The last time New York City faced a budget shortfall even close to the estimated $4.8 billion one expected for this year, Jaws was on the big screen and the Bee Gees were filling the airwaves. The year was 1975 and the deficit was $1.68 billion. Those familiar with local history may reminisce about this troubled time by recalling the famous Daily News headline: "Ford to City: Drop Dead." Having borrowed its way into a financial nightmare, the city was facing default and desperately requesting federal aid. Businesses were fleeing to the suburbs and tourism was flagging. Sound familiar?
To help cure the problem, Mayor Abe Beame and the city council raised property taxes. Between 1965 and 1975, the tax rate had already risen nearly 80 percent, starting at $4.56 per $100 of assessed value and ending at $8.187. The increase from 1974 to 1975 was 11.3 percent, the highest ever.
In addition to the dramatic increase in the tax rate, the city made adjustments on taxes to corporate franchises, savings and commercial banks, stock transfers, and bond transfers. Officials also hoped to close a $500 million delinquency in real estate tax payments.
In 2002, are co-ops and condos looking at increased real estate taxes to help close Mayor Michael Bloomberg's budget gap, the largest ever? The short answer is, well, maybe.
Flashback to 1991. Homeowners were getting slammed. Although values were plummeting, real estate taxes had been steadily increasing for years. They affected the four tax classes, which had been created in 1983: Class 1, including most residential properties of up to three units, vacant land zoned for residential use, and most condominiums of not more than three stories; Class 2, featuring all other property that is primarily residential; Class 3, containing utility-company equipment; and Class 4, focusing on property that is not within Classes 1, 2, or 3. Since the divisions were devised, only Class 3 had seen a dip in its tax rate; the other three had been steadily rising.
Concerned about this, the Real Estate Board of New York and other organizations started a campaign to put a remedy in place. The city's answer was to freeze the overall tax rate at $10.591. It was an informal agreement between the city council and the mayor. In 1994, after some readjusting to Class 3, this was changed to $10.366 and has remained there ever since. While the individual four tax classes have varied — Class 2, for instance, was $10.369 in 1994, shot up to $11.056 by 1997, and then dropped down to $10.792 in 2002 — the overall rate averaging the four has stayed the same (see chart on page 51).
Sometime in the intervening years, it became an unwritten rule not to fiddle with the overall tax rate. It was seen as a bad political move. When the market began to rebound and the assessed values started going up again in the late 1990s, real estate taxes increased. Higher assessments meant higher taxes. So, more was being taken in without touching the tax rate. Abe Kleiman, a partner with the accounting firm of Kleiman & Weinshank, says boards should plan for at least a five-percent increase in their real estate taxes, maybe more. (Increases in assessments are phased in over a number of years.)
"I looked at a number of properties and saw that the average increase in their market value was about 9.3 percent," he notes. "The average increase in transitional assessed value was up 6.8 percent. When 20 to 25 percent of a building's budget is real estate taxes, this absolutely has an effect. But it's also just a fact of life."
This would seem to offer proof that the "gentlemen's agreement" has been good. Indeed, as of late April, Bloomberg has said he will not increase real estate taxes. His position has received the support of the Citizens Budget Committee (CBC), a non-profit, non-partisan organization that reviews and makes recommendations on financial matters for the city and state and which has officially argued against any increase in taxes. (The possible exception to this would be re-instituting the commuter tax.) Unofficially, however, CBC finds the four-class system ineffective and inequitable and wonders about the wisdom in maintaining the freeze.
"At times like this, a fresh look at the property tax rate and the system may provide some help," says Doug Offerman, senior research associate at CBC. "The current arrangement doesn't work well." Others agree.
According to Glenn Pasanen, associate director of City Project, a non-profit organization that reviews and makes suggestions on city financial matters, property taxes used to represent about 46 percent of revenues for the city, but that has dipped below 40 percent now. Even during the boom times of the last few years, he says, revenues were more or less flat.
"We have long been trying to push the council to consider raising the rate in a fiscal crunch, but they have been reluctant. Really they are giving up their power by eliminating this option. They are at the mercy of the freeze." The argument that city dwellers have income tax to contend with has some validity, he adds, but when factored in, residents aren't "off the map" in terms of the amount of taxes they are paying.
A spokesman for the New York City Independent Budget Office (IBO), a city agency that does budget and policy analysis, agrees, noting that the mayor and the council are making a mistake by remaining committed to a freeze that amounts to no more than a handshake.
"The tax rate is one of the most powerful tools the council has," says George Sweeting, the IBO's deputy director. "In the late '80s and early '90s, the tax rate was increased to help close budget gaps. Essentially, [when the rate was frozen] they took away one of their policy tools. This may be the year to break the freeze."
Ironically, one of the supporters of such a proposition may be the current commissioner of the New York City Department of Finance (DOF). In a 1998 paper entitled, "Taking Control of the Property Tax Levy: A Challenge to the New York City Council," Martha Stark argues that the city council should "…assume its Charter-granted control of the property tax …[and]… rather than continuing the property tax freeze, the City Council should agree to a mechanism for adjusting the property tax levy that it controls. The mechanism could be an agreed upon percent change or could be linked to inflation or the economy." Stark estimates that the property tax levy had declined by more than $500 million since 1993 and that revenue had fallen by $625 million.
Because of the freeze, the city council has essentially given over its power to the DOF, which is responsible for assessments. It works like this: tax levy equals tax rate, multiplied by assessed value. With the tax rate frozen, assessors thus determine the property tax levy and the revenues because they control the assessment, the only variable.
Stark warned four years ago that this may result in assessors "cooking" the books, a fear that was realized in February when, as one of her first official acts as commissioner, she reported that 17 assessors had been arrested and charged with accepting bribes to reduce assessments on 500 major properties in the city. The loss of tax revenue was estimated at $40 million a year.
"The city council continues to have authority over the property tax, and it has several options for exercising that authority," Stark says. "It can freeze the tax rate, as has been done for several years, or freeze the levy, or decide to ensure that the property tax levy — in addition to debt service — covers certain expenses like education costs. It is up to the council, working with the mayor, to decide how much revenue it wants to raise each year from the property tax. It is important that council members take into consideration the pros and cons of any option they choose and not turn the property tax — which, to a large degree, acts as the city's budget stabilizer — into a tax determined by unpredictable market conditions.
Lessons on this may be found outside the city. New York City is not the only city or area to be experiencing financial woes, but it may remain the stalwart when it comes to increasing property taxes. In New Jersey and Nassau County, officials have turned to property tax increases to make up for their own shortfalls.
New Jersey already has the highest per capita property taxes in the nation, and officials are projecting more increases, higher than at any time in the past 10 years. Throughout the state, local governments are proposing tax rate increases that will raise the average homeowner's tax bill by several hundred dollars. The end result of this, according to Larry Silverman, president of Atlantic Management, based in Union City, could be a downward turn in pricing, as sellers have to adjust for the additional costs.
"A lot of condo buyers, especially, look at the total payment and if taxes are suddenly going up $100 a month, there will have to be some adjustments in pricing," he notes. The adjustment has a domino effect, as well. Everything may go up with it, or boards may be forced to try to hold the line on fee increases. Silverman adds that it is nothing boards haven't faced recently, whether it was fuel prices going through the roof a few years ago or the increase in insurance costs this year. "We're going to survive the tax shock," he says.
The increase in Nassau County's property tax, estimated at 19.4 percent, may not be as bad as it sounds. The average homeowner will probably see about a four-percent increase in his total real estate bill, or around $226. The deficit facing Nassau County is $30 million, but there is a fear this may explode to $428 million by 2005. Like New York City, officials are examining the idea of trimming the work force.
Nassau and Suffolk County have traditionally paid much more in real estate taxes than New York City, up to double or triple, according to Alvin Wasserman, director of Fairfield Properties in Commack. So the slight increase "won't be earth-shattering," he notes. "Let's say you buy a two- or three-family home in New York City and pay about $2,000-$3,000 in taxes. In Nassau, you'd be paying $6,000-$10,000. But the county has expenses [and] taxes are how they pay for them. You can't disrupt that too much."
Many experts say that New York City won't look to real estate taxes as these other governments have as a means to combat the deficit. The increases boards will see should, for the most part, be the increase in values that are being transitioned in from previous years. One tax expert hinted that the real estate tax does remain one of the few areas where the city can act on its own without approval from Albany, but did not foresee such a move in the immediate future.
"The last time the tax rate was raised was during the [David] Dinkins administration," notes James Wetzler, a director at Deloitte and Touche and former New York State Commissioner of Taxation and Finance from 1988 to 1994. "And the last time the city faced such a deficit was during the 1970s. Typically, budgets always project deficits and then work to close them. Because of the decline in the economy and 9/11, however, a manageable deficit this year has been converted into a very large one. There are much better controls in place now, though, than there were in the '70s, so we are in better shape that way. I would be surprised if the mayor raised real estate taxes. More likely, there would be other tax increases."
Bloomberg's path can partially be predicted by what other New York City mayors have had to do. Facing deficits, Ed Koch and David Dinkins raised taxes; Rudolph Giuliani (and Koch, too) reduced spending. It remains to be seen whether just taking one of these steps will succeed and whether borrowing money, which Bloomberg is proposing and which got the city into so much trouble decades ago, might not cause further hardship down the road.
The bottom line for boards: take that money you saved in heating costs this winter and plan on paying slightly more in real estate taxes as your value increases. And don't be surprised if the warmer weather starts to put a thaw on the freeze.