Budget Trends in the City of Hartford

Hartford is in the middle of a budget debate in which City leaders work to close a meaningful gap between revenue and expenses. There are many moving parts to the discussion, and difficult decisions will be made. There is also one real estate related consideration that we want to highlight.

Last June the state legislature passed a law that defines how the City of Hartford’s split property tax system will work for the coming five years. A new provision was added that ties the residential assessment ratio directly to the changes in the inflation-adjusted tax levy. (Here is more information for those interested in background on the property taxes in Hartford)

Stone Field, HartfordMy understanding is that the provision is trying to say that if City spending outpaces inflation, then more of the tax burden will shift to the residential taxpayers. Nobody knows how this provision will play out since it is brand new. We do know that it will not be triggered for the coming tax year – grand list 2011, which runs from July 2012 through June 2013.

With the City facing a $56m budget gap, it seems unlikely that it will be triggered next year either. The budget being put together right now will need to be less than last year’s budget in order to balance. Inflation is almost certainly going to be positive, so City spending will not outpace inflation. However, it is much less clear what will happen for the year after that.

Suppose City leaders aggressively cut the budget for the coming year, which allows tax revenue to also be meaningfully cut. If these cuts are not sustainable, and the City needs to increase revenue next year through higher taxes, then it’s possible that the new provision in the property tax legislation would be triggered, shifting tax burden to residential property owners.

Although we have been following the budget discussion through the media, and attended one of the Council Committee of the Whole budget workshops, we do not have much visibility into expenses in future years. We know that pension contributions are increasing to make up for the meaningful losses that the pension fund experienced during the downturn in the financial markets from 2007 – 2009. Perhaps there are other expected expenses on the horizon that City leaders can plan for.

The most recent Courant article about the budget talks notes that City Council is reluctant to increase the mill rate to offset the decrease in property values identified in revaluation 2011. Presumably, part of their reluctance is to protect homeowners in addition to the perception issues specifically mentioned.

We encourage leaders to keep homeowners in mind as they work through the City’s financial issues. Certainly a smaller budget, and lower accompanying taxes, is a worthy goal that many homeowners would appreciate. However, it may turn out to be more advantageous to gradually reduce the budget and tax levy over the course of multiple years than to make a single dramatic cut.

Dropping the property tax levy too much this year could set the stage for an accelerated shift of the tax burden to homeowners that could have strongly negative consequences in the long run. Especially since the shift would be on top of the scheduled 3.5% increase in residential taxes that is also built into the law.

So are we actually asking for more taxes? Yes and no.

Taxes would (ideally) be flat or down for most homeowners in dollar terms – how much they actually owe for the year beginning in July 2012 – so no, we’re not asking for more taxes. But the mill rate would increase, and we would be taxed at a higher percentage of our property’s value, which means there would be a perception of a tax increase and the accompanying gnashing of teeth.

Hartford’s property tax system is very complicated, with aggressive negotiation between the business community and the residents setting the rules. For the coming five years the rules of the game suggest that a gradual decrease in the City budget is most beneficial for residents. The 3.5% more that residential property owners will pay each year is enough. We don’t need to be piling more tax burden on homeowners due to improperly managed budget gyrations.

Perhaps the City should take a page from big business’s playbook and smooth revenues over the coming years. It would be a win-win since the tax burden would decrease for commercial property owners without shifting the burden to homeowners too quickly.

West Hartford Taxes

It’s budget season in Greater Hartford, which is always a contentious time for property owners since it is often the first sign of rising taxes. West Hartford has a double dose of uncertainty as the Town works to figure out both the size of the budget and the implementation of the recently completed revaluation.

West Hartford Town Hall

I attended the first of two public budget hearings on Tuesday afternoon in the Town’s Legislative Chambers. Since it seemed like the Town Council was looking for input on the budget side of things, I decided not to share thoughts on the revaluation side of the equation.

Nearly all of the Town Council members were able to attend the 2:00pm session in person, which was quite impressive. The Town also put together a four page summary of the proposed budget that includes prose descriptions in addition to the financials. There is a lot of information available on the Town’s Proposed Budget web page, though I don’t see that specific summary document.

The hearing had an audience of about 20, and the only item on the agenda was listening to public comment. Seven of the attendees took a turn at the podium to share their views on a range of budget-related issues. Of the speakers, I would characterize five as expressing various levels of opposition, one as neutral with concerns, and one as supportive with concerns.

The level of Town employee benefits was cited as a specific concern by nearly all the speakers, even the one supporting the proposed budget. Most presented the issue as a long-term challenge that threatens the Town over the coming decades. Top Gun fan George Kennedy, President of the West Hartford Taxpayers Association put it this way, “The Town is writing checks that our bodies can’t cash.” One person cited specific benefits that they felt were out of line with the “real world” of the private sector. And another person worried about a future financial situation in which it wouldn’t be possible to raise taxes enough to fund Town operations, the school system and the retirement benefits liability – that West Hartford would eventually face bankruptcy like other towns and cities around the country.

The second theme of the public remarks was that the distribution of the tax burden and the assessment process were not working properly. One speaker, a local real estate agent, noted that the town has square footage wrong on many properties and too few people challenge their assessments. Another argued that the Town Assessor had kept the Market Value of that homeowners’ property unfairly high while other nearby homeowners saw more meaningful reductions in their Market Values since 2006. Another speaker criticized the decision to implement the new values all at once since his taxes are projected to increase by 24%. Finally, the assertion was made that the citizenry supporting the budget don’t pay the majority of the taxes (Note that this statement was not supported, and I would love to see the data that does back it up).

It was interesting that of the seven speakers at the public hearing, four of the homeowners are projected to have higher taxes while the other three are projected to have a lower tax bill. The lone individual speaking in favor of the proposed budget did so despite facing a 16% tax increase.

It is also apparent that the overall level of the budget is more of a concern than the tax allocation system. We reviewed the Town Assessor’s 2011 Market Values for each of the seven homeowners and did not see any obvious errors. There are questionable 2011 Market Values out there, but that’s what the assessment appeals process is for, and the values for these homeowners seemed reasonable.

Taking this a step further, the proposed budget calls for taxes of just over 2.5% of Market Value. A home worth $300,000 should pay property taxes of:

($300,000 market value) x (70% assessment ratio) x (35.92 mill rate) = $7,543.20

which is basically $2,500 per $100,000 of property value.

 

Those who would like to share their views on the proposed budget will have an opportunity in a couple weeks. There will be a second Public Hearing on Monday, April 9th, 2012 at 6:00pm in Room 314 of Town Hall. Please see the Town’s Proposed Budget web page for more information and the tax calculator.

 

Related Posts:
West Hartford: Proposed Town Budget
West Hartford Revaluation 2011 – Mill Rate Estimate
West Hartford Revaluation 2011 – Informal Hearings
West Hartford Revaluation
West Hartford Revaluation, Part II
Property Taxes and Revaluations

West Hartford: Proposed Town Budget

On Tuesday evening, Town Manager Ron Van Winkle presented his proposed budget to the Town Council. West Hartford Patch was in attendance and provides a thorough account of what happened. Mr. Van Winkle’s slides are also posted on the Budget Page of the Town website.

The quick summary is that the proposed budget is a 5.1% increase over the current year budget, which means that the Town will need to collect more in property taxes in the coming year.

Homes in West Hartford

Moving beyond the question of how much of a budget increase is appropriate, we get to a more difficult question. How should the tax burden be distributed across property owners?

The current situation is a hot mess. It is unfair, and it is confusing. We believe that the Town leaders need to rip the band aid off and implement the new market values all at once. Here’s why:

1. Property values declined from the 2006 values. The Town Assessor found that property values fell modestly between 2006 and 2011. Since we were already working towards the higher 2006 number with that phase-in, before it was frozen, moving to the lower 2011 number won’t be as dramatic a change as we faced last time around.

2. It’s the fair thing to do. Because prices didn’t fall as much as was feared, and because we didn’t complete the 2006 phase-in, we never reached the “fair” allocation of the tax burden for the previous five years (where everyone pays based on their property values). In hind-sight, we probably should have completed the phase-in as planned. Launching another phase-in now will extend the misallocation of the tax burden for another five years.

3. Keep it simple. The frozen phase-in was very difficult for owners, home buyers and real estate agents to understand. It also made a lot of extra work for the town employees. A special website was built to try to address the concern, and someone had to be there to field the extra calls from us agents and other interested parties. All real estate websites showed an incorrectly high tax number, unless a seller’s real estate agent knew that it needed to be corrected, and how to correct it.

The evolution of property values since revaluation 2006 should give Town leaders and residents confidence that property values are stable. Further, revaluation 2011 numbers are closer to the bottom of the market than the top. This spring we are seeing a very active real estate market in which demand is higher than supply. The new market values are a snapshot of the true current price environment and should be used as the basis for the distribution of the tax burden for the coming five years.

The West Hartford Budget Process will continue until the mill rate is officially adopted by the Town Council on April 24th. There will be two public hearings; one on Tuesday 3/27/2012 at 2:00pm, and the other on Monday 4/9/2012 at 6:00pm. Both will be held at Town Hall, Room 314 Legislative Chambers.

 

Related Posts:
West Hartford Revaluation 2011 – Mill Rate Estimate

West Hartford Revaluation 2011 – Informal Hearings

West Hartford Revaluation

West Hartford Revaluation, Part II

Property Taxes and Revaluations

Using Assessor Data to Bid

Buyers in search of a bargain can be resourceful in finding support for a low bid. Zillow is the most common “proof” offered as justification for a lowball offer since Zestimates almost always err on the low side (which makes sense considering their business model). But every now and then someone tries to argue that a property’s taxable value is an important data point.

Towns in Greater Hartford set taxable values once every five years during a revaluation. They do their best to put a current market value on each property, but they use a statistical process that has an element of randomness and is not as accurate as actually putting the home on the market and collecting offers.

SquirrelWhile talking to a local Assessor about the revaluation process, I also learned that in his town he tries to assign “market values” somewhere between 5% and 10% below what a property would actually sell for. We didn’t get into the specific reasons why, but from a practical point of view this seems important so that everyone in town doesn’t challenge their tax assessments. I also got the sense that this was a standard practice that was taught in assessor school.

What I’m trying to say is that the value of a property found in the Assessor’s database is almost never relevant to a purchase negotiation. That number is usually out of date, and was never super-accurate in the first place.

Forcing your agent to use that as justification for your opening bid (after they try to convince you otherwise) is not a winning negotiation strategy because it signals that you are irrational. You’re better off portraying yourself as inflexible by supporting your bid with a statement like “25% below the asking price is all I’m willing to pay because that’s all I feel the home is worth.” You probably won’t get the house using that strategy either, but at least the seller and their agent will respect your honesty.

Just so you know, sellers prefer not to deal with irrational buyers. You never know what they’re going to do, and whether they are going to follow the local conventions of a deal. So if you are prone to bursts of irrationality, then it will be in your best interest to keep it hidden until after the deal is signed.

One more point on the Assessor’s market value data. The town in which you’re looking for a home may have done a revaluation recently, and may have made the new “market values” publicly available on their website. For example, both Hartford and West Hartford updated their values in November of last year. Even though those numbers are fresh, and one could argue that it would be rational to use them in a negotiation, I would still advise against it. They are still systematically low, and they still contain an element of randomness. Most importantly, listing agents are likely to respond poorly to the argument that the town’s value is relevant, even if it’s not completely crazy.

News from West Hartford

At the end of last week there were two news stories in which we had the opportunity to contribute.

First was a piece in the West Hartford News about the market conditions in West Hartford. The 2011 revaluation and associated grand list are almost complete, just waiting on the final appeals by individual property owners. That process has not seemed to be a big concern to home buyers as sales activity is up over last year.

The final piece of the puzzle will be what the town leaders decide to do with the results of the revaluation. Will they implement it immediately, or phase it in over time? Our December analysis of where the mill rate might fall if the revaluation were implemented immediately and the budget remained flat continues to be a reasonable approximation.

West Hartford, CT

The second West Hartford news item we contributed to was the analysis of the announcement of a “Neighborhood Market by Walmart” coming to Bishop’s Corner. Having lived far enough south to be familiar with Walmart as a grocer, and having studied Walmart extensively at business school, there are two things that jump out at us:

1. Four grocery stores in Bishop’s Corner is too many.
2. Walmart will have a price advantage over the other three.

Walmart will likely pressure Big Y the most since they are both general grocers, but attract some of the shoppers from the other two as well. Whole Foods seems like they would be least impacted by Walmart due to their high-end image, while Crown would fall somewhere in between. If any of the three established grocers are marginal operations, then Walmart’s arrival seems like it could be the catalyst to force them out.

Pushing one of incumbents out will obviously upset people – loyal shoppers and Walmart-haters alike – but that’s the way we see it. What do you guys think, can four grocers make a go of it on one intersection?