This is the third installment in our series on the 2015-17 budget process, and the second concerning revenue projections in the Five-Year Fiscal Forecast. The mayor’s budget is scheduled to be released on Thursday, so we’re covering this to provide some context for the budget decisions to be made over the next two months. As we did in the last post, we summarize the Forecast’s discussion of revenue sources, limitations on those sources and projections for revenue.
It isn’t unusual at citizen budget discussions to hear a proposal that wealthier Oaklanders pay taxes at a higher rate. Although this concept is attractive to many – possibly most – people, the suggestion highlights one of many limitations on the City’s ability to levy taxes. Among those limitations: a California city can’t impose an income tax, or any other tax based on the income or wealth of the people who pay it. Moreover, Proposition 13 limits ad valorem property taxes. The baseline is 1% of assessed value of property. Beyond that, the City can impose an ad valorem property tax to cover obligations incurred before 1978 (as Oakland does to provide an income stream to partly fund its long-closed Police and Fire Retirement System), plus an assessment for certain bond measures authorized by two thirds of the voters. The assessed value starts at the sales price of the property, and cannot grow by more than 2% as long as the same owner holds the property.
And much of the baseline property tax for Oakland properties doesn’t go to the City of Oakland. Although not discussed in the Five Year Financial Forecast, our research has shown that only 26% of the Proposition 13 baseline property tax on Oaklanders goes to the City. Oaklanders’ property tax bills contain a large number of parcel taxes and other special assessments, some supporting police, fire, libraries and other typical city services. Not all of these are city assessments. Nearly all require a 2/3 vote, and they cannot be based on income levels.
So, current projections of revenue are based, in large part, on anticipated real property values and transfers. And here, there are a number of good reasons for playing it safe. The City, looking at historic trends of boom and bust, believes we’re heading for a time of economic contraction. Nearly 50% of Oakland’s revenue is tied to revenue from property–like property tax–and the city expects the housing markets to finally cool off.
The five-year forecast points out that while real estate sale and resale values continue to soar (Oakland has seen double digit year-over-year growth in home prices), the sale of both residential and commercial real estate is noticeably slowing down.
As noted, much of Oakland’s revenue rides on real estate. There are signs of growth: Property tax will grow from $149 to $196 million annually between 2014 and 2018. The City also expects that new redevelopment projects, including the addition of over 750 units in the next two years, will pay off.
But property tax revenue is complicated by the affordable housing debate. In the next two years, approximately half of those new housing units will be designated “affordable” housing for low to moderate income earners. These properties are exempt from property taxes and business license taxes derived from rental income.
It also doesn’t help that much of the Oakland’s revenue sources are tied to the mood of the economy at large. One notable example is the real estate transfer tax (RETT). This is a 1.5% tax on sales of real estate. Understandably, the five-year forecast calls this revenue source promising but ultimately unpredictable and flat-out “volatile.”
“The recent growth in RETT has been largely due to the sale of large commercial buildings as post-recession commercial real estate, once again, becomes an attractive investment,” says the report. In recent years, the Mayor and City Council have each year tried to relax restrictions on treating RETT as sustainable, ongoing income sources. Make Oakland Better Now! has resisted these efforts, and will continue to do so.
The City projects that construction of nearly a million square feet of commercial and office space will be underway in downtown, Lake Merritt, and Oakland City Center in the next five years. (Vacancy rate is these neighborhoods dropped to 8.4% at the end of 2014, the best number since 2008.)
The increasing demand for commercial space and low supply is pushing rents upward, resulting in an increase in business taxes received from commercial landlords. (Likewise, the increased demand in the residential rental market causes residential rents to rise faster and is expected to drive up business tax revenues.)
This squeeze isn’t always to the city’s benefit. “As the population increases,” the five-year report notes, “the demand for community service programs, parks and recreation, after school programs, and for human services, such as schools, housing needs,and public safety [will increase],” putting pressures on the city.
(Look for the City’s “Nexus Study”– analyzing the “nexus” between development and increased demand for housing, transportation services and public facilities–coming out later this year.)
Revenue numbers are a relative bright spot in the five-year forecast, a chance to reflect on Oakland’s recovery and boom. But looking at the city’s truly exciting but perilous growth side-by-side with projected budget shortfalls, underfunded pension liabilities and deferred capital expenses, the boom isn’t big enough. We’ll be looking at these in our next posts.