Receive update on property tax rates for Washington Unified School District Bonds, consider resolution authorizing two assistance programs for taxpayers affected by the error in setting the 2022-23 tax rates, and adopt budget resolution appropriating funds for such programs. (Estimated general fund impact $200,000) (4/5 vote required) (Haynes)

California Government Code Section 29100 requires the Board of Supervisors to annually adopt tax rates on the secured property tax roll on or before October 3rd of each year. While Article XIIIA of the California Constitution limits the property tax rate for local agencies to 1% of assessed value, additional tax rates may be levied to pay for voter-approved bonds.

Voters in many school districts have approved the issuance of bonds to pay for the construction and rehabilitation of school facilities, which are paid for by property taxes above the regular 1% rate. Education Code Section 15250 requires the Board of Supervisors to annually levy a tax that is sufficient to pay for the principal and interest on voter-approved bonds issued by school districts as payment becomes due. This process ensures a reliable stream of funds to pay for the bonds, thus making the bond a safer investment that reduces the cost to school districts and taxpayers.

Unfortunately, in 2022-23 the County made an error and did not levy a tax rate for the Washington Unified School District (WUSD) Bonds that were approved by voters in the 2004 elections, despite ongoing bond payments.  Since taxpayers paid less in 2022-23, state law required the tax rate levied for the WUSD 2004 Bonds in 2023-24 to be higher in order to collect sufficient revenue to make payments on the WUSD 2004 Bonds when it becomes due.

Modeling performed by the Department of Financial Services (DFS) indicates that had we been aware of the ongoing debt payments for the WUSD 2004 Bonds, the tax rate in both 2022-23 and 2023-24 would have been $60 per $100,000 of property value. Instead, as a result of not levying a tax in 2022-23, the tax rate in 2023-24 is $120 per $100,000 of property value, or double what it otherwise would have been.

While the 2023-24 tax rates are required by state law to avoid default on the school’s bonds, staff is aware that some taxpayers might face a financial hardship in having some of last year’s taxes effectively reallocated to this year if they were not expecting it. Staff also is aware that taxpayers who recently purchased their homes might feel that they are paying taxes that should have been levied on the prior owner.  In order to mitigate the financial hardship from the temporary reallocation in the tax rate, staff have developed two proposed tax assistance programs for the Board’s consideration: one that would allow participating taxpayers to defer the WUSD 2004 Bond tax up to a year, and another to offset the portion of the tax that would have been paid by the prior owners if there was an ownership change in the 2022-23 or 2023-24 fiscal years (i.e. July 1, 2022 through June 30, 2024). In addition, the Department of Financial Services (DFS) is implementing a variety of process improvements to ensure that this situation does not occur again in the future. These issues are more thoroughly described in the following sections.

WUSD 2004 Bond Tax Assistance Programs
Staff recommend that the Board adopt a resolution approving two proposed tax assistance programs, as further described below.

1. Tax Deferral Program
The proposed Tax Deferral Program will allow taxpayers who face a financial hardship to defer payment on the 2023-24 taxes levied for the WUSD 2004 Bonds for up to one year.

Taxpayers would qualify for the program by submitting a simple one-page application self-certifying that the increased WUSD 2004 Bond tax in this year would create a financial hardship. The County would accept the self-certification as proof of the financial hardship, and no further documentation would be required. Taxpayers participating in the deferral program will receive a separate property tax bill for the taxes levied on the WUSD 2004 Election Bonds, which will be due no later than December 10, 2024.  In addition, participating taxpayers will receive a revised property tax bill for the remaining property taxes, assessments, and charges that are not being deferred. 

The first installment for the remaining tax bill for taxpayers participating in the tax deferral program will be due no sooner than 30 days from the date that the amended bills are mailed. The due date for the second installment of the remaining tax bill will be April 10, 2024.  Any taxes not paid in full by the revised due dates would still be subject to penalties and interest pursuant to Part 5 of the Revenue & Taxation Code, beginning with Section 2501, as they ordinarily would.

Upon approval by the Board, staff will mail an application and information bulletin to eligible taxpayers. Taxpayers will also be able to submit an application through an online portal on the County’s website. The deadline to submit an application to participate in the Tax Deferral Program will be Monday, November 27, 2023. This deadline will ensure that staff have enough time to process the application and mail revised tax bills prior to the current December 10th due date.

2. New Buyer Tax Offset Program
Under the proposed New Buyer Tax Offset Program, the County will offset a portion of the 2023-24 taxes levied for the WUSD 2004 Bonds for taxpayers who purchased or purchase their property between July 1, 2022 and June 30, 2024. 

This program is being offered in recognition that taxpayers who purchased property within the WUSD during this timeframe may feel they are being unfairly burdened by taxes that would have been at least partially the responsibility of prior property owners had the taxing error not occurred.  For taxpayers participating in this program, the County will offset the amount of the current tax that the prior owner would have paid had the correct rate been charged in 2022-23. The offset amount for eligible taxpayers will be pro-rated based on the purchase date of the property to reflect the relative burden imposed on new buyers. 

An example will help to illustrate this methodology. Suppose a taxpayer purchased a home on July 1, 2023 and the current tax amount for the WUSD 2004 Bonds is $600.  Had the taxing error not occurred, the new buyer would have been liable for $300 in the current year because they owned the home for the entirety of the 2023-24 tax year. Under the proposed program, this new buyer would be eligible for an offset of $300, or 50% of the current WUSD 2004 tax amount, that would not have been charged this year had the error not occurred.  

As another example, if the taxpayer had instead purchased the home on January 1, 2024, then the current year’s tax liability would be split evenly between the new owner and prior owner at closing during the acquisition. If the current tax amount for the WUSD 2004 Bonds was $600, then the new owner would be responsible for $300.  However, had the taxing error not occurred, the 2023-24 tax would have been half, and the new owner would have only been responsible for $150 for their six months of ownership during the 2023-24 tax year.  In this case the new owner would be eligible for an offset of $150.

Given that the error would affect buyers through the end of the 2023-24 fiscal year, applications for the New Buyer Tax Offset Program will be accepted through July 31, 2024. As with the deferral program, applicants can self-certify a financial hardship without additional documentation.  Upon approval of the application, DFS will send a notice to taxpayers informing them of the offset amount and how that will affect their tax payments. It is anticipated that taxpayers who submit an application by March 31, 2024 will have the offset applied to their second installment payment (due April 10, 2024), while taxpayers who submit an application after that date will receive a direct reimbursement once taxes are paid in full. Taxpayers who elect to participate in the offset program will not also be able to participate in the deferral program.

Staff have identified 715 properties would be eligible to apply for the New Buyer Offset Program.  That number is expected to increase somewhat as more properties are bought and sold through June 30, 2024.  Staff estimate the program’s maximum cost to the County would be approximately $200,000.

Internal Process Improvements
In addition to the proposed tax assistance programs, DFS is implementing a variety of procedures and process improvements to ensure that the current situation does not happen again in the future.  These improvements are described in more detail below.

Comprehensive Bond Review – The crux of the current situation occurred because DFS inadvertently misplaced a debt schedule related to the WUSD 2004 Bonds. While it is not known for certain how this occurred, it is likely that the debt schedule was misplaced when the bonds were refinanced in 2012 or 2015.  To ensure this does not happen again, DFS will be performing a comprehensive review of all outstanding bond issuances and will verify debt schedules with the respective school districts.

Improve Tax Rate Methodology – In the past, tax rates have been calculated on a year-by-year basis depending on factors such as growth in assessed valuation, upcoming bond payments and available fund balances. However, it is possible for bond issuances to have highly variable debt payment schedules, which can lead to large fluctuations in tax rates. To minimize these fluctuations, DFS will implement revised methodologies to model long-run changes in debt payments with the intent of adjusting tax rates more gradually and incrementally over a period of time.

Better Coordination With School Districts – As part of an effort to improve quality control, DFS will coordinate with school districts to share draft tax rate calculations each year before the tax rates are approved by the Board and placed on the property tax bill.  This will give the districts an opportunity to review the calculations, verify the debt payments, and raise any issues or concerns before the tax rates are finalized.

Improved Public Outreach and Communication –The collection of property taxes is a highly regulated process that does not allow for much discretion on the part of the Tax Collector. While the Department of Financial Services is performing tasks largely mandated by state law, this does not mean that the Department cannot do more to keep the public informed of upcoming charges and better inform our constituents.  The Department of Financial Services will work with the County’s Public Information Officer to improve the Department’s outreach efforts, including to elected officials and community stakeholders, to better inform the public about the property tax process.

The Department of Financial Services deeply regrets the error that resulted in the increased tax rate for the WUSD 2004 Bonds on the 2023-24 tax bill. While the root of the error was likely made many years ago, the Department could have done more to inform the public of the issue.  We hope that the steps outlined above show that we are taking all efforts to rectify the situation and to ensure that it does not happen again in the future.

The Department of Financial Services has worked closely with the County Administrator's Office, County Counsel and the Supervisor for District 1 in developing the proposed tax deferral and assistance programs. DFS has also closely collaborated with the Washington Unified School District and the Yolo County Office of Education in developing internal process improvements.