During the last year a number of significant changes were made to Florida’s ad valorem taxation system that may adversely affect the financial condition of local governments. Florida Statutes and Rules of the Auditor General require auditors of local governments to report on the financial condition of a local government as well as whether or not the entity is in a state of financial emergency.1 In addition, bond rating agencies and credit analysts evaluate a government’s financial condition when issuing bond ratings and determining acceptable market interest rates. Therefore, the effect of recent legislation affecting Florida’s ad valorem taxation system should be of concern for auditors, government finance officers, elected officials, and other users of governmental financial statements.

Generally referred to as property tax reform, the recent changes basically affect the local government property tax process, homestead and non-homestead properties, as well as tangible personal property. The 2007 Legislature passed a number of administrative reforms that generally make it more difficult for a local government to increase either the millage rate or property tax revenues.2 Additionally, the 2007 Legislature proposed various and extensive amendments to Florida Statutes affecting local government ad valorem taxation. These changes to the State Constitution were approved by Florida voters in a special referendum election on January 29, 2008.3 A summary of the major provisions of the reforms approved in the referendum
election follows.

• Applicable to all ad valorem tax levies
  • All or part of the existing Save Our Homes exemption4 becomes “portable” (up to $500,000) upon a change in property ownership.
  • The first $25,000 of the assessed value of tangible personal property is exempt from ad valorem taxation.
  
  
• Applicable to all ad valorem tax levies other than school district tax levies
  • Annual increases in the assessed value of nonhomestead property (i.e. commercial, multi-family, etc.) will be limited to 10% (of the prior year assessment) provided no change in ownership occurs.
  • An additional homestead exemption of $25,000 for homesteads valued above $50,000.
    

Additional administrative changes related to ad valorem taxation reform may provide some fiscal relief for a “county of special financial concern”.5 For fiscal 2008/2009 such counties may receive legislative funding to offset reductions in property tax revenues resulting from the Constitutional amendment.6 County school districts are also allowed legislative fiscal relief from any negative impact resulting from the new legislation. However, to date no funding source has been specifically identified for such legislative fiscal relief.

According to the Florida Department of Revenue, local governments levied $25.9 billion of property taxes in 2005 making ad valorem tax revenues the largest governmental revenue source in the state. However, property taxes are levied by 67 counties and 67 county school boards, 462 cities, 231 independent special districts, and 5 water management districts. The $25.9 billion of property taxes levied for fiscal 2005/2006 provided full or partial funding of local services to approximately 18,000,000 permanent Florida residents.7 This amounts to less than $1,400 per person annually or $4 per day for elementary/secondary education, protection of Florida’s natural water supply, police and fire protection, public libraries, and many other locally provided services.

For fiscal 2008/2009, the Florida Office of Economic and Demographic Research estimates the recent property tax reforms will decrease total local ad valorem tax revenues almost $1.3 billion.8 This represents an average ad valorem tax per capita savings of less than $67 which corresponds to less than 1% of the Florida April 1, 2008 per capita income ($37,058). Over 12% ($161 million) of the $1.3 billion decrease for fiscal 2008/2009 represents reduced local funding for elementary/secondary education and almost 54% ($706 million) denotes reduced funding for county provided services (i.e. health care, jails, law enforcement, fire/rescue, etc.). Reductions in municipal property tax revenues represent over 18% ($241 million) of the total 2008/2009 decrease with the balance ($160 million) representing decreased tax revenues for independent special tax districts. In future dollars, the total estimated decrease in ad valorem tax revenues for 2012 is estimated at over $2.5 billion or $123 per capita which is less than 1% of the projected per capita State income at April 1, 2012 ($43,741). Per capita effects of the various tax reform initiatives appear relatively minimal; however, the aggregate effect may have a significant negative impact on local government financial condition.

Financial condition encompasses not only the financial position of a government but also it’s ability to adequately provide services and meet its obligations both today and in the future. How well a government is able to meet its obligations and provide services to its constituents is directly related to its available financial resources. Being of sound financial condition is important to bond rating agencies, credit analysts, and companies looking to relocate in Florida, and citizens as well as elected and appointed local government officials. Therefore, the general and jurisdiction-specific effects of Florida’s ad valorem taxation reforms must be considered when assessing a local government’s financial condition.

Bond rating agencies or credit analysts might view decreased property tax revenues and tighter statutory control over ad valorem finance and taxation as a deterioration of financial condition. Potentially, deteriorating financial condition might result in a lower initial bond rating, a lower credit rating, or downgrading an existing bond rating all of which typically result in a higher cost of funds for the local government. In such cases, the local government might need to postpone borrowing for needed capital improvements or enter into less traditional financing arrangements. For the professional finance or budget officer, this may translate into budget reductions for operations and services in order to meet increased debt service requirements. Auditors will need to consider these potentially negative factors, as well as others, in their annual assessment of financial condition required under Florida Statutes. All in all, while recent property tax reforms might appear to benefit Floridians in the short-term, it remains to be seen what the actual long-term effect will be.