Michael A. Jacoby is the executive director of the Illinois Association of School Business Officials, based in DeKalb. Rebecca Weidner is a copywriter on Illinois ASBO’s marketing team. This article was sent to Illinois ASBO members in November and is used with permission.
Now that property values in most communities are in decline since the real estate bubble burst several years ago, a new reality is emerging in districts subject to the Property Tax Extension Limitation Law (PTELL). With declining values and a continuing increase in the consumer price index (CPI), district tax rates are increasing proportionately. The impact of this for a local property owner can be the sad reality of the loss of value in his or her property corresponding with a higher tax rate to produce an aggregate tax extension that matches the increase in CPI.
An additional complication is that local property taxes are the aggregate mix of residential, commercial and industrial values. So, even if a parcel changes in value, the rate associated with that parcel is connected to the value changes (up or down) of all other parcels within the jurisdiction of the local taxing body.
Transparency is difficult to come by as these equations are extremely detailed. In addition, many separate and distinct entities such as township assessors, county assessors, county clerks, the Department of Revenue, the Property Tax Appeal Board and other local governmental entities are responsible for determining the variables that make up the tax bill.
In light of this emerging issue, legislators introduced legislation that would establish additional caps on local extensions where aggregate property values were decreasing. While those efforts (HB 3793/SB 2073) sounded good to taxpayers, the rhetoric around them — though loudly spoken — was full of half-truths.
Nothing in these bills would have guaranteed lower tax bills for residents, and the decline in services (police, fire, municipal, schools, parks, etc.) could have been devastating to communities. HB 3793 was defeated resoundingly (34-75) in early November.
But just because the bill is dead, school districts should not relax efforts to address value and tax relationships with their communities.
Several years ago, the CPI was at 0.1 percent, which was nearly the zero percent proposed, and the incidence of declining values and increasing tax rates was still present.
Illinois already has a significant equity gap between districts and setting an additional cap only on some for reasons that may not even be associated with residential property values, would simply exacerbate the issue. With more than 60 percent of all school funding in Illinois dependent on local property taxes and with ever decreasing financial support from state and federal resources, such an additional cap would severely impact the quality of instruction for our children and erode the one thing that contributes to higher property values — excellent schools.
In response to this growing problem, Illinois ASBO gathered various district leaders who were already experiencing or anticipating declining EAV and increasing tax rates for a discussion group. Out of this timely and relevant discussion, emerged a list of 10 best practices for districts that may be experiencing or looking toward this issue.
Focus group districts
Of the districts represented at the discussion group:
Six were experiencing their first year of declining EAV and increasing tax rates. They saw an average decline in EAV of around 7 percent with the resulting average tax rate increases of 14 percent.
Five were in their second year, with an average EAV decline of 3 percent in the first year and around 6 percent in the second year.
Two represented districts that were in their third year of declining EAV, averaging 9 percent.
Three districts came in anticipation of this issue in the future.
On average, in the second and third year of decline, districts experienced an increased tax rate of around 4 percent.
Community awareness
The first logical question was: “What kind of dialogue has there been on the issue?”
The majority in attendance had already begun preliminary discussions with their boards, although depending on the background and experience of board members, the level of understanding varied. The best scenario was an active board that was able to go into the community and explain the issue.
In most represented districts, the community was starting to become more aware, with a few districts beginning to get some calls from press and community members.
As districts were not yet feeling heavy pressure from outside forces, participants decided that planning and preparing now for how to communicate about this issue was necessary. Thus, the following list of Top 10 Best Practices emerged:
Communicate early. Making board and communities aware of the emerging issue is seen as the first and most important action a leadership team can take. This should not be a surprise when tax bills are distributed!
Limit “defensive” or “protective” levies. When values were increasing and new property was emerging at record rates, districts often responded by levying in excess of what they expected to receive. This protected against an under-levy and permanent losses in extension. Now that values are decreasing, the CPI may be a better measure for anticipating the increase in levy requests. Staying below the 5 percent level also eliminates the need for public hearings on the tax levy. In the end, the CPI is going to determine the actual extension, so why ponder something greater if not necessary? Some districts are abiding by the “Truth in Taxation” procedure even if the levy is less than 5 percent, which is something to consider.
Place tax rates in a long-range context. This means showing the current rate in light of the long-term rate trends. Since most property taxpayers only understand the current rate against their current value, it is good for them to see the rate changes over the last 10 to 20 years when the typical impact of PTELL was to lower rates or keep them steady.
Communicate about PTAB. When an adverse decision is rendered by the Property Tax Appeal Board, it is best to publicly communicate the impact as soon as practicable. This mitigates a misunderstanding of the shift of tax burden between corporate and industrial and residential taxes.
Interact with assessors. A practical step is to interact with assessors so that districts can know what their targets are for assessment and the impact triennial or quadrennial assessments will have when implemented.
Compare current rates to voter approved rates. Again, the impact of PTELL over time has been to reduce tax rates well below those rates already approved by voters. Comparing current rates to the voter-approved rates will often show that the rate is still lower than the community agreed it would embrace through referendum.
Adopt levies early. Several districts in Cook County have adopted levies earlier in the fiscal year in order to have that discussion take place in the community outside of the time when tax bills from the prior year levy are being received. Since property taxes are almost always perceived as onerous, discussing a future levy at the same time as residents are paying the current tax can be problematic.
Have proactive dialogue. Discussing options in advance with a board of education can mitigate a reactive decision regarding levies, rates and budgets.
Make no promises. In prior economic time, it was quite common to make tax rate promises when presenting a referendum to the community. Now that the volatility of local values is quite real, it is prudent to refrain from those types of commitments.
Abate and restructure debt. While this is an option to lower the overall tax rate, it can be used only sparingly and restructuring can happen only once. However, if the options are to restructure or abate versus lowering the levy for operating funds, it is a better option to lower the bond and interest rate than permanently lose extension for the education or other operating funds.
‘De-geeking’ the issue
The idea of creating simpler explanations so that the board and community members could more easily understand the complexity of this issue is a challenge for every school leader. Suggestions include:
Clarify that the district levies dollars as opposed to a rate.
Create easy to understand graphics.
Produce a series of short, simple communications so stakeholders can understand all the moving parts.
Use simple “cause and effect” illustrations, i.e., “If we levy X dollars, our budget will look like X in the long term and the typical tax bill will change by X.”
What’s next?
Many policy-related issues were suggested in the discussion. Illinois ASBO has already begun to address some, and will continue to explore them more specifically through the Delegate Advisory Assembly. These include: TIF transparency, the raising of statutory rate limits and PTAB recovery.
A future issue may be to look more carefully at the Cook County multiplier and the necessity of processing a levy under the tax cap.
Illinois ASBO will continue to watch for issues such as this that may lend to future discussion groups and look for ways to aid districts with their many challenges.