Wednesday, Dec. 13, 2006 | Monday was the last day for San Diego County residents to pay their property taxes. This has been a particularly lucrative time of year for local governments in recent times. The combination of an awe-inspiring housing boom and a strong economy has thrust property values into the stratosphere.
The now-elderly, but still-virile Proposition 13 continues to serve its purpose to reward homeowners with stable property taxes if they stay put. But they don’t all stay put and, in spite of Proposition 13, local governments around the region have pulled in enormous sums of money as properties everywhere change hands.
For a good example, look at the city of Chula Vista. According to the county’s records and the city’s budget, the city of Chula Vista will collect nearly double the amount of property taxes this year than it did just five years ago. The county of San Diego, which collects the taxes for all local agencies, will this year dole out 31 percent more to the city of San Diego than it did three years ago.
It’s very sobering to note that the city has found itself in such a paralyzing financial crisis at the same time it experienced such an impressive increase in property tax revenue. What, one wonders, might be the situation had property values not gone through the roof?
But the boom is over. In putting together their five-year financial forecast, Mayor Jerry Sanders’ staff recognized the housing market slowdown underway and expressly worried about the possibility that next year, in 2007, the median price of a single-family home in San Diego County could drop to as low as $550,000. That, again, he worried could happen by next year.
Unfortunately for the mayor’s projections, we’re already there. There are two major local surveyors of home prices: the firm DataQuick Information Systems and the San Diego Association of Realtors. DataQuick puts the median price of a single-family home in San Diego County at $535,000. The Realtors put it at $550,000.
Regardless, the housing market may be correcting itself even faster than the mayor’s gloomy predictions envision.
But the mayor, at least, has tried to imagine the less-luxurious times in store for the housing market and, therefore, the potential revenues the city may rake in. In his much-publicized five-year financial plan, the mayor projects a modest 2 percent growth in property taxes each year until 2012.
This is a conservative estimate and the mayor’s staff should be commended for avoiding what must be the inevitable temptation to inflate projected revenues to justify current and future promises to employees and residents. Sanders has a difficult job ahead trying to balance the budget as it is and we eagerly await his promised solutions.
But at least he’s looking at the numbers as a realist. Sanders has even wisely recognized the potential of a real estate slowdown’s effect on sales tax revenue as well. After all, people have been using their homes as ATMs: As their property values increased, they pulled out loans and spent them. If property values continue to fall, consumerism might slow down as well.
It’s not so certain, on the other hand, that Chula Vista will choose an equally realistic fiscal path. Chula Vista officials in May released a five-year projection of revenues that envisions the city collecting an increase of 7 percent in its property taxes each year until 2011.
The city’s director of finance said that she and others are in the process of updating those projections to perhaps better account for the deflating home prices.
This will be difficult for Chula Vista to do. It has already promised its police officers, for example, very healthy pay increases for each of the next five years. This year, the police will receive a 10 percent increase in pay. In 2007, 2008, 2009 and 2010, the police are guaranteed raises of 4 percent, 3 percent, 4 percent and 4 percent respectively.
The city of Chula Vista, however, is guaranteed nothing in increased tax revenues. It should not, nor should any planner, assume that they will come just because recent years have been so robust.
Even with the revenue floods, Chula Vista has had to reach into its fiscal reserves. What would happen without such increases in property tax revenue?
We encourage Chula Vista and all local cities to plan conservatively for a time when property taxes don’t flow so readily. You cannot plan a farm based on the water levels measured during flood years. Similarly, city planners should try to envision receiving a very small – if any – increase in revenue so that they are not left with only one place to turn as they watch their coffers dry up: the taxpayers.
Or, if they choose to spend as before, they should warn taxpayers that if per chance property tax and sales tax increases don’t rise like they have in the past few years, they will need some help paying the bills.