Date: June 7, 2013

From: Rick Hooper

cc: Miriam Roskin, Traci Ratzliff, Sara Belz

Subject: Next steps for the MFTE review

Dear Nick and Lisa:

Per Lisa’s request of June 6, we’d like to share OH’s current thinking on how to proceed with the MFTE review even as the question of the program’s tax impacts remains in motion.

We have been attempting to answer the following question: when appraising new MFTE projects, to what extent does the King County Assessor’s Office: (i) include the projects’ new construction value when calculating the following year’s property tax levy collections versus (ii) exclude the projects’ new construction value from the levy calculation?

In the former case, the exempted resulting tax burden would be shifted to other property taxpayers. In the latter case, the City (and County and State) would forgo the revenue associated with the new construction until the exemption period ends.

Under either scenario, and as we’ve always known, the benefits created through the MFTE program come at a cost. The only issue is who bears the cost – other taxpayers or the City (and County and State) Treasury.

In order to get a better read on the question of who bears the cost, we need data from King County. At a May 23 meeting with the Assessor’s Office (inclusive of Lisa, Traci Ratzliff, and staff from OH, CBO, and Law), Assessor’s Office staff told us that they could produce information on new construction amounts that were included vs excluded in the levy calculation within two months. We sent them a follow up letter to confirm this commitment, but haven’t received a response.

Absent the information, OH staff did a "best guess" analysis of existing MFTE projects using property appraisal information publicly available from the Assessor’s website. That analysis suggested that about one-third of the new construction value was included in the levy calculation, with the remaining two-thirds excluded. We are happy to walk through our methodology with you, but again, we cannot know whether this is correct without a response from the County.

Regardless of the new construction split for past projects, we are working with King County to discuss ways to simplify the process in the future. It’s a two-part plan, as follows:

The City will batch all projects’ final certificates of tax exemption and transmit them to the County in bulk at year-end. This will ensure that all records are treated consistently for purposes of incorporating new construction costs into levy calculations. The only disadvantage to this approach is that MFTE property owners will likely receive temporary tax bills during their first year of exemption; the County will then correct (i.e., lower) those bills in February.

The County will appraise the new construction value of MFTE properties in July of each year, just prior to the cutoff for the appraised value’s inclusion in the following year’s levy. This will ensure that the County captures the value of the residential improvements at a single point during the year and reflects maximum value of new construction generated under the MFTE program.

We at OH can easily implement part 1, but we must depend on King County to do part 2.

We understand that the Committee is interested in knowing whether these administrative changes will increase the amount of new construction value that the County recognizes, rather than defers until the end of the exemption period. We believe that it will indeed increase the amount of appraised value that the County includes in the following year’s levy, but likely there will always be some portion of appraised value that is excluded from the calculation. (This would occur, for example, if a July appraisal captured the value of a partially completed building in July, and that building was completed (and certified as tax-exempt) prior to year-end. We’d be happy to walk through a few scenarios with you in person.)

In considering policy changes to SMC 5.73, the Council has two choices as to timing, and OH is happy to accommodate whichever you choose. The first option is to defer the policy discussion until the County provides information on how much new construction, under past practice, has been included vs excluded from the levy calculation. The second option is to carry forward with the decision agenda. Under this second option, OH could present a single number to represent the maximum cost of the program to the General Fund or to other taxpayers, with acknowledgment that the actual incidence of the program’s cost fall somewhere in between.

Again, we are happy to accommodate either path. Just let us know if you’d like to discuss the options in person.