Evaluation of the Property Tax Postponement Program

Evaluation of the Property Tax Postponement Program MAC TAYLOR LEGISLATIVE ANALYST OCTOBER 8, 2018 analysis full gutter AN LAO REPORT LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Executive Summary California Has High Housing Costs, but Property Tax Payments Are Near the National Average. Housing is very expensive in California—in early 2018, the typical California home cost $481,000, roughly double the price of the typical home in the United States. Proposition 13 (1978), which limits property tax growth after a home is purchased, has kept property tax payments relatively low by comparison. In fact, in 2016, the median property tax payment in California was $3,550, only somewhat above the national median of $2,350. Nonetheless, some homeowners in California face difficulty affording their property taxes. Some Options Available to Homeowners Who Cannot Afford Property Taxes. Homeowners who cannot afford to pay their property taxes have some options to borrow against the equity in their homes and use those funds to pay their taxes. These options include home equity loans (which are only available to homeowners with sufficiently high credit scores and incomes) and reverse mortgages. In addition to these options, the state offers the Property Tax Postponement (PTP) Program to help certain homeowners afford their property taxes and stay in their homes. This report evaluates PTP. How PTP Works. Homeowners qualify for PTP if they are: (1) over the age of 62, blind, or disabled; (2) have household incomes less than $35,500; and (3) own at least 40 percent equity in their home. Under PTP, the state pays a participating homeowners’ current-year property taxes directly to the county on their behalf. Similar to a loan, homeowners (or their heirs) must eventually repay the state for these payments with interest. Homeowners can defer these repayments indefinitely, but must repay the state when the property is inherited (by someone other than a spouse), sold, or refinanced. Evaluation In this report, we identify a variety of advantages and shortcomings of PTP, organized into five areas: • Eligibility. An advantage of PTP is that it provides guaranteed eligibility for those who qualify. The income eligibility threshold, however, does not vary by household size, is not indexed for inflation, and does not vary geographically. Moreover, PTP is not available to some lower-income homeowners who could benefit from it. • Participation. Participation in PTP is very low—a clear shortcoming of the program. In particular, in the most recent years, PTP has had around 1,000 participants—compared to the over one million Californians who are over the age of 62, own their own homes, and live in a household with incomes less than $35,500. • Affordability. PTP has two advantages with respect to affordability: (1) PTP allows participants to indefinitely postpone repayments and (2) PTP loans are less costly than reverse mortgages. However, the PTP interest rate is too high—the Legislature very likely could set the interest rate lower while still keeping the program cost-neutral. • Budgetary. A key advantage of PTP is that it does not carry a cost to taxpayers. In fact, PTP provides a General Fund benefit—meaning low-income participants in the program are www.lao.ca.gov 1 analysis full gutter AN LAO REPORT effectively subsidizing the state’s General Fund. We are not aware of any other safety net program in state government that generates General Fund revenue. • Administrative. PTP has high administrative costs and PTP participants must subsidize the relatively high costs associated with processing unapproved applicants. Policy Alternatives Option to Eliminate the Program. PTP has a very low participation rate and a high per-participant administrative cost. Both of these factors suggest the program is providing little total benefit. As such, the Legislature may want to consider eliminating the program. Options to Improve the Program. If the Legislature wants to maintain the program, we recommend a variety of changes to PTP to improve it. In particular, we suggest: • Base Income Limit Thresholds on Regional Income Limits. The income threshold used by PTP to determine eligibility does not vary by household size or geography, nor does it increase with inflation. To address these issues, we recommend the Legislature base income eligibility on the “income limits” published each year by the Department of Housing and Community Development, which are tailored for county median income and household size. • Consider Expanding Eligibility by Lowering Age Requirements. In this report, we discuss why lower-income homeowners who are younger than 62 could benefit just as much—or potentially more—than homeowners who are older than 62. In particular, low-income homeowners in their 40s and 50s spend higher shares of their income on property taxes than older homeowners. The Legislature could expand eligibility by setting a different age threshold or eliminating the threshold entirely. • Lower the Interest Rate and Eliminate the General Fund Benefit. PTP has an interest rate of 7 percent, which is high. The state could afford to lower the interest rate for PTP participants and keep the program self-funded. Moreover, if program revenue exceeds its cost by a certain amount, that balance is deposited into the General Fund—meaning PTP provides a benefit to the state budget. We recommend the Legislature eliminate this General Fund benefit and lower the interest rate associated with the program. • Couple Changes to Eligibility With Options to Limit State Risk. If the Legislature expands eligibility in the program, the changes could mean higher state costs from uncollectable loans. To address this risk, the Legislature could consider additional changes to balance these risks, including: adjusting the interest rate, limiting the total amount of deferment allowed, and limiting the number of years a homeowner—particularly a younger homeowner—can participate in the program. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT INTRODUCTION California home prices have been higher than taxes and stay in their homes. This report evaluates the U.S. average since the 1940s. In the 1970s, the PTP Program. We first describe the Californians California home prices began growing particularly that are most likely to face difficulty in affording quickly, significantly outpacing the growth in the their property taxes. We then provide an overview rest of the nation. Late in that decade, the state of the PTP Program and identify its advantages and established the Property Tax Postponement (PTP) shortcomings. We conclude with two different policy Program to help low-income seniors and people alternatives that the Legislature could consider who are blind or disabled afford to pay their property based on our evaluation of the program. AFFORDING PROPERTY TAXES IN CALIFORNIA In this section, we provide background on Proposition 13 Places Limits on Property property taxes in California and how much Taxes. Proposition 13, which was passed by voters Californians pay. We also discuss what happens in 1978, places two key limits on property taxes: when homeowners have difficulties paying their • Tax Rate. Proposition 13 limits a property’s property taxes and identify some specific groups base tax rate to 1 percent. (Below, we discuss that may have more difficulty affording these taxes. how additional tax charges cause the rate on What Do California’s High Housing property tax bills to surpass this limit.) Before Proposition 13 passed, local governments Prices Mean for Property Taxes? were able to set property tax rates at the level Home Costs in California Are High. Housing they each determined appropriate. is more expensive in California than in most of the • Growth in Taxable Value. Proposition 13 also rest of the United States. In early 2018, the typical limits the growth of a property’s taxable value California home cost $481,000, double the price to 2 percent or the rate of inflation, whichever of the typical U.S. home ($241,000). Although is lower. In the year a property is sold, its single-family home prices in less costly areas of taxable value is reset to the purchase price. the state—such as Fresno and Bakersfield—are considered inexpensive by California standards, Average Property Tax Rate Is Slightly Higher they are about average compared to the rest of the Than 1 Percent. While Proposition 13 limits a country. property’s overall tax rate to 1 percent, most Homeowners Pay Property Taxes on Their property tax bills also include additional ad valorem Homes. Homeowners pay property taxes directly property taxes to pay for voter-approved bonds. As to the county they live in based on the taxable a result, the average property tax rate paid in the value of their homes. Taxable value (or assessed state is 1.14 percent. These average rates varied value) is based on the property’s purchase price. from 1 percent in Alpine and Sierra Counties to Each property owner’s annual property tax bill is 1.21 percent in Alameda County in 2016-17. determined by multiplying the taxable value of her Growth in Market Value Generally Exceeds property by her tax rate. (As such, the property tax Growth in Taxable Value. Most properties’ market is an ad valorem tax because it is based on the values grow faster than 2 percent per year. As a value of the home.) For example, the owner of a result, under Proposition 13, the taxable value of property with a taxable value of $100,000 and a most properties is less than their market value. tax rate of 1 percent pays an annual property tax The longer a property is owned, the wider this payment of $1,000. gap tends to grow, as shown in Figure 1 (see next page). As such, older homeowners—who www.lao.ca.gov 3 analysis full gutter AN LAO REPORT on December 10 and once on Figure 1 April 10. Some homeowners have A Property's Taxable Value and difficulty paying these taxes on Market Value Diverge Over Time time. Homeowners who fail to Value of a Typical Home Last Purchased in 1980 (In Thousands) pay their property taxes by these dates are considered delinquent. $700 Delinquent homeowners pay a 600 10 percent penalty to the county for each late payment. They also 500 must pay interest on delinquent Market 400 Value taxes of 1.5 percent, which accrues each month the payment 300 is still outstanding. The cost of these penalties and interest 200 accumulate quickly, meaning 100 Assessed Value a delinquent homeowner’s total outstanding debt to the county is often much larger than 1980 1985 1990 1995 2000 2005 2010 2015 2018 just the amount of past due taxes. The most recent data available suggest the statewide delinquency rate was 1.3 percent have generally owned their homes for longer— in 2016 (defined as the amount in tend to pay lower property taxes than younger unpaid property taxed due as a share of total taxes homeowners. due). However, there is substantial variation in this High Housing Prices Do Not Directly Translate rate at a county level. In 2016, the delinquency rate to High Property Taxes in California. While the ranged from 0.6 percent in San Mateo County to cost of housing is high in California, Proposition 13 16.9 percent in Imperial County. has prevented this from directly translating into Homeowners Can Lose Their Properties for high property taxes, particularly for homeowners Property Tax Delinquency. State law requires who have owned their homes for many years or counties to allow homeowners to enter into a decades. On the other hand, property taxes are payment plan for tax delinquent properties. As long more expensive for people who recently purchased as the homeowner makes payments according to their homes. Compared to other states, while the terms, the county will not sell the property. If a housing prices are high, property tax rates in homeowner is delinquent on his property taxes for California are relatively low. As a result, per person five years, the county can sell his home through a property tax collections are only somewhat above “tax sale.” Under a tax sale, the county lists a home the national average. In 2016, the median property for sale in the amount due in unpaid property taxes tax payment in California was $3,550, somewhat and fees at public auction. When properties are above the national median of $2,350. sold for more than the list price, other lien holders (for example, a mortgage lender) can request What Happens to Those Who repayment of their debts by filing a claim with the Cannot Afford Their Property Taxes? county. Some Homeowners Face Difficulties Affording Tax Sales Are Relatively Rare. Tax sales Their Property Taxes. For many Californians, the as a share of all properties are relatively rare. property tax is one of the largest tax payments For example, in 2016, Los Angeles County sold they make each year. Property taxes are due to 842 residential and commercial parcels in three tax the counties in installments twice per year: once sales. For comparison, there are currently about 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT 2.2 million residential and commercial parcels in compared to homeowners aged 42 to 51, who Los Angeles County. In 2016, 69 properties were paid median property taxes of $4,450. approved for tax sale in Placer County, but 47 • Hold More Wealth. Because older were redeemed or removed prior to the sale (for homeowners have owned their homes for example, because the homeowner paid the taxes) longer, the amount of home equity they and so only 22 were actually offered at the auction. hold also tends to be higher. (Equity is the difference between the market value of a Who Faces Difficulties home and the debts held against the home, Affording Their Property Taxes? such as a mortgage.) For example, in 2016, homeowners aged 62 to 71 held an average There are many reasons that a property enters of 75 percent of equity in their homes, a tax sale. From our discussions with county tax compared to homeowners aged 42 to 51, collectors, we understand that these reasons often who held an average of about 60 percent. include: (1) homeowners with a principal residence However, home equity is an illiquid asset that who are unable to afford their property tax homeowners can only access, typically, by payments, (2) developers with unfinished housing selling or mortgaging their home. projects, and (3) heirs who are not aware that they now own the property or cannot afford the tax Low-Income, Younger Homeowners Pay payments. The remainder of this section focuses Higher Shares of Income Toward Property on the first group, describing those who might be Taxes. Figure 2 shows the median share of least likely to be able to afford their property tax income spent on property taxes by age of payments on their principal residence. homeowners for those whose incomes are lower Older Homeowners Have Lower Incomes, but than $35,500 per year. The figure shows that More Wealth and Pay Less in Property Taxes. low-income homeowners of all ages pay higher Homeowners in their 60s are often are no longer shares of their income toward property taxes working. As a result, they often have less income than other homeowners do. Among lower-income than those who are younger. In 2016, for example, homeowners, those who spend the most on homeowners aged 62 to 71 had median household property taxes are actually those in their 40s and incomes of around $48,000, compared to 50s, rather than the oldest homeowners. This is homeowners aged 42 to 51, who had median incomes of $88,000. Figure 2 However, older homeowners also Among Lower-Income Homeowners, Younger tend to: Homeowners Pay More in Income on Property Taxes • Pay Less in Property Share of Income Spent on Property Taxes (2012 Through 2016) Taxes. Older homeowners, 14% on average, have owned their properties for longer. 12 Because Proposition 13 10 (1978) holds property 8 taxes relatively constant in real terms over time, 6 these homeowners pay 4 less in property taxes, on average, than younger 2 homeowners. For example, in 2016, homeowners 25 35 45 55 65 75 85 95 aged 62 to 71 paid median property taxes of $3,050, www.lao.ca.gov 5 analysis full gutter AN LAO REPORT because older homeowners tend to pay lower • Home Equity Loans or Lines of Credit. property taxes than younger homeowners as a Home equity lines of credit and home equity result of Proposition 13. So, holding income roughly loans allow a homeowner to borrow against constant as Figure 2 does, older homeowners tend the equity held in the home. Similar to a to pay lower shares of their income toward property mortgage, home equity loans and lines of taxes. credit are secured against the borrower’s Working Age Homeowners Are More Likely home. However, these loans must be repaid to Have Temporary Periods of Low Income. (in many cases, starting immediately) and Homeowners who are younger than retirement not all homeowners have enough income or age and are not disabled are more likely to be able sufficiently high credit scores to access them. to participate in the labor force, earning income. • Reverse Mortgages. Reverse mortgages However, working age people can sometimes are a type of home equity loan that are experience a temporary reduction in income as available only to seniors. The most common a result of a job loss or illness, and, for a period type of reverse mortgage is the Home Equity of time, may not be able to afford their property Conversion Mortgage (HECM), described in taxes. Because Proposition 13 limits growth in the nearby box. Unlike home equity loans or property taxes from year to year, for working age credit, (1) homeowners can defer repayments homeowners, these affordability issues might more on reverse mortgages indefinitely and (2) all often be temporary, rather than permanent. homeowners who meet the eligibility criteria for the program qualify for them, regardless of What Are the Private Sector Options to income or credit worthiness. Help Homeowners Pay Property Taxes? Cost of Financing Involves Interest and Private Sector Financing Options Can Fees. Both of these financing options involve Help Homeowners Pay Property Taxes. When two main types of costs to the homeowner: homeowners cannot afford to pay property taxes, an interest rate and fees. An interest rate is they have some options to borrow against the charged as a percentage of the total loan. Fees equity in their homes. These loans are available to associated with reverse mortgages and/or home homeowners for any purpose, but can be used to equity loans include: appraisal fees, closing costs finance property taxes. In particular, there are two (such as attorney’s fees, fees for preparing and common financing options available to homeowners filing a mortgage, fees for title search, taxes, and who meet the requirements: insurance), and loan origination fees. PROPERTY TAX POSTPONEMENT PROGRAM Under PTP Program, State Pays Property for these payments with interest. The program is Taxes on Behalf of Eligible Homeowners. The administered by the State Controller’s Office (SCO). state offers the PTP Program to help certain The remainder of this section describes: (1) the homeowners afford to pay their property taxes. history of PTP, (2) how PTP works, and (3) how PTP Under PTP, the state pays a participating is funded. homeowner’s current-year property taxes directly to the county on his or her behalf (meaning that HISTORY OF PTP PTP cannot cover past due or delinquent taxes owed). To participate, homeowners must meet Voters Authorized Property Tax eligibility requirements and apply for the program. Postponement in 1976. In 1976, the Legislature Similar to other financing options, the homeowner placed a constitutional amendment on the ballot (or his or her heirs) must eventually repay the state (Proposition 13) authorizing itself to “provide by 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT law for the manner in which a person of low and the Legislature established PTP in statute in moderate income, age 62 or older may postpone 1977. In the first year of operation, 1977-78, ad valorem property taxes” on his or her principal nearly 13,000 people applied for PTP. A year dwelling. An amendment was needed to operate later, when voters passed Proposition 13 of 1978, such a program because the California Constitution which limited taxes on property to 1 percent of its stipulates that “all property is taxable” and taxable value, participation declined sharply and courts have required the state to uniformly apply about 8,500 people applied. At the time, PTP was property taxes. As a result, all exemptions from the administered by both SCO and the Franchise Tax property tax—like those for public schools—are Board (FTB). constitutionally provided. Eligibility Expanded to People Who Are Blind Legislature Established PTP in 1977. Following or Disabled in 1984. In 1984, the Legislature the voters’ approval of Proposition 13 in 1976, placed another constitutional amendment on the Reverse Mortgages Home Equity Conversion Mortgage (HECM). HECMs are the most common type of reverse mortgages—making up more than 95 percent of the U.S. reverse mortgage market since the early 2000s. (The rest of the reverse mortgage market is made up of proprietary reverse mortgages, which are privately financed and are more readily available to people with higher-value homes.) HECMs allow seniors to take out a loan that accesses the value of the equity in their homes and use it for any purpose (including, for example, to pay property taxes). When a homeowner takes out a HECM loan, the private lender records a lien on the property. These loans are insured by the Federal Housing Authority (FHA) against the risk that the balance of the loan grows to exceed the value of the home. Applying for a HECM. To qualify for a HECM loan, a homeowner must be 62 years old or older, occupy the home, be able to pay property taxes and insurance, and keep the house in good condition (HECM homes must meet FHA standards). Homeowners must either own their homes free and clear or, if they do not, the HECM loan cannot exceed the value of the homeowner’s equity. Amount, Frequency, and Duration of Loans. The amount a borrower can receive from an HECM loan is determined by a formula, which is based on a variety of factors, including the property’s appraised value and the homeowner’s age. In 2016-17, the average HECM loan in California had an initial principal limit (the present value of loan proceeds available to the borrower) of $283,000. Homeowners can receive payments in five different plan types, which vary by tenure and term. For example, a homeowner can receive the loan in equal monthly payments for as long as they occupy the home or as a flexible line of credit. Cost of the Loan. HECM loans carry two types of major costs: an interest rate and fees. The average interest rate charged on HECM loans in California in 2016-17 was 4.53 percent. In addition to the interest rate, the homeowner pays substantial fees as part of the loan and to the private lender who administers the loan. The largest of these fees is the mortgage insurance premium (which pays for the FHA-backed mortgage), which is charged up front at 2 percent of the appraised value and ongoing of 0.5 percent of the loan balance for standard HECM loans. Borrowers typically pay for these fees using the loan proceeds. Repayments Can Be Deferred Indefinitely. Repayments on HECMs can be deferred indefinitely, but a loan becomes due and payable if the borrower: passes away, moves away from the home, sells the home, or fails to pay the home’s property taxes or insurance. www.lao.ca.gov 7 analysis full gutter AN LAO REPORT ballot, this time expanding its authority to provide another party, like an heir) repays SCO for the tax for the deferral of property tax payments by people payments. who are blind or disabled. Voters approved the Homeowners Submit Annual amendment (Proposition 33), and shortly thereafter the Legislature passed legislation that implemented Applications to SCO the program expansion. Eligibility for PTP Based on Three Main Legislature Suspended PTP in 2009. The Criteria. Homeowners apply for PTP each year state continued operating the program for a few between October 1 and February 10. Homeowners decades until it faced budget deficits following the can qualify for PTP if they: (1) are over 62 years financial crisis in 2008. As one of many actions the old, disabled, or blind; (2) have household state took to balance the budget, the Legislature income less than $35,500; and (3) own at least suspended PTP in 2009. After suspension, SCO 40 percent equity in their home. (Before the could not make property tax payments on behalf of program was suspended, the equity requirement new or existing participants, but still administered was 20 percent.) Statewide, on average, approved repayments for existing participants. applicants are 72 years old, have household During Suspension, Legislature Authorized incomes of about $20,000, and own 85 percent County Property Tax Deferment Program. In equity in their homes. Additionally, the applicant’s 2011, after suspending PTP, the state authorized home must be a single-family or multifamily unit participating counties to operate their own property and the applicant must use it as his or her primary tax postponement programs with their own funds. residence. There are no eligibility requirements for Counties must use similar eligibility requirements creditworthiness (SCO does not run a credit check and rules as PTP in establishing these programs. on applicants). Homeowners are not permitted to Based on this authority, Santa Cruz established a participate in PTP if they already hold a reverse property tax postponement program and began mortgage (although no similar requirement exists making repayments for participants in 2012-13. for home equity loans). We do not know of any other California counties Homeowners Must Requalify Each Year. that have operated their own property tax deferral Homeowners must submit their applications programs. annually and requalify for the program each year. Legislature Reauthorized PTP in 2014. (Before the program was reinstated, homeowners In 2014, the Legislature reinstated PTP, with only needed to qualify once and then could apply significant modifications, in Chapter 703 (AB 2231, to stay in the program if needed, but did not need Gordon). SCO began accepting new applications to requalify.) Using data from accounts paid in full for PTP in 2016 and began making payments to during 2016-17 and 2017-18, about 30 percent of counties on these homeowners’ behalf for tax applicants used the program only once. Roughly year 2016-17. (Santa Cruz County operated its 60 percent of participants used the program for five own deferment program through 2015-16, and years or fewer. suspended it after the state reinstated PTP.) SCO Reviews and Assesses HOW PTP WORKS Applications SCO Accepts Around 65 Percent of This section describes how PTP works, Applications. SCO received about 1,300 organized around the four important steps in applications for the PTP Program in 2016-17 the process. First, homeowners submit annual and 2017-18 and approved around two-thirds of applications to SCO to participate in PTP. Second, these applications. In each of these two years, SCO reviews those applications and accepts or over 400 applications were denied for various rejects them. Third, on behalf of those applicants reasons, such as the homeowner failed to complete that are accepted, SCO makes property tax the application or did not meet the required payments to counties. Finally, the applicant (or 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT qualifications. Among these, most commonly, number of bedrooms. As a result, SCO does not applicants were rejected because their household require the homeowner to acquire an independent income exceeded the maximum threshold. appraisal of the property. Each time a homeowner reapplies for the program, SCO reassesses the SCO Makes Property Tax Payments to property for changes in both the homeowners’ Counties for Approved Applicants outstanding debt and the estimated market value of the home. SCO Pays Entire Property Tax Bill Directly to County. Once an application is accepted, SCO Homeowners Repay SCO makes a one-time payment for the homeowners’ entire property tax bill directly to the county in Repayments Can Be Deferred Indefinitely. the first week of the month following acceptance. Program participants can defer their repayments (SCO’s application period opens in October and so on postponed property taxes indefinitely, but must SCO makes these payments to counties between repay the state when the property is inherited (by November and June of each year.) The average someone other than the applicant’s spouse), sold, amount of these payments was $3,200 in 2017-18. or refinanced. Repayments also are triggered if the After accepting an application, SCO records a property owner moves, transfers title, defaults on notice of lien with the county on the home of the a senior lien, or obtains a reverse mortgage. To participating homeowner. ensure it can recover its costs, the state records a notice of lien on any property with postponed Homeowners Still Need to Make Property taxes in the program. When a home is sold by the Tax Payments When Application Is Pending. homeowner or an heir, the state’s lien receives Homeowners who are approved for PTP do not precedence in chronological order. That is, if a need to pay the county late penalties or fees even homeowner took out a mortgage in 2000 and a if they missed an installment. Denied applicants PTP deferment in 2014, the mortgage holder would who miss an installment still owe the outstanding receive payment on the outstanding amount before amount, including delinquent fees, to the county. the state. To avoid these fees, SCO advises applicants with pending applications to still pay the first Homeowners or Heirs Repay the Loan With installment of their property taxes on time. If their Interest. The state charges a flat, simple interest PTP application is accepted, the state will pay the rate of 7 percent on PTP accounts. Before the homeowner’s full property tax payment and the program was suspended, the state charged a county will reimburse the amount paid. rate that varied based on the rate of return in the state’s checking account, known as the Pooled Total Value of Postponed Taxes Cannot Money Investment Account. Between 1994-95 Exceed Estimated Value of Home Equity. SCO and 2008-09, this rate varied from 2 percent to does not allow the total amount of postponement 5 percent. to exceed the estimated value of the applicants’ home equity. (The total amount of postponement On Average, Accounts Are Repaid After is equal to the sum of all postponed property tax 15 Years. The average length of postponement payments, including the first year.) There are two (from the first year an applicant entered the important determinants of home equity value: program to when their account was repaid in full) (1) the homeowners’ existing outstanding debt was 15 years. In 2016-17, 70 participants, around and (2) the market value of the home. SCO uses 9 percent of the total, repaid in full within a year. a property and ownership search engine to verify When an account is fully repaid, SCO charges the the amount of outstanding debt on a property— account a one-time fee of $8, which is paid to the including a mortgage, home equity line of credit, county to release the state’s lien. and tax liens. SCO estimates the market value of Some Accounts Are Not Repaid. Sometimes, a the home by comparing the property to recently home is sold for less than the outstanding balance sold surrounding properties on a number of of the debt owed on the house. In some of these specifications, such as its size in square feet and cases, the state is not able to recover its costs www.lao.ca.gov 9 analysis full gutter AN LAO REPORT (particularly when the state’s lien is more recent counties for new loans) and administrative costs. In than others). In 2016-17 and 2017-18, the default any given year, disbursements and administrative rate (the amount the state deemed uncollectable costs can exceed collections as long as the as a percent of the total amount collected) was program has sufficient carry-in balances to cover its 9 percent and 5 percent, respectively. net costs. Historical data from the program indicate In the Event of a Tax Sale, the State’s this has been the case over the long term. Between Repayment Is Prioritized. In the event of a tax 1994-95 (the first year for which the SCO has data) sale, the state’s lien does take priority over other until program suspension in 2008-09, collections lien holders. That is because the county is not exceeded the costs of disbursements and permitted to sell the property for less than the administration by an average of $1 million per year. outstanding balance of defaulted taxes, associated (In some years, such as 2008-09, disbursements fees, and the outstanding balance of the PTP loan. did exceed collections.) Under New Program, Excess Balances PTP REVENUE AND COSTS Swept to General Fund. When the program was reinstated and the Senior Citizen and Disabled Program Costs Funded by Special Fund. PTP Citizens Property Tax Postponement Fund was is operated using a special fund, the Senior Citizen created, enacting legislation required balances in and Disabled Citizens Property Tax Postponement the fund above specified thresholds to sweep to the Fund. (Before the program was suspended in 2009, General Fund. In particular, fund balances above the program was operated within the General $20 million at the end of 2016-17 and $15 million Fund.) SCO deposits collections from homeowners at the end of 2017-18 (and each subsequent making repayments into the account. SCO then year) transfer to the General Fund. In 2017-18, uses the funds in this account to make property the balance of the fund exceeded the threshold tax payments to the counties and to cover its by $5.7 million and that amount was transferred administrative costs. SCO’s costs to administer the to the General Fund. The administration currently program were $2 million in 2017-18. anticipates that $2.7 million will transfer in 2018-19. Program Funded by Repayments and Interest. Even before it was suspended in 2008-09, the For the program to operate without General Fund program provided net General Fund benefit over support, PTP collections (repayments on existing the long term, but because it was operated within loans) must exceed disbursements (payments to the General Fund, no swap was required. EVALUATION OF THE PTP This section provides an evaluation of PTP, loans. In that way, PTP and HECM programs including both advantages and shortcomings of are similar (although PTP has some advantages the program. These are organized into five different relative to HECM which we discuss later on in this areas, which are summarized in Figure 3 and evaluation). described in more detail below. PTP Is Not Available to Some Homeowners Who Could Benefit. PTP targets seniors and Eligibility people who are blind or disabled with incomes PTP Provides Guaranteed Eligibility for less than $35,500. However, other homeowners Those Who Qualify. All aged, disabled, or blind could also benefit from the program. Figure 4 (see homeowners who meet the income and equity page 12) shows the share of household income eligibility requirements for the program qualify for spent on property taxes among homeowners at PTP, regardless of the value of their home or credit different ages and household income ranges (those history. As such, PTP offers a financing option for in the first group qualify for PTP). Darker shades homeowners who may not qualify for traditional correspond with older homeowners, while lighter 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT shades correspond with younger homeowners. income toward property taxes, relative to Generally, at higher levels of income, homeowners older homeowners. For example, those ages of all ages spend lower shares of their income 42 to 51 with incomes between $35,000 on property taxes. The figure suggests that other and $45,000 spend about 6 percent of groups could potentially benefit even more from the their income on property taxes, a higher PTP Program, including: percentage than those ages 72 and above at any income range displayed. • Low-Income Homeowners Younger Than 62. As the figure shows, among lower-income The PTP Income Threshold for Eligibility households, older homeowners spend the Has a Few Shortcomings. PTP uses one, fixed lowest shares of their income on property household income threshold for eligibility of taxes. Conversely, low-income homeowners in $35,500. As a result, the threshold: their 40s and 50sspend the highest shares of • Does Not Vary by Household Size. A single their income on property taxes. individual living alone with an income of • Homeowners With Higher Levels of Income. $35,500 faces a different financial situation Figure 4 also shows that homeowners in than a family of four living in a household their 40s and 50s with household income with the same income. To account for above $35,500 also pay higher shares of Figure 3 Summary of the Evaluation of the Property Tax Postponement Program Advantage Shortcoming Eligibility • PTP provides guaranteed eligibility to • PTP is not available to some homeowners who could benefit, homeowners who qualify. including: younger homeowners and those with higher levels of income. • The PTP income threshold does not vary by household size, is not indexed for inflation, and does not vary geographically. Participation • PTP participation has been low historically and is even lower after reinstatement. Affordability • PTP allows participants to indefinitely • PTP interest rate could be lower (while still keeping the program postpone repayments. cost-neutral). • PTP loans are less costly than reverse mortgages. Budgetary • PTP does not carry a cost to taxpayers • PTP provides a General Fund benefit without justification. • PTP may have less long-term sustainability with General Fund sweep. Administrative • PTP has high administrative costs. • PTP participants subsidize the administrative costs associated with unapproved applicants. PTP = Property Tax Postponement Program. www.lao.ca.gov 11 analysis full gutter AN LAO REPORT an average of 12 percent of Figure 4 their income toward property Homeowners in Their 40s and 50s at Various Income Levels taxes. Conversely, lower-income Pay the Highest Shares of Income Toward Property Taxes homeowners in Imperial County, 8% where the area median income is $48,200, pay just over 4 percent 42 to 51 of their income toward property 32 to 41 7 taxes. This is because places with 52 to 61 higher area median income also 62 to 71 have higher home prices. All else 42 to 51 equal, a low-income person living 6 32 to 41 in Santa Clara County is likely 52 to 61 to spend more on housing than 42 to 51 72 to 81 62 to 71 a person with the same income 5 52 to 61 living in Imperial County. 81 and Over 32 to 41 72 to 81 62 to 71 4 Participation 72 to 81 81 and Over PTP Historically Has Had Low Participation. In 2008-09, 3 81 and Over the last year the program was operated before suspension, SCO Income $25,000 Income $35,000 Income $45,000 to $34,999 to $44,999 paid property tax payments on to $54,999 2 behalf of 5,676 homeowners. For comparison, in 2008, there were nearly one million Californians who were aged 62 or over, these differences, other housing assistance owned their homes, and lived programs usually vary eligibility based on both in a household that had an income of less than household income and size. $35,500. While not everyone who is eligible for the • Is Not Indexed for Inflation. PTP’s income program will participate, this number of participants threshold is not indexed for inflation. was still very low relative to the number of potential Household incomes rise over time with participants. In part, this low rate of participation inflation. In future years, this will mean the may suggest that the program is not targeted current threshold will lose value. As a result, toward those who are least able to afford their the proportion of homeowners who are eligible property taxes. for the program will decline. After Reinstatement, PTP Has Even Lower • Does Not Vary Geographically. The share Participation. In the five years before suspension, of income that low-income homeowners the program received around 7,400 applications spend on property taxes varies substantially per year on average. In 2017-18, the program by geographic area. Figure 5 shows that received around 1,300 applicants and accepted lower-income homeowners (those with about 900 of them. As such, while PTP had few incomes less than $35,500) in counties with participating homeowners even before it was higher area median incomes tend to spend suspended, it is even smaller today. The decline higher shares of their incomes on property in applications could, in part, be the result of tax payments. For example, lower-income the suspension of the program and the resulting homeowners in Santa Clara County, where difficulty in outreach. Other new features of the the area median income is $125,000, pay program also might influence potential applicants 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT not to apply, including the fact Figure 5 that the interest rate is now much Low-Income Homeowners Pay More Toward Property Taxes higher. In Counties With Higher Area Median Income Affordability Area Median Income PTP Allows Participants $140,000 Santa Clara to Indefinitely Postpone 120,000 Repayments. PTP participants Marin 100,000 can defer their repayments on postponed property taxes 80,000 indefinitely, with repayments 60,000 triggered only if the homeowner Imperial 40,000 passes away (and someone 20,000 other than the spouse inherits the home), sells or refinances 2 4 6 8 10 12 14 16 18% the home, moves, transfers Property Tax Payments as Percent of Income title, defaults on a senior lien, or (Among Those With Incomes Less Than $35,000) obtains a reverse mortgage. This provides a great deal of flexibility and affordability for participants, who may not have sufficient covered these costs over the long term. This income to repay the outstanding suggests the interest rate is too high. That is, the balance on the loan until they can access their state could afford to lower the interest rate for PTP home equity, for example, by selling their home. In participants and still keep the program self-funded. this way, PTP and HECM are similar. PTP Loans Are Less Costly Than HECM Budgetary Loans. HECM is much more expensive for PTP Does Not Carry a Cost to Taxpayers. The participants than PTP. Although PTP carries a PTP Program is self-funded. That is, disbursements higher interest cost for homeowners (7 percent for property tax postponements and administration compared to 4.53 percent for HECM), PTP loans costs are paid using collections from existing carry virtually no fees. HECM loans, by contrast, accounts. As a result, PTP does not carry a cost to carry often significant, fixed upfront fees and taxpayers. additional annual costs for insurance. As described in the box on page 14, the total cost, on average, PTP Should Not Provide a General Fund to a homeowner to use PTP is typically lower Benefit. As it is currently structured, PTP provides than the cost to take out a comparable loan using a General Fund benefit to taxpayers. That is HECM. (The average HECM loan, however, is much because current law requires balances above larger than the typical total deferment under PTP, $15 million in the Senior Citizen and Disabled suggesting these programs can serve different Citizens Property Tax Postponement Fund to purposes.) sweep to the General Fund. There is not a clear public policy rationale for generating a General PTP Interest Rate Could Be Lower (While Still Fund benefit from this program. In fact, if the Keeping the Program Cost Neutral). The interest purpose of this program is to keep people in their rate associated with a PTP loan needs to cover homes, it essentially is a safety net program. We two major state costs: (1) SCO’s administrative are not aware of any other safety net program in costs and (2) state losses from delinquent loans. state government that generates General Fund Even when the program operated at a much lower revenue. interest rate, its collections on existing accounts www.lao.ca.gov 13 analysis full gutter AN LAO REPORT Comparing HECM and PTP Average HECM Loan Is Much Larger Than Average PTP Amount. In 2016-17, the average initial principal limit of Home Equity Conversion Mortgage (HECM) loans made to Californians was nearly $300,000. While not all participants will use the entire amount of their available loans, this average is significantly larger than the average amount of total property tax payments postponed under Property Tax Postponement (PTP). Data from the State Controller’s Office suggest the average participant uses PTP to postpone a total of $9,900 in property taxes—a much lower principal amount. Cost of PTP Is Usually Lower Than HECM. While the interest rate associated with PTP is higher than the average rate charged on HECM loans, HECM loans have other fees that make them more expensive. Suppose a homeowner was choosing between PTP and HECM to help pay for five years of property taxes on a house with a taxable value of $300,000—representing around $18,000 in property taxes. Under PTP, the homeowner would repay the total principal amount plus about $1,200 in interest costs. Under HECM, assuming the current statewide average interest rate of 4.53 percent, the homeowner would repay roughly similar amounts for interest (because it is compounding, not simple), but would also pay $6,000 upfront and around $100 each year thereafter for the mortgage insurance premium and a few thousand dollars upfront for origination fees. These costs could be financed using the loan, but would result in a much higher total outstanding loan balance. Homeowners May Prefer HECM for Larger Loans, but PTP for Smaller Cash Needs. As a result of these differences in the programs, homeowners may prefer to use HECM for more significant income-support needs. In particular, a homeowner who needs many thousands of dollars per year to make ends meet or tens of thousands of dollars in a single year to make home repairs may prefer to access home equity through HECM. PTP, which provides less money to homeowners but is generally cheaper, may be a better option for those who face smaller annual shortfalls in their household budgets. General Fund Revenue Sweep Might Hamper Administrative Fund’s Long-Term Sustainability. Over the long Administrative Costs Are High Relative term, without the General Fund sweep, the program to Program Benefits. The program currently is likely to have enough funds to pay disbursements costs about $2 million per year for SCO to using collections. (This has been true historically administer. At the end of 2017-18 SCO had and new features of the program, like annual 3,832 total outstanding accounts, meaning the applications, limit the state’s risk even further.) state administrative cost for each participant was However, in some years, particularly in a recession, about $521 annually. These costs are high relative disbursements could exceed collections. In those to the average postponement amount, which was years, the fund will need a reserve to cover these $3,204 per person in 2017-18. costs. The General Fund sweep limits the size of Administrative Costs Are High Relative to the program’s reserve, potentially hampering its Other State Programs. Elements of PTP’s program long-term sustainability. design mean that the administration costs of PTP are much higher than the costs the state incurred to run another program with the same objective. 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Specifically, the state used to administer the Program Participants Pay for the Cost of Senior Citizen Property Tax Assistance Program Assisting Nonparticipants. We understand that (PTAP), which is described in the box below. With one reason administrative costs of PTP are high the PTAP program, the FTB provided grants to is that the work to process applications is manual low-income seniors and people who are blind or and time-consuming. Also, SCO works with many disabled to help them defray the cost of property applicants and potential applicants individually— taxes. In the last year of operation, PTAP had over sometimes involving multiple phone calls—to help 600,000 participants and state administrative costs them understand the program and to complete of $6.4 million—carrying an administrative cost their applications on time. Many of the applicants per participant of $10. This program was relatively SCO works with either do not ultimately apply for inexpensive to operate because processing most PTP or are not approved for the program. As a applications was routine. In particular, FTB required result, program participants are effectively paying homeowners to file for the program with a copy of for the cost of state assistance for those who do their tax return, meaning FTB could use automatic not ultimately participate. processes to confirm applicants’ income eligibility for the program. POLICY ALTERNATIVES Below, we outline two different policy alternatives ELIMINATE THE PROGRAM the Legislature could consider adopting based on our evaluation of PTP. Under the first alternative, Legislature May Want to Consider Eliminating the Legislature could eliminate the program. Under the Program. PTP has a very low participation rate the second alternative, if the Legislature would and a high per-participant administrative cost. Both rather leave the program in place, we offer a variety of these factors suggest the program is providing of options to improve the program that address little total benefit. Moreover, the program may have many of the shortcomings we identify in our had a stronger justification when it was originally evaluation. established in 1977 at a time when there were no Senior Citizen Property Tax Assistance Program (PTAP) State Operated PTAP Between 1967 and 2009. Between 1967 and 2009, the state administered PTAP, a direct grant program to help low-income seniors and people who are blind or disabled afford their property taxes. (In contrast to the Property Tax Postponement Program, which is a loan program, PTAP provided recipients with direct cash payments.) PTAP was administered by the Franchise Tax Board, which distributed payments and validated applicants’ eligibility using information from their annual tax filings. As one of the many actions the state took to address budgetary shortfalls in the Great Recession, the Legislature suspended the program in 2008-09 and has not paid claims since that year. Payments Averaged Around $300 Per Person. In the last year of operation, the average grant amount was $304 per person, in many cases covering a relatively small portion of a homeowners’ property tax costs. This grant amount varied based on a formula which took into account a person’s household income and the taxable value of their home. The program was available to both homeowners and renters. (Because renters do not pay property taxes directly, in these cases, grants were computed based on a property tax equivalent.) www.lao.ca.gov 15 analysis full gutter AN LAO REPORT statewide constitutional limits on property tax rates income), and extremely low income (60 percent of or taxable values. Proposition 13 (1978), however, very low income). The Legislature could choose keeps annual growth in homeowners’ property among the different HCD income limits for eligibility taxes low and is likely a key reason that tax sales depending on whether it wished to expand eligibility are relatively rare. This makes the public policy to households at higher income levels or keep rationale for PTP less clear. As such, the Legislature eligibility at a roughly similar level. Specifically, the might want to consider eliminating the program. Legislature could choose to target income limits of: Some Ongoing Administrative Costs Would • Very Low Income. To keep eligibility roughly Still Be Necessary. Even if the Legislature similar, the Legislature would use “very low eliminated the program for new applicants, SCO income” as the threshold. For example, would require resources to process repayments on in Sacramento County, which has an area outstanding loans. As such, SCO’s administrative median income near the state average, a costs would likely decline to the levels during household of four is designated as very low program suspension after 2009, which were about income if it has an income less than $40,000 $500,000 per year. Administrative costs would (the same threshold for a family of two is continue until all remaining participants repaid their $32,000). accounts, although the costs would likely decline • Low Income. To expand eligibility to over time. The state could continue to use program households at higher levels of income, the collections to pay for these costs and use the other Legislature could use “low income” as the incoming funds for General Fund benefit. threshold. For example, a household of four in Sacramento County is considered low income IMPROVE THE PROGRAM if its earnings fall below $64,000 ($51,000 for a family of two). If the Legislature instead wants to maintain the program, we would recommend a variety Using one of these thresholds, rather than of changes to PTP. The first set of these a set dollar amount, would address all of the recommendations is aimed at increasing shortcomings of the income threshold identified in participation and better aligning eligibility and our evaluation. benefits of the program with those who need it Consider Expanding Eligibility by Lowering most. The second set of recommendations is Age Requirements. Earlier, we discussed why aimed at helping the Legislature keep the program lower-income homeowners who are younger than cost neutral for taxpayers even while expanding 62 could potentially benefit from the PTP Program. eligibility. In particular, Figure 4 showed that low-income Improve Targeting of Eligibility homeowners in their 40s and 50s spend the highest shares of their income on property taxes, Base Income Thresholds on HUD Regional which makes it more likely that they could face Income Limits. The income threshold used by short-term cash flow issues. For example, younger PTP to determine eligibility currently does not vary homeowners facing unemployment as a result by household size, geography, or with inflation. of injury or job loss could benefit from the PTP To address these issues, we recommend the Program. The Legislature could expand eligibility Legislature base income eligibility on the “income to those younger than 62 by setting a different limits” published each year by the Department age threshold—say, 40—or by eliminating the age of Housing and Community Development (HCD). requirements entirely. Based on data from the federal government, HCD Legislative Options to Lower Age publishes county-level thresholds for households Requirements. The Constitution only authorizes of different sizes that fall into three categories: the Legislature to operate a property tax low income (80 percent of median income in the postponement program for homeowners who are county), very low income (50 percent of median blind, disabled, or over the age of 62. As such, 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT the Legislature has two options to expand lower could mean higher state costs from uncollectable age requirements for the program. First, the loans. For example, allowing younger homeowners Legislature could place a constitutional amendment to participate could increase the risk that the before voters to change eligibility. Second, the total amount of deferment (the size of the loan) Legislature could change the administration of PTP exceeded the value of the equity held in the home. to reimburse homeowners directly, similar to the This is because, compared to older homeowners, PTAP program (which did not require constitutional younger homeowners typically hold less equity authorization). Changing the administration of the and live longer. To address this and other risks, the program in this way would mean PTP would not Legislature could consider coupling changes to be a property tax exemption. This latter option has eligibility with changes to other program features some drawbacks. In particular, it likely would mean that address costs and limit state risk. In particular, higher administrative costs for SCO to issue checks the Legislature could consider changes to: for each approved applicant. Also, depending on • Interest Rate. The interest rate is the major how the program was constructed, it could result in mechanism the state can use to cover its some cash flow issues for homeowners, who might costs (and therefore keep the program cost still need to first pay their property tax payments to neutral to taxpayers). While the current rate is the county and would then apply for reimbursement too high, depending on the extent of changes from the state. made to eligibility, the Legislature may want Improve Affordability, to lower the interest rate less than it would otherwise (if the program were not expanded). But Limit State Risk • Total Amount of Deferment. The Legislature Lower the Interest Rate and Eliminate could limit the total amount of PTP deferment General Fund Sweep. For reasons we discussed to the estimated value of equity a homeowner earlier, the program’s interest rate of 7 percent holds in the home. This is, in practice, what is high. The high interest rate, coupled with the SCO already does with existing applicants, sweeping of fund balances above $15 million to but the requirement is not statutory. To the General Fund, means PTP provides a General mitigate state risk even further, the Legislature Fund benefit to taxpayers. To address these could set this threshold lower, for example, problems, we recommend the Legislature eliminate to 90 percent of the estimated value of equity the General Fund sweep and lower the interest held by the homeowner. rate. In particular, to account for variations in the • Number of Years of Participation. Another interest rate environment over time, the Legislature option to limit state risk is to limit the number could allow the rate to vary—for example, by linking of years a younger homeowner is allowed to it with earnings in the Pooled Money Investment participate in the program. For example, the Account. Historical data from the program suggests Legislature could limit those under the age that PTP’s historical interest rate was adequate to of 62 from accessing the program for more cover administrative costs and state losses from than, say, five years, but place no limit on delinquencies. those older than 62. Couple Changes to Eligibility With Options to Limit State Risk. If the Legislature expands eligibility in the program, as we outline above, the changes www.lao.ca.gov 17 analysis full gutter AN LAO REPORT LAO PUBLICATIONS This report was prepared by Ann Hollingshead and reviewed by Lourdes Morales and Carolyn Chu. 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 report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 18 LEGISLATIVE ANALYST’S OFFICE