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HomeMy WebLinkAbout03.25.20 Email from Shari McCracken - FW_ Delaying April 10 Property Tax Deadline From:McCracken, Shari To:Alpert, Bruce;Bennett, Robin;Clerk of the Board;Connelly, Bill;Cook, Holly;Lambert, Steve;Lucero, Debra; McCracken, Shari;Ring, Brian;Ritter, Tami;Rodas, Amalia;Sweeney, Kathleen;Teeter, Doug Subject:FW: Delaying April 10 Property Tax Deadline Date:Wednesday, March 25, 2020 3:51:42 PM Board Members, Just an FYI – the LAO’s analysis of delaying property tax payments and suggested alternatives. Shari Shari McCracken Chief Administrative Officer Butte County Administration 25 County Center Drive, Suite 200, Oroville, CA 95965 T: 530.552.3305 M: 530.990.5029 ***Please note this is a new phone number and update your records accordingly*** Twitter | Facebook | YouTube | Pinterest From: SYASL County Info <SYASLCountyInfo@SYASLpartners.com> Sent: Wednesday, March 25, 2020 3:44 PM To: SYASL County Info <SYASLCountyInfo@SYASLpartners.com> Subject: LAO: Delaying April 10 Property Tax Deadline ATTENTION: This message originated from outside Butte County. Please exercise judgment before opening .. attachments, clicking on links, or replying. To: County Administrative Officers and Interested Parties From: Paul J. Yoder and Karen Lange Date: March 25, 2020 RE: LAO: Delaying April 10 Property Tax Deadline The LAO prepared a brief analysis regarding the advocacy of some to delay the April 10 property tax deadline. While this analysis was done to brief key budget staff, the LAO is allowing us to share it. It’s not been published online but you might find some of their data points useful. -Paul and Karen We understand that the idea of delaying the April 10 property tax payment deadline has been put forward by several groups. To help you think about such a change, we put together the thoughts below. Property Taxes Raise About $70 Billion Annually. Property tax revenues are collected by the county and distributed to local governments and schools within the county. Property Taxes Are Due in December and April. California property owners pay their property taxes in two installments. The first installment is due by December 10 and the second by April 10. Counties distribute these revenues to local governments shortly after collecting them. Second installment collections are distributed in April and May. (Some smaller property tax components are received and allocated in other months of the year.) Delaying Property Tax Deadline Could Create Cash Flow Problems. If the state were to delay the April 10 property tax deadline, some local governments and schools probably would face cash flow issues. Our analysis suggests that about 15 percent of cities and do not have sufficient cash reserves to cover two months of expenses. Similarly, about 10 percent of school districts have insufficient cash or reserves to cover a two month delay in April property tax collections. These cash flow issues present somewhat different challenges for schools and other local governments. We discuss these issues in more detail below. Could the State Backfill Local Government Property Tax Revenues? Given the possibility of cash flow issues for some schools and other local governments, there probably would be a need for the state to provide short-term loans to local entities. Offering loans to local entities could be risky for the state because—although its cash position currently is strong—it faces significant uncertainty about its own cash inflows in the weeks ahead. The delay of the April income tax filing deadline for state taxpayers will reduce the state’s own liquidity. One option could be to limit loans to only those local entities with the most acute cash needs. This probably would require the state to make loans of, at most, a few billion dollars per month. Making this amount of funding available probably would be feasible for the state for a short period of time. Limiting loans in this way, however, would be challenging. The state is not in the position to assess the financial position of California’s thousands of local governments on such a short timeline. In addition, given the severity of the current crisis, the state likely would face pressure from localities to make the loans broadly available. The demand for loans under a broader program is difficult to predict, but it is possible the locals could request tens of billions of dollars in loans. Providing loans of this magnitude is probably infeasible. Local Alternatives to Delaying Payment Deadline. We understand that counties have some flexibility under current law around late payments. Specifically, existing law provides counties the authority to waive penalties and interest for those individuals who makes late payments. Leveraging this existing flexibility could allow local governments to provide some relief to property owners that are facing financial hardship without the wholesale disruptions in revenue caused by a property tax payment postponement. Should the Legislature wish to allow for addition relief to property owners, it could amend Revenue and Taxation code to offer local governments the option to pass an ordinance extending the April deadline. The Legislature has taken this approach in the past—for example, in response to the 1989 Loma Prieta earthquake. School Districts Property Taxes Are About One-Third of School Funding. The Local Control Funding Formula (LCFF) is the primary source of funding for school districts. During the 2018-19 fiscal year, districts received $55 billion from the LCFF. $18 billion of this funding is provided through property taxes. The rest comes from two state funding sources: General Fund Apportionments ($30 Billion). The state makes General Fund apportionments to school districts according to the “5-5-9” schedule. Under this schedule, school districts receive 5 percent of their payment in July, 5 percent in August, and 9 percent in September and each subsequent month. Education Protection Account ($7 Billion). Proposition 30 (2012) established the Education Protection Account to receive the additional revenues associated with increases in the state’s highest income tax brackets. The State Constitution requires these funds to be allocated for schools on a quarterly basis (in September, December, March, and June). On a statewide basis, the average district receives about 55 percent of its LCFF revenue from the General Fund, 33 percent from local property taxes, and 12 percent from the Education Protection Account. The exact share, however, varies widely across districts. For example, some districts receive virtually all of their revenue from local property taxes, whereas others receive nearly all of their revenue from the state General Fund. How Districts Manage Cash Flow Interruptions. Generally, districts first turn to their General Fund reserves to manage any interruptions in cash flow. If these reserves are insufficient, state law allows districts to borrow up to 75 percent of the cash associated with their other operating accounts (such as the accounts they use to operate school meal programs and adult education programs). Using general fund reserves or borrowing from other accounts typically does not require significant lead-time. If these options are insufficient, districts have various options for external borrowing. For example, districts can borrow cash from their county offices of education or their county treasurers. Loans from these agencies generally are modest. Districts also can borrow cash from private lenders through Tax Revenue Anticipation Notes (TRANs). Borrowing from any of these external sources typically requires several months of lead-time to prepare the necessary documents. This means that, if the state decided to delay the filing deadline for April property tax payments, school districts would need to rely on internal sources of cash, like reserves, to manage the cash flow interruption. What Share of Districts Would Be Unable to Cover a Two Month Delay in April Property Tax Collections? Our analysis suggests that about 10 percent of school districts—perhaps around 100 districts—have insufficient internal sources of cash or reserves to cover a two month delay in April property tax collections. (This analysis excludes charter schools, which are described in more detail below.) Our analysis assumes that property tax collections for all districts drops by 40 percent in April, but for various reasons actual collections would not likely drop by that much. While most of these affected school districts are relatively small, some are larger. On average, these districts have about 8,000 students, but five have over 30,000 students. Cash Flow Interruptions More Challenging for Charter Schools. Like school districts, charter schools are funded through LCFF and receive cash from General Fund apportionments, local property taxes, and the Education Protection Account. Charter schools, however, typically have more difficulty managing interruptions in their cash flow. Among other factors, charter schools generally (1) have fewer internal accounts from which to borrow, (2) receive lower priority when borrowing from their county treasurer or county office of education, (3) pay higher interest rates when borrowing from private lenders. Some charter schools belong to management organizations that can help them meet cash flow challenges. Cities, Counties, and Special Districts Property Taxes a Key Flexible Funding Source for Local Governments. While property tax revenue makes up a relatively small share of local governments’ total revenue (less than 20 percent), it does provide an unrestricted sources of revenue for local governments. (Refer to Revenue Sources for Local Government on page 17 of CalFacts.) Local governments rely on property tax revenue to pay for vital services in their communities. Delaying property tax payments would affect local governments negatively. The severity of the impact would likely vary significantly among local governments. Some Local Governments Lack Large Cash Reserves. A local government’s level of reserves is a major factor in determining how it will weather a property tax payment postponement. A larger level of reserves would allow a local government to more effectively manage an interruption in revenue. An analysis of financial data submitted to SCO indicates local governments have modest reserves. We found that about 15 percent of cities only have enough cash to cover no more than two months of key expenses—general government and public safety expenses. Further, another 15 percent of cities only have enough cash to cover two to four months of key expenses. While many small cities fall into these categories, some larger cities like Los Angeles, Long Beach, Bakersfield, and Anaheim are also included. Existing Reserves Likely Needed to Meet Demands of the Current Crisis. Even for local government’s with large reserves, the current public health crisis is resulting in volatile financial markets and a rapidly changing economic picture—which creates significant uncertainty. The suddenness of delaying the second property take payment would be particularly problematic. It would make it so that local governments would not be able to take action to prepare for the delay. Local governments would have to rely on their existing reserves to address the budget challenges on the horizon. Tapping reserves to carry a local government over an interruption in property taxes payments is risky. On a dollar-for-dollar basis, a local government would be eliminating a tool to address other vital needs they might face in the coming months as they continue to respond and recover from the public health crisis.