Squeezed taxes put agencies in a bind

Tax rate 'compression' brings fiscal hammer down on local services
by: CHRISTOPHER ONSTOTT Urban renewal projects like those in South Waterfront are tying up an increasing amount of property tax dollars, limiting the City Council’s responses to revenue shortfalls.

A perfect storm of economic bad news is battering the state, stifling employment, suppressing wages and depressing property values. One result is lower-than-expected tax collections, forcing local governments to consider cutting services as the demand for them increases.

In late September, Gov. John Kitzhaber directed state agencies to draft their next budgets with possible reductions of between 5 percent and 10 percent. In early October, Mayor Sam Adams told city bureau directors to prepare for possible budget cuts of 4 percent, 6 percent and 8 percent.

Just last week, TriMet General Manager Neil McFarlane revealed that the regional transit agency was facing a shortfall of $12 million to $17 million in next year's budget.

The situation is a sharp reversal from just a few months ago. In May, state economists told Oregon lawmakers the economy was improving and they would have more money to spend during the next two years. Around that time, Portland's City Council approved a new budget that included about $500,000 for a new bureau, the Office of Equity. And McFarlane was talking about restoring service cuts as TriMet's top priority.

But, as TriMet's board learned last week, the economy has stalled again. McFarlane says the agency expects to receive about $3 million less in payroll tax revenue than expected because of stagnant wage growth. The payroll tax accounts for roughly half of TriMet's budget.

'I'm not sure I've ever seen so many forces of uncertainty coming together,' McFarlane told the board Oct. 26.

Another problem facing city budgets includes declining statewide revenue. The Bureau of Transportation said this week that falling state gas tax revenue could force it to cut $16 million to balance its 2012-13 budget, meaning the loss of dozens of jobs. The gas tax is the largest source of funding for city transportation projects.

'Today we are faced with two interrelated challenges,' said Tom Miller, the bureau's director. 'We must provide basic transportation services even as we make strategic choices about Portland's transportation future. And we are forced to do it all with an ever-shrinking number of dollars.'

Slow wage growth is also a major factor in the state's budget problems. Because Oregon does not have a sales tax, the state's general fund budget is more dependent on income taxes than other states.

Property tax statements arriving in the mail reveal one problem confronting Portland and other municipal governments. The real market value of many properties has dropped from last year. That reduced the amount of property taxes some local governments - including the city of Portland - can collect.

Tax experts call it 'compression,' a byproduct of Oregon's complicated property tax limitation system.

'Falling market values are preventing some local governments from collecting all of the property taxes they are legally entitled to collect,' says Tom Linhares, executive director of the Multnomah County Tax Supervising and Conservation Commission.

For example, in the fiscal year that began on July 1, compression is preventing Portland from collecting nearly $16 million. The amount is likely to be even more in the fiscal year that begins July 1, 2012 - the year Adams has told bureau heads to prepare for cuts.

Dropping market value

Modern governments are funded from so many different sources that it is impossible to pin their budget woes on a single one. For example, Portland also expects lower-then-usual collections from business licenses because of the poor economy. The city and TriMet also believe the federal government will deeply cut money it sends each year to state, regional and local governments.

Property tax restrictions caused by compression are also contributing to the projected shortfalls, however. Compression happens when tax rates on individual properties exceed the tax limitation of $15 per $1,000 of assessed value established by voters in the state Constitution for schools and general government operations. That can happen if voters approve new local option levies that push the cumulative tax rate above the $15 per $1,000 of property value.

Compression can also happen when a property's real market value drops to a property's assessed value, the separate value established on which taxes are based. That is happening more often because of declining real market property values. The assessed value automatically increases 3 percent a year.

Because of compression, total property tax collections throughout Multnomah County are only projected to increase 1.2 percent this fiscal year, less than half the automatic 3 percent increase and less than inflation. Altogether, governments within Multnomah County were prevented from collecting around $86 million in property tax revenue, according to Multnomah County Assessor Randy Walruff.

Although that is a small percentage of about $1.3 billion the governments could have collected, the shortfalls to some jurisdictions are significant. For example, the county was prevented from collecting nearly $26.6 million in property taxes, including nearly $10 million that would have gone to general operating expenses. Almost $17 million would have gone to the library system, which is funded by a local option levy that is more vulnerable to compression.

Walruff says compression can theoretically continue to happen until the real market value of all taxable property in Multnomah County falls to its assessed value, further reducing property taxes that can be collected. According to Walruff, that has already happened in some parts of the state, including Deschutes County, which is at 100 percent compression.

Undue burden

The city of Portland is limited in its ability to react to the compression-caused shortfalls. An audit released in July warned that the city has locked up an increasingly large percent of its property tax dollars in long-term commitments, including bond debt.

When City Auditor Lavonne Griffin-Valade released the audit, she said the City Council must soon begin making hard decisions to ensure Portland's fiscal sustainability.

'Improving the city's financial position will involve difficult decisions, but council must act soon to ensure an undue burden is not placed on future generations,' Griffin-Valade wrote in the audit.

One issue identified in the audit is the growing share of property tax dollars committed to urban renewal bonds. Those projects overseen by the Portland Development Commission have created new neighborhoods in the Pearl District and South Waterfront. They have also helped to fund affordable housing development around town and such transit projects as the Interstate MAX line and the Portland Streetcar loop.

But bonds to fund the projects are consuming a larger share of the city's property tax dollars. According to the audit, the amount committed to urban renewal bonds grew from 16 percent in 2001 to 24 percent in 2010.

Another commitment is the Fire and Police Disability and Retirement Fund, which has consistently consumed 25 percent of property tax dollars during the past nine years.

When the commitments are totaled, the amount of discretionary general fund dollars has dropped 10 percent since 2001, from 56 percent to 46 percent.

After the audit was released, the city Office of Management and Finance argued that Portland was in better financial shape than most other cities its size. Four months later, the continued poor economy is forcing the council to consider the kind of hard decisions Griffin-Valade warned about.