My heart was warmed by the response to last Sunday’s property tax primer.
In emails, tweets and Facebook posts, I got a lot of positive reader push back.
I was worried that people would see a wall of gray type on the page, recognize that math was involved and turn to the funny pages. In fact, I said as much in the column.
It turned out a lot of readers read to the bottom of the story and said so in their responses.
Several of them came up with engaged, interesting comments and others posed questions that deserve response.
So I will:
“As you so accurately noted, the (property tax assessment) cap has kept taxable assessment down,” one reader wrote. “I suspect, but don’t know, that the slice of property tax base that is not taxed because of the cap is as much as 10 percent. That is a huge part of the tax base that is not being used at all.”
Let’s find out.
The state constitution says that taxable property covered by homestead exemptions can only go up 3 percent a year. Taxable value on other property can only go up 5 percent a year.
At first, the question seems like a simple calculation based on stuff readily available at the county courthouse: Take the total market value, subtract the total taxable value, multiply by the 11 percent assessment ratio, multiply again by the millage rate. Voila! We’d know how much revenue there’d be for local government if it weren’t for the 3 percent cap.
But, like most things involving property taxes, it’s more complicated than that.
We also have to take into account that there are a variety of other breaks on taxable property values: There’s an exemption for qualifying disabled veterans and a property valuation freeze for homestead-eligible property owners over the age of 65 with a total household income up to $67,100 a year. Some property is assessed but is legally exempt from property taxes. And millage rates vary from city to city and school district to school district.
The Tulsa County Assessor’s Office came to my rescue.
Taking all those issues into account, the assessor’s office — which has been incredibly generous with its help on this and last week’s project — found 68,916 taxable accounts with a difference between the market value and the taxable value due to the 3 percent and 5 percent caps. The difference is $1.62 billion.
The assessor applied the assessment ratio and the homestead exemption where appropriate and found $178 million would be subject to the millage, if not for the caps.
The assessor’s office applied the appropriate millage rates to all those accounts and the total revenue difference is $23.6 million. That’s the equivalent of 2.9 percent of property tax revenue in the county for the year.
It’s worth noting that that caps’ discounts are not spread evenly among property owners. The longer you’ve lived in your home without doing something to trigger a move to market value, the bigger the potential difference between your property’s fair market value and its taxable value. Logically, we can conclude that favors older, long-term homeowners who often have limited incomes, but it disfavors young families who are often at the low end of their earning curve.
Remember, the millage varies from year to year according to how much money is needed to service bonded debt and lawsuit judgments. With revenue growth from a big slice of taxable property restricted by exemptions and caps, a higher millage is needed to service those costs. That means those young families don’t get much of a discount from the cap and pay property taxes at a higher rate because of them.
I couldn’t find any reliable statewide source of information on the effects of the cap, but there’s another related issue that was championed by former state Auditor Gary Jones.
For decades, some counties, especially rural counties, undervalued property. In 2014, 52 of the state’s 77 counties would have generated an additional $192 million in property tax revenue if their valuations had been accurate, according to the Oklahoma Tax Commission.
Pressure from the state board of equalization got all the counties into compliance as of fiscal year 2018, but the taxable value on the undervalued properties will only rise toward accurate market values at a rate of 3 percent or 5 percent a year, unless the property is sold.
Jones described one case where a property was on the books at $10,000, but actually was worth $65,000. According to my calculations, that $10,000 value, rising at 3 percent a year, will get to $65,000 in 63 years. Of course, by then the property should be worth a lot more than that.
This is why that is important: Because of the state’s equalization rules, schools in counties with more accurately valued property, such as Tulsa County, end up getting penalized in their state funding because of the residual effects of the phony property value numbers elsewhere.
• • •
“I would be curious to find out at what point did property tax cease to become the primary funding source for the local schools,” another reader wrote. “I think that was the original intent, and property taxes were chosen over sales taxes because they were deemed to be more stable.”
The simple answer is April 25, 1990.
That’s the day Gov. Henry Bellmon signed House Bill 1017, which raised personal income taxes, corporate income taxes, sales taxes and use taxes to fund public schools.
From then on, everyone has assumed that the state will shoulder the biggest burden in school funding. Although the responsibility hasn’t always been fulfilled, it has always been assumed from then, as was confirmed with last year’s state-funded teacher pay raise averaging $6,100.
Andrew Tevington, a senior aide to Bellmon, agreed with my version of history.
Tevington reminded me that Bellmon, a farmer, hated property taxes. He originally proposed abolishing most property taxes in favor of a 1.9 percent sales tax on goods and services. That idea went nowhere with the Legislature, but it helped force what became HB 1017.
Robert Dauffenbach, senior associate dean at the University of Oklahoma’s Price College of Business, offered a more nuanced history.
He found state Department of Education records that show state aid to schools in 1924 was 1.8 percent of the education funding stream.
State aid rose notably during the Depression, but was still less than a third of the mix.
In 1985, after equalization started taking effect, the state first accounted for more than half of the funding mix.
After HB 1017, the number definitely went up. In 1990, state money was 54.8 percent of the mix. The peak came in 1997, 60 percent.
Years of state neglect of its duty had the funding mix below 50 percent again by 2012, but last year’s $400 million House Bill 1010xx ought to make it rise.
Dauffenbach offered an important note: In recent years, the Education Department has changed its accounting methods to be more accurate and account for more state money, so the most recent numbers aren’t directly comparable to those from the past, but the trends are still valid.
The importance of local property taxes varies greatly from district to district and from year to year.
Thirty-eight “rich” districts get no money from state aid. But a lot more poor districts are far more dependent on the state.
I went to online state Department of Education records, and cherry-picked a few likely looking districts. Atoka gets 12.4 percent of its revenue from property taxes; Tushka, 12.3 percent. There’s a lot more districts like Atoka and Tushka than those 38 rich districts.
The state is undeniably in the leadership role for school funding, and, as Dauffenbach concluded, HB 1017 was a turning point.
The reader’s premise that property taxes are generally more stable than sales taxes (and much more stable than oil field taxes) is correct. But constitutional millage limitations, assessment caps and the strength of the farm lobby have combined to keep property tax revenue far from adequate, forcing other choices.
• • •
“Looking at the school districts operating budgets, it might be interesting to go back in time and see what percentage of the budgets go to current active employees versus retired employees no longer working,” a reader wrote. “I suspect that the percentage paid to retired employees might be increasing over time.”
The simple answer is that no local school district money goes directly to retired employees and never has. Those pensions are paid by the Oklahoma Teachers Retirement System, a state-managed fund.
But simple answers aren’t always completely accurate.
Tom Spencer, OTRS executive director, explained that every school district contributes 9.5 percent of each employee’s compensation to the pension fund. The employees contribute an additional 7 percent.
Hypothetically, if the pension fund were 100 percent funded, the normal cost of accruing pension liabilities would be the equivalent of 10.34 percent of school payrolls, according to the most recent audit of the fund. That includes a small bit for administrative costs.
It’s fair to say that the difference between the 16.5 percent contributed by schools and their employees and 10.34 percent are residual costs of retired employees, Spencer said. That’s the equivalent of 6.16 percent of school district payrolls.
Interesting fact: The anticipated total payroll for school districts and other agencies that are part of OTRS for the current fiscal year is $4,400,449,611. Apply the 10.34 percent cost: $455,006,489. The actual costs to OTRS employers and employees is $726,074,185.
So it’s fair to say the difference — $271,067,696 — is supporting retired teachers. The 57.6 percent portion coming from the employers only, most of which are school districts, is $147,855,107.
It’s worth noting that OTRS isn’t at 100 percent funding. It’s at 72.9 percent, the highest level in its history.
Getting close to 100 percent would require more money from school districts and their employees or a bigger return on OTRS investment or a bigger contribution from the state or some combination of the three.
The 9.5 percent of payroll pension cost to school districts and the 7 percent to employees is statutory and hasn’t changed recently. Of course, when teachers get raises — such as the $6,100 bump approved by the Legislature last year — the amount going to OTRS also goes up.
So, the reader is right. The amount school districts end up paying (indirectly) for former teachers is going up, but only because the amount they are paying their current teachers is going up. As a percentage of payroll, it is stable.
• • •
There’s a rule of thumb in journalism: Don’t dive too deeply into the weeds.
The assumption is that readers think they want to know what’s what, but when presented with complicated nuances and anything that involves math, they bail out.
My recent experience has proven to me that if it’s an issue as real as their property tax bill, readers will follow every detail and read all the way to the bottom.
Now, on to the funny papers!
Read each part in the series Wayne Greene does the math: The Tulsa World's editorial pages editor goes after some big topics and the millions of dollars around them in this series of explanatory journalism.