Shrinking ratable base tough on budget

Last Updated on Tuesday, 03 January 2012 13:34 Written by Ann Richardson Wednesday, 04 January 2012 00:00

City budget to be introduced Jan. 12

OCEAN CITY — The 2012 municipal budget will be unveiled next week, but Frank Donato, the city’s finance director, said a bad economy and the resulting decline in the ratable base means it won’t be an easy process.

“We are expecting a difficult budget,” Donato said.

He said that it’s not because municipal government is overspending: a real estate market in decline over the past several years has taken a toll.

“This generally happens. There is always a delayed effect when you have a declining market,” he said. “The market peaked in 2005 and it’s been declining ever since. We are starting to see the effects several years later.”

Mayor Jay Gillian will deliver the budget to City Council 7 p.m. Jan. 12 at City Hall; budget workshops are scheduled for 6 p.m. Jan. 18 and 19 at the library, 17^th Street and Simpson Avenue.

“We’ll hand out copies of the budget document on Jan. 12 and the mayor will give a speech, at the workshops; we’ll really get into the nuts and bolts,” Donato said.

He said city officials plan to spend a lot of time communicating with taxpayers concerning the impact of the loss of ratables on the municipal tax rate. Appeals, he said, have a domino effect. Donato said the city faced more than 650 tax appeals in 2011, resulting in a net loss of $113 million in the city’s total assessed value, which means $850,000 less tax revenue.

Facing the prospect of at least another 1,000 appeals in 2012, Donato said the city decided to take a proactive approach and adopt what he called a compliance plan. Approved by Cape May County officials, the plan permits the city to perform reassessments in select areas that have the most appeals.

“We knew if we sat around and did nothing we’d see more than a thousand tax appeals in 2012,” he said. “We wanted to do this before the budget season. If you do nothing and adopt a budget based on an inflated tax base, it really affects the budget. You have adopted a budget that is based on a tax base that is not real. As property owners file appeals and the value disappears, it really affects the budget.”

Most of the tax appeals in 2011 were waterfront properties along the beach and bay, Donato said. These properties, he said, saw the largest increase as property values exploded in the boom years and thus experienced the greatest drop when the real estate market tumbled. Most of those property owners were taxed on inflated values when the market bottomed out.

“The result of the compliance plan was that the assessments in the neighborhoods where the majority of the appeals happened were reduced,” Donato said.

As part of the compliance plan, the has city reassessed about 3,000 properties on or close to the water, resulting in a decrease of more than $500 million in assessed value.

When you do the math, Donato said, the impact on the city’s tax rate will be felt by those in the middle of the island: property owners who experienced the least volatility as the market boomed and then bottomed out. The middle will have to pony up to make up for the loss.

“It’s not going to seem fair to some people, but that’s where the inequalities were,” he said. Those in the middle will have to pick up the slack for those on the water who have just seen their assessments lowered.

“That’s what’s going to happen, but you have to look at it this way, for a couple of years the property owners on the beach and bay have been picking up the slack,” Donato said. “They were paying on inflated values.”

“When we figure out the tax rate we take the tax levy – the amount that needs to be raised by taxes to make the budget work – and we divide it by the ratable base,” Donato said.

He said that even if the tax levy remains the same, if the ratable base decreases, the tax rate will increase.

“It’s going to affect different people differently,” he said. “It will all depend on the value of your home. Those whose rate went down will pay less; those with the same assessment will pay more.”

The state, Donato said, would like Ocean City to perform a complete revaluation, which would involve inspecting the inside of every building on the island.

“The state is not looking too favorably at the reassessment plan, because we did not want to inspect every home,” he said. “We were looking at an in-house reassessment, which would not involve every home.”

Land value is the problem, Donato said, not the housing stock.

“The value of the home itself has not changed all that much, it’s the value of the land that went down,” Donato said. “Houses are not selling for what they were in 2005, but it has nothing to do with the housing stock, it’s all land value. It’s supply and demand.”

The last full revaluation, Donato noted, was in 2001-2002.

“We’re coming up on 10 years and the state would like to see that you have inspected all properties within the last four years,” he said.

A full revaluation costs considerably more than a reassessment plan, he said.

“We were looking to save about $1 million,” he said. “Our reassessment plan would have cost about $1 million less than a full revaluation plan because inspecting every property on the island is a very laborious and expensive process.

“We’re going to get more clarification on that this week,” he said. “The problem is with the land values. If we could just go through and reassess land values on an in-house method, we’d be in good shape. Inspecting over 19,000 properties would have to be contracted out.”

Donato said he and the city’s tax assessor, Joe Elliott, would be communicating with the county Tax Board as early as this week “to discuss our options going forward.”

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