How low will they go?

Bending to market pressures, Cuyahoga County Auditor Frank Russo recently announced that the County’s 2009 valuation update will likely result in significant decreases in the County’s assessed value of residential homes – with an 8% average reduction across the County. 


The media reports note that the State intends to compare Mr. Russo’s proposed values to the actual sales figures from each community and will ultimately approve new fair market values likely between 92% to 94% of the fair market value.  The State’s suggestion of a 6% to 8% discount off of the appraised fair market value is really aimed at those properties that have not been recently sold. This “discount” should not be applicable to those non-residential properties where there was a recent arm’s length sale of the property. 


School districts (when the sale exceeds the current assessed value) and property owners (when the sale is below the assessed value) actively seek adjustment of the market value of the non-residential properties to an amount equal to the purchase price. The Ohio Supreme Court has held that the purchase price paid in an arm’s length sale is the best indication of the fair market value of real property.  


The Auditor’s decision to seek an 8% average reduction in value comes at the close of the property tax complaint filing season which ended March 31. In Cuyahoga County alone, a reported 17,000 decrease complaints were filed at the Cuyahoga County Board of Revision with respect to the 2008 tax year. Compared to the record 10,000 decrease filings last year with respect to the 2007 tax year, the 2008 “off-year” filings (the last year of the 2006-2008 triennium) are extremely notable.  


So, what will this mean?


To the County:


The County is likely hoping that by making value reductions itself, it will deter a crush of 2009 tax year filings next spring.  Not likely. Except in a few special circumstances, property owners are permitted to file a reduction complaint only once every triennium with the largest filing push often seen in the first year of the triennium.   The 2009 tax year is both a full reappraisal year in Cuyahoga County and the first year in the next triennium (which is usually marked by the highest number of decrease complaints). 


By throwing property owners a bone in the form of the proposed decreases, the County may satisfy some property owners. But for those who track the decline in the median home values since 2007, an 8% or even 10% reduction might not be enough to satisfy their concerns.

To the Property Owners:

Not as much as they would hope. The real impact will vary from city to city based upon the size and types of levies already on the books.  In each community, only certain fixed rate levies will be affected by the reduced property values.      


Only the first 10 “inside” (or unvoted) mills in a community and the “20 mill floor” allowed to the school district (a.k.a. the “growing” mills) for certain school district operating costs will cause tax bills to rise or fall with changing property values. 


These growing mills are approved by voters and enjoy the same growth potential as the inside mills during a positive market and can generate an increasing level of tax revenue as property values increase over time. In down markets when the overall community property values are reduced, they will result in less taxes generated and decreased revenue.    


But a second group of levies–which make up the largest portion of a community’s bundle of levies and are commonly referred to as the “outside” millage–will not result in lower taxes during a down market. Instead, they generate the same amount of taxes and a level income stream to the benefited parties, despite what happens to property values. 


The effect of House Bill 920:


This result is thanks to House Bill 920 enacted in 1976, among other reasons, to control the increase in property tax bills as market values grew at an inflationary pace. H.B. 920 regulates most voter-approved levies including most of the outside millage, but excludes the inside mills, the growing mills, as well as the levies approved by voters to generate specific dollar amounts to pay the principal and interest on bonds or for emergency school levies from its adjustments.


H.B. 920 causes the outside millage (and tax rates) to adjust downward as overall property values increase so that a constant stream of tax dollars is generated. This reduction in millage or effective tax rates is known as the application of a tax reduction factor. While it protects taxpayers from unvoted growth in their property tax bills, it routinely frustrates cities and school districts alike as it requires repeated trips to the polls as new tax revenues are needed.   


It is interesting that H.B. 920 is silent about what happens when overall property values actually decrease.The original drafters in 1976 HB 920 did not specifically address what would happen in a down market. Franklin County Auditor Joe Testa stated that the tax reduction factors in H.B. 920 actually work in the reverse to keep the stream of revenue to cities and school districts constant. In down markets, the adjustment would occur by applying a lesser tax reduction factor to the original voter approved millage (vs. the prior year) meaning the effective tax rate would actually increase when compared to the prior year. However, the tax reduction factor applied could never cause the effective tax rate to exceed the original voter approved millage.


Even in today’s market, there should be enough rebound room between the original voter approved millage and the current millage rate so that the millage can be “increased” (or not decreased as much as in past years) and still generate the same intended tax dollars.   However, if the market values fall too dramatically and levies don’t have much upward adjustment room, we may see some levies freeze or slip below what was originally intended. Depending upon your point of view, the good news is that the values have not slipped that far—yet.