Budget Challenges are Here to Stay

Recently, most Owosso property owners received news of a tax break when they opened their 2010 Notice of Assessment. The taxable value of homes in our City went down an average of about 6 percent. Upcoming tax bills from the City (which also reflect school and county taxes) will be going down for most homeowners, but the amount of the decrease varies. As individuals, this is welcome relief at a time when all of us face a difficult economic situation, too many residents struggle to find a good paying job, and record numbers of homeowners are trying to stave off foreclosure. Having our property taxes go down will be a help in these tough times.

However, when we look at the reduction in property taxes from a city-wide standpoint, we see both some immediate problems and some long-term challenges. Well over half of the City's General Fund revenues come from the local property tax. The drop in property values results in a reduction of about $230,000 in revenues this year. This follows a $110,000 drop last year. In fact, the recent reductions in property values take the City back to a revenue level they earned in 2004. The following table outlines the State Equalized Value (SEV) and the taxable value of property (in millions of dollars), the tax rate (millage) and property tax revenues (also in millions) for the last seven years. The taxable value of property lags the SEV because of Proposition A, which limits the rate at which property tax assessment can rise. The millage rate has declined slightly over time because of the Headlee amendment, which limits the rate at which city tax revenues can increase. In any case, the decline in tax assessments while offiering relief for property owners, puts a burden on the City of Owosso to cut expenses commensurate with the drop in revenues (click on the "budget" label to the right to see more background on how this comes at the same time as other financial challenges to the City).

Impact of Prop A on taxes and revenues. State ballot Proposition A, passed in 1994, overhauled and reduced property taxes in Michigan and changed the way we finance education in our state. However, its passage came during a period of relative economic health and steadily rising property values. One impetus for Prop A was the relief it offered from increases in property tax assesments that led to higher tax bills. Prop A contained a provision, reasonable at the time, that the taxable value on one's property should not increase faster than the rate of inflation, or 5 percent, whichever was less. Again, this was good news for existing homeowners, and while it limited the growth in tax revenues for local governments, their revenues still increased annually, and at a rate that could be estimated with some accuracy.

Also, Prop A required the taxable value of a home, upon sale, to be reset to reflect the news sales price (this is now called the pop-up tax ) and catch up on the lag between SEV and taxable value created by Prop A's limits on increased assessment. Again, while this was sometimes a surprise to new homeowners, it did help keep local government revenues increasing, albeit more slowly, over time.

In the last three years, Michigan changed in ways that the authors of, or voters for, Prop A probably never anticipated. First, property values stopped rising, and then dropped dramatically. While at first some people's assessments continued to rise despite the economic malaise, as the taxable value continued to make up the lag behind SEV, by 2010 most homeowners will now see an actual drop in their taxable value, thus the tax savings for individuals and the lost revenue for the City. At the same time that property tax revenues dropped, the housing finance crisis brought the sale of new homes to a virtual stop, and thus there were few new re-assessments from sales.

But the problem will be with us for years. . . Just like a family or business with less income, the reduction in property tax revenues has required the City to review priorities and make some painful cuts in spending. The budget process for the City of Owosso has officially started, and this year promises to be more difficult than last year. However, unlike a business anticipating an upturn in the economy, the City cannot look forward to a quick restoration in tax revenues if and when the economy recovers.

Remember the limitations on the increase in taxable value set by Prop A? They apply whether we are in a boom period or in a recovery period. Thus, if the economy turns around in 2011, home values stabilize and then begin to increase, the most our taxable value can increase is 5 percent; and given (thankfully) the era of low inflation we are in, the cap on increase in assessed value will probably be less. Thus, while it has taken only two years for property values to dive more than 20% it will take at least 4 years, and probably more, for taxable values to recover. The highwater mark for property tax revenues was 2008, it may be a decade until we return to that level.

Given the lasting impact of the recent downturn in property values, it will be necessary for the City to look at long-term reforms and reductions in public services. If there are short-term fixes available, they will only put off the necessity of making permanent cuts in city expenditures.