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Cities feel squeeze of 2011 tax law

Change in commercial assessments bites into city’s general fund

NORTH LIBERTY– An amendment passed by the Iowa legislature 18 months ago is now beginning to squeeze city budgets.
North Liberty City Administrator Ryan Heiar told the North Liberty City Council last Tuesday, Jan. 8, that the city will collect less in property taxes for the general fund than anticipated in 2013-2014.
About $150,000 less, in fact.
In 2011, debates over changing commercial property tax formulas kept Iowa lawmakers in session longer than usual, and ultimately resulted in no decision. However, they did manage to agree on one change that gives tax breaks to property owners with undeveloped land, and significantly impacts city finances.
Prior to 2011, lots platted for development but remaining undeveloped were allowed to be assessed at their agricultural value for three years from platting, resulting in a lower taxable value. The amendment extended the timeframe, so new lots slated for development would not be assessed at the higher commercial or residential levels until five years from the time of platting or until development actually occurred. Further, lots platted between January 2004 and January 2011 won’t be valued and taxed as either commercial or residential property for eight years from platting, or until the improvements occur, whichever comes first.
North Liberty had many properties that were already being assessed at a commercial value, even though they sat empty. While there is no refund to property owners, the city has to adjust its anticipated future tax revenues because those properties will once again be assessed– and taxed– at their pre-developed rate.
Because property taxes are based on the previous year’s assessed values– those to be collected in 2013-2014 are based on 2012’s valuations– municipalities have not yet felt the pinch.
Until now.
Cities were reminded of the shortfall when they received their 2012 land valuations from the Johnson County Assessor’s Office.
Even though the law has been in effect for over a year, Heiar said the valuations came as an unpleasant surprise.
“When that law was passed, we didn’t realize it was going to affect properties already being taxed (at the higher rate),” Heiar said. “It was retroactive, and we didn’t realize it would include properties already classified as commercial.”
The change in North Liberty’s overall land valuation went up, from $645,420,985 in 2011 to $667,812,077 in 2012. But commercial valuations went from $144,194,737 to $128,188,090, down about $16 million.
“In fiscal year 2014 it represents minimal growth,” Heiar said. “But it’s still growth, which is a lot more than many other Iowa cities experienced.”
In smaller cities with much less property platted for development, the deficit bites even deeper. In neighboring Solon, for example, the change takes $2 million in assessed value off the city’s tax rolls.
“It basically ate up all the growth we’ve had over the last several years,” said Solon City Administrator Cassandra Lippincott.
As North Liberty moves forward in its FY14 budget planning, Heiar said the change will mean city departments and the council will face more rigorous spending choices.
“Obviously it affects the general fund, so we needed to take a look at requests from our department heads. When the requests came in, we had to look at cutting about $500,000 from the budget to keep our tax rate the same as last year,” Heiar said. “We have done that in the first draft of the budget, so now the council will have some other decisions to make.
Heair said the lower assessments could affect North Liberty’s debt service tax rate.
“The question now is, do we want to move forward with some of the bigger projects? One thing council wanted to consider was increased transit funding; well, we need to look at the potential effect on the tax rate. Another item that came up during the budget goal setting session was a branding project. It’s not in the budget right now, so they have to consider if they still want to do that.”
The North Liberty City Council has scheduled its next budget work session for Tuesday, Jan. 15, at 6:30 p.m. The meeting is open to the public.