The 2017-18 Budget: Evaluating the State-County Assessors' Partnership Agreement Program

The 2017-18 Budget: Evaluating the State-County Assessors’ Partnership Agreement Program MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • MARCH 2017 Summary The property tax is a major source of revenue for local governments, raising more than $55 billion annually for counties, cities, special districts, and schools and community colleges (“schools”). Counties administer the property tax. While most local governments that receive property taxes reimburse the county for their share of administrative costs, schools are not required to pay these costs. Instead, counties pay the schools’ share of costs as well as their own. Statewide, counties pay about two-thirds of the cost to administer the tax while receiving less than one-third of the revenues they collect. As a result of this imbalance, there have been long-standing concerns that counties might not fund property tax administration at an appropriate level. The state budget could be affected if property tax administration is inadequately funded because local property taxes that go to schools generally offset required state spending on education. In recognition of concerns about the adequacy of funding for county assessors, the 2014-15 Budget Act established a three-year pilot program, known as the State-County Assessors’ Partnership Agreement Program (SCAPAP). Under this program, the state allocated grants to eight county assessors’ offices to improve local administration of the property tax. A primary goal of SCAPAP was to measure whether and to what extent property tax revenues would increase if county assessor funding were increased. In this report, we look at data from the first two years of SCAPAP and attempt to gauge the program’s effect on property tax revenues. Our analysis suggests the effect of SCAPAP on property taxes has been modest. There is even a good chance the state’s fiscal benefit from SCAPAP did not exceed state costs for the program. Potential to realize additional property tax revenue, however, is not the only factor the Legislature should consider in deciding whether changes to county assessor funding are warranted. The current funding structure for county property tax administration, for example, raises important questions about intercounty disparities. Should the Legislature wish to address this issue, the most straightforward approach would be to allow counties to charge schools for their share of property tax administration costs. 2017-18 BUDGET 2 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET BACKGROUND Property Tax Allocation counties receive above-average shares. Los Angeles and San Francisco Counties, in contrast, get a Property Tax a Key Local Government Revenue larger share of the countywide property tax and Source. The property tax is California’s second largest their schools receive smaller shares. source of revenue, raising more than $55 billion Property Taxes Also Affect State Budget. annually for local governments—including cities, Though considered a local tax, the property tax counties, special districts, and schools. Figure 1 shows has a major impact on the state’s budget. Under how property tax revenues were distributed statewide the state’s education finance system, the amount to these governments in 2014-15. In future years, the of school funding each year is set according to share of the property tax allocated to schools will Proposition 98 and paid for with a combination increase to more than 50 percent due to the end of a of local property tax revenue and state General temporary adjustment known as the “triple flip” and Fund revenue. Increases in property tax revenues the dissolution of redevelopment. generally allow for decreases in state General Fund Local Governments’ Shares of Property Tax spending on education. The state therefore benefits Revenues Vary. The distribution of property taxes from additional local property taxes. In 2015-16, shown in Figure 1 reflects statewide averages. local property taxes offset about $19.5 billion in The share of property taxes allocated to specific required state spending on education. (In certain counties, schools, and other local governments, instances, under Proposition 98’s so-called “Test 1” however, varies across the state. Among other calculation, school property tax revenue increases factors, this variation reflects taxation decisions of the overall level of school funding and does not the mid-1970s. In some counties, the distribution offset the required state contribution.) of property tax revenues differs considerably from the distribution shown in Figure 1. For example, Property Tax Administration Orange, San Mateo, and Santa Clara Counties get a smaller share of the countywide property tax than Counties Administer the Property Tax. County the share shown in Figure 1 and schools in these assessors determine the taxable value of property, county tax collectors bill property owners, and county auditors distribute the revenue among Figure 1 local governments. Statewide, county spending for Allocation of Property Taxes assessors’ offices totals around $550 million each Among Local Governments year. County costs for property tax collectors and 2014-15 auditors are unknown but much smaller. Other Paying for Property Tax Administration. For most of the state’s history, counties paid all property tax administration costs using county resources. After passage of Proposition 13 in 1978 and some Schools changes to state-county program responsibilities, Counties however, counties argued that they did not have sufficient revenues to continue paying all these costs. In 1990, the state authorized counties to split these costs among all governments receiving property tax Cities revenues, including schools (Chapter 466 of 1990 www.lao.ca.gov Legislative Analyst’s Office 3 2017-18 BUDGET [SB 2557, Maddy]). One year later, in response to would also affect the state because most property concerns from schools—and related litigation—the tax revenue allocated to schools offsets required state prohibited counties from charging schools, in state spending on education. effect requiring counties to cover the schools’ share Inadequate Funding Also Raises Other of these costs (Chapter 75 of 1991 [SB 188, Maddy], Concerns. The state also has a policy interest in and Chapter 333 of 1991 [SB 282, L. Greene]). funding to county assessors being sufficient to Cost Allocation System Raises Concerns. ensure a fairly administered property tax system, Making counties responsible for covering the with accurate determinations of value, complete schools’ share of property tax administrative property tax rolls, accessible records, and full costs has prompted concerns that counties might compliance with the laws governing property not fund these activities appropriately. This is tax administration. Such a system likely would because counties pay a large share of property tax function more efficiently, be viewed more favorably administrative costs (often more than two-thirds) by taxpayers, and would help ensure that property yet receive a small share of property tax revenues owners in different counties are treated similarly. (often less than one-third). County assessors have a State-County Assessors’ statutory obligation to administer the property tax fairly and effectively. As part of county government, Partnership Agreement Program however, funding for county assessors’ offices In recognition of concerns about the adequacy depends on annual budget decisions by county of funding for county assessors, the 2014-15 Budget boards of supervisors. Given the many competing Act established a three-year pilot program known as uses for county resources, it is reasonable to assume the State-County Assessors’ Partnership Agreement that supervisors are more likely to approve assessor Program (SCAPAP). Under this program, the state office spending proposals that generate enough allocated grants to eight county assessors’ offices county benefits to offset the county’s costs. to improve local administration of the property Counties’ Shares of Costs Vary. As discussed tax. The eight participating counties and their above, the share of property taxes received by schools respective grant amounts are shown in Figure 2. varies considerably from county to county. This Each participating county was required to match the means that the share of property tax administration state grant dollar for dollar. Funds were to be used costs covered by counties also varies significantly, to identify newly constructed or sold properties, with some counties paying a comparatively high share of costs. In these counties, the potential that Figure 2 county assessors are underfunded is heightened. Funding Allocations to Beyond concerns over funding, this situation also Participating County Assessors raises a question of fairness: should some counties (In Thousands) be required to pay a higher share of property tax County 2014-15 2015-16 2016-17 administration costs than others, leaving those counties with less funding for other public services? Fresno $825 $619 $619 Madera 150 150 150 There does not appear to be a compelling rationale Monterey 200 200 200 for this differential treatment. Riverside 1,875 1,875 1,875 Inadequate Funding Could Mean Less San Benito 150 150 150 Property Tax Revenue. If tax property tax San Francisco 300 460 525 Santa Clara 785 785 785 administration is not funded adequately, counties Tuolumne 104 104 104 could collect less property taxes for all local Totals $4,389 $4,343 $4,408 governments than they otherwise would. This 4 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET revalue properties to their current market value, and property taxes, a portion of which would be directed respond to property value appeals. These activities to schools, offsetting state education spending. were anticipated to generate additional local EVALUATING SCAPAP Although the final year of SCAPAP is still employees hired by each participating county. As ongoing, the legislation establishing SCAPAP Figure 3 shows, in some counties the additional requires the Department of Finance to report to the staff were a modest increase from previous levels Legislature in May 2017 on the program’s outcomes. (around 3 percent in Santa Clara County), while To further assist the Legislature in evaluating representing a more substantial increase in SCAPAP, our office has analyzed data from 2014-15 other counties (roughly 25 percent in San Benito and 2015-16 to gauge whether the program has County). Assessors also used SCAPAP funds to measurably increased property tax revenues. Our pay for services from contract workers and retired analysis suggests the effect of SCAPAP on property annuitants. taxes has been modest. We estimate that increased Did SCAPAP Increase Property Tax Revenues? property tax revenue to schools from SCAPAP were at best slightly above the state cost of the program. Our Approach to Analyzing SCAPAP’s There is, however, a good chance that revenue gains Effect on Property Tax Revenues. Determining fell short of state costs. the effect of SCAPAP on property tax revenues Below, we provide a brief description of how is difficult because it is not possible to know how the county assessors spent their SCAPAP grant much revenue would have been collected in the funds and then discuss the results of our analysis of absence of the program. As we discuss in detail in the effect of SCAPAP on property tax revenues. A the box on page 6, this can make straightforward more detailed description of our methodology can approaches—such as calculating the increase be found in the technical appendix. in taxable property values arising from work completed by newly hired staff—problematic. In How Did Assessors Spend the Grant Funds? SCAPAP Funds Figure 3 Primarily Used for SCAPAP Funds Primarily Spent on Additional Staff Additional Staff. Additional Staff Paid for by SCAPAP County assessors used SCAPAP funds (both Increase Over 2013-14 state grants and county County 2014-15 2015-16 2014-15 2015-16 matching funds) to hire Fresno 17.0 15.0 20% 17% additional employees, Madera 1.5 2.5 6 10 Monterey 4.5 4.0 9 8 including property Riverside 5.0 19.0 3 10 appraisers, information San Benito 3.0 2.5 30 25 services staff, clerical San Francisco 8.0 9.0 6 7 staff, and administrative Santa Clara 7.0 8.0 3 3 Tuolumne 2.0 2.0 18 18 staff. Figure 3 details SCAPAP = State-County Assessors’ Partnership Agreement Program. the number of new Note: Part-time staff displayed as 0.5 full-time staff. www.lao.ca.gov Legislative Analyst’s Office 5 2017-18 BUDGET Why Not Focus on Workload Completed by New Staff? County assessors primarily used the State-County Assessors’ Partnership Agreement Program (SCAPAP) funds to hire additional staff to perform various activities—such as identifying and valuing newly constructed buildings and revaluing properties to their current market values—that generally result in an increase in taxable property values and therefore higher property tax revenues. Participating county assessors were required to report how many of these types of activities were performed by staff paid for with SCAPAP funds and how much these activities added to their county’s property tax base. One potential approach to estimating the effect of SCAPAP on property tax revenues could be to total these reported increases in taxable property values. This approach, however, is problematic because it fails to account for what might have occurred otherwise. Had assessors not received SCAPAP funds, two possible scenarios could have occurred: (1) the workload performed by SCAPAP funded staff would not have occurred and taxable property values would not have increased or (2) the workload performed by SCAPAP funded staff would have been absorbed by existing staff and taxable property values would have increased anyway. Simply totaling the taxable property value increases attributable to work performed by SCAPAP staff ignores the possibility of scenario 2. We cannot be sure whether scenario 1 or scenario 2 (or some combination of the two) would have occurred. We do, however, see some evidence that suggests at least some of the workload performed by SCAPAP staff could have been absorbed by existing staff. Based on data reported by county assessors to the State Board of Equalization, assessor staff productivity appears to have declined somewhat during the first year of SCAPAP (2014-15) relative to the year before. The figure shows that the number of new construction assessments completed per assessor staff declined from 34 to 30 in SCAPAP counties, while increasing from 37 to 39 in counties that did not participate. We see a similar pattern in the number of revaluations of properties that previously Productivity Appears to Have received a reduction in their taxable value Declined in First Year of SCAPAP in light of declining real estate values Assessments of New Construction during the Great Recession. The number Completed Per Assessor Staff Member of these reevaluations completed per staff 40 member declined by 100 (from 215 to 115) 35 in SCAPAP counties, while declining 30 by only about 70 (from 210 to 140) in 25 nonparticipating counties. There are other 20 2013-14 possible explanations for these trends—for 15 2014-15 example, some staff effort in SCAPAP 10 counties may have been diverted to training 5 newly hired staff—but we cannot rule out SCAPAP Counties Rest of State that a shift in workload from existing staff SCAPAP = State-County Assessors’ Partnership Agreement Program. to newly hired staff occurred. 6 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET light of these challenges, we developed a statistical $15 million annually, with $4 million to $6 million model to estimate what would have happened to of this increase going to schools. At an annual cost taxable property values (and resulting property of about $4.5 million, this means the state, at best, tax revenues) in the absence of SCAPAP. To came out slightly ahead. There is, however, a good estimate what would have occurred in SCAPAP chance that revenue gains were lower. In fact, our counties, our model draws on information about range contains zero—meaning that we cannot rule (1) growth in taxable property values in SCAPAP out that the program had no effect on revenues. In counties in years leading up to the program; these cases, the benefits to the state—in terms of (2) home prices, home sales, and residential and reduced school funding obligations—are less than commercial building permits in SCAPAP counties; the annual state cost. and (3) taxable property value growth in counties Caveats. Our analysis is limited by several that did not participate in SCAPAP. To estimate factors. As with any statistical analysis in public the effect of SCAPAP, we compare actual growth finance, our results are subject to some level of in taxable property values in SCAPAP counties to estimation and measurement error. We also only our estimates of what would have occurred without had data on taxable property values for the first two SCAPAP. years of SCAPAP. It is possible that the third year Modest Effect on Property Tax Revenue. of the pilot may result in larger increases in taxable Based on the results of our statistical model, we property values. SCAPAP also may have facilitated have developed a range of values that the effect of procedural or technological improvements within SCAPAP is likely to fall in. At the high end of our assessors’ office which may have longer-term effects range, our estimates suggest SCAPAP may have on growth in property values. These effects would increased property taxes to all local governments in not be captured by our analysis. participating counties by as much as $10 million to POLICY IMPLICATIONS Modest Expectations About Property Tax for the program. While the results of a temporary Gains Seem Warranted. The Legislature has had pilot program may not perfectly foretell what long-standing concerns about the adequacy of might occur with broader, permanent reforms, funding for county assessors. Over the years, a these results nonetheless suggest that modest wide variety of approaches to address this issue expectations about potential property tax gains are have been proposed. Three years ago, our office warranted. suggested that SCAPAP would provide important We note, however, that these conclusions information to inform such efforts. are based on an analysis of only the first two Our assessment of SCAPAP offers a key years of the program. Should future analyses of takeaway: this pilot tempers our expectations the program’s third year or years immediately about the potential property tax gains that could following the program find different results, it may come from additional funding to county assessors. be appropriate to reconsider our findings. Our analysis of SCAPAP suggests that its effect Uneven Treatment of Counties Remains a on property tax revenues has been modest. There Concern. Potential to realize additional property appears to be a good chance the state benefit from tax revenue, however, is not the only factor the SCAPAP—via decreased need for General Fund Legislature should consider in deciding whether spending for schools—did not exceed the state costs changes to county assessor funding are warranted. www.lao.ca.gov Legislative Analyst’s Office 7 2017-18 BUDGET The current funding structure for county property Options. Should the Legislature wish to tax administration, including county assessors, eliminate these disparities across counties, the raises important questions about intercounty most straightforward approach would be to disparities. Because the school share of property allow counties to charge schools for their share of taxes varies across counties, requiring counties property tax administration costs—likely totaling to cover the schools’ share of property tax between $220 million and $280 million statewide. administration costs places a greater burden on The Legislature has a variety of options for some counties than others. Those counties, in turn, implementing such a change. These options range have less funding available for other public services. from the state paying for schools’ share of costs on There appears to be little justification for these their behalf to requiring schools to pay for their disparities. share of costs out of their general purpose funds. 8 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET TECHNICAL APPENDIX Goal. Our goal was to estimate the effect of the Data. We attempt to explain annual growth in State-County Assessors’ Partnership Agreement taxable property values for property tax roll years Program (SCAPAP) on taxable property values 2013-2014 through 2016-17. This period includes in participating counties while accounting for two years before and after the establishment of growth in taxable property values that would have SCAPAP. (The property tax roll for a given year occurred in the absence of SCAPAP. is largely determined by county assessor work Approach. We developed an econometric done in the preceding year.) Data on taxable model to estimate the effect of SCAPAP property values by city comes from the Board of participation on growth in taxable property values Equalization. Our data on home prices and home of cities in participating counties. Our model sales comes from the real estate site Zillow. For attempts to explain annual changes in taxable residential and commercial permits, we used data property values based on changes in residential from the Construction Industry Research Board. and commercial building permits, home prices, Results. The results of our regression are shown and home sales. It also includes an indicator of in Figure A-1. The broader economic variables whether or not each city was in a SCAPAP county. all have the expected relationship with taxable Finally, we include indicators of the year and property values: higher home prices and sales and county to account for any idiosyncrasies specific to more residential and commercial construction a particular year or county. This method essentially contribute to higher taxable property values. holds constant broader economic factors that affect The point estimate of the effect of SCAPAP on taxable property values and isolates the effect of taxable property values is slightly negative. This SCAPAP from these other factors. estimate, however, is subject to some uncertainty. We estimate our model using ordinary least Recognizing this uncertainty, we estimated a range squares with cluster-robust standard errors, of values in which the effect of SCAPAP is likely to accounting for clustering of our city level fall (a 95 percent confidence interval). This range observations at the county level due to SCAPAP includes zero as well as some positive values. applying to all cities in participating counties. We use city, as opposed to county, observations Figure A-1: Regression Results because this provides us Dependent Variable: Annual Change in Taxable Property Valuesa additional data points, Standard allowing us to capture Explanatory Variablesc Coefficient Error additional nuance in the In a SCAPAP county -0.004 0.002 relationship between Median home pricea,b 0.009 0.002 property value growth Annual change in home pricea,b 0.148 0.032 Change in home price over past three yearsa,b 0.041 0.019 and the explanatory Residential permit value as a percent of prior year property tax rollb 0.944 0.196 factors. We also attempted Commercial permit value as a percent of prior year property tax rollb 0.320 0.184 to estimate our model Existing home salesb 0.325 0.074 with county-level data, Constant -0.119 0.029 a but could not estimate the Variable in logs. b Variable lagged one year. effect of SCAPAP with c County and year effects also included but not reported here. meaningful precision. www.lao.ca.gov Legislative Analyst’s Office 9 2017-18 BUDGET 10 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET www.lao.ca.gov Legislative Analyst’s Office 11 2017-18 BUDGET LAO Publications This brief was prepared by Brian Uhler and reviewed by Jason Sisney. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This brief and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. 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