Sunday, October 7, 2007

Finish the Sentence

The Dispatch headline reads "Builders warn against Darby housing levy" ...

The rest of that sentence should read "... because their business has always been subsidized by the rest of the unsuspecting community, and this Big Darby Accord levy jeopardizes that subsidy."

As described in this newsletter by the Buckeye Association of School Administrators, the construction of new homes is not helpful in solving the funding problem in growing Ohio school districts, such as Hilliard City Schools. In fact, it is the primary cause of funding problems in districts like ours.

Don't get me wrong - I applaud businesses which can manufacture a product or deliver a service which has value in the free market. Such businesses employ workers and pay taxes, both of which are essential to a healthy local economy. In fact, I am part of a team of investors and management who are trying to get a small business , headquartered here in our school district, off the ground right now.

My objection is to the decades of developer-friendly politics in central Ohio, and in particular the way in which our taxing mechanisms cause new homeowners to be subsidized by the rest of the community. This effect is like a modified Ponzi scheme in that the apparent cost of ownership a new homebuyer perceives is lowered because of this subsidization. Soon enough, however - in fact the next time a school levy passes - the once-new homeowner becomes part of the group subsidizing yet newer homeowners. You want to be the last person to build a house in a community because everyone else subsidizes you.

An study published by The Ohio State University says it this way: "residential development often brings costs to the community that are not fully borne by the new residents, but instead are distributed throughout the community"

A very powerful way to have new homeowners pay for the costs they bring to the community is impact fees. Indeed, the City of Hilliard charges impact fees already. Mayor Don Schonhardt said in January 2007: "We were the first central Ohio community to impose an impact fee and that fee went up last year to $1,500 per single family dwelling unit."

Unfortunately, both the Mayor and the school district leadership were silent when State Rep. Larry Wolpert introduced HB299 (126th General Assy) which would have given school districts the authority to levy impact fees as well.

Some opponents to impact fees say they serve to bar lower income folks from a community by placing the cost of a new home out of reach. The way many impact fee systems are designed, this is true. And that's not a good thing in my opinion.

However, I have proposed an impact fee approach which neutralizes this objection. The first stage would be to deal with the cost of facilities. If a new high school costs $50 million and houses 2,000 students, then the cost per student is about $25,000. I would propose that when a new house is built, this $25,000 is tacked onto the mortgage and paid out to the school district. The school district would add it to their building fund, and in theory when the time comes to build a new high school, the money would already be in the bank - no new capital levy required!

But how is this fair to the homeowner carrying the $25,000 in their mortgage? The answer is that the homeowner would be credited their cost of the impact fee through property tax credits.

The cost of $25,000 added to a 30 year, 6% fixed interest rate mortgage is $150 per month, or $1,800 per year. I propose that this amount would be credited against the homeowner's school tax bill.

For someone who builds a home appraised at $150,000, the current annual school tax would be approximately $1,934 per year. Subtract the $1,800 credit, and this homeowner would owe an additional $134 per year in school tax.

However, if a homeowner builds a $500,000 house, the same $25,000 impact fee would be assessed, and the same $1,800 credit applied to their school tax bill. Since the full school tax on a $500,000 home would be about $6,448, this homeowner would be charged an additional $4,648 per year.

Can the district use the impact fee money for anything they want? How can we be sure they won't spend it as fast as they get it? I would propose that impact fee money can only be used for school construction and capital improvements, and then only with the approval of the voters of the school district. But note that the question before the voters will not be whether or not to raise taxes, but rather to spend money we have already collected.

How does a homeowner recoup their impact fee if they sell their house? Easy - the buyer must pay the impact fee to the seller, and the buyer will assume the same property tax credit the seller enjoyed. Again, a wash.

What would lenders think of adding an impact fee to the mortgage? Because net cash flow of the borrower would remain the same as it would be under the current system (i.e. the higher principal and interest payment would be offet by a lower property tax payment), the impact fee would cause no change to the borrower's ability to make payments. However, in these days when mortgage foreclosures are an increasingly common reality, the lender must have confidence it their ability to recoup their money if they foreclose. Presuming that the next buyer would assume the impact fee, like any other buyer, the risk to the lender should be acceptable.

What if mortgage interest rates go up? I proposed that the property tax credit the homeowner would receive would be calculated based on prevailing rates on 30 year fixed mortgages, set once per year. The presumption is that as long as the $25,000 fee remains constant, the school district will have the opportunity to purchase income producing instruments (e.g. Treasury bonds) at a fairly constant spread to the mortgage rate. In other words, the income lost due to larger tax credits to the homeowner would be offset by higher earnings on the capital fund.

Wouldn't this make it harder to sell a house which had been imposed an impact fee if the one next door had not? This would be a rare scenario in that impact fees would almost always be assessed in areas where a cluster of new homes are being built. But when it does occur, the tax credit offsets the difference in cost.

What about those of us who already live here? No change. We continue to pay our property taxes as today. But we should not see any significant new bond levies for school construction - the impact fee collections would pay for that. However, we have to start building the impact fee fund soon. It's too late if we wait until the next school is needed.

How is this fair to someone who moves into the district, but doesn't have any kids. Isn't the Mayor emphasizing retirement housing these days? This is an fascinating question, only because so many people ask it. Isn't it interesting that people think they shouldn't have to contribute to school funding if they don't have kids. I wish I didn't have to pay for government services I never use. In the past 28 years, I've paid a ton of Hilliard City income taxes and have never lived within the city limits.

What if the school district needs more money in the future? Then we would have to pass additional levies, same as today. We might increase the impact fee, but presumably this would require approval of some state agency which ensures that the fee is reflective of our actual costs.

So how is this different that our current system?

The impact fee is automatic: if you build a house in our school district, you get charged the fee. The school district gets the money as soon as the homeowner moves in rather than only after the passage of another levy which we all must pay. There is no option for a new homeowner to move into our community then vote against levies to support the very schools they moved here to enjoy. The impact fee is a commitment to pay, in advance, the cost a new homeowner creates.

There are doubtless many details that would need to be worked out, such as the extent in which owners of multi-family housing pay into the impact fee system. But impact fees have been used all over the country in growing bedroom communities, so they must be effective.

If they work to better fund municipalities like the City of Hilliard, then they would work to better fund our school systems as well. I would hope Mayor Schonhardt agrees.

1 comment:

  1. Can the district use the impact fee money for anything they want? How can we be sure they won't spend it as fast as they get it?

    It may not be unprecedented that government hold onto a stack of money without spending it, but it sure is unusual. Social security was originally "set aside" money, and when Al Gore came up with his "lock box" idea it didn't fly with the American people. There's too much skepticism.

    But at least you are thinking outside the box.