Prop. 5 could affect Sonoma city, school coffers

An initiative on the November ballot that would allow senior California homeowners to move and still get a property tax break could cause revenue to Sonoma Valley schools and the city of Sonoma, as well as schools and cities across the state, to drop significantly.

Experts say Proposition 5, proposed by the California Association of Realtors, could play out in different ways. However, if more and more homeowners over 55 moved to the Valley, bringing their lower taxes with them, revenue would stagnate or even drop – and 21 percent of the city’s general fund comes from property taxes.

Schools and other local governments each probably would lose over $100 million in annual property tax revenue in the first few years, growing over time to about $1 billion per year in today’s dollars, according to the state Legislative Analyst’s Office, a nonpartisan fiscal agency that has advised the state legislature for decades.

“Places like Sonoma are at a threat of having a freeze or even reduced property taxes if (the proposition) passes, because someone will bring a tax base with them that is lower than would have happened otherwise,” said Robert Eyler, a professor and chair of economics at Sonoma State University.

“Many people who live in San Francisco would love to move to Sonoma because it’s this beautiful place to retire, and the property tax they would end up paying because of (the initiative) is lower,” Eyler said. “That is where places like the Sonoma Valley might suffer.”

This is just one scenario that might occur should Proposition 5, the Property Tax Fairness Initiative, pass, Eyler said. Under other scenarios, revenue might be unaffected, or even increase.

Placed on the ballot by the 185,000-member Realtors’ association, the initiative would expand Proposition 13, a state constitutional amendment that has kept homeowners’ property taxes artificially low for decades.

California homeowners’ property tax bills are based on the assessed value of their homes. Under Proposition 13, a home is assessed at its purchase price when it is sold.

In between the purchase and the next sale, the assessed value can go up by no more than 2 percent per year(the value of additions or major improvements can be added into the mix).

The result: The property taxes of many people who have owned homes for a long time are far below what they would pay if they bought a new house in today’s expensive market. This tends to discourage people from moving, according to the Legislative Analyst’s Office.

The aim of the initiative is to encourage people over 55 to move, freeing up houses currently owned by seniors for would-be homeowners.

“My mother is locked into a house in Berkeley. If I wanted to move her up here to Sonoma County, she would lose her tax base, because her home is in Alameda County,” said David Kerr, a Sonoma Valley real estate agent.

“Her property taxes are a couple thousand dollars a year now,” Kerr said. “She would buy a house in Temelec in a hot second, but she would be paying (thousands more per year) if she moved to Sonoma County.”

The real estate agents’ association posits the proposition as a potential partial solution to the housing crisis that has dogged the state for years. As of early 2016, the Bay Area economy had added 480,000 private-sector jobs over the previous five years, but only 50,000 housing units.

A dearth of homes for sale has persisted in the Bay Area and the Valley for at least five years, sending home prices soaring.

The average sale price for Valley homes and condos in the three-month period of April, May and June of this year was $1.3 million, compared with $962,000 in the same time period in 2017, based on numbers from Bay Area Real Estate Information Services.

The initiative would also address a catch to Prop. 13. Generally, a homeowner’s taxes only remain low as long as they stay in the same county. Only 11 California counties allow the homeowner to take their low property tax base with them; these include Alameda, San Mateo and Santa Clara counties.

People over 55 did get some relief from Propositions 60 and 90, which passed after Prop. 13. These propositions allow senior homeowners to transfer their property tax assessment to a replacement home of equal or lesser value, on a one-time basis.

Under the new proposed initiative, people over 55, as well as those who lost homes in natural disasters and the disabled, would keep lower taxes no matter how many times they sell and move within the state.

“Theoretically, you should have seniors with a low tax base leaving and the people who buy the house will have a higher tax base. That is the optimal result of the proposition,” Eyler said.

Kerr described a best-case scenario if Prop. 5 passes.

“Let’s say somebody from Sonoma moves away. Let’s say they bought their house for $150,000 during the downturn in the market,” Kerr said. “The house is now worth $500,000. If they take their tax base and go elsewhere, then the new homeowner will be paying property taxes on $500,000,” provided that homeowner isn’t a senior with a low tax base.

However, the Legislative Analyst’s Office predicts different outcomes.

“Right now, about 85,000 homeowners who are over 55 move to different houses each year without receiving a property tax break. Most of these movers end up paying higher property taxes. Under the measure, their property taxes would be much lower. This would reduce property tax revenue,” the office said in its report.

Also, for some time there has been talk of a trend of younger people leaving the Valley. In 2010, the median age in Sonoma was 48; in 2016, it was 51, according to the American Community Survey, an ongoing survey by the U.S. Census Bureau.

In 2010, people age 60 to 64 made up 7.8 percent of Sonoma’s estimated population of 10,292. In 2016, that age group comprised 9.7 percent of the city’s population, which had grown to an estimated 10,952.

Meanwhile, those age 30 to 34 years, fell from 5.6 percent to 4.1 percent of the population.

School enrollment has been edging downward, a district official noted.

“We are seeing a small reduction in enrollment every year,” said Bruce Abbott, associate superintendent of business services for the Sonoma Valley Unified School District.

“At the beginning of this year, we saw a 2.5 percent reduction, about 90 fewer students,” Abbott said. There are about 4,000 students in the district, with an additional approximately 500 students in charter schools.

Abbott said the district got $36.8 million in property tax revenue in the 2017-2018 fiscal year. The district budget for that year was about $50 million.

As to the effect on school revenues, “It will depend on who buys and who sells,” Abbott said. “If more people who are over 55 buy here and bring in their lower assessed value,” the district will see less revenue, he said.

On the other hand, if a homeowner with a low tax base sells and leaves and the buyer isn’t 55 or over, the district will get more revenue from the property tax, Abbott said.

The associate superintendent added that this is not the trend. “We are not seeing younger couples coming in. This is not a place where young people come to buy a home. It is a place where people come to retire.”

Cathy Capriola, Sonoma’s city manager, said, “Any loss in property tax to cities reduces funding for city services, but we don’t have an analysis for what the projected impact would be at this time.”

Property taxes play a major role in Sonoma’s $19.3 million annual budget for fiscal year 2018-19. Property taxes are projected to be $3.9 million, or 21 percent of the City’s budget.

Reach Janis Mara at janis.mara@sonomanews.com.