The Indy Star had an interesting article today on a proposed plan by the Indianapolis Public Library to invest $58.5M across 11 different branches, raised by bonds and paid for via property tax levies (“$58M in bonds, no referendum? Indy library project raises questions“). The issue raised was why the $58.5M proposal would not have to go through the referendum process, which has been required for capital projects over $12M since 2008.
The answer, which is both legally correct and widely accepted, is that the Indianapolis Public Library proposal, although presented as a single coherent package, is not a single capital project. It is spread over 11 different branches, paid for by 8 different bonds spread over 6 years. In fact, it would not even be feasible to implement the proposal as a single project, as different branches would be ready for the renovations at different times.
The article pointed out, though, that while it was appropriate to consider this proposal across multiple projects, none of which reached the $12M level required for a referendum, other governmental units could theoretically attempt to subvert the referendum requirement by breaking projects down into separate pieces all of which individually fall beneath the $12M threshold but collectively would have required the referendum.
The article also discussed an example in which the City of Lebanon managed to split a $4.5M aquatic center project into smaller projects, none of which individually required that the city go through the petition and remonstrance process. Petition and remonstrance is a process that allows taxpayers to object to a capital project over $2M (and less than $12M, which requires a referendum), and results in a race between supporters and opponents of a project to get the most petition signatures.
One important consideration, which I was surprised was not mentioned in the article, is that there IS an advantage (from the perspective of units of local government) to going through a referendum: property tax levies that are approved through the referendum process are exempt from the circuit breakers (property tax caps). Debt service levies that do not go through a referendum are within the property tax circuit breakers.
You may remember that this issue had some application close to home. The 2008 general election in Monroe County included a referendum in the Richland-Bean Blossom School Corporation to raise $35M for several school building projects (the Junior High and the High School). The referendum failed. In 2009, however, the RBBSC school board passed two separate $10M bond levies, in order to make improvements to the Junior High School and the High School, separately. Each of these projects were below the $12M referendum threshold. Both added to taxpayers’ property tax bills. However, since they didn’t go through the referendum process, these bond levies were inside the property tax circuit breakers, and resulted in some circuit breaker revenue loss to all units of local government serving the Richland and Bean Blossom townships.
Although this doesn’t exactly rate as breaking news, the Indiana Department of Local Government Finance recently released the 2014 reports on the impacts of the circuit breakers for all units of local government in Indiana, including Monroe County. Today’s post is part one of a two-part series on the circuit breakers in Monroe County. Today I will discuss what the circuit breakers are, and how much they are costing Monroe County (or conversely, saving Monroe County taxpayers) in 2014. Tomorrow’s post will break the numbers down a little further and discuss the impact on individual taxing units within Monroe County, as well as consider what the trends mean for the future.
What Are Circuit Breakers?
The circuit breakers — also referred to as “tax caps” — refer to various statutory (and constitutional) limitations on the property tax responsibility of individual property taxpayers in Indiana. There are actually two types of circuit breakers: the 1%-2%-3% circuit breakers and the Over 65 circuit breakers. Note that circuit breakers are limitations on an individual’s property tax bill, and represent a loss of revenue to the local units of government; local units cannot shift this loss to other taxpayers.
1%-2%-3% Circuit Breakers
1%-2%-3% Circuit Breakers are caps in the amount of property tax owed by taxpayers as a percentage of the gross assessed value of their property. These circuit breakers apply to the following property types:
1% of homestead properties
2% of other residential properties, long-term care facilities, and agricultural land
3% of all other properties (i.e., business and personal property)
For example, the property taxes of an owner-occupied (homestead) house that is assessed at $150,000 are capped at 1% of that assessed value, or $1500. If the house is not a homestead (i.e., is a rental property or vacation home), the limit would be 2%, or $3000. Only property taxes that are passed by referendum are exempt from the circuit breaker calculations. For example, voters in 2010 passed an operating levy via referendum for the Monroe County Community School Corporation (MCCSC). These taxes do not count towards the amount used to determine the circuit breaker.
These circuit breakers were placed into the Indiana Constitution by referendum in 2008 (wisely, Monroe County voted against!). The following is the section of the Indiana Constitution that refers to the circuit breakers:
This subsection applies to property taxes first due and payable in 2012 and thereafter. The following definitions apply to subsection (f): (1) “Other residential property” means tangible property (other than tangible property described in subsection (c)(4)) that is used for residential purposes. (2) “Agricultural land” means land devoted to agricultural use. (3) “Other real property” means real property that is not tangible property described in subsection (c)(4), is not other residential property, and is not agricultural land. (f) This subsection applies to property taxes first due and payable in 2012 and thereafter. The General Assembly shall, by law, limit a taxpayer’s property tax liability as follows: (1) A taxpayer’s property tax liability on tangible property described in subsection (c)(4) may not exceed one percent (1%) of the gross assessed value of the property that is the basis for the determination of property taxes. (2) A taxpayer’s property tax liability on other residential property may not exceed two percent (2%) of the gross assessed value of the property that is the basis for the determination of property taxes.
(3) A taxpayer’s property tax liability on agricultural land may not exceed two percent (2%) of the gross assessed value of the land that is the basis for the determination of property taxes.
(4) A taxpayer’s property tax liability on other real property may not exceed three percent (3%) of the gross assessed value of the property that is the basis for the determination of property taxes. (5) A taxpayer’s property tax liability on personal property (other than personal property that is tangible property described in subsection (c)(4) or personal property that is other residential property) within a particular taxing district may not exceed three percent (3%) of the gross assessed value of the taxpayer’s personal property that is the basis for the determination of property taxes within the taxing district. (g) This subsection applies to property taxes first due and payable in 2012 and thereafter. Property taxes imposed after being approved by the voters in a referendum shall not be considered for purposes of calculating the limits to property tax liability under subsection (f). (h) As used in this subsection, “eligible county” means only a county for which the General Assembly determines in 2008 that limits to property tax liability as described in subsection (f) are expected to reduce in 2010 the aggregate property tax revenue that would otherwise be collected by all units of local government and school corporations in the county by at least twenty percent (20%). The General Assembly may, by law, provide that property taxes imposed in an eligible county to pay debt service or make lease payments for bonds or leases issued or entered into before July 1, 2008, shall not be considered for purposes of calculating the limits to property tax liability under subsection (f). Such a law may not apply after December 31, 2019.
Over 65 Circuit Breakers
The Over 65 Circuit Breaker is a different limitation on property tax liability. It is aimed at limiting the annual increases on individual tax bills for homesteaders on fixed incomes. In particular, it applies to homestead properties (dwelling plus up to one acre of land) occupied by owners over 65 years of age earning up to $30,000 per year ($40,000 including spouse’s income) that are assessed at $160,000 or less. This circuit breaker limits the annual increase in property taxes to qualifying homesteads to 2%.
Monroe County Circuit Breaker Impacts: 2013 vs. 2014
The following table summarizes the impacts of all of the circuit breakers in Monroe County for 2014, and compares them to their 2013 values.
Circuit Breaker Type
The big takeaways are:
The circuit breakers overall are responsible for the loss of $819,507 in revenue for Monroe County, spread across all units of local government (Part 2 of this series will explore how this breaks down across units)
Monroe County does not (yet) have any 3% circuit breakers that apply — this means that our property taxes are still relatively low compared to our assessed values, and no property owner’s taxes are higher than 3% of the assessed value of the property.
Homesteaders (the 1% circuit breaker) overall are receiving the majority of the benefit of the circuit breakers (and conversely the 1% circuit breaker is responsible for the majority of the revenue loss for Monroe County governmental units)
Both the 1% (homestead) and 2% (other residential, and agricultural) circuit breakers increased substantially from 2013 to 2014. This means that the tax rates overall are rising at a faster rate than the assessed values.
The Over 65 circuit breaker resulted in a substantial tax benefit to seniors at $197,528, and did not increase significantly from 2013-2014. This is to be expected. Property taxes did not rise substantially from 2013-2014, and the number of seniors in the community is relatively stable.
Monroe County vs. Other Counties
So how does the impact of the circuit breakers on Monroe County stack up against other counties? The following table shows the total 2014 circuit breaker amounts for each of the counties in Indiana (except for LaPorte, for which information isn’t yet available).
2014 Circuit Breaker Credits
From this comparison, we can see that the impacts on Monroe County, ranking 54 of 91, are relatively low compared to many other counties. It isn’t surprising that the circuit breakers hit the biggest counties/municipalities the greatest — Marion, St. Joseph, Elkhart, Lake, Allen. There are several anomalies in the list — for example, Delaware County, ranked 6th, saw a disproportionate hit from the circuit breakers. Tippecanoe County saw a much greater impact, at almost $8M, than did Monroe, at less than a million.
Of our neighbors, Lawrence County saw the highest impact, at $2,754,204, while Brown County saw the lowest impact, at a paltry $6,734.
Overall, Monroe County continues to see low property taxes, and relatively high assessed values (meaning strong real estate value). However, the increases from 2013-2014 are concerning, not because they have a particularly high impact in 2014 (they don’t), but because they could cause bigger problems in the future if the trend continues.
In January, I wrote Circuit Breakers, Protected Taxes, and Idled School Buses, about the Indiana statute that required schools who have lost revenue from the circuit breakers (including the 1%-2%-3% tax caps in the Indiana Constitution) to prioritize debt funds over any other fund when applying the losses from the circuit breakers. This is due to what in the statute are called protected taxes.
The legislation underlying protected taxes measn that school corporations facing circuit breaker losses had to first fully fund debt funds, even beyond the amount needed to make required debt service payments, which typically meant that capital projects and transportation funds had to bear the full brunt of the circuit breaker losses. This has even led to some school corporations considering ending school bus service entirely.
HEA 1062 Gives a Temporary Reprieve
This week, however, the Indiana General Assembly passed, and the Governor signed, House Enrolled Act 1062, giving school corporations hit heavily by circuit breakers a three-year reprieve. HEA 1062 allows school corporations that are experiencing at least a 10% hit to their transportation funds due to circuit breaker losses to apply circuit breaker losses proportionally to all funds, rather than funding debt service first, for the years 2014, 2015, and 2016.
Rearranging the Deck Chairs?
Welcome as this statute is, it is only a short-term fix for what will be an ever-growing crisis for school corporations around the state. All this action does is give school corporations a little flexibility in how they arrange the deck chairs on the Titanic. In 2013 (the latest year for which the numbers have been determined), the circuit breakers sucked $245M of funding out of our school systems, a number that will undoubtedly increase in years to come, and is nearly impossible to reverse, given the fact that the 1%-2%-3% circuit breakers have been enshrined in the Indiana Constitution.
Just for an illustration of the harm that the circuit breakers are doing to our schools, I pulled together some of the higher circuit breaker cuts for various school corporations around the state (for 2013). I also included their 2014 amounts budgeted for transportation for comparison.
We are fortunate in Monroe County that, due to our relatively low property taxes and high assessed values, our school corporations have been relatively insulated from the effects of the tax caps. Just for comparison, here are the same numbers for our two Monroe County school corporations:
However, we can’t assume that we will always be insulated from this erosion of revenue. The 2014 circuit breaker numbers will be released shortly, and we will be able to assess the impacts on all local units of government.