CITY BUDGETS STRESSED BY
EXEMPTIONS, MANDATES, GROWTH, LAWSUITS,
HEALTH COSTS, & THE PUBLIC

By

Dr. Susan A. MacManus, University of South Florida
Dr. Mark S. Pritchett, The Collins Center For Public Policy, Inc.
Uri J. Fisher, University of South Florida

With the assistance of
Michael Keenan

For
Florida League of Cities
Quality Cities
(will appear in March/April 2002 issue)

CITY BUDGETS STRESSED BY
EXEMPTIONS, MANDATES, GROWTH, LAWSUITS,
HEALTH COSTS, & THE PUBLIC

Florida has undergone tremendous growth in recent years (+24% between 1990 and 2000). The state is considerably more diverse today than it was a decade ago-demographically, socio-economically, and politically. Population growth has been the greatest in the state's suburban and rural areas, as movers rush to "fill-in" less-crowded areas.

What impact has all this population change had on city budgets? How much do budgetary pressures differ by a city's size and its current fiscal condition? And to what extent has constitutional amendments and revisions approved by the voters in 1998 taken property off the tax rolls?

The Collins Center For Public Policy, Inc., in cooperation with the Florida League of Cities, surveyed Florida municipalities in the Fall of 2000 to find out the answers to these questions. Mail surveys were returned by 205 cities in 52 counties.

1998 CONSTITUTIONAL AMENDMENTS/REVISIONS:
ADOPTION EXEMPTS MORE PROPERTY FROM TAXATION

Florida voters approved 12 constitutional amendments and revisions in November 1998. Two directly affect city property tax rolls once triggered. The first deals with historic property. The second with an additional homestead exemption for eligible senior citizens.

Amendment 1: Historical Property Tax Exemption & Assessment
Amendment 1 was placed on the ballot by the state legislature. It passed with a 55% "Yes" vote. The amendment allows counties and municipalities to adopt ordinances to assess historic properties solely on the basis of their character or use. It eliminates the requirement that owners of historic properties must be rehabilitating or renovating those properties in order to receive tax exemptions from a county or municipality.

Prior to passage of this amendment, the assessment of historic property had been based on their potential highest and best use, often as developed commercial property. As the executive director of the Tallahassee Trust for Historic Preservation noted: "This type of assessment [was] causing an increase of taxes on historic properties even though owners [were] not able to restore them."

The double-edged sword of this amendment was apparent from the start. As noted in the Naples Daily News, "On the positive side, the amendment would allow local government to strengthen historic preservation efforts by expanding eligibility for tax breaks. On the downside, the amendment would take more land off tax rolls."

To date, few municipalities have exercised their option to exempt a property and to determine how much of a tax break to give it. Just 2% of the survey respondents (all over 25,000 population) reported any increase in the number of requests for such an exemption from a property owner. The number of exemptions granted last year under this provision ranged from one to four.

There are several explanations for this low implementation rate. Many cities simply do not have properties that are on a historic place registry. Secondly, owners of such eligible property often are unaware of the exemption. Finally, even if aware, the tax break may not be enough of an incentive to keep an owner from tearing down a structure, especially in an area where land values are escalating.

Amendment 3: Additional Senior Homestead Exemption

This amendment (68.5% "Yes" vote) authorized the Legislature to allow counties and municipalities to adopt ordinances that grant an additional homestead tax exemption not greater than $25,000 to persons 65 or older whose annual household income is $20,000 or less.

In a fast-growing state like Florida, elderly homeowners on fixed incomes often experience higher property tax bills due to rising home values. Amendment 3 was designed to offer property tax relief to these seniors.

As of May 2001, 78 of Florida's 404 cities (19%) had implemented this option. (See table in Appendix A.) One city, Miami Beach, has opted to phase in the exemption over three years. Eight cities have chosen to grant exemptions below the $25,000 maximum permitted by the amendment (seven-- $10,000; one- $5,000).

Support for the senior homestead exemption is strongest among low-income seniors who believe they deserve and need the tax break. As one 74 year old low income Pinellas Park resident sees it: "Don't you think we paid our dues to deserve this tax break? Don't you think that at a time in our old age we deserve a respite? " But even some more affluent seniors favor it. A 63-year-old proponent of the exemption says: "I really feel sorry for anyone who makes only $20,000 a year. That's why I am probably in favor of the exemption for seniors. I know it will mean more taxes for me. But so what. I am still in favor. I can't see where it would hurt me that much."

Opposition generally comes from younger cohorts who believe the exemption is discriminatory because many well-off seniors are eligible while many poorer young persons are not. Some long-time residents are also against the additional exemption. They resent "snowbirds" moving to Florida, taking advantage of the exemption, and driving up everyone else's property taxes. Said one 62-year-old resident of Melbourne: "Everybody down here is old. And more older people are moving down here. What if more people move in who are [eligible] for the exemption. That would start an unending cycle with taxes going up every year. Anything that costs me more money I am against."

But most often, opposition comes from within government-from city officials who anticipate the exemption will have a major impact on their budget.

Many Florida cities, including those that have not yet adopted the exemption, expect this amendment to have a "moderate" to "large" impact on their finances, if enacted. (See Figure 1.)

A number of cities have considered granting the exemption but have backed away from it once they estimated the impact it would have on their property tax revenues. Said one county official: "Amendment 3 would have eroded our ad valorem tax base if we had accepted it. We could not have made up for lost revenue by other means."

Naturally, cities experiencing greater fiscal stress are more likely to anticipate a heavier impact than their better-off counterparts. (See Table 1.)

Table 1
Fiscal Impact Projected to be Larger in Poorer Cities

Over half (57%) of the cities in excellent fiscal shape estimate they would not have to do politically risky things like increase the property tax, raise user fees, and/or reduce services should they decide to implement the senior homestead exemption. (See Table 2.) Cities with more volatile finances see little escape from those alternatives, which explains their reticence to adopt the ordinance.

Table 2
Poorer Cities Face More Politically Unpopular Ways to Replace Lost Revenue

Mixed Opinions Regarding Definition of Income For Eligibility Determination

Fear of irreplaceable revenue loss is the major deterrent to implementing the Save Our Senior homestead exemption, even in the face of lobbying efforts from senior constituents. But there is also some concern about the breadth of the income definition adopted by the legislature. To qualify, a homeowner must be at least 65 years old and have a household income of $20,000 a year as shown on the adjusted gross income line of federal 1040 tax forms. However, the definition adopted excludes tax-exempt income.

City officials are split in their opinions about the breadth of this definition: 48% see it as "too broad"; 43% see it as "just right." But one thing is clear: a high percentage of cities that have formally rejected the exemption see the income definition as "too broad." (See Table 3.)

OTHER BUDGET STRESS FACTORS

Pressures on Florida municipal budgets vary considerably. But over half of all the survey respondents identify employee health insurance costs (64%) and state mandates (52%) as major stress factors. Over 30% cite the public's anti-tax mood, rising litigation costs, and federal mandates. (See Total column in Table 4.)

Budget Pressures Vary by City Size

Larger cities (over 50,000) feel the most fiscal pressure from within -- employee unions (79%) and spiraling employee health insurance costs (67%). (See Table 4.)

*Volunteered "Other" responses included: "community is built out 100%;" "environmental and water regulations;" "aging infrastructure;" "service area significantly larger than incorporated area of city;" "elected officials;" "tourist driven demands on services with very little direct return on revenue;" "large low income population;" "police protection and salaries;" "personnel cuts;" "homestead exemption;" "large percentage of tax exempt property;" "general expenses rising but revenue growth is flat."

Moderate-sized municipalities (25,000-49,999), the most pressured by growth (42%), also cite the same major internal pressures: employee unions (53%) and employee health insurance costs (42%).

State mandates, as well as employee health insurance costs, are the two factors most frequently identified by smaller cities (under 25,000). Smaller cities are in a little worse fiscal condition than larger cities. (See Table 5.)

Budget Pressures Vary by City Fiscal Condition

Budget stress factors identified as "major" differ by current fiscal condition. Several patterns are evident. Cities in poorer fiscal shape ("poor" or "fair") are the most likely to be pressured by an anti-tax mood among their constituents, rising litigation costs, growth management laws, state-granted tax exemptions, transportation needs, and social service needs. (See Table 6.)

Cities in better shape ("good" or "excellent") are more prone to report being stressed by employee unions, health care costs, and population growth.

*Other: see Note to Table 4.

SUMMARY

Today, the budgets of Florida municipalities are being hit from all directions-from voter-imposed constitutional amendments, state and federal mandates, major demographic shifts, growth-related infrastructure needs, lawsuits, rising health care costs, pressure from employees, and a festering anti-tax sentiment. Cities have little control over most of these dynamics but are expected to produce a balanced budget.

When given the option of granting new property tax breaks, many hesitate. The most hesitant are the cities that are already in poor fiscal condition or perceive that they could be if they granted certain exemptions.

The bottom line is that when city officials anticipate serious revenue loss, and see little chance of a politically acceptable "budget-balancing" approach, they balk. Such has been the case with the additional senior homestead exemption. This explains why less than one in five cities has granted this exemption as of May 2001.

To a lesser extent, it also accounts for cities' reticence to grant more property tax breaks to owners of historic property, although there is little evidence that cities tend to deny such requests. It is more often the case that eligible property owners are unaware of these breaks or that the tax reductions are too small an incentive to keep them from selling their historic property, especially in areas with rapidly-rising land prices.

Standing up to pressures from groups, like senior citizens, who are suddenly made eligible for tax relief by ratification of constitutional amendments, is easier when the relief is painted as unfair. A high percentage (88%) of cities that have rejected the senior homestead exemption perceive the definition of income used to determine eligibility as "too broad." Officials in these communities have often pointed to intergenerational injustice, highlighting the fact that many younger homeowners are just as in need of property tax relief as the eligible seniors.

When asked to identify the major factors putting pressure on their budget, over half of the survey respondents mentioned two: rising employee health insurance costs (64%) and state mandates (52%). Over 30% cited the public's anti-tax mood, rising litigation costs, and federal mandates as well. Beyond that, their answers differed considerably by their municipality's size and current fiscal condition.

Not surprisingly, Florida's smaller, poorer municipalities identify the most stress factors. Just 4% of cities with populations 50,000+ rate their current fiscal condition as "poor" or only "fair" compared to 25% of those with populations below 10,000.

Fashioning any "one size fits all" fiscal policy for Florida's local governments is always difficult, if not impossible. Our municipalities vary tremendously in their socioeconomic composition and their politics. When given fiscal options, not all cities will choose to exercise them. Even when universally applicable mandates are imposed, they will vary in their fiscal impact-almost always hitting the "budget pocketbooks" of smaller, poorer cities the hardest.

Appendix Table A
Cities Adopting Senior Homestead Exemption
(as of May, 2001)

Source: Florida Department of Revenue. *Miami Beach 3-year phase in to $25,000.