Meeting the Challenge: Examples of Boston’s Fiscal and Economic

Development Initiatives

Ronald W. Rakow, Commissioner City of Boston Assessing Department

Critical Issues for the Fiscal Health of New England Cities and Towns

April 8, 2016

Property Tax Reliance

• Property taxes constitute over

two-thirds of City revenue.

• No other major source of tax

revenue (e.g., sales tax, income

tax, payroll tax, etc.).

City of Boston FY16 Estimated Revenue

Property Tax 67%

State Aid 15%

Excises 6%

Other 9%

Licenses & Permits

2%

Interest 0%

Reserves 1%

Boston’s Fiscal Challenges

Source: City of Boston FY 2016 Proposed Budget

Boston is 52% Tax Exempt

• State Capitol

• 30 Colleges and Universities

• 25 Nonprofit Hospitals

• Over 20 Cultural Facilities

City of Boston Exempt Properties

Boston’s Fiscal Challenges

Proposition 2 ½

• Limits levy to 2.5% of total assessed value

• Limits growth in levy to 2.5% per year, with an

allowance for growth to the tax base.

• As a result, Boston’s annual growth in property

tax revenue typically ranges between 4% to 5%.

Boston’s Fiscal Challenges

Boston needs to be creative in both growing and preserving its property tax revenue

Highlight 4 Initiatives:

• Payment in Lieu of Tax (PILOT)

• Infrastructure Investment Initiative (I Cubed).

• Personal Property Audit Program

• Reduction in Tax Abatements and Appeals

Boston’s Fiscal Challenges

Disconnect between Benefits and Costs • Benefits spread broadly:

o City

o State

o Region

o World

• Costs are concentrated on Boston taxpayers o Reduction in revenue - $400M from “meds” and “eds” alone

o Costs of providing municipal services

PILOTs

PILOT Task Force Recommendations

PILOT Task Force

• Program to remain voluntary

• Nonprofits owning tax-exempt land valued in excess of $15

million are asked to participate in the program

• PILOT should be 25% of what institution’s tax-exempt property

would generate if fully taxed

• Nonprofits should receive up to a 50% PILOT deduction for

qualifying community programming to the unique benefit of

Boston residents

• Nonprofit should receive a credit for any real estate taxes paid on

institution-use property

• New PILOT formula to be phased in over a period of 5 years

starting in FY 2012

PILOT Program Results

$8.7

Economic Development Incentives

• Development incentives were all based on property tax abatements – TIFs, Chapter 121A, Pilots

• Downside – Reduced critical property tax revenue – State Government – which often received upwards of

80% of the new revenue generated by development (e.g. income, sales, hotel tax), often did not participate in incentive

Boston needed to change the paradigm

I Cubed Concept

■ Development generates new state income, sales, meals, and hotel tax revenue that can support infrastructure investment.

■ Community and developer determine a project’s economic feasibility and guarantee that state tax revenue growth will exceed debt service for the infrastructure.

■ State, community, and developers share risk and rewards.

Use public infrastructure investment to stimulate large-scale economic development

I Cubed Results

• Stimulates development without sacrificing critical property tax revenue

• Government role changes to building public infrastructure vs. providing tax subsidies

• Program is producing results: • Projects: Fan Pier, Boston Landing, Van Ness • 2 million square feet of development • Over 2,000 net new jobs • Over $75 million in new infrastructure supports

further development

Fan Pier

Boston Landing

The Van Ness

Personal Property

• Personal property: – the machinery and equipment used by

business – ranges from the chairs in a barber shop

to the poles and wires owned by a utility

• Self-reported by the owner on a tax return • In Boston the personal property tax was

underutilized – the forgotten stepchild of City revenue

Personal Property: Discovery

• Discovery process ensures a broader tax base and more equitable tax structure.

• Sources – New business filings with City clerk – Mining various databases containing business listings – Real estate tax returns (i.e., commercial property

tenants) – Staff awareness – Drone fleet*

• In the previous 2 years 295 non-reporting accounts were discovered yielding over $19 million in assessed value.

*we don’t really have a drone fleet

Personal Property: Audits

• A companion to the discovery process, the audit program was rolled out in 2009

• Audits compare personal property tax returns to company books to ensure all property is reported

• Results: – Over 1,200 audits complete – Individual assessments increased and decreased –

but net gain of $437.6 million in value (14%) for audited accounts

– Noticeable uptick in voluntary compliance revealed in more recent audits

– Fewer than 10 open appeals on audit cases

Personal Property Tax Revenue

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2009 2010 2011 2012 2013 2014 2015 2016

Mill

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Growth in Personal Property Tax Revenue

• Over the past 5 years, personal property accounted for approximately 8% of the levy…

• …but generated over 37% of the growth in tax revenues.

• The once forgotten stepchild is now punching well over its weight

Impact of Abatement Appeals

“Tregor” Era – 1980’s • Court ordered

abatements for large commercial properties

• Significant deficits in overlay accounts

• Bond rating teetering at junk bond status

Today • Appeal activity low • Court decisions support

assessment methods • Surplus in overlay • AAA Bond Rating

Impact of Abatement Appeals

Elements of a Successful Appeal Process: • Actively monitor and closely manage abatement appeals • Recognize Errors1 Early - Avoid Multi-year Payouts • When You’re Right, Fight

– Eliminate “abatement culture” – A win in a precedent setting case can eliminate similar appeals

• Get it Right the First Time – More Accurate, Responsive Assessments – Better Access and Utilization of Market Data

1In those very, very rare instances when assessors make an error

Impact of Abatement Appeals

Reactive vs. Proactive

• Previously, assessors spent nearly two-thirds of their time working on their– that’s like trying to drive your car using the rear view mirror

• The preferred scenario - focus on the current assessments and getting them right the first time

Appeal Backlog has Disappeared

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97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Thou

sand

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Outstanding Appeals

Virtuous Cycle

Vicious Cycle

Fiscal Impact of Reduced Appeals

• Since 2003 Boston has: – reduced its annual abatement overlay

from 5% of levy, to 2%, resulting in an additional $60 million per year in operating revenue.

– generated $378 million in overlay surpluses that were applied to the general fund