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Tuesday, October 26, 2010

More from Ray

Great meeting at Sierra Oaks Vista last night. The giant billboard trailer was there again. Turns out it's a for hire thing, and the owner doesn't even livew in the area. Should we really have expected better?

If you can, please try to make one of the last few meetings. The election is a week away, and the time to let someone else do the heavy lifting is past. We all need to commit to taking a few steps here - talking to neighbors, dropping by local businesses, or whatever it takes. Within the bounds of propriety of course. We aren't the other side.

The closer we get to the election, the more I'm tied up with my day job and stru ggling to find time to do anything else. There is so much I want to be writing here, but just can't find the time. Luckily Ray is on a different schedule, and is able to help fill in the gaps. Take it away Ray!


Myth – Property taxes shown on the independent report requested by LAFCO will be much lower than projected.

The Stay Sacramento – No on Cityhood campaign has constantly claimed that taxes will be raised because property values in the area are declining. As an accountant, I decided to look at this “the sky is falling” view to see if it could hold up. On the other side, the LAFCO report does show that the property tax revenues are decreasing slightly over the next 10 years which did not make any sense to me either. Therefore, I decided to look at the issues using some real life assumptions. I would invite any and all realtors to add their input to this information, so that a professional will be able to add credence to my assumptions.

First, however, I need to give you two examples of how the property taxes work should you be unfamiliar with this issue.

It is good to remember that Proposition 13 limits property tax increases to a maximum of 2% per year, and also put into law that all tax increases must be approved by 2/3rd’s of the voters. Rhetorical question - Are you planning to vote for a tax increase any time soon?

Here are the two examples.

In my personal life, my mom’s house at the height of the real estate boom was worth approximately $580,000 to $605,000. Now the house may be put up for sale and the realtor shows that it could be sold for somewhere between $400,000 and $450,000, a decrease of about 30%, right in line with average property decreases throughout the state. Yet, if the house is not sold, the property taxes will continue to increase by 2% for the foreseeable future. How could that be? Well, since the property was purchased many years ago, when you look at the tax bill, the property taxes are based on a value, also known as the tax roll value, of about $100,000. Therefore, if the property is sold, the property taxes will go up about 4 times.

My wife and I bought our home in the Mission Oaks area in December 2002 for approximately $300,000. (It was a great location, near Mira Loma HS for our youngest daughter, close to markets and restaurants, and easy access to the freeway to get downtown and the airport.) Two years later, the home was valued at between 0$400,000 and $425,000, about a 25% increase! We were ecstatic!! Well, then real estate values declined, and when we refinanced our home earlier this year, the value of the home was back at about $300,000. Wow, what a let down. L Nine years and we were back where we started. Well I looked at our recent property tax bill and sure enough, the value on the property tax rolls still show the value at the original value, and the property taxes that will be due this year will be basically the same as it was last year.

I also called the Sacramento County Assessor’s office and discovered that their office had automatically lowered the values of most homes purchased in Sacramento County during 2004 and 2005 to reflect the downturn, and these revised values were reflected in the LAFCO report that was completed for the year 2008-2009.

There were people that did purchase homes at the height of the market that may not yet have had their values reduced to the current market values. According to the Assessor’s office, they are eligible to make a Prop 8 claim, in which the assessor will review the tax roll values again. I will address this issue in my analysis.

Finally, the assessor’s office told me that property taxes on foreclosed properties become the responsibility of the financial institution that forecloses. A lien is placed on the property for all delinquent property taxes and must be cleared before the property can be resold. Therefore, any implication that there is a loss of property taxes in this situation in invalid. There would only be a delay to the city in collecting these taxes for any property that falls into that category.

Because of the complexity of the analysis, I used an Excel spreadsheet, which I forward to anyone that requests it. However, I am unable to attach it to this article so I hope you will trust me in my conclusions without actually seeing the data.

My first assumption is that I will use the property tax revenue figure shown in the second year column from the LAFCO report. The report shows that this is the first revenues will be received in this category, and since property tax collections are always paid for the prior year, they represent the taxes collected for the first year the city is in existence.

Second, property values will stay flat over the next 10 years. (See my discussion “Three reasons why Sacramento County wants the City of Arden Arcade to be successful” on the Arden Arcade Facebook page in which I believe that property values will in fact increase over the next ten years. However, it is an argument that I have asked a realtor to address.)

Third, 10% of the properties in the area purchased at the peak of the market have not been reduced to their current tax roll values. I will use a downward adjustment of 20%.

Fourth, 20% of the properties in the area, are similar to my property, the property taxes will not increase over the next 10 years.

Fifth, 20% of the properties in the area, have only experienced a small increase in the property values and will only experience a 1% yearly increase.

Sixth, the remainder of the properties fall into the category of my mom’s house, and will continue to experience a full 2% tax increase under Prop 13 over the remaining 10 years.

Scenario 1:
Here are the numbers. Under the LAFCO budget, total Property Tax revenues for the entire 10 year period total $53,280,000. According to the revised analysis, the total revenues show a total of $56,084,000, or an increase of $2,804,000. The analysis does show that the first year the LAFCO budget is higher by $137,000, but all other years show that the revised analysis that I prepared has larger revenues.

OK, Ray, aren’t you being overly optimistic? Well, let me change my third assumption above, and instead of only 10% of the properties being lowered, let’s use 20%.

Scenario 2:
Again, here are the numbers. Under the LAFCO budget, total Property Tax revenues again total $53,280,000. According to the revised analysis, the total revenues show a total of $54,588,000, or an increase of $1,308,000. This analysis does show that the first three years the LAFCO budget are higher by $273,960, $150,470, and $26,750 respectively, but again all other years show that the revised analysis that I prepared has larger revenues. And I want you all to remember that the LAFCO budget also shows a 5% contingency for each year which is a minimum of $1,113,000 the first year and increases from there. This contingency dwarf’s any property tax shortage in my analysis.

Scenario 3:
But let’s add one more assumption. Starting with all the assumptions in Scenario 2, doesn’t it make sense that homes will be selling during the 10 year period? I will make a simple assumption that there will be a small 2% sale activity only for years 4, 6, 8 and 10. Also instead of using my mom’s example, of a 4 fold increase in the tax value, I will only use a figure of twice the amount currently being collected, i.e. a tax roll basis of $100,000 before the home is sold, and a tax roll basis of $200,000 afterward.

Again, here are the numbers. Under the LAFCO budget, total Property Tax revenues again total $53,280,000. According to the revised analysis, the total revenues show a total of $59,255,000, or an increase of $5,975,000. That’s almost $6 million above the current $35 million operational budget surplus that is shown on the LAFCO report. This analysis does again show that the first year the LAFCO budget are higher by $273,960, but again all other years show that the revised analysis that I prepared has larger revenues.

And remember, I started with an assumption that property values will not go up over the next ten years. Do you think that is reasonable?

As always, I want everyone to do their own research, and I think you will end up seeing how a ‘Yes’ on Measure D is the only way to get away from Sacramento County with its the huge inefficiencies and budget deficits. And, because of this, the county will never be able to focus on the needs of our area.

Ray, the Accountant

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