Just as an escalation in property tax rates becomes real for jurisdictions in Pinal and Pima counties, Pima is taking the state to court over the very issue causing the higher bills.
“Utterly bizarre” is how lobbyist Michael Racy of Racy Associates described the legislative budget formula and how it came to be passed in the wee hours of the last day of the session. He said the process was full of procedural errors that may have been unconstitutional.
Rep. Vince Leach (R-District 11) said the Legislature was following the Arizona Constitution.
The legislative budget moved $46 million in state liability to the counties. That created a surprise deficit of an estimated $4.6 million for Pinal County and $22 million for Pima, according to the County Supervisors Association.
In response to the budget move, the Pinal County Board of Supervisors voted to increase its property tax rate 20 cents. The Pima County supervisors voted to pursue legal action against the Legislature.
Racy lobbied legislators and the governor’s office for months trying to modify the 1 percent property tax cap liability language that impacted only Pima and Pinal counties along with 27 school districts. The cap alone would make Pinal County liable for an estimated $2.8 million.
State Sen. Steve Smith (R-District 11) said he made two phone calls to the governor’s office to try to temper the rollout of the impact, but the legislation went forward as written.
“For whatever it’s worth, I tried to slow it down,” Smith said.
Next budget year, the cap could impact taxing districts in Cochise and Yavapai counties, “even school districts in Maricopa County,” Racy said.
1 percent property tax cap
The voter-initiated, 1-percent cap has been in place 34 years. The law never spelled out what happened if the limit was surpassed.
“No one thought 1 percent would ever be approached,” Leach said.
Though jurisdictions inched above the cap it was not excessive even into the recession years. But in 2014, Pima County raised its overall tax rate 63 cents only a year after a 25-cent jump, and that got the attention of the Joint Legislative Budget Committee, Leach said.
“The JLBC was saying, ‘What’s going on here? This line item keeps growing,’” he said. “That’s what got us to where we are today.”
Leach and Racy agreed that part of the cause of districts exceeding the cap has been the low valuations without a corresponding drop in property taxes. But Leach said some jurisdictions all over the state were relying on the state “backfilling” any encroachment of the 1-percent cap. That was estimated to be $40 million in the next fiscal year, Leach said.
Smith said allowing the backfill had been well intentioned but some districts were taking advantage of the safety net.
With the state’s new budget, in any county that exceeds the 1-percent cap plus $1 million, the taxing jurisdictions within the county must pay proportionally.
Racy said that is “really troubling and really problematic because you end up with one jurisdiction paying other jurisdictions’ bills.” He called that unconstitutional. A provision on tax breaks was added in the final day of the budget discussions.
The Legislature delegates the interpretation of the law and its provisions to the Property Tax Oversight Commission, which uses the statewide average to determine which jurisdictions are impacted.
Racy said his work to clarify the budget language through the Legislature seemed to have many on board, but it never moved off the floor. “Almost no one wants to take ownership of the issue,” he said.
Pinal County impact
That piece of the state budget has taxing districts within the county in a quandary and even at odds with one another. Maricopa officials have spoken out against Pinal County’s tax hike to 3.999 and a proposed increase in the Central Arizona College tax rate.
Mayor Christian Price frequently has equated the liability formula to a balloon. “You can squeeze one end, and the other end goes up, but there is no more air in this balloon,” he said.
Smith, who is from Maricopa, said the impact of the cap’s liability shift on taxing jurisdictions in Pinal County was clear as he sat in on the Senate budget hearings. The item only showed up in “the waning days” of the session, he said.
“This was an alarm to me because it affected basically our entire district,” he said. “Whether you agree with the 1 percent or not, the backfill or not, the state pursuing it or not, the decision to do it through Pima and Pinal counties directly affected our District 11.”
CAC has proposed raising its primary tax rate from 1.91 to 2.76. The CAC board meets May 19 for a public hearing on the increase.
Last week, Price, City Manager Gregory Rose, Finance Director Brian Ritschel and Intergovernmental Affairs Director Paul Jepson met with CAC President Doris Helmich to explain what the budget shift means among the taxing entities. Price said he and the city officials were there to protect the interests of Maricopa.
“We all cross reference each other’s revenues based on the taxation,” Price said. “If we raise our taxes, we just pull from CAC and Pinal County and vice versa.”
Helmich said the college board understands a tax rate increase could have consequences on other jurisdictions like Maricopa.
“The thing is, no one knows what it will mean yet, because it’s the Property Tax Oversight Commission that decides how it’s going to get done, and they don’t meet until September,” Helmich said. “We’re all left not knowing how it affects each other.”
During the meeting, Helmich touted the economic development CAC brings to Maricopa.
Estimates tend to shift on the financial impact increased rates from the county and the college would have on Maricopa. Price said the current estimate is $250,000 “on top of the $1.75 million the state is taking from us.”
Smith said he and Senate President Andy Biggs pointed out to the governor’s office the hardship the implementation of the budget formula would have on Pinal and Pima, already with difficult budget decisions. He said they sought to have it phased in instead of being implemented all at once.
“I tried to slow it down or stop it,” Smith said. “It doesn’t it mean I necessarily agree or disagree with it. It’s just tough economic times for a lot of us, especially in our county. Is there another alternative?
“The plea was made, but unfortunately it was not able to change the direction.”
Why a lawsuit?
Helmich hopes the Pima County suit will resolve the issue, at least in an injunction.
Price said it’s too early to tell how successful the lawsuit might be.
“It needs to be brought to the governor’s attention and the Legislature’s attention,” he said. “Unfortunately, it seems the court is the only way to go.”
“You cannot tax one entity and give it to another, which is sort of the premise of this whole thing,” Helmich. “The way that they’re putting entities into categories is very difficult to understand.”
She called the 1-percent cap liability shift a penalty, “because I don’t know what else to call it.”
Leach, on the other hand, calls it “the Constitution.” He also took issue with the use of the term “shift,” but said the real shift is collecting money from districts under the 1-percent cap and giving it to districts over the cap.
Helmich said the college board feels this may be the last time they will be able to get the levy they need. Combined with the secondary rate, CAC’s total rate would be $3.11 for a countywide district. She said that hardly compares to the Maricopa Unified School District rate of $6.60.
Without the possible injunction, Helmich said CAC would lose another $1.5 million.
The college’s future costs include maintenance on the Signal Peak campus on a pay-as-you-go plan, fully staffing its Maricopa campus and replacing a 20-year-old computer system. The latter is more than $3 million, and the administration wants to spread that over two fiscal years.
Price said Maricopa has worked to absorb its pending budget reductions by going without some programs. “The question is, how long can you do that? Sooner or later, you have to pay the piper.”
Pima County is seeking other entities to join in its lawsuit, which is being handled pro bono. Neither CAC nor Maricopa has considered that yet. Price said City Hall would have to evaluate any political fallout that move could have.