homepage logo

Revenue diversification: Tax plan has supporters, detractors

By Staff | Aug 21, 2015

As the Cape Coral City Council moves through the budget workshops toward public hearings in September, the city’s relatively new “revenue diversification” tax plan continues to generate both praise and criticism.

Critics maintain it’s not “revenue diversification” if the money is still coming from the same tax source – the residents of Cape Coral. Critics also say that the new taxes, even with a proposed millage reduction, are a less obvious way to bring in more money to spend than are property taxes, which are both capped and subject to the state’s Homestead Exemption.

Proponents of the “three-legged stool” tax plan proposed by City Manager John Szerlag and approved by City Council in 2013, say funding the operations budget from three primary revenue sources instead of one provides stability.

“Absolutely,” said Councilmember Rana Erbrick when asked if she supports the tax plan that underscores the proposed 2016 General Fund budget. “After seeing first hand what happens when you lose 60 percent of your valuation almost overnight, it makes sense to smooth off your revenue sources by diversifying.”

Based on the premise that property taxes were an unstable source of revenue, Cape Coral officials approved two new taxes in 2013, a fire services “assessment” and a public services tax on electric bills.

With the city barely on the uptick in terms of property valuations following the housing market collapse, Szerlag proposed the new taxes to council as a more sustainable approach to taxation.

Instead of relying primarily on a single source of revenue, the city would impose two taxes not reliant on property values while also reducing the ad valorem tax rate by a mil, $1 for every $1,000 of taxable valuation. Taken with the property tax reduction, the new taxes would bring in another $20 million per year for neglected capital projects at a cost, to the average Cape Coral homeowner, of approximately $150 per year.

Szerlag dubbed the combination of property taxes, fire services assessment and public services tax a “three-legged stool” upon which city operations could rest.

“At that time we were trundling down an unsustainable financial path,” Szerlag said in this year’s budget overview memo to the Cape Coral City Council on July 15. “We were spending down fund balance, had a failing capital program and needed $20 million in additional revenue each year to sustain our operations. To change direction, Cape Coral had to fund the general operations of government. We needed to become economically stable.”

“As a result of the combined efforts of the City Council and City administration, our organization is in a much stronger position to deliver services to our community within a more stable financial environment. We have reduced our reliance on an unstable tax system to fund our general operations. Ad valorem taxes now comprise 48 percent of our General Fund revenues as compared to 63 precent in FY 2013,” he stated further.

As discussions continue concerning this year’s proposed $623.1 million total budget with a projected operating, or general, fund budget of $197.5 million, council remains supportive of Szerlag’s approach. It allows for the completion of the promised 1 mil reduction while also bringing in an estimated $7.2 million in public services tax revenues and $19.6 million in fire service assessment dollars. That is based on a millage rate of 6.9570, a decrease of .75 mils (which follows an earlier .25 mils cut to total the promised 1 mil reduction); a continuation of the public services tax at 7 percent, and a fire services assessment “recovery” of 64 percent of operational costs, up from the 38 percent recovery now charged. The assessment recovery, in turn, frees up money in the General Fund previously used for fire department operations.

With the additional taxes, the proposed property tax will be at its lowest rate since 2009.

This illustrates how the diversification approach makes sense for the city and residents alike, Councilmember Richard Leon said.

When the bottom fell out of the housing market, the seated council was forced to raise the property tax rate 62 percent.

Instead of being forced to hike property taxes, “You put in a system that will be more fluid and stable in the long run,” Leon said.

Critics take a different view, saying property taxes, even at a higher rate, remain a better taxing mechanism.

Former mayor John Sullivan says he voted against both the fire assessment and the public services tax in 2013 for that reason.

“First of all I felt times were tough – and they haven’t got much better,” he said. “I made a commitment when I ran that I wouldn’t approve any new taxes, fees or assessments, and I kept that commitment. I made that commitment because, in my opinion, in the past, the city wasted a great deal of taxpayer money. I think they are about to now, based on the money they are spending.”

He pooh-poohed the premise that the new taxes constitute revenue diversification.

“I am a proponent of real tax diversification,” Sullivan said. “This is not, in my opinion, real diversification if it comes from all the same places – so how is it diversified?”

He said it is simply more revenue the residents were told was for capital improvements but is otherwise being spent.

“They made a commitment to the taxpayers as to why they needed new taxes and they turned around and gave extraordinary raises to city employees,” Sullivan said.

Property taxes are a stable revenue source if budgeted properly, he added.

“I think they could be, yes, if the money was properly managed. By that I mean set aside in good times,” Sullivan said.

Lee County Property Appraiser Kenneth M. Wilkinson was asked whether property taxes have, historically, been “stable” as a source of funding.

He said it would be inappropriate for him to comment on how taxing authorities, such as the city of Cape Coral, choose to raise revenue. However, based on the numbers, he does view property taxes as a stable revenue source.

“I cannot know what others are thinking nor do I want to tell any taxing authority how to budget just as I would not want any taxing authority to tell this office how to value property,” Wilkinson said. “The two processes are separate. Yet to answer your question, it has always been my belief that the property tax is one of, if not the, most reliable local tax as millages can be adjusted annually to ensure adequate funding and generally the largest portion of local budgets nationally.

“You can rely on it,” he added.

At the request of The Breeze, Wilkinson’s office provided a record of real property and tangible personal property values for Lee County from 1993 (the first readily accessible year via a computer search) to the present. For Lee County in general, and Cape Coral specifically, valuations do not show any historical pattern of increases and declines. With the exception of the four years following the collapse of the housing market – essentially 2008-2011 – valuations ticked upwards every year, spiking substantially in the real estate “boom” years that led to the crash. The largest increases came in 2006 when total taxable valuation jumped just shy of 40 percent in the county and just over 50 percent in the Cape on top of a 50 percent increase just the year before.

“I think history has proven that the property tax is certainly one of the most stable taxes there is,” Wilkinson said.

Other experts have a different perspective on what the numbers mean.

According to Joe Mazurkiewicz, a former Cape Coral mayor and the President for BJM Consulting, Inc., the 1993 to present stats are an accurate reflection of the economy and it is the economy that drives the numbers. This means property valuations can and have fluctuated in the past.

“In the ’90s, there was a continuous uptick in the economy,” Mazurkiewicz said.

But the years 2006-2013 demonstrate an instability also seen, to a lesser extent, during the recessions of the early ’70s and early ’80s.

“It was not as deep as 2006 but it was there,” he said, which is why local government should look to mixed streams of revenue.

The choices, though, are very limited by state statute.

The best mix among the options is both “progressive taxes,” like property taxes where those with more expensive properties pay more while those with lower valued properties pay less, and “regressive taxes,” where everybody pays, Mazurkiewicz said.

“That’s the best scenario, in my mind, both progressive and regressive sources to make it fair,” he said.

With property taxes, there are approximately 7,000 Cape Coral homes that pay nothing while 20 to 30 percent pay very little, he said. With the fire assessment and the public services tax, everybody pays something, everyone pays their share.

“That causes all citizens and property owners to pay something for city services,” Mazurkiewicz said. “I think that is the most fair scenario of all.”

The issue of revenue diversification – relying on multiple streams of revenue – is not only an issue of “stability,” some analysts say.

It’s a matter of good business, according to Steve Riggs, a former member of the city’s now-disbanded Financial Advisory Committee and a senior partner with an international professional services firm that specializes in operations management. His support of revenue diversification pre-dates Szerlag’s tenure with the city, dating back to 2006 when he served on the FAC.

“From a purely pragmatic, business perspective, I noted there was incredible pressure on the ad valorem revenue stream,” Riggs said. For that reason he favored implementing a public services tax well before the city actually approved one.

The real estate “bubble” bursting proved the point:?The Cape had little to fall back on when property valuations plummeted, he said.

“‘Sustainable’ is probably the wrong word now,” Riggs said of ad valorem taxes as a revenue source. “I would rather say ‘predictable’ rather than sustainable.”

There is a budgetary caveat that comes with adding new taxes without the constraints that come with property taxes, though, according to Riggs.

“It’s establishing core services appropriately and funding appropriately,” he said.

“You also want to make sure the amount of money collected is appropriate for the core level of services. The right level of revenue, for the right services, at the right level of services.”

That is not a view unshared by some members of the Cape Coral City Council as they progress through the budget process.

“We need to be careful that we are not going into a tax-and-spend mode,” Erbrick said. “We need to carefully scrutinize the items in this budget that were not in the last three year’s rolling budgets.”

Among the items she has flagged for discussion?

Proposals for two new fire stations, one this budget year, one next, a proposed new fleet building and a training facility. These are new budget proposals that need to be weighed against some pressing needs, including economic development funding, as well as possible tax reductions, Erbrick said.

“What do we need to give back to our residents to show we are good stewards?” she said.

Residents also need to know that there is more coming to the revenue diversification mix – a “fourth leg” to the so-called stool upon which the city can rely, Leon said.

The fourth component is a larger commercial contribution as increased business development takes place in the city.

Cape Coral garnered an additional 100 businesses in the last month alone, the Coralwood Mall is undergoing a major improvement project with new anchor stores coming in, and plans for a conference center to be built at the Westin illustrate how the Cape is moving forward, Leon said.

“You’re starting to see that, too,” he said of a growing commercial base and the tax benefits such growth means. “Revenue diversification is not taking money from the right pocket instead of the left; it’s bringing in business and developing that ‘fourth leg.'”