West Coast - Wednesday, July 23, 2008 12:53 - 1 Comment

Property tax revenue drop hitting many cities hard

The housing market meltdown that is eroding homeowner equity is now hurting local governments as county assessors in hard-hit portions of the state, including the East Bay, report that property tax revenues will be far less than anticipated.

In Contra Costa, the extent of the softening of property assessments for the 2008-09 fiscal year caught city and county officials by surprise. “We were quite shocked,” said County Administrator John Cullen as he pondered how the county will make up an unanticipated $12.7 million shortfall in an already lean budget year. Almost half of that will have to come out of fire and library services.

California voters in 1978, property taxes are set at 1 percent of assessed value. And that assessed value can only increase at a rate of 2 percent annually up to the market value. When a property is sold, the valuation is reset to the market price.As a result, for most homes, because of the fast run-up in real estate prices over the past decade, the assessed value is usually less — often far less — than the market value. So, even when prices decline, the assessed value on most houses will continue to rise by 2 percent. The exception is a recently purchased home that has lost market value.

That’s why most officials expected to see a softening in the rate of increase of total assessed value of property in their communities, but few were prepared for a flattening or, in the case of some cities, an actual decrease. They were surprised that the dramatic decrease in values of recently purchased homes overwhelmed the assessment increases on long-held properties.

Antioch and Brentwood officials were anticipating 3 percent to 4 percent increases in the assessed value of all property in those cities and instead were shocked by record 9 percent decreases. In Oakley and San Pablo, projected 2 percent increases turned into, respectively, 5 percent and 3 percent cuts.

In Contra Costa County government, Cullen was forecasting a 4 percent increase in assessed value and instead learned that tax assessments overall would show almost no change. The difference is why he has to cut another $12.7 million.

Contra Costa is hardly unique. In the Central Valley, Stanislaus County experienced a 7 percent decline and San Joaquin declined 1 percent. But the downturn in property tax revenues will not be universal. For example, assessed value of property increased 5 percent in Alameda County and 8 percent in San Mateo County.

The communities hardest hit are generally those with the largest stocks of new homes — houses that were purchased, and assessed, at the peak of the market before prices tumbled. That’s why eastern Contra Costa will suffer greater tax hits than most other parts of the East Bay and why Central Valley communities such as Stockton, Tracy and Lathrop experienced declines.

In Contra Costa, the news is just circulating. Assessor Gus Kramer reduced the valuation on 30 percent of the 274,400 single-family homes in the county. “We were caught completely off guard,” said Brentwood City Manager Donna Landeros. “No way,” said San Pablo Finance Director Bradley Ward when I told him about his city’s assessment.

Some county and city officials, including Cullen, Landeros, Jakel and Oakley City Manager Bryan Montgomery, say they were led to believe by Kramer or members of his office that the hit would not be as severe. For his part, Kramer insists he misled no one.

What seems almost certain is that next year will be even worse. That’s because the latest assessments for the 2008-09 fiscal year, which began July 1, are based on the value of homes as of Jan. 1, 2008. Similarly, next year’s assessment will be based on the value as of Jan. 1, 2009. We’re halfway there already and, since the start of the year, property values have only declined further.

In Antioch, the drop will wipe out about $1.25 million in revenues this year, or nearly 3 percent of the city’s income. “I was very surprised to see that number,” said City Manager Jim Jakel, who hopes to cover the shortfall by not filling positions as employees leave.

Officials expected past increases in property assessments, and the resulting tax revenues, would slow in the throes of the housing market collapse. But they thought their property tax revenues were insulated from an actual decline because of the unique way property is valued for tax purposes in California. They were wrong — as they are now learning long after they passed their budgets for the fiscal year that started July 1.

Here’s how the assessment system works: Under Proposition 13, approved by