Houston: Drop in property values gives city bigger fiscal headache

As if nosediving sales tax revenues and a looming budget deficit were not enough, a swathe of successful lawsuits from business owners protesting their property values have handed Houston City Council another fiscal headache.

Mayor Sylvester Turner lamented what his finance director projects as a $16 million drop in property tax collections during the current budget year, which ends in June.

Granted, that’s not much in a more than $2 billion operating budget. But if all other trends hold, the news means there may be $16 million less on hand to close an already daunting $126 million budget gap for the new fiscal year that starts July 1.

Finance Director Kelly Dowe used new data from the Harris County Appraisal District to make the estimate. That data, said HCAD’s chief appraiser Sands Stiefer, was drawn from November and December, when many judges are trying to clear their dockets.

Cites inequality

Turner at Wednesday’s council meeting lashed out at what he said is an “inherently unfair” system that rewards commercial property owners who hire lawyers to argue their properties are worth less than county officials contend.

That hands a higher share of the tax burden to individual homeowners who lack the same means to fight, the mayor said.

“They’re doing it each and every year. When they’re not successful at the appraisal districts, they go to court for relief,” Turner said. “The reality is, that $16 million is a real hit to the city’s budget.”

The hit is particularly harmful, Dowe said, because the city is operating under a cap on property tax collections that voters imposed a decade ago.

The City Council last fall dropped the tax rate to about 60 cents per $100 of home value, the lowest rate since 1987, to ensure it does not collect more revenue than the cap allows.

If more tax protests or lawsuits are successful than expected, however, there is no way to adjust the rate back up to ensure the same dollars are collected, he said.

“For three budget cycles I’ve talked about having a spending problem and asked for cuts, but now we also have a revenue problem,” said Councilman Jack Christie, who chairs the council’s budget committee. “It’s essential that we solve both of these areas. Let’s be austere in what we do.”

The spike in property value litigation dates to 2013, Stiefer said, when HCAD began substantially raising commercial and highrise office values in response to the booming economy and owners pushed back. On 2012 appraisals, for example, 2,800 lawsuits were filed covering $29 billion in property. In 2013, that jumped to 3,500 lawsuits encompassing $56 billion in property, a trend that held for 2014.

Costly litigation

Though HCAD lately has won a slightly larger share of lawsuits than it used to, Stiefer said, the losses inherently involve higher dollar amounts and more volatile results for local governments.

“I’m spending close to 20 percent of my total budget on litigation right now,” he said. “It’s very expensive to defend these commercial property cases. We’ve been successful in moving the needle a little bit, but it’s a huge amount.”

Mary Van Kerrebrook, an attorney who represents property owners challenging their valuations, lamented that the tax system has “become a political punching bag,” pointing to a 2014 dust-up initiated by Harris County Commissioners Court over commercial valuations that ultimately fizzled out. Fallout from the showdown made HCAD wary of reducing values during initial protest hearings, Van Kerrebrook said.

“As an outgrowth of that, of course, there are more lawsuits because that’s the only other place that taxpayers can go,” she said. “HCAD and the mayor can talk about commercial properties all they want, but the truth is there are plenty of homeowners who’ve been treated in the same way, but homeowners typically don’t have the money or the time or the resources to file suits.”

Council’s discussion of property tax collections on Wednesday led quickly to talk of whether voters should be asked to alter the revenue cap.

“If we really, truly want to remove this cap, information like this needs to go out amongst the public so they can really figure out, ‘What do we want to do?’ ” Councilman Jerry Davis said. “I believe if some of them see that, they may be inclined to remove the cap.”

No amendments now

Councilman Dave Martin turned to his neighbor at the dais, Councilman Dwight Boykins, and said, “It sounds like that anti-revenue-cap train is getting a little more crowded, because you were the only one on it for a while. I’m not one of them.”

Turner, who backed a plan to raise the cap by $85 million to hire more police during the campaign, tried to rein in that discussion.

Having just altered term limits, Houston cannot amend its charter to touch the cap again until 2017, he said, adding that he focused on the property tax difficulties “for information purposes only.” He also warned council members against taking immutable positions as financial challenges loom.

To deal with those hurdles, Dowe said he has pulled nearly $18 million originally given to departments in the current budget and is holding those dollars in reserve. Turner said he hopes to wring another $5 million in savings from leaving vacant city jobs unfilled.

article by

Mike Morris


City Hall Reporter, Houston Chronicle

for http://www.houstonchronicle.com/