An article published, on July 17th, in the Journal News provides additional evidence that New Rochelle school taxes will increase in excess of the 3.3% claimed by the district.
Back in early May I forecast that New Rochelle property owners could expect property tax increases between 6% and 9% (2 to 3 times higher then district projections) based on much higher then normal property tax relief appeals. The article in the JN confirms this as the number of property tax grievances is approximately double when compared to last year.
According to the JN roughly 21% of New Rochelle residential property owners have filed for property tax reduction. In my May 7th post I projected that the number would be 20%.
City tax assessor Louis Perone now says “The City is expecting around 2,500 (appeals) this year”. Last year 1,320 cases were filed. Perone expects a “majority” of the 2,500 grievances will be granted. Last year only 416 of the 1,320 (32 percent) were successful. When Perone states a “majority will be granted” we should expect something over 50%. I expect that number to be in the area of 75% to 80%.
Now that we know how many people have filed tax grievances the next is question is how much relief will those who are successful in their appeals receive. Using my own home as an example, I think it would be safe to say many of the homes in the City are currently on the tax roles at or near peak market values. The
Case-Shiller (CS) 20 City Composite Index is down 33% from its June 2006 high. The CS New York City Area index is down 22% from 2006 highs. In the July 24th JN there was an article stating that Westchester home prices were down 16.3% from June 2008 to June 2009. Using resources like Zillow.com and the MLS I have found many New Rochelle properties that are offered at 20% to 25% discounts from peak prices. Keep in mind these properties are offered at those prices it certainly does not mean that they are selling. Given these data points, it would be safe to say that NR prices are down 20% to 30% from the peak. Additionally, I would also point out that there is a statute in place which caps the maximum assessment reduction at 25%. I had originally modeled a 30% price reduction with a 20% rate of appeal. This produced a property tax increase of approximately 9%. However, with a maximum reduction of 25% that number falls to 7.5% and with a 20% factor you are looking at a 6% increase in taxes.
Building the Model is not the hard part knowing how to use it is!
In the arena of financial models, the best model is the one that is always correct. Nearly as good are models that are always wrong, provided that you quickly realize that they are always wrong. Not surprisingly coming into contact with these types of models is a very rare occurrence. The bulk of models are sometimes right and sometimes wrong. The key is to understand when your model is going to be right or wrong and how to interpret errors when they occur. Being able to integrate and interpret new information when it becomes available is also important. In this specific case of the New Rochelle tax assessments I built a “top down” driven model, as I had a limited set of inputs to construct it. I was actually able to get some very helpful information from the City Tax Office which was useful in the interpretive analysis.
In the 2008-2009 tax year the City saw a 1.4% decline in assessables. Using my model I calculated that a 10% rate of successful appeal coupled with a 10% decline in fair market value (FMV) would result in a 1.4% decline in property tax revenue. The July 17th JN article provided some very useful information which helped me to better understand the model. 1,320 relief appeals were filed, in 2008, 11% of the residential tax roll. However, only 416 were granted roughly 3.4% of the tax roll. Using that appeal rate my model produced a 0.35% assessable reduction. In order to arrive at a 1.4% result my model would have to factor a 40% decline in FMV. Well above the statute limitation of 25%. There are additional factors that I did not build into the model that could account for this disparity. These factors include foreclosure activity, tax delinquencies and certiorari appeals on commercial R.E. (CRE is down 30% to 40% BTW). Additionally off budget spending and the difference actual and projected spending can have a significant impact. Although I am working on a fairly limited data set, it appears that the model produces an optimistic outcome bias. The information in the JN suggests that local property tax revenue is far more leveraged to the appeal process then previously thought. My projections using a 20% appeal rate and 20% reduction in FMV produces a tax increase of approximately 6.0% for those who do not file appeals. However, given the bias of the model, based on 2008 data, more successful appeals and a greater reduction in FMV I could easily see the number coming higher then 6.0%. I am comfortable with the original forecast of 6% to 9%. However the data provided from the JN article indicates that the probability that the number comes in much higher then 9% is not zero. I would attach a 10% probability that school tax increase could turn out to be 10% or higher.
It’s about process!
The model that I built is far from perfect and can be greatly improved based on a collaborative process. I was able to build the basic outline with limited information and input. This is not something I did on a full time basis. It took me 2 or 3 hours to build. What matters is I made an attempt to build it. Which is more then those who work in the finance office of the New Rochelle School district have done. To them simply calling the City finance department to “get the number” is enough. To them; when, how, why and what if do not really fit into the equation.
When you oversee a budget of a quarter of a billion dollars, most of which is funded directly by the residents of the City, simply calling to “get the number” is not enough. If you were a shareholder in a public company, would you find it acceptable if the CEO and the CFO did not provide revenue forecasts to the Board of Directors? Would it be acceptable for the Board of Directors not to demand revenue information from the management team? Of course it would not be acceptable. In fact it would be a violation of the fiduciary responsibility of both the management team and the Board of Directors. Well this unacceptable behavior is exactly what you are getting from senior management and the Board of the NRSD. I am sure if the School Board were to demand that the district finance department put together a process to forecast property tax revenue for the coming academic year they would be able to do it. If they were unable to do so I know of many able financial professionals, who live in New Rochelle, who could offer assistance free of charge.
If this concerns you then consider the school board is meeting tomorrow to receive their auditor's report. If you are as concerned as I am about the lackadaisical attitude of the school district towards the budgeting process perhaps you will consider showing up tomorrow night at City Hall. Only when New Rochelle residents show up and demand accountability and transparency from our Board of Education are we going to get accountability and transparency from our Board of Education.