Property Taxes now… League of Oregon Cities Annual Conference September 24, 2015 Don Hudson Finance Director dhudson@ci.tualatin.or.us Carol Samuels Managing Director carol.e.samuels@pjc.com

Oregon Property Tax Timeline Our tax code can be divided into historic “eras” Ancient History “Golden Age” “California∙ozoic” November 1990 (Measure 5) November 1996 (Measure 47) “Crayon∙ozoic” “Messy∙ozoic” May 1997 (Measure 50) “Ice Age” Today

Ancient History – The Golden Age (who knew?) Prior to 1990, property taxes were set on a “levy-based” system A city’s levy was submitted to the County as a dollar amount Rates were calculated by dividing that amount by the real market value of the property Some jurisdictions had “tax bases” authorized levy amounts allowed to increase automatically by 6% annually. Voters could approve unlimited increases in tax bases Other jurisdictions survived on temporary “serial levies” or permanent “continuing levies” with no automatic inflators These discrepancies led to wide disparities of tax rates between like jurisdictions and wide discrepancies in funding levels

Ancient History – The Golden Age (cont’d) On average, property taxes accounted for 70% of school operating funding School districts were divided into “haves” and “have nots” where some were exceptionally well funded, others were constantly threatened with closure. Tax rates varied wildly. Brookings-Harbor School District Pleasant Hill $ 2,591/Student $ 6.65/$1,000 $ 4,736/Student $ 28.25/$1,000 Source: “Recent History of Oregon’s Property Tax System,” Tom Linhares, December 2011.

Ancient History – Tax Calculations Tax Base Real Market Value Rate City $ 1.5 million $ 200 million $ 7.50 County $ 2.0 million $ 300 million $ 6.67 Total $ 14.17 House A House B Target Market Value $ 50,000 $ 100,000 $ 30,000,000 Tax Rate X $ 14.17 Tax $ 708 $ 1,417 $ 425,100 In subsequent years, the “tax base” and related levy authority for City and County would grow by 6%. If value didn’t keep pace with 6% growth, tax rates would rise.

Ancient History – Property Tax Increases Between 1981-1991, although property values rose slowly due to recessionary forces, 6% tax base increases caused much faster growth in property tax bills The effective tax rate statewide rose $19.05/$1,000 in 1980-81 $26.61/$1,000 in 1990-91 The pot was about to boil over . . .

Measure 5 – California∙ozoic Era Measure 5 was approved in November of 1990 by a 52% margin 14 of 36 counties approved Multnomah, Washington and Clackamas all voted yes Although very different in substance, M5 was inspired by California’s Proposition 13 M5 retained the levy-based system but added rate-based limits $10/$1,000 for local governments $5/$1,000 for education The education rate limit was phased in over a five year period, starting at $15/$1,000, declining by $2.50/year

California∙ozoic Era (Cont’d) M5 required the State initially to backfill losses to schools As a result, K-12 funding shifted largely to the State, leading to other changes (school consolidation, equalization formula) Today, roughly 70% of education funding comes from the State. Property tax levies were still divided by RMV; the resulting tax rates were then compared against the limits. Tax bases could still increase by 6% annually If rates exceeded the limit, levies were “compressed” proportionally until within the limit For the first time, overlapping jurisdictions “competed” against each other for revenue under the limits

Compression Calculation Measure 5 Property Tax Calculation Tax Base Real Market Value Rate Compression Calculation City $ 1.5 million $ 200 million $ 7.50 52.93% $ (2.21) $ 5.29 County $ 2.0 million $ 300 million $ 6.67 47.07% $ (1.95) $ 4.71 Total exceeds $10 limit $14.17 Compressed Rate: $ 10.00 House A House B Target Market Value $ 50,000 $ 100,000 $ 30,000,000 Tax Rate X $ 10.00 Tax $ 500 $ 1,000 $ 300,000 Previous Tax $ 708 $ 1,417 $ 425,100 M5 Impact $(208) $ (417) $ (125,000)

Drafters of M5 Dividing Up Property Tax Revenue

1996 Setting the stage: Rapidly increasing residential real market values caused property tax rates to fall below Measure 5 limits Compression declined Taxes rose Bill Sizemore got a pack of crayons

Measure 47 – Crayon∙ozoic Era Approved by voters in November 1996 Kept Measure 5 limits, but restricted annual tax increases to 3% Added double majority voter requirements Measure 68 revised when double majority applies Legislature concluded that the measure was unworkable and chose to rewrite it and refer a new measure to the ballot Measure 50 was approved by the voters on May 20, 1997

Measure 50 – The Messy∙ozoic Era Fundamental change from levy-based to rate-based system New “permanent” rates established by: Calculating 1997 levies, reduced them by 17%, and then dividing by 90% of the 1995-96 RMV (the “Assessed Value”) Assessed Value growth was limited to 3% per year; it can never exceed RMV New properties are brought on at county-wide ratio of AV to RMV (the “Change Property Ratio”) Created voter-approved, temporary, “Local Option” levies All levies still subject to Measure 5 limits And so, the ice age began…

The Ice Age: Calculating Permanent Rates City $ 1.5 million – (17%) = $ 6.91 $200 million – (10%) County $ 2.0 million – (17%) = $ 6.15 $300 million – (10%) _______ $13.06 All “Permanent Rates” would now be applied to “Assessed Values” going forward.

Require voter approval Levied in addition to permanent rates Local Option Levies Temporary property tax levies for additional capital (10 years) or operating (5 years) funds Can be levied as fixed dollar amount or rate per thousand of assessed value Require voter approval Levied in addition to permanent rates Still subject to Measure 5 limits on a property by property basis, leading to uneven treatment on who pays, and significant volatility in revenues from year to year Compress to zero before permanent rate levies 14

Effective Tax Rates 1980-2011 The net effect of M5 and M50 has been to significantly reduce effective tax rates as a percent of actual market values Source: “Recent History of Oregon’s Property Tax System,” Tom Linhares, December 2011.

Impacts Since the Ice Age Began Divergence of AV and RMV Maximum Assessed Value Created inequities Permanent rates Property to property Neighborhood to neighborhood Compression 16

Impacts of M50: Differences between RMV and AV Initially after the passage of Measure 50, RMV growth strongly outpaced AV. That began to change in 2008. County reassessed properties every 5 years

Historic RMV, AV and MAV – Deschutes County – Example Account Impact of M50: MAV limits revenue during recessions AV can never exceed RMV, but if RMV dips below AV, the previous AV is retained as the “Maximum AV” and stays in place until RMV rebounds Historic RMV, AV and MAV – Deschutes County – Example Account AV (Lower of RMV or MAV) Fiscal Year

Inequity – Permanent Rates (Cities: pop. 25k – 40k)

Inequity – Permanent Rates (Select Counties)

Inequity – Property to Property Measure 50 inequities not confined to Portland Metro Area Values and Taxes – 2011-12 Tax Year RMV AV Taxes Difference $ 245,250 $ 136,600 $ 2,080 ($1,560) $ 245,320 $ 3,640 $ 270,510 $ 132,630 $ 2,020 ($2,060) $ 270,480 $ 4,080 $ 285,270 $ 103,080 $ 1,570 ($2,662) $ 285,200 $ 4,232 Bend Redmond $ 164,710 $ 99,720 $ 1,846 ($1,121) $ 164,500 $ 2,967 $ 155,590 $ 134,530 $ 2,490 ($318) $ 155,690 $ 2,808 “Horizontal inequities—unequal tax treatment of taxpayers with similarly valued property, are widespread among the four counties (Deschutes, Jackson, Multnomah and Sherman) observed.” Sisters $ 277,990 $ 123,220 $ 1,997 ($2,105) $ 276,080 $ 251,520 $ 4,102

Inequity – Neighborhood to Neighborhood Measure 50 locked in AV at 1996 levels Values and Taxes – 2011-12 Tax Year Established This block receives a Measure 50 discount of 13 to 23 percent off their tax rate applied to their RMV. Block 1 RMV AV Taxes 9910 SW 61st $ 269,670 $ 213,930 $ 4,236 9931 SW 61st $ 270,590 $ 236,110 $ 4,270 9930 SW 61st $ 279,390 $ 216,920 $ 4,385 9911 SW 61st $ 311,450 $ 252,070 $ 4,897 Gentrifying This block receives a Measure 50 discount of 73 to 82 percent off their tax rate applied to their RMV. Block 2 RMV AV Taxes 5134 NE 16th $ 267,870 $ 72,870 $ 1,624 5117 NE 16th $ 268,480 $ 51,790 $ 1,154 5126 NE 16th $ 282,140 $ 51,640 $ 1,151 5133 NE 16th $ 352,530 $ 81,930 $ 1,826

Inequity – Neighborhood to Neighborhood Recent Oregonian Article:

Compression

Types of Compression Rate Compression Value Compression Based on Measure 5 limits Affected by additional tax levies Local Option Levies New Special Districts Value Compression M5 category limits can be exceeded Occurs when gap between Market Value and Assessed Value is insufficient to cover rates above the limits Property tax revenues declining due to reduction of real market values Not truly compression, but “convergence” As market values drop, potential for reduced assessed value growth

Hierarchy of Rates Local Option Levies (LOL) reduced first If more than one LOL is in effect, reductions are made proportionally If compression amount exceeds all LOL, all other property taxes in that category are proportionally reduced Urban renewal is compressed with general government permanent levies

$160 million in lost tax revenues in FY 14-15 Compression Losses Since 1997-1998 Why is Compression such an issue?!?!?!? A few other counties have less than $100 of compression Amount of Revenue lost in 14-15 is decreasing, but still over $175 million of lost tax revenues due to compression. Number of Entities in Compression: Over 57% of Oregon’s 242 Cities All of Oregon’s Counties, except Curry County Approx. 92% of all Oregon School Districts $160 million in lost tax revenues in FY 14-15

Tax Code 012-002 / City of Milwaukie General Government Education Taxing Entity Tax Rate/$1,000 AV Clackamas County $2.5035 Clackamas County – Local Option Levy $0.2480 Clackamas County Lib $0.3961 County Urban Renewal $0.1119 City of Milwaukie $4.0680 Port of Portland $0.0699 Metro $0.0962 Metro – Local Option $0.0960 Clackamas County Fire $2.3816 N Clackamas Park Dist $0.5319 Vector Control $0.0065 Vector Control – Loc Opt $0.0250 Total $10.5346 Taxing Entity Tax Rate/$1,000 AV North Clackamas SD $4.8123 Clackamas Community College $0.5557 Clackamas ESD $0.3675 Total $5.7355 While people may notice this type of list on their property tax statement (if they read it at all), but most don’t realize how their property taxes break down and how they are split up between general government and education.

Compression Example Property A Property B Real Market Value = $200,000 Assessed Value = $170,000 Total Education levy rate = $5.7355 per $1,000 Total General levy rate = $10.5346 per $1,000 Real Market Value = $200,000 Assessed Value = $195,000 Total Education levy rate = $5.7355 per $1,000 Total General levy rate = $10.5346 per $1,000 Measure 5 limits (based on RMV) Education: $5 x $200 = $1,000 General: $10 x $200 = $2,000 Total Tax Burden (based on AV) Education: $5.7355 x $170 = $975 General: $10.5346 x $170 = $1,790 Compare Tax Burden to Measure 5 Limits Both tax burdens are below M5 limit $975 < $1,000 $1,790 < $2,000 No Compression Measure 5 limits (based on RMV) Education: $5 x $200 = $1,000 General: $10 x $200 = $2,000 Total Tax Burden (based on AV) Education: $5.7355 x $195 = $1,118 General: $10.5346 x $195 = $2,055 Compare Tax Burden to Measure 5 Limits Both tax burdens are above M5 limit $1,118 > $1,000 $2,055> $2,000 Compression exists $118 for Education $55 for General Government

v City of Sweet Home Permanent rate of $1.42 Compression Impacts to Entities v City of Sweet Home Permanent rate of $1.42 Police and Library services funded through Local Option Levies since 1986 Voters reapproved levies in 2010 (nearly 60% and 55%) Other taxing entities recently passed levies

Compression Impacts to Entities Market values plummeted $38M, $34M and $18M over last three years

Compression Impacts to Entities Revenue loss due to compression $300,000 (13% of prop. tax revenue) in 2009-10 $730,000 (31% of prop. tax revenue) in 2011-12

New special districts formed, with their own permanent rates Compression Creates Competition Between Entities New special districts formed, with their own permanent rates Example: Multnomah County Library District Linn County and City of Albany Linn County voters passed local option levy in 2010, and renewed it in 2014 Their two local option levies lose $6.3 million to compression City of Albany renewed its levy rate in 2012, effective in 2014 Raised rate from $0.95/$1,000 to $1.15/$1,000 to compensate for compression Net of $0.95/$1,000 did not happen

City of Sweet Home – November 2015 Election Compression Creates Competition Between Entities City of Sweet Home – November 2015 Election Asking voters to renew Police and Library Levies Increasing both levies, with hope of keeping more revenue in Sweet Home when compression occurs 34

Conclusions and Next Steps Our property tax system is hard to understand, inequitable, unstable and inadequate. It needs to be changed! LOC has taken the lead in recent legislative efforts to make modifications: Placing local option levies outside the limits of M5, which eliminates compression Having property values ‘reset at sale’ Changed Property Ratio Unfortunately, these efforts have not been successful…yet 2015 Legislature mandated that LRO produce a comprehensive report on potential reforms by December 2015 We need your help to keep the pressure on to make this a legislative priority

Questions? Piper Jaffray - Seattle-Northwest Division Carol Samuels, Managing Director carol.e.samuels@pjc.com 503-275-8301 City of Tualatin Don Hudson, Finance Director dhudson@ci.tualatin.or.us 503-691-3050 Piper Jaffray Disclosure: In providing the information contained herein to a municipal entity or obligated person, Piper Jaffray is not recommending an action to any municipal entity or obligated person recipient, is not acting as an advisor to any municipal entity or obligated person and does not owe a fiduciary duty pursuant to Section 15B of the Exchange Act to any municipal entity or obligated person with respect to the information and material contained in this communication. Piper Jaffray is acting for its own interests, and any municipal entity or obligated person recipient of this information should discuss any information and material contained in this communication with any and all internal or external advisors and experts that the municipal entity or obligated person deems appropriate before acting on this information or material.