The New Rochelle School District admitted last week at a public meeting at the New Rochelle Public Library that no effort has been made by the district to forecast the impact of lower housing prices on tax appeals which, in turn, will likely drive a large descrease in the assessed value of property in New Rochelle. All of which means that in order to fund the $230 mm budget the District hopes to pass on May 19th, school taxes will have to increase two or three times more than the District has claimed.
In March when the New Rochelle School Board held it’s “Budget Workshops” the vast majority of discussion and debate centered on the spending side of the school budget. When the revised budget was released on April 21st the administration and board decided to institute minimal cuts in spending. I was disappointed that a more aggressive effort to reduce spending was not made. I know that many other New Rochelle residents shared this view. However, it was not the spending side of the budget that was my primary concern. As the parent of two children about to enter the school system, the last thing I would want to encourage is cuts in necessary educational spending. It was the revenue side of the budget that concerned me.
When evaluating the budget, it is the estimate of real estate property tax revenue that causes the greatest concern. One must keep in mind that the revenue number contained in the school budget is not set in stone, it’s merely a forecast. In the 2009/2010 budget, the district is projecting that real estate tax assessables will decline by 1.76%. Given the current state of the national and local real estate market this number seems to be quite optimistic. I contacted Assistant Schools Superintendant John Quinn to find out what assumptions the district modeled for local real estate prices and the percentage of N.R. residents they expect to be successful in property tax appeals. Additionally, I also asked him for data on actual property tax revenue versus forecast revenue for 2008/2009. Unfortunately, I did not receive a response from Mr. Quinn. I was able to speak with Mr. Quinn at the N.R. League of Women’s Voters Coffee and Conversations series on Thursday, April 30th. Mr. Quinn confirmed that the district does not construct a model for revenue projections. He informed me that the district gets their projected revenue data from the City tax office and “plugs” the data into their budget assumptions process. When I used the term “plug” Mr. Quinn became uncomfortable and said I was being unfair. I beg to differ in that view. Mr. Quinn overseas a $230mn budget yet makes no effort to employ a critical review process on revenue expectations. He simply calls City Hall and gets a number, process complete. I believe that taxpayers of New Rochelle deserve better. The only one being unfair is Mr. Quinn. If the district is wrong on revenue assumptions they simply blame the City and it ends there. Mr. Quinn has no ownership responsibility through the entire process. That is the accountability gap in action. In normal markets, when home prices are rising, revenue projection is not a problem. When prices are falling rapidly, this process can become far more complex. In uncertain times the ability to successfully forecast revenue numbers becomes extremely difficult. If one needs evidence of this look at the recent earning reports released by public traded companies. Many of these firms have beaten their earning estimates because they were able to aggressively cut costs. Their revenue forecasts, largely, came in below their forecast expectations. If the guys in the private sector can’t hit these numbers why should be expect the apparatchiks who work for the NRSD to do any better?
Case-Shiller data released on April 28th showed that N.Y. area single family home resale prices, to Feb. 2009, have fallen 17.5% from the June 2006 peak. This data is somewhat distorted by the inclusion of NYC properties which, until recently, have held up better in terms of pricing. Looking at comparables and using web resources such as Zillow.com it is fairly apparent that R.E. prices in southern Westchester have fallen 25% to 35% from peak. Going forward it would not be surprising to see prices decline an additional 10% to 20%. Real Estate in the Northeastern U.S. is lagging the California cycle by about 18 months. Conclusions from a meeting I recently had with the CEO of a medium sized mortgage servicer suggested they are currently seeing rapid increases in defaults within their prime loan Northeast portfolio. The only difference is the West coast cycle was driven by poor credit decisions by lenders. The East coast cycle is being driven by wage reduction and job loss. This process will certainly impact markets in New Rochelle. I expect to see a sharp increase in foreclosure and bankruptcy activity over the next year. What will shock people is how much of this default activity will take place in the North end of New Rochelle.
Given this price decline it would seem obvious that many households within the community will appeal for property tax relief this June. As part of the process of preparing my own property tax appeal I contacted the New Rochelle tax office on April 24th. The person whom I spoke with informed me that the office was being inundated with requests for property tax relief. They are expecting the number of appeals to be much greater then anything they have seen before. When I reached out to the local R.E. community in order to get appraisal information the message I received was similar.
If this budget is approved and property tax revenue does not meet forecast expectations it will require property taxes to be increased in excess of the proposed 3.22%. This increase can be imposed without a vote. I created a model to see what would happen to the property tax revenue assumptions given a certain level of price depreciation and percentage of successful property tax appeals. In the model, I assumed that projected assessables would be held at zero. When a 30% price decline with a 20% appeal rate is modeled, property taxes increased approximately 9% for households who did not apply for tax relief. Those households who did appeal for relief saw a 24% decline in taxes. If 40% of households received relief with a 30% price decline those who did not file would see a 17% increase in school tax while those who did apply would see reductions of 12% to 23%. I was able to solve for the projections in the proposed budget. My estimate is the current revenue numbers assume a 12% decline in prices with a 10% rate of successful relief, with the majority of appeals taking place at the above median price point. This price decline is far less then what current conditions indicate. My model does not factor forecloses or property tax defaults which clearly would place downside risk on forecast revenue. I spoke briefly with Superintendant Richard Organisciak, last Thursday; he felt that the above situation in fact did not represent a tax increase but rather property tax redistribution. I do not believe this is the case. While those who successfully appealed would see a net reduction in property tax, the reduction would be less then that decline in property value. For example, homeowner #10 (figure 1) has a home that is valued on the tax rolls at $1.2mn and appeals for tax relief. The homeowner receives at 30% reduction, to $840,000 in the value. The property taxes would fall to $13,054 from $18,648 a 30% decline. But to make up for the fall in assessables the tax would then be increased to $14,245. This is a 9.13% tax increase from the reduced value!
Figure 1 (click here to enlarge)
Given the potential for a large shortfall in property tax revenue the only reasonable way for an individual homeowner to hedge this risk is to file a property tax relief appeal. Once people realize this I believe the process will feed off of itself and there will be a rush within the community for tax relief. If this were to occur we could certainly see appeal rates well in excess of 20% of households. If you are going to vote “yes” on the proposed budget I would strongly recommend that you file an appeal. Not doing so is like walking on a tightrope without the benefit of a safety net. In fact, last August, District 6 Councilperson Marianne Sussman encouraged residents of her district to apply for tax reductions. In her blog she wrote the following “I urge all taxpayers in District 6 to consider whether they should apply for a reduction in assessment this year.” Clearly Ms. Sussman sees what’s going on. The root of this problem is the submission of a school budget that does not address the realities of the current economy. The school district is able to justify their spending numbers on the back of revenue projections that don’t jibe with the marketplace. Approval of this budget could possibly create a situation by which taxes are increased at a rate far greater then anticipated. If this does happen residents who do not apply for tax relief could find themselves under even greater financial stress and hardship. If you truly care about the community at large, financial accountability and the quality of our schools the only reasonable course of action is to vote “NO” on the budget on May 19th.
I found this story on bloomberg today. Nearly 25% of all homeowners are underwater on their houses. Clearly shows the need for tax reduction appeals