Motion passed by the city council, essentially tabling this floating property tax issue. See tracking the action for the details of the motion.

Yet Another Critical Financial Problem Facing the City Right Now

Citizens for Phoenix has had several meetings with key people in the finance area of the City of Phoenix. Each has expressed concern that unless the property tax rate is permitted to float higher in the future, then the amount of taxes collected by the city will decline in direct proportion to assessed values, and the result will be insufficient cash to cover the city’s bond interest. 

This is Why and How They Propose to Raise the Property Tax:

The City of Phoenix receives funding for both its general fund and for its debt service from property taxes. These taxes, as seen on any homeowner’s tax statement, are currently a fixed rate total of $1.82 per $100 of assessed value of the home. 

Different types of property are assessed at different rates, however, owner occupied residential property is assessed at 10%.  A house with a $200,000 assessed value (the average in the city of Phoenix) would be assessed as follows:

 

$200,000   owner occupied assessed value

  X    10%     assessment ratio

  $20,000

/      $100    “per $100”

      $200

X    $1.82    current tax rate

=    $364     total property tax paid to the city of Phoenix

 

However, while the $1.82 rate has historically been fixed, it is actually made up of two separate rates whose proportions may shift from year to year, but can never exceed the $1.82 total fixed rate.

The first rate, known as the primary rate, is currently fixed at 0.8832 per $100 of a home’s assessed valuation and all monies collected from this portion of the rate go directly to the General Fund. A home with the assessed value of $200,000 would thereby have a primary tax of $176.64. This portion of the total tax is used for general fund purposes which include the police, firemen and all other general city services.

The secondary rate has always been fixed in the past as well and is currently 0.9368 per $100 of the assessed valuation. Thus, the owner of a $200,000 home would pay a secondary tax of $187.36. This portion of the total tax is used to support the bond obligations of the city.

Therefore, the property tax the homeowner currently pays on a $200,000 home is made up of $176.64 from the primary rate + $187.36 from the secondary rate for a total combined annual payment of $364.00.

Bond rating agencies (which determine our city credit rating) look to the ability of the city to cover principal and interest payments as well as how they will provide contingency funds to cover shortfalls in tax receipts, as part of the rating formula to determine a city’s credit worthiness.  This is where the problem lies.

The city has a significant problem with its receipt of property taxes because they are based upon assessed valuations. Everyone knows that these valuations have been dropping due to the current real estate collapse. As those valuations diminish, the city is foreseeing that if the property tax rate remains at $1.82 the taxes it receives will go down; hence the budgetary shortfall.

Critical in this analysis is the fact that it is from the secondary tax that the city receives funds to pay for the principal and interest of bonds that it has already sold and those it hopes to sell in the future. If the amount to be received  from the secondary rate is reduced because assessed values have been reduced, it might  seem like a good thing for the taxpayer, but it is potentially devastating to the city if it cannot recover enough funds to cover the obligations it has to service its bonds.

As the assessed valuation goes down, and the interest and principal obligations remain steady, the secondary rate must be increased to a higher percentage rate of a lower assessed value or the city will not have enough funding to cover these fixed debt obligations, and its credit rating will drop.  Therefore, the city is proposing that the City Council adopt a policy to allow the secondary rate portion of the property tax to float, up or down as needed in any given year, but only to that amount necessary to cover their debt service.

With this floating rate plan, the average homeowner will still see lowered taxes as some in the city have claimed, however, these will still be higher than they would have been if the rate had not been floated. Or, stated another way, the taxes paid if the secondary rate is increased will still go down, but it is also true and must be noted that they will go down less than they would have if the rate had not been allowed to float (see example).

Why Not Take the Money From the Primary Rate?

There are those who would argue that the city should shift some of the funds from the primary tax to cover their bond obligations rather then float the secondary rate higher. This is actually the only other legal option available to the city if they do not float the secondary property tax rate higher.

However, this option would require taking $60 million from the General Fund immediately, which would put us right back where we were last February before we balanced the budget. 

So now we would have accepted a 2% food tax, and still be facing massive cuts to public safety and city services because that tax money would now have to be diverted from the General Fund to service our bond obligations.

Between a Rock and a Hard Place

The city believes that without a policy in place to allow them to float its secondary rate when needed to cover debt service, not only will they have to default on future payments, the bond rating agencies would lower our credit rating at our next review (this summer) which would seriously impact our city for generations to come.

Our group understands the issue as presented by city officials, but recalling that our principles rest upon fiscal responsibility, which is defined by living within one’s means, we feel as if we are trapped between a rock and a hard place for the following reasons:

a) Together we found a way to balance the 2010 -11 budget with everyone’s participation and sacrifice.  It took one time accounting maneuvers which cannot be duplicated next year; reductions in salaries and benefits by the police, fire, and civilian unions; cuts to many necessary services; and department mergers which may produce some savings that have yet to be seen.

But, the city is still holding over 250 full-time positions empty on their books and listing them as a savings. We still have never seen the entire budget, only those things the city wanted to cut. So how do we know there are not more cuts available that we would choose, but they haven’t?

b) We do not want to hinder the ability of the city to meet its obligations or endanger the bond ratings of the city.

But we are reluctant to continue to support the assessing of additional taxes without serious spending restraints attached to them which will clearly demonstrate the city’s visible movement toward a more fiscally responsible structure.

c) We are concerned that having just accepted a food tax and without the results of the citywide audits that will help determine what further cuts to city programs, personnel, and services are possible, there couldn’t be a worse time to increase the property tax without some concrete restrictions on spending.

But, not to pass the property tax rate increase and be forced to take the money out of the General Fund would wreak its own share of havoc on the citizens.

What is the City Going to Do and What is the Dollar Impact to Us?

On May 25th, the Mayor and Council will vote on whether to make the secondary rate a floating rate that will, by policy, float up or float down, to only that percentage necessary to cover its debt service. If passed, this rate change will not go into effect until fiscal year 2012-13 and is estimated to rise to $1.95 because assessed values are estimated to go down another 10% and that is the ratio needed to cover the debt. 

However, if the estimate forecasted for assessed values are flat in 2012-13, then by policy, the rate would not need to float up if it is sufficient to cover the debt for that year and total tax rate would remain at $1.82.

What is Our Response?

After much deliberation, we believe that it is not the place of this group to take a formal position to fight or to support this tax.  We believe it is our responsibility to educate our members to the fullest extent possible, including the pros and cons of all sides of the issue, so that each of you can make an informed decision whether to support or oppose this tax based upon the immediate interests and concerns of your families. 

If you do choose to allow the Mayor and Council to vote to float the secondary property tax rate, it is our recommendation that you let them know you are not happy about supporting an increase, but will do it as long as spending restraints on bonds be enacted concurrently as a condition of accepting the policy change. 

Citizens for Phoenix has clearly demonstrated the desire to support the elected officials and management of the City of Phoenix while remaining committed to educating and unifying the electorate. 

Given the critical nature of this subject we would encourage all citizens to reflect carefully upon the information we have provided, how it will impact them,  and then make their opinions known by emailing their councilperson and/or attending this crucial meeting if desired: May 25th, 2pm, at the City Council Chambers: 200 West Jefferson Street, Phoenix.

We have provided both “for” and “against” the tax emails for you to choose from if you would like to send them from this site. 

The important thing is to act now, whether you send one of these or one of your own making, you must let your voice be heard!