Tax Appeals swamp U.S. Cities and Towns as property prices plunge.

By Jeff Green and Tim Jones -
Dec 8, 2010 10:34 AM ET
Wed Dec 08 15:34:12 GMT 2010

A fiscal flood that threatens to
swamp local government budgets across the U.S. overflows from
file cabinets in the office of Patty Halm, chair of the Michigan
Tax Tribunal. The backlog of cases from taxpayers seeking to lower
property-tax bills of more than $100,000 shot up to 14,236 this
year from an annual average of about 6,000 during the past
decade. The backlog of smaller claims was at 28,558 at the end
of September, eight times higher than a decade ago, according to
records at the tribunal, a Lansing-based administrative court.

From Los Angeles to Atlantic City, the New Jersey gambling
resort whose credit rating Moody’s Investors Service cut by
three levels last month, property owners are demanding lower
taxes after real-estate values plunged. The disputes over
billions in dollars come as municipalities are already slashing
services such as police and fire protection and may depress
revenue further as communities try to recover from the longest
recession since the 1930s. In Michigan, Governor-elect Rick Snyder has warned that hundreds of towns face financial crises.

“We’re just getting swamped,” said Halm, 54, who was
appointed in 2003. “We’re constantly buying new file cabinets
to hold all the cases. We even have six surplus file cabinets in
the courtroom.” U.S. home prices are 30 percent below their peak of April
2006, according to the seasonally adjusted S&P;/Case-Shiller
index of property values in 20 cities. They may drop 10 percent
more, Greg Lippmann, a founder of New York-based LibreMax
Capital LLC, said Dec. 2 at the Hedge Funds New York Conference
hosted by Bloomberg Link.

Appeals Upon Appeals- Meanwhile, the Moody’s/REAL Commercial Property Price Index
of U.S. commercial property is 43 percent below its October 2007
peak. “If we look into the future, assessments will have to
reflect the market value, and two years out, property-tax
receipts will have to be coming down,” Michael Pagano, dean of
the College of Urban Planning and Public Affairs at the
University of Illinois at Chicago, said in a telephone
interview. “If the appeals are largely successful, they will
generate a lot more appeals.”

In Michigan, seven judges and 15 hearing officers are
clearing the backlog. Five additional staff members are crammed
into cubicles in hallways and a library space, said Halm, who is
also one of the judges. More than a dozen mismatched file
cabinets line the hallway outside the tribunal, among about 50
that have been added for the overflow.

Amid the Cabinet: This week a chief clerk sat surrounded by them on the
floor, sorting files to get ready for hearings. Bins held even
more folders. Oakland County, the Detroit suburb with Michigan’s second-
highest median income, didn’t previously pay much attention to
Tax Tribunal cases because any losses were covered by new
construction gains, said Robert Daddow, deputy county executive.
Now, about $3.9 billion in taxable value, or 5 percent of the
county’s tax base, is under review, he said.

Cities and towns across Michigan had property-tax
collections plunge as much as 20 percent in the past year, the
steepest drop since a 1994 rewrite of state levies, forcing
scores to decide whether to borrow to pay bills or risk default
on bonds.

Municipal budgets “tend to lag economic conditions” by 18
months to several years, according to a National League of
Cities report in October that Pagano co-wrote. “The full weight of the decline in housing values has yet
to hit the budgets of many cities and property tax revenues will
likely decline further in 2011 and 2012,” the report said.

Already Struggling Douglas Roberts, Michigan’s former treasurer, said in a
telephone interview from East Lansing that the impact of
property-tax appeals “could be significant” because cities are
already struggling with rising pension and health-care costs and
declining revenue.

Settlements are likely to increase across the state through
2013 as the backlog is worked through, compounding other revenue
shortfalls, Daddow said. “In some of these instances, probably most of them, local
governmental units have not been setting money aside for this,”
Daddow said. “That will be huge. That will be another big
headache coming down the pike.” In many states, property-tax appeals are handled primarily
at the local level.

Clark County, Nevada, which includes Las Vegas, had 8,300
appeals last year, an increase from 6,000 the year before and
1,900 in 2008, according to Rocky Steele, assistant director of
assessment services. “It was a big year, the biggest we’ve ever had,” Steele
said in a telephone interview.

Losing Hand- Clark County’s taxable real-estate value fell to $184
billion for the 2010-11 fiscal year from $263 billion the prior
year and the record $320 billion in 2008-09, according to
Steele. The one-year reduction will cost the county a projected
$514 million in lost taxes. Almost all the hotel casinos and
major property owners received reductions, Steele said.

In Atlantic City, where 11 casinos account for 74 percent
of the property-tax base, the city has exhausted a reserve for
tax appeals that in 2006 held $26 million, according to a Nov. 4
Moody’s report on the rating cut. The company reduced the credit
to Baa1, three levels above speculative grade, from A1. All Atlantic City casinos have pending property-tax
appeals, Moody’s said. Since their valuation is based on
gambling revenue, which has declined more than 11 percent this
year, appeals may continue, the rating company said.

Resort Under Pressure- “The city’s negative fund balance position, outstanding
tax casino credits and the significant number of remaining
unsettled casino tax appeals will continue to pressure the
city’s financial position,” Moody’s said in the report.

New Jersey homeowners filed 18,147 property-tax appeals in
Tax Court during the fiscal year ending June 30, up from 10,067
in fiscal 2007, according to a report by the state judiciary. Moody’s today cited continuing tax appeals when it lowered
the rating on about $3.7 million in outstanding debt for the
Borough of Roseland, New Jersey, to fourth-highest Aa3 from Aa2. A reserve fund for tax appeals in the town about 20 miles
(32 kilometers) east of New York City may fall to $600,000 this
year from $3.5 million in 2007, and the borough may issue bonds
to handle future appeals, Moody’s said in the report.

‘Overloaded’ in L.A. Across the country, the situation is similar. “We’re just overloaded,” said Khanh Nguyen, chief of
assessment appeals in Los Angeles County, whose more than 10
million residents make it the nation’s largest.

The county expects “a few thousand” more than the 42,000
applications last year, Nguyen said. That’s quadruple the 9,353
in 2007, she said. The appeals are rising as the overall tax
rolls declined by $18.5 billion, or 1.67 percent, to $1.089
trillion in 2010. The phenomenon is not universal. In Miami-Dade County,
which is Florida’s largest municipal borrower, 2010 tax appeals,
due in September, dropped 27 percent from 2009, to about
105,000, said Robert Alfaro, Value Adjustment Board manager. In Illinois, pleas for relief arrive every week on the desk
of Louis Apostol, executive director of the state Property Tax
Appeal Board.

‘Heart-Wrenching’ “These letters are heart-wrenching. I’ve got drawers and
drawers of them,” Apostol said in a telephone interview from
his office in Des Plaines. Illinois may have 19,350 property appeals this year, 10
percent more than in 2009, he said. The backlog is about 35,000,
to be processed by a staff of 21. Fifty-four people handled
roughly half the workload in 2003, he said. More than 80 percent come from homeowners and the board
approves an average of 30 percent of them, he said.

Determining the impact could take two years, he said. In
the meantime, Apostol will continue receiving letters of
complaint forwarded by Governor Pat Quinn. “I respond directly,” Apostol said. “I also include my
phone number and tell them how they can appeal their taxes.”

To contact the reporters on this story:
Jeff Green in Southfield, Michigan, at
jgreen16@bloomberg.net;
Tim Jones in Chicago at
tjones58@bloomberg.net.

To contact the editor responsible for this story:
Mark Tannenbaum at
mtannen@bloomberg.net