022549
0 1.25 3.32 3.84 0.37
0.997 0.214 0.001 0 0.714
-0.02655
0.041638
-0.64
0.526
-0.0878 0.296682
0.028849 0.131044
-3.04 2.26
0.003 0.027
Table 2 Statistical analysis of both the dependent and independent variables
Variable uncollectible Rate of unemployment Median Household Income Median Home Price % of Population Black or African % of Population Hispanic Percent of Population with High School Degree or higher Mauldin 23 Obs 77 77 Mean 2.21039 7.255844 Std. Dev. 1.067099 1.717594 Min 0.35 3.9 Max 6.14 11.1
77 77 77 77
56636.05 386118.8 6.568961 30.97312
12466.78 182585 3.675179 12.65331
33647 104859 1.1 13.75
85978 806700 14.3 55.83
77
80.39156
6.805481
62
89.8
Property Tax Revenue Decline in the State of California and the Implications April 10, 2008 Percent of Population with Bachelors Degree or Higher Annual % Change in Population
77 77
30.53117 1.638961
11.03992 1.073538
10.5 0.18
51 4.75
To determine if the variables were statistically significant at the 95% confidence level, an analysis was performed. The data values ranged from - to - or to . If they excluded 0 it was determined to be statistically significant at the 95% confidence level. If the values ranged from - to including 0, it was determined to be statistically insignificant at the 95% confidence level.
RESULTS
Through an analysis of the variables it was determined that the following variables were statistically significant: median household , percent of population Black or AfricanAmerican, percent Bachelors degree or higher, change in population. Out of all 8 variables it is interesting to note that these were the only ones which proved to be statistically significant at the 95% confidence level. From the regression it is interesting to see that the only variable to promote a decline in the property tax delinquency rate is percentage of population holding a Bachelors degree or higher. For every 1% of uncollectible or delinquent tax revenue, the presence of a population with a Bachelors degree or higher decreases it by -0.09%. What can be inferred from the data is that in counties with a higher presence of the population with Bachelors degree or higher there should be lower rates of property tax delinquency. In contrast the following variables increase property tax delinquency rate: median home price, percent of population Black or African-American, and change in population. These increase delinquency by 0.036% (for every $100,000), 0.12%, and 0.30%, respectively. The coefficient for the median home price was relatively small at 3.56E-06. To make it more
Mauldin 24
Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
relevant, this number was multiplied by $100,000. For every $100,000 increase in median home value in a county the property tax delinquency rate increases by 0.036%. In an examination of race and its effects on the property tax delinquency rate, the only variable that was statistically significant was Black or African-American. It was found that for every 1% of Black or African American population within a county the property tax delinquency rate increases by 0.12%. This incidence can partially be explained by historical factors such as the prevalence of lower incomes and poor credit history. As a result many blacks were limited to subprime mortgages for financing their homes. For many Blacks or African Americans who live in low-income, minority areas with limited credit history, they pay more interest on mortgages, [Tedeschi, 2007]. According to data from the Federal Reserve, 55% of blacks who took out purchase mortgages in 2005 got higher-cost loans, compared with about 17% of whites and Asians, [Kirchoff & Keen, 2007]. As these higher-cost subprime loans reset many blacks or African-Americans are unable to afford their mortgage payments, and consequently this leads to higher rates of property tax delinquency. According to a study done by Deboer & Conrad in 1988, people may utilize the local government as a form of credit by forgoing payments on property tax. This may have very well been the case in counties or communities with a higher black or African-American presence The last variable to be statistically significant was the change in population. For every 1% increase in annual population change the property tax delinquency rate increases by 0.30%. This result was unexpected due to the historic correlation between population and economic activity. As population increases usually economic activity and vitality are present thus leading to a broader property tax base. Currently, no speculation can be made to interpret the meaning of this result.
Mauldin 25
Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
Conclusion
In conclusion, the goal of this research, though limited in scope and nature, was to examine the property tax revenue decline, in relation to property tax delinquency, in the state of California. Therefore the property tax delinquency rate of 11 California counties was examined to see if there was a statistically significant relationship between the county property tax delinquency rate and a host of independent variables that can be classified under Race, Age, and Socioeconomic Indicators. Through regression, it was determined that the following variables were statistically significant: median home price, percent of population Black or African-American, percent Bachelors degree or higher, and change in population. It was found that higher median home prices, higher black or African-American communities, or a greater change in population can increase property tax revenue decline. However, in contrast the presence of educated adults age 25+ with a Bachelors degree or higher decreases the property tax delinquency rate by 0.088%. It is important to understand these relationships, as the state of California faces a $16 billion budget deficit and may look to local governments to support more of the educational funding. For future research, it would be interesting to look at property tax roll and minorities as it relates to equity in order to gain further insight into the complexities associated with the effects of the subprime mortgage market on minority populations within communities.
WorksCited
Chiang, J. (2007). Distribution and Reporting of Local Property Tax Revenue Review Report Property Tax Allocation Program. Sacramento: California State Controller. Mauldin 26
Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
Christie, L. (2008, January 29). Real Estate Mortgage Meltdown. Retrieved March 10, 2008, from CNNMoney.com: http://money.cnn.com/2008/01/29/real_estate/foreclosure_filings_2007/ Coleman,M. (2006). Fact Sheet: The ERAF Property Tax Shift. Retrieved April 16, 2008, from League of California Cities: http://www.ci.covina.ca.us/news/ERAF_facts.pdf Conrad, J., & DeBoer, L. (1988). Rural Property Tax Delinquency and Recession in Agriculture. American Journal of Agricultural Economics Vol.70, No.3. , 553-559. Data, C. T. (2002). History of Taxation. Retrieved March 10, 2008, from California Tax Data: http://www.californiataxdata.com Deboer, L., & Conrad, J. (1988). Do High Interest Rates Encourage Propety Tax Delinquency? National Tax Journal , 555-560. Denison, D., Yan, W., & Zhao, Z. (. (2007). Is Management Performance a Factor in Municpal Bond Credit Ratings? The Case of Texas School Districts. Public Finance & Budgeting , 86-98. Equilization, C. S. (2005, September). California Property Tax an Overview. Retrieved March 10, 2008, from Boad of Equilization: http://www.boe.ca.gov Finance, C. C. (2007). California Economic Indicators: Real Estate Woes Persist. Sacramento: California Department of Finance. Finance, C. D. (2007). California Economic Indicators: Disappointing Real Estate News. Sacramento: Department of Finance. Fox, Z. (2008, January 25). Property Tax Delinquencies Rise: North County Times. Retrieved March 30, 2008, from North County Times: http://www.nctimes.com/articles/2008/01/26/news/top_stories/22_36_591_25_08.txt Groves, S. (1980). "Financial Trend Monitoring System" Handbook 2 of Evaluation of Local Government Financial Condition. Washington, D.C.: International City Management Association. Kirchoff, S., & Keen, J. (2007, April 26). In 2005, half of minorities purchased their homes with subprime loans Today, delinquency rate are soaring in minority neighborhoods; Across the USA, the same story: 'I got into a bad deal'. USA Today , p. 1B. Lending), C. (. (2008, February 22). The Impact of Court Supervised Modifications on Subprime Foreclosures. Retrieved March 10, 2008, from Center for Responsible Lending: http://www.responsiblelending.org/ Lin, J. (2007, October 10). Bee Capital Bureau. Retrieved March 10, 2008, from Sacramento Bee: http://www.sacbee.com/111/story/424058.html Lin, J. (2008, February 15). Emergency cuts likely today. Retrieved April 1, 2008, from Sacramento Bee: http://www.sacbee.com/capolitics/story/714631.html McNichol, E. C., & Lav, I. J. (2008). 20 STATES FACE TOTAL BUDGET SHORTFALL OF AT LEAST $34 Billion in 2009; 8 Others Expect Budget Problems. Washington D.C.: Center on Budget & Policy Priorities. Schloemer, E., Li, W., Ernst, K., & Keest, K. (2006, December). Losing Ground Foreclosures in the Subprime Market and Their Cost to Homeowners. Retrieved April 1, 2008, from Center for Responsible Lending: http://www.responsiblelending.org/pdfs/foreclosure-paper-report-2-17.pdf Sternleib, G., & Lake, R. W. (1976). THE DYNAMICS OF REAL ESTATE TAX DELINQUENCY. National Tax Journal , 261-271. Tedeschi, B. (2007, February 25). New Help for Subprime Mortgages. The New York Times , p. 12. Walters, D. (2007, August 27). Capitol Alert. Retrieved April 1, 28, from Sacramento Bee: http://www.sacbee.com/772/v-print/story/346979.html
Mauldin 27
Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
Appendix
AppendixICorrelationTablebyVariable AppendixIICountyProfiles AppendixIIIIndependentVariablePredictions
Mauldin 28
Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
AppendixICorrelationTablebyVariable
Table 3. Correlation Statistics of Uncollectible Rate and Independent Variables
% of population Black or AfricanAmerican Percent of Population with Highschool degree or higher Percent of Population with Bachelor's degree or higher
uncollectible rate uncollectible rate unemployment rate median household income median home price % of population Black or AfricanAmerican % of population Hispanic Percent of Population with High school degree or higher Percent of Population with Bachelor's degree or higher Annual % Change in Population 1.00 0.20
unemployment rate
median household income
median home price
% of population Hispanic
Annual % Change in Population
1.00
-0.40 -0.33
-0.34 -0.27
1.00 0.73 1.00
0.15
0.06
-0.02
0.01
1.00
0.49
0.35
-0.65
-0.54
-0.37
1.00
-0.38
-0.40
0.78
0.63
0.34
-0.90
1.00
-0.58
-0.32
0.80
0.84
0.14
-0.82
0.78
1.00
0.47
0.10
-0.51
-0.66
-0.13
0.41
-0.40
-0.70
1.00
AppendixIICountyProfiles
Mauldin 29
Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
Table 4. Educational Attainment by Percentages by County (Population, Age 25+)
Highschool Graduateor graduate (includes professional Associate's Bachelor's degree equivalency) degree degree County Alameda 20.03 6.74 23.16 15.36 ContraCosta 19.94 7.47 23.52 14.33 LosAngeles 20.84 6.42 17.89 9.23 Orange 17.79 7.88 22.05 11.29 Riverside 27.28 7.35 11.95 6.72 Sacramento 22.98 8.67 18.75 8.64 San 27.13 7.92 11.05 6.04 Bernardino SanDiego 19.10 7.50 19.58 12.25 San 14.39 5.73 30.83 18.22 Francisco SantaClara 16.94 7.68 25.44 18.12 Tulare 24.82 6.76 8.34 3.78
Percent high school graduate orhigher 84.76 86.49 73.39 80.89 78.59 84.59 75.71 83.06 84.60 85.81 64.46
Percent bachelor's degreeor higher 38.50 37.85 27.14 33.36 18.70 27.36 17.11 31.83 49.06 43.56 12.11
Table 5. Economic Indicators by County
Median household Unemployment income (dollars) County Rate Alameda 7.61 62008.57 ContraCosta 7.26 66681.30
Mauldin 30
Mean Median household HomeValue income (dollars) (dollars) 79738.57 477426.57 86480.84 464670.84
Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
LosAngeles Orange Riverside Sacramento San Bernardino SanDiego San Francisco SantaClara Tulare
7.76 5.30 7.31 7.39 8.16 5.30 7.04 7.37 9.71
46677.57 63848.57 48365.14 50572.29 47220.57 53157.43 61530.43 80333.71 37260.71
66574.14 84460.86 63096.57 62668.29 59437.00 69747.57 86891.00 101735.71 49921.71
357141.00 454199.43 250979.57 259822.57 223337.86 398684.00 632873.57 598985.14 143764.00
Table 6 Social Indicators by County
County Alameda Contra Costa LosAngeles Orange
Mauldin 31
%Non Family Average Medianage %21Years %65Years& %ofFamily Household household Average size familysize (years) andOver Over Households Single 35.43 71.26 10.04 63.97 36.03 2.76 3.44 36.10 32.89 34.23 70.74 67.95 69.09 10.46 9.64 9.98 66.77 67.42 70.46 33.23 32.58 29.54 2.78 3.05 3.03 3.40 3.75 3.59
Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
Riverside Sacramento San Bernardino SanDiego San Francisco SantaClara Tulare
32.39 33.60 30.29 33.96 38.27 35.36 28.71
66.18 68.25 63.53 69.00 82.76 71.34 61.76
11.84 10.65 8.21 14.27 14.10 9.85 9.19
73.55 65.24 75.71 65.64 44.58 69.88 78.14
26.45 34.76 24.29 34.36 55.42 30.12 21.86
3.02 2.70 3.25 2.75 2.28 2.92 3.33
3.53 3.33 3.73 3.38 3.22 3.47 3.75
Table 7. Race & Ethnicity by County
%White County ONLY Alameda 41.37 ContraCosta 47.72 LosAngeles 29.89 Orange 48.98 Riverside 47.73 Sacramento 55.06 San 40.38 Bernardino SanDiego 53.04 San 43.53 Francisco SantaClara 41.34 Tulare 39.38
%Blackor African American %Asian ONLY ONLY 13.41 22.92 11.33 18.00 8.88 12.40 1.44 14.86 5.60 4.17 9.76 12.57 8.62 5.14 6.68 2.40 1.37 5.03 9.66 32.24 28.35 3.32
%Hispanic orLatino (ofany race) 20.32 20.18 46.63 32.16 39.28 17.77 42.98 28.91 14.04 24.73 53.88
AppendixIIIVariablePredictions
PredictedOutcomeonDelinquencyRate (%Uncollectible) Demographic Statistically Significant?
IndependentVariable
Mauldin 32
Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
%ChangeinPopulation
Yes,increased AspopulationincreasesIwouldpredictthe propertytaxroll&basetoincrease.Signsof propertytax economicgrowthinacommunityareoften delinquencyrate. mirroredbyanincreaseinpopulation.In contrastsupportingandecreasein uncollectible Anincreaseinunemploymentwillincrease %Uncollectible. Anincreaseinpopulation21yearsto64 yearswouldincreasetherateof Uncollectibleduetomostsubprime mortgageholdersbeing1sttime homeownerswithlittlecredithistory. Ipredictedthatiftherewasahigher populationofpopulationthatwas historicallymorestableandcurrent homeownersthentherateofuncollectible woulddecline. Race Iwouldpredictadecreaseinthe delinquencyrate.Historically,Caucasians tendtomakemoreincomethanother ethnicities&minorities. No No
UnemploymentRate %21YearsandOver
%65Years&Over
No
%Whiteonly
No
%BlackorAfricanAmerican
Yes,increased Iwouldpredictanincreaseinthe propertytax delinquencyrate.Tendtomakelessin delinquencyrate incomethancounterparts.Inadditionthe lowhomeaffordabilityrateinCaliforniamay haveincreasedthisdemographicsuseof subprimeloanstoaideinfirsttimehome ownership. Iwouldpredictadecreaseinthe delinquencyrate.Ofallminoritiesmost equivalenttoCaucasiansinincomeand educationlevel. No
%Asian
Mauldin 33
Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
HispanicorLatino(ofany race)
No Iwouldpredictanincreaseinthe delinquencyrate.Tendtomakelessin incomethancounterparts.Inadditionthe lowhomeaffordabilityrateinCaliforniamay haveincreasedthisdemographicsuseof subprimeloanstoaideinfirsttimehome ownership. SocialMeasure Iwouldpredicttherateofdelinquencytogo No down.Perhapsgreatervestedinterestin communityduetopropertytaxrevenue providingalargeportionofschoolfunding.
%ofFamilyHouseholds
%NonFamilyHouseholds Single
Iwouldpredictagreaterrateofpropertytax No delinquencyduetotheroleofspeculative investorsinCalifornia'shousingmarkettend tobenonfamilyhouseholds. EducationalAttainment Duetolesseducationtendtomakeless income,lesslikelytobehomeownersandif theyarewouldbeconsideredinthelow incomebracketwithlittlecredithistory.
Lessthan9thgrade
No
9thto12thgrade,no diploma
Duetolesseducationtendtomakeless income,lesslikelytobehomeownersandif theyarewouldbeconsideredinthelow incomebracketwithlittlecredithistory.
No
Highschoolgraduate (includesequivalency)
No Althoughtheyareahighschoolgraduate thepopulationinthisbracketmakes significantlylessinincomethen counterpartswithcollegeexperience.Dueto thecorrelationbetweenincomeand educationthisdemographicislesslikelyto behomeowners.Iftheyarewouldbe consideredinthelowincomebracket.
Mauldin 34
Property Tax Revenue Decline in the State of California and the Implications April 10, 2008
Somecollege,nodegree
Duetolesseducationtendtomakeless incomethancounterparts,withcollege degrees.
No
Associate'sdegree
Wouldexpectdelinquencyratetodecrease. No Degreeattainmentsignifiesgreatersenseof responsibilityperhapsmorelikelytopay propertytaxes,inadditiontoincrease income.
Wouldexpectdelinquencyratetodecrease. Degreeattainmentsignifiesgreatersenseof responsibilityperhapsmorelikelytopay propertytaxes,inadditiontoincreaseincome.
Bachelor'sdegree
No
Graduateorprofessional degree
Wouldexpectdelinquencyratetodecrease. No Degreeattainmentsignifiesgreatersenseof responsibilityperhapsmorelikelytopay propertytaxes,inadditiontoincrease income. Thegreaterthepopulationofacommunity illustrateseducationattainmentincreases thelikelihoodofpropertytaxrevenue payment. Thegreaterthepopulationofacommunity illustrateseducationattainmentincreases thelikelihoodofpropertytaxrevenue payment. Economic No
Percenthighschool graduateorhigher
Percentbachelor'sdegree orhigher
Yes,decreased propertytax delinquencyrate.
MedianIncome MedianHomePrice
AsmedianincomeincreasesIwouldexpect adecreasein%uncollectible AsmedianhomepriceincreasesIwould expectanincreaseinuncollectible.Thisis duetothelowhomeaffordabilityratein California
No Yes,increased propertytax delinquencyrate
Mauldin 35