Special District Association 2014 Annual Conference

Taxes, Assessments and Fees

Presentation by

JoAnn Groff Colorado Property Tax Administrator

and

Michael ValdezSDA Director of Policy

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State Fiscal System

Basic Principles of State Tax System in State Constitution

Personal and Corporate Income Taxes reserved to State

Property Taxes reserved to local governments:

Municipalities Counties Special districts School districts

Some taxes are allowed to both the state and local

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State Income Tax

Reserved to the State

Includes both personal income tax and corporate income tax.

Constitutes the primary source of state tax revenue

o $6,180,665,308 collected in 2013

o 60% of all state revenue

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Sales, Use and Excise Taxes

State Sales and Use Tax Rate set at 2.9%

Many exemptions, some in constitution, some in statute

o $3,358,295,290 Collected in 2013 (including excise taxes)

o 32.6% of all state revenue

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Sales and Use Taxes

Local Sales and Use Taxes

Rates set by local taxing authority

Many are State collected and remitted back to the local entities

Only Home Rule Cities can collect their own sales and use tax –69 Home Rule Cities currently self-collect

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Local sales and use tax collections and distributions

In 2007, over $1.92 billion in sales taxes were levied by

271 local governmental entities: 52 counties,

214 municipalities, and 5 special districts Total sales and use tax revenue collected in 2013 Counties: $462 Million

Cities collected by the state* $139 Million

Local Improvement Districts $5.3 Million

*Home Rule Cities information not available at slide time!

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Specific Ownership (SO)

Tax: Paid upon registration of motor

vehicles. Statewide approximately $450 million

annually?

Distributed by county treasurer on a pro-rata share to all taxing entities based on entity mill levy

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Property Tax

Property tax, also called ad valorem tax

Levied in Colorado by over 2000? local taxing entities

Total in excess of $7 billion in 2013.

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Property Tax Rate

The rate of tax (mill levy) is determined annually by each taxing entity, based on

Budget established/amount of property tax needed by the entity to fund that budget

Divided by the ASSESSED value of taxable property within the entity

o As certified by the county assessor to the entity

Mill levy as set by the entity

o As certified by the entity to the County Commissioners

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Property Tax Terms So what is a mill?

A “mill” is 1/1,000 of a dollar or

.001 applied against ASSESSED Value

For example: A residential property with an actual value of

$100,000

o ASSESSED value would be $7,960

• One mill is $7.96

A commercial property with an actual value of $100,000

o ASSESSED value would be $29,000

• One mill is $29.00

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Property Tax Terms continued

What is a taxing entity/jurisdiction? An entity with the authority to levy taxes against

property

o School Districts, Counties, Cities and Special Districts

What is a tax area? A geographic area where all properties are serviced

by the same taxing entities.

What is ASSESSED value? It is the actual value of a type of property multiplied

by the assessment rate.

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Property Tax Examples Tax Area Example

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Property Tax Examples continued

Entity Mill Levies and Tax Area and Example for Mr. Smith: There will be four taxing entities for Mr. Smith’s Tax

Area

o County 20.24 mills

o City 9.07 mills

o School District 45.06 mills

o Water and Sanitation 2.75 mills

Total Mill Levy 77.12 mills or .07712

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Property Tax Examples continued

Computing the Property tax for Mr. Smith’s Tax Area: Mr. Smith’s residential property is worth $100,000

of ACTUAL value

o Actual value X residential ASSESSMENT rate = $7,960

o Assessed value X 77.12 mills for tax area =

• $7,960 X .07712 = $613.86

Constitution provides all levies must be “uniform” Social “engineering” comes in the various

Assessment Rates

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Total Distribution of Property taxes SDA

Based on 2013 Annual Report to the Governor and General Assembly: School Districts (Total Levy) 4.52 Billion

50.3%

Junior Colleges $84 Million 1.2%

Counties $1.40 Billion20.0%

City and County of Denver $373 Million 5.3%

Other Municipalities $342 Million 4.9%

Local and Special Districts $1.28 Billion 18.3%

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Limitations on Property Taxes

5.5% Limitation

“Gallagher” Amendment

TABOR Amendment

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5.5% Limit: § 29-1-301, 302, Colorado Revised Statutes:

Adopted in 1913

Limits any district’s revenue from property tax to no more than 5.5% more than the previous year

Exceptions for new growth

Provisions for voter approved suspension of the limit

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1982 Amendment 1(aka Gallagher Amendment)

Referred Constitutional Amendment, adopted in 1982

Eliminated personal property tax on

o Household furnishings and personal effects not used for the production of income at any time,

o Inventories of merchandise and materials and supplies held for consumption

o Livestock; agricultural and livestock products; and agricultural equipment used in the production of agricultural products

Established the annual audit of assessors’ offices to confirm proper values

Ensured Agricultural properties would be valued on production rather than Market, Income or Cost approach

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“Gallagher” part of Gallagher Amendment

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Amendment initially established assessment rate at 21% of actual value for residential property, and 29% for most other properties

GALLAGHER = During a year of general reassessment, the percentage of total statewide tax base attributable to residential property shall remain the same as it was the prior year after adjusting for new construction …

The proverbial 45% of value coming from residential property, and non-residential property making up approximately 55%.

Residential rate re-calculation became a permanent part of the constitution.

“Gallagher” part of Gallagher Amendment continued

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Recap of Residential Assessment Rates since Gallagher Years Rate enacted RAR Study Rate 1983-1986

21.00%  

1987 18.00%  1988 16.00%  1989-90 15.00%  1991-92 14.34%  1993-94 12.86%  1995-96 10.36%  1997-98 9.74%  1999-2000

9.74% 9.83%

2001-02 9.15%  2003-04 7.96%  2005-06 7.96% 8.17%2007-08 7.96% 8.19%2009-10 7.96% 8.85%2011-12 7.96% 8.77%2013-14 7.96% 9.13%

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“Gallagher” part of Gallagher Amendment continued

Evan Goulding states: “Every reduction in RAR results in a simultaneous reduction in property tax base (assessed value) for every local government which has a mill levy.”

JoAnn Groff doesn’t necessarily agree, depends on the make up of your taxing area. The problem:

Residential Assessment Rate calculated statewide

All property tax areas are local

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Business Personal Property (BPP)

Included in property tax base for all taxing areas

Assessed Value of BPP was 14.70% of total assess value statewide in 2013

Varies greatly by county

o Lowest was Hinsdale 1.71%

o Highest was Rio Blanco 53.28%

Total assessed value of BPP in 2013 - $13 Billion State-wide

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Business Personal Property (BPP) continued

Totally exempting BPP could result in $1 - $1.2 Billion* loss to all local governments

*Total guestimate of the PTA based on total program of schools totaling 1/3 of all property tax, 2010 Legislative Council estimate of $ 400 M necessary to backfill schools by general fund if BPP eliminated

Also has Gallagher implications:

o If you lower the 55% side of the pie you must lower the 45% side of the pie. The size of the pie must get smaller to maintain ratio.

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1992 Amendment 1(aka Taxpayer’s Bill of Rights or TABOR)SDA

Initiated Constitutional Amendment adopted in 1992

More than fifty court cases have been necessary to provide understanding and interpretation of the complex measure

Currently a case is pending brought by a group of former legislators and concerned citizens stating the whole amendment is unconstitutional

o Until that case is decided…

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TABOR Amendment

Limits property taxes in two ways:

i. Section (4) Required Elections. …districts must have voter approval in advance for: (a) any new tax, tax rate increase, mill levy above that for the prior year, valuation for assessment ratio increase for a property class, or extension of an expiring tax, or a tax policy change directly causing a net tax revenue gain to any district.ii. Section 7(c) limits revenue from property tax to increase in any year by no more than the previous year’s limit (or actual revenue, whichever is less), plus local growth plus inflation as reflected by changes in the Denver-Boulder Consumer Price Index (CPI).

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TABOR Amendment continued

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Mill Levy increases must have voter approval.

(Para. 4(a)).

Voting on taxes is the central mantra of TABOR

Especially troublesome when coupled with potential Gallagher assessment rate reductions, where a mill levy increase may be necessary simply to stay even with revenue.

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Ratchet Effect

Fiscal year spending can only increase by the amount of the previous year’s fiscal year spending

+ plus local growth

+ plus inflation in the prior calendar year. Local Growth = net new construction less destruction

Inflation = Denver/Boulder Consumer Price Index [CPI]

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Ratchet Effect continued

If revenue (and thus spending) is reduced in a given year, next year’s allowable spending is built from the reduced revenue, or the new year’s limit,

whichever is less.

The practical effect is that in bad times, a district loses revenue, and cannot move back up to a previous level without a vote of the people.

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Refunding under TABOR

If revenue from sources not excluded from fiscal year spending exceeds limits in dollar amounts for that fiscal year, the excess shall be refunded. [Section 7(d)] Various methods of refunding are allowed

Failure to refund can result in up to ten percent penalty against the district

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TABOR de-Brucing

Voters can approve a revenue change as an offset. This provision has led to the common practice of putting a ballot issue before the voters, asking them to allow the

district to keep and spend an unspecified amount of revenue in excess of TABOR’s limits, often for an indefinite period of time. This has become known as

de-Brucing.

Limited de-Brucing refers to a vote to retain a specified amount of excess revenue, from a specified revenue source, or for a specified period of time.

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de-Brucing continued

General de-Brucing seeks to retain a more general amount of excess revenue, and for a longer, or unspecified time period.

de-Brucing, however, is limited only to approving revenue changes, whether limited or general, and does not relax or remove any of the other restrictions of TABOR.

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Enterprise Status One of the more important safe harbors in

TABOR is the “enterprise exception”

TABOR excludes from its limitations any qualified “enterprise”;

However, the term presents many difficult interpretive questions

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Enterprise continued

Section 2(d) defines an enterprise as “a government-owned business authorized to issue its own revenue bonds and receiving under 10 percent of its annual revenue in grants from all Colorado state and local governments.”

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Enterprise continued

The district itself, because it has the power to levy a property tax, probably cannot qualify as an enterprise.

Nicholl v. E - 470 Public Highway Authority. An activity of the district, however, such

as a water distribution system, golf course, etc., may be self- supporting through fees, or other means, so that less than 10 percent of its revenue is from taxes or government grants, and thus qualify as an enterprise.

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Designating an Enterprise

Enterprise status may vary year to year, depending upon percentage of revenue made up of taxes and grants.

When a segregated activity of a district qualifies as an enterprise, the district probably does not need to take formal action to designate it as an enterprise.

The better practice, however, is to adopt a resolution on an annual basis designating each enterprise owned by the district.

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Special Assessments

Cost of a local improvement, assessed upon property specially benefited (local improvement districts)

§ 30-20-601 C.R.S. Frequently used by municipal “special

improvement district,” or county “local improvement district”

Funds generated by special assessment cannot be diverted to other purposes

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Fees, rates, tolls, penalties, or charges

For services, programs, or facilities furnished by special districts

Authorized as part of general powers of the board on behalf of the district. § 32-1-1001(1)(j) C.R.S.

Adopted by rule or regulation

Constitute a perpetual lien on the property, which may be foreclosed in the same manner as provided by the laws for the foreclosure of mechanics’ liens

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Late fees and delinquency charges are limited by statute

“Delinquency Charges” regulated by § 29-1-1102 C.R.S.

No delinquency charge on any amount paid within five days of due date

Limited to $15 or up to 5% per month or fraction thereof, not to exceed a total of 25% of the amount due, whichever is greater

No interest can be charged on the delinquency charge

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Late fees and delinquency charges are limited

by statute continued

Interest can be charged on the amount of the fee or charge due.

Interest cannot exceed the amount of the delinquent fee, and cannot exceed 18% per annum

Limits shall not prohibit a district from recovering costs of collection, including disconnection or reconnection fees, reinstatement charges, or penalties assessed where fraud is involved

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Late fees and delinquency charges are limited by statute continued

Water and Sanitation districts are empowered to assess reasonable penalties for delinquency in the payment of

rates, fees, tolls or charges, or violations of the rules and regulations, with interest from due date at not more than 1% per month, and to shut off or discontinue service.

§ 32-1-1006(d) C.R.S. Where these rules are inconsistent, districts

should follow the rule that is most restrictive on its administration of delinquency charges

In order to enforce, fees and charges should be adopted by rule or regulation, and have clear policy and penalties spelled out

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Special Circumstances

Fire protection districts are limited to fees and charges as follows: § 32-1-1002(1)(e) C.R.S.

for ambulance or emergency medical services;

for requested or mandated inspections if a fire code is in force;

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Special Circumstances continued

Water and sanitation districts have the power to divide the district into areas according to the services furnished therein, and to fix different rates, fees, tolls, or charges and different rates of levy for tax purposes against all of the taxable property within the several

areas of the district… § 32-1-1006(1)(b) C.R.S.

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Impact Fees Special districts have no independent authority

to impose impact fees.

Cities and Counties have clear authority to impose impact fees, pursuant to § 29-20-104.5 C.R.S., adopted in 2001 in a special legislative session. This act, however, intentionally omitted special districts from

the definition of local governments, thus precluding direct “impact fee” authority on behalf of special districts. The Act also clearly states that the local government, i.e., city or county, may impose an impact fee to “fund expenditures by such local government on capital facilities needed to serve new development.

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Impact Fees continued

The same act enumerates the conditions which must be met to avoid “takings” problems. Great care must be given to meeting the conditions included in the statute, which largely mirror leading

Supreme Court cases

Since the law would seem to indicate that the money must be spent by the collecting entity, care should be exercised in structuring cooperative efforts where a city or county imposes and collects an impact fee for the benefit of a special district

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Multi-fiscal Year Debt

Affects bonding, short term loans, multi-year employment contracts

Must have voter approval in advance. (TABOR, Para 4(b)).

Lease-purchase has been approved by Supreme Court as one way to deal with this restriction

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Emergency Reserves

Each district must annually reserve 3% or more of its fiscal year spending excluding bonded debt service

To be used for declared emergencies only

Problem is in the definition of “emergency.”

It excludes economic conditions or most conditions other than natural disasters, and probably does not cover most natural disasters. The result is that 3% of a district’s funding is tied up in a dedicated reserve, and completely unusable by the district.

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Non-Emergency Reserves

Annual Revenue under revenue limits, not spent, can be moved into non-emergency reserve account

Reserve funds can be kept, grown, and spent without regard for future TABOR limits

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Questions?

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For Michal or JoAnn?

Thank you!