Tax Appeals Swamp U.S. Cities, Towns as Property Prices Plunge

A fiscal flood that threatens to swamp local government budgets across the U.S. overflows from file cabinets in the office of Patty Halm, chair of the Michigan Tax Tribunal.

The backlog of cases from taxpayers seeking to lower property-tax bills of more than $100,000 shot up to 14,236 this year from an annual average of about 6,000 during the past decade. The backlog of smaller claims was at 28,558 at the end of September, eight times higher than a decade ago, according to records at the tribunal, a Lansing-based administrative court.

From Los Angeles to Atlantic City, the New Jersey gambling resort whose credit rating Moody’s Investors Service cut by three levels last month, property owners are demanding lower taxes after real-estate values plunged. The disputes over billions in dollars come as municipalities are already slashing services such as police and fire protection and may depress revenue further as communities try to recover from the longest recession since the 1930s. In Michigan, Governor-elect Rick Snyder has warned that hundreds of towns face financial crises.

“We’re just getting swamped,” said Halm, 54, who was appointed in 2003. “We’re constantly buying new file cabinets to hold all the cases. We even have six surplus file cabinets in the courtroom.”

U.S. home prices are 30 percent below their peak of April 2006, according to the seasonally adjusted S&P/Case-Shiller index of property values in 20 cities. They may drop 10 percent more, Greg Lippmann, a founder of New York-based LibreMax Capital LLC, said Dec. 2 at the Hedge Funds New York Conference hosted by Bloomberg Link.

Appeals Upon Appeals

Meanwhile, the Moody’s/REAL Commercial Property Price Index of U.S. commercial property is 43 percent below its October 2007 peak.

“If we look into the future, assessments will have to reflect the market value, and two years out, property-tax receipts will have to be coming down,” Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago, said in a telephone interview. “If the appeals are largely successful, they will generate a lot more appeals.”

In Michigan, seven judges and 15 hearing officers are clearing the backlog. Five additional staff members are crammed into cubicles in hallways and a library space, said Halm, who is also one of the judges. More than a dozen mismatched file cabinets line the hallway outside the tribunal, among about 50 that have been added for the overflow.

Amid the Cabinets

This week a chief clerk sat surrounded by them on the floor, sorting files to get ready for hearings. Bins held even more folders.

Oakland County, the Detroit suburb with Michigan’s second- highest median income, didn’t previously pay much attention to Tax Tribunal cases because any losses were covered by new construction gains, said Robert Daddow, deputy county executive. Now, about $3.9 billion in taxable value, or 5 percent of the county’s tax base, is under review, he said.

Cities and towns across Michigan had property-tax collections plunge as much as 20 percent in the past year, the steepest drop since a 1994 rewrite of state levies, forcing scores to decide whether to borrow to pay bills or risk default on bonds.

Municipal budgets “tend to lag economic conditions” by 18 months to several years, according to a National League of Cities report in October that Pagano co-wrote.

“The full weight of the decline in housing values has yet to hit the budgets of many cities and property tax revenues will likely decline further in 2011 and 2012,” the report said.

Already Struggling

Douglas Roberts, Michigan’s former treasurer, said in a telephone interview from East Lansing that the impact of property-tax appeals “could be significant” because cities are already struggling with rising pension and health-care costs and declining revenue.

Settlements are likely to increase across the state through 2013 as the backlog is worked through, compounding other revenue shortfalls, Daddow said.

“In some of these instances, probably most of them, local governmental units have not been setting money aside for this,” Daddow said. “That will be huge. That will be another big headache coming down the pike.”

In many states, property-tax appeals are handled primarily at the local level.

Clark County, Nevada, which includes Las Vegas, had 8,300 appeals last year, an increase from 6,000 the year before and 1,900 in 2008, according to Rocky Steele, assistant director of assessment services.

“It was a big year, the biggest we’ve ever had,” Steele said in a telephone interview.

Losing Hand

Clark County’s taxable real-estate value fell to $184 billion for the 2010-11 fiscal year from $263 billion the prior year and the record $320 billion in 2008-09, according to Steele. The one-year reduction will cost the county a projected $514 million in lost taxes. Almost all the hotel casinos and major property owners received reductions, Steele said.

In Atlantic City, where 11 casinos account for 74 percent of the property-tax base, the city has exhausted a reserve for tax appeals that in 2006 held $26 million, according to a Nov. 4 Moody’s report on the rating cut. The company reduced the credit to Baa1, three levels above speculative grade, from A1.

All Atlantic City casinos have pending property-tax appeals, Moody’s said. Since their valuation is based on gambling revenue, which has declined more than 11 percent this year, appeals may continue, the rating company said.

Resort Under Pressure

“The city’s negative fund balance position, outstanding tax casino credits and the significant number of remaining unsettled casino tax appeals will continue to pressure the city’s financial position,” Moody’s said in the report.

New Jersey homeowners filed 18,147 property-tax appeals in Tax Court during the fiscal year ending June 30, up from 10,067 in fiscal 2007, according to a report by the state judiciary.

Moody’s today cited continuing tax appeals when it lowered the rating on about $3.7 million in outstanding debt for the Borough of Roseland, New Jersey, to fourth-highest Aa3 from Aa2.

A reserve fund for tax appeals in the town about 20 miles (32 kilometers) east of New York City may fall to $600,000 this year from $3.5 million in 2007, and the borough may issue bonds to handle future appeals, Moody’s said in the report.

‘Overloaded’ in L.A.

Across the country, the situation is similar.

“We’re just overloaded,” said Khanh Nguyen, chief of assessment appeals in Los Angeles County, whose more than 10 million residents make it the nation’s largest.

The county expects “a few thousand” more than the 42,000 applications last year, Nguyen said. That’s quadruple the 9,353 in 2007, she said. The appeals are rising as the overall tax rolls declined by $18.5 billion, or 1.67 percent, to $1.089 trillion in 2010.

The phenomenon is not universal. In Miami-Dade County, which is Florida’s largest municipal borrower, 2010 tax appeals, due in September, dropped 27 percent from 2009, to about 105,000, said Robert Alfaro, Value Adjustment Board manager.

In Illinois, pleas for relief arrive every week on the desk of Louis Apostol, executive director of the state Property Tax Appeal Board.

‘Heart-Wrenching’

“These letters are heart-wrenching. I’ve got drawers and drawers of them,” Apostol said in a telephone interview from his office in Des Plaines.

Illinois may have 19,350 property appeals this year, 10 percent more than in 2009, he said. The backlog is about 35,000, to be processed by a staff of 21. Fifty-four people handled roughly half the workload in 2003, he said.

More than 80 percent come from homeowners and the board approves an average of 30 percent of them, he said.

Determining the impact could take two years, he said. In the meantime, Apostol will continue receiving letters of complaint forwarded by Governor Pat Quinn.

“I respond directly,” Apostol said. “I also include my phone number and tell them how they can appeal their taxes.”

To contact the reporters on this story: Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net; Tim Jones in Chicago at tjones58@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net