CFO says loss in ratable base results in tax increase

Last Updated on Monday, March 19, 2012 04:30 pm Written by Claire Lowe Thursday, February 16, 2012 11:30 am

OCEAN CITY — The city does not have a revenue problem, nor does it have a spending problem, according to Ocean City Director of Finance Frank Donato. He said that proposed local purpose tax increase in 2012 was due solely to the loss in ratable base as a result of tax appeals and the 2012 compliance plan.

Donato presented the city’s revenues during the first of two budget workshops in City Hall on Wednesday, Feb. 15.

The $69.19 million budget is up .35 percent from 2011. Local revenue is anticipated at $15.8 million, up $680,239 from 2011. State aid, which is assumed at $2.14 million, stayed the same as in 2011, but may change, Donato said. He said it is “a bit of an unknown at this point” until the governor gives his budget address.

“Delinquent taxes is going to stay consistent,” he said.

And for the first time since they were separated in 2011, the local purpose tax levy and the local library tax levy are presented separately, $43.1 million and $4 million respectively.

The $43.1 million local purpose tax levy will mean a 1.6-cent increase to the tax rate per $100 of assessed value, almost 5 percent, for 2012, despite the fact that the levy is actually decreasing by $213,112.

The local tax rate is derived by dividing the local tax levy by the city’s total ratable base. Donato showed a pie chart of the total 2011 tax rate, which was 75.2 cents and was made up of 18.1 cents for the county, 1 cent for the county open space fund, 18.9 cents to the school, 33.8 cents for local purpose, and 3.4 cents to the library.

He said that the term “a penny on the tax rate” can be confusing because it “means two different things, one to the municipality and one to the homeowner.”

A penny to the municipal tax rate is a fraction of the ratable base. In 2012, a penny on the Ocean City tax rate means $1.217 million in the budget. A penny to a taxpayer is $10 per $100,000 of property value, or $50 for $500,000 home.

Over the last several years, the ratable base for the city has grown substantially, he said, starting at about $3.5 billion in 2001 and increasing to a high of $12.85 billion in 2011.

“That was really watering down the tax rate,” Donato said of the boom years when property values were escalating.

“Now we’re starting to see the eventual effects of that downturn in the market,” he said.

Donato said that while spending is up $241,000 over 2011, the ratable base had decreased by $681 million.

“The problem that’s associated with this year’s tax rate increase is ratables,” Donato said.

There were 650 tax appeals filed as of April 1, 2011, and, once they settled, the city saw a $113 million loss in its ratable base. A tax appeal, he said, hits the city two-fold, once on the city’s total valuation, but also results in a loss of tax revenue.

“Appeals cause a much bigger problem than proactively assessing changes ahead of the budget,” Donato said, which is why the city filed a compliance plan with the county to reduce the valuations of 3,200 properties on the beach and bay fronts.

The compliance plan resulted in a loss of $606,882,900 to the ratable base. He said the compliance plan focused on the properties similar to the appeal properties that had the biggest deviation between market value and assessed value.

In addition to tax appeals and the compliance plan, the city lost $11.7 million in what Donato called “miscellaneous adjustments,” but added $50.5 million in new ratables, which is a positive sign for the real estate market, he said.

He said he would like to think that the real estate market has stabilized and is getting better.

“It’s not a reflection of what the real estate market is today,” he said of the overall loss in the city’s valuation.

Donato said municipalities see a delayed effect from the fall of the real estate market.

He said that if not for the loss in ratables, the tax rate would have decreased .22 cents to 33.58 cents.

“It’s going to affect people differently,” he said of the tax rate increase. “Really, this is a tax rate adjustment as opposed to an increase.”

Donato said another compliance plan for the city is being considered. The city originally applied to the state for a full reassessment, but was denied because of its action plan.

“The state denied that application on the basis (that) we didn’t feel we needed to do inspections on the entire island,” he said.

Donato said the reason the city did not want to do a full revaluation, which he said could cost around $1 million, was because the adjustments were largely due to a fall in land value.

“We didn’t feel that was a necessary cost to put on the taxpayers,” he said.

The city will continue to work with the county to complete another compliance plan, a process which would take place in the fall, he said.

Ocean City’s proposed 2012 budget anticipates increased revenues from fees and permits, fines, parking, beach fees, sales of property, the Aquatic and Fitness Center and construction code.

“You can’t budget anything more in 2012 than what you realized in 2011,” Donato said of the anticipated revenues.

He said the city can’t be too aggressive with revenues, but has to base the anticipated revenue off its own track record. The 2012 budget will also use $2.5 million out of the fund balance to offset appropriations. The library tax levy is anticipated at $4 million, down from $4.25 million in 2011.

There will be a workshop on the budget appropriations 6 p.m. Thursday, Feb. 16 in City Hall. The appropriations, which must equal revenues, are made up of salary and wages, other expenses, statutory and deferred charges, state and federal grants, capital, debt service and reserve for uncollected taxes. Debt service and other expenses are increasing, while the other line items are decreasing.

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