Unanticipated value correction creates higher than expected city taxes

By Ed Nadolski

Editor in Chief

As City of Burlington officials wrapped up their budget process in late 2011, they were confident the average property owner would pay no more than an additional $10 for the city portion of their 2012 property tax bills.

However, when the bills arrived last month, taxpayers and city officials alike were disappointed to discover that $10 increase was closer to $30, and total tax bills – including schools, the county and the state – were in most cases hundreds of dollars higher than last year.

So what happened?

According to City Administrator Kevin Lahner, a one-time correction made by the state Department of Revenue increased the value of one of the city’s tax incremental financing districts (TID) by roughly $25 million – and consequently reduced the city’s total tax base, making the taxes paid by property owners higher than anticipated even though the tax levy was the same as 2011.

The bottom line: Tax bills are higher than anticipated because the property value assumption under which city and school district officials crafted their budgets was wrong.

“I don’t like to be surprised and I don’t want the public to be surprised,” Lahner said. “It ends up evening out (next year), but that doesn’t hold sway with taxpayers (who have to pay more this year).”

He acknowledged that many people would likely view the news as nothing more than municipal mumbo-jumbo intended to make excuses for a higher than expected tax hike.

However, Lahner shared with the Standard Press the text of an email from Department of Revenue employee James Bender containing a breakdown of assessments supporting his claim. Bender provided the information at Lahner’s request.

The problem is the information involves an obscure portion of just one of the many variables that goes into property tax bill calculation.

“The challenge is conveying that to taxpayers,” Lahner said. “It’s about as clear as mud.”

The bigger question most taxpayers have, however, is not what happened, but why it wasn’t noticed sooner and how it can be prevented in the future.

Lahner said the correction was filed by the state after the city was notified of its certified TID values.

“(Then) we got all the data needed to create our (tax) rate right at the deadline (for preparing tax bills),” he said.

With the focus on getting tax bills out, none of the city staff noticed the $25 million bump in TID No. 3.

“At some point we saw the TID 3 number, but it didn’t ring a bell with anyone until after we got the tax bills out,” Lahner said the process took place over the matter of a few days.

Lahner acknowledged that “had we realized this (sooner), we would have dropped our (tax) rate some.”

The information also could have influenced officials in the Burlington Area School District – which accounts for the single largest portion of the tax bill – to make changes to reduce their anticipated tax hike. The district approved a 3.6 percent tax levy increase after a lengthy and contentious process. School Board members said they approved the hike with the knowledge that it would be offset somewhat by the city’s closing of TID No. 4.

That’s where things begin to get convoluted for most people.

To understand the entire picture, taxpayers need to have a passing knowledge of TIDs and their impact on property taxes.

Tax incremental financing is a tool allowed by the state that enables communities to develop or redevelop stagnant or blighted areas to spur the local economy. When a TID is established its property value is frozen for general assessment purposes at the current depressed level. As the TID property is improved – which could include removal of dilapidated buildings and installation of roads and utilities – a property value increment is created between the original value and the improved value of the property.

Under TID rules, the taxes generated by that increment are used for a specified period of time (typically 20 years) to pay for the cost of improvements needed to make the property marketable once again.

Once those improvements are paid off, the full value of the TID – including all the new development, which could be houses, stores or factories – is returned to the general property tax roll of the community.

That was the case this year when the city closed TID No. 4, which includes the Burlington Manufacturing and Office Park on the city’s south side. The closing was expected to create an increase of about $25 million in the city’s total property value – its tax base.

Because the total tax levy needed to support the budget is divided by the tax base to create the actual tax paid by residents, officials assumed any tax levy increases would be reduced by the property value windfall created by the closing of TID No. 4.

That assumption is correct until the unanticipated increase in TID No. 3 is factored in.

“It was very close to the value that we gained from closing TID No. 4,” Lahner said.

The net result? Higher than anticipated property taxes.

Lahner said he still doesn’t know exactly why the correction occurred. Based on the information he received from the state, he couldn’t say whether it was the result of some past accounting or assessment error.

“(The impact is) artificially created because it’s a correction and a one-year blip on the screen,” he said.

The good news, if there is any in this situation, is that taxpayers should reap the benefit of the TID No. 4 closing next year. However, that windfall could be easily eaten up by budget increases or property value decreases.

“If you assume that everything stays the same, the actual (average city) bill will drop $30,” Lahner said.