Downtown doomsday
Property assessment declines will crush city, school budgets
It’s impossible to overstate how badly Pennsylvania’s system of real estate taxation works, and in particular how dire the situation is in Allegheny County. A coming wave of rulings on Downtown assessment appeals will not only obliterate the budgetary projections of the three taxing bodies — the county, the City of Pittsburgh and Pittsburgh Public Schools — but will also drain their current reserves. That’s because the appeals are retroactive, and will trigger massive refunds to commercial property owners.
This doomsday scenario is due in part to misfortune: The COVID pandemic sucked the life out of Downtown, and there’s no sign of recovery to pre-pandemic occupancy levels. When vacant subleases are accounted for, about 28% of Golden Triangle office space is still unused. Because commercial property is assessed based on the income it generates, this means a collapse in assessed value, anda collapse in tax receipts.
More fundamentally, however, the coming fiscal cliff is the result of a standoff between county officials on the one hand, and school and municipal officials on the other, caused by Pennsylvania’s nonsensical property tax regime. For 12 years, no one has had a political incentive to make the first move: either to call a massively disruptive reassessment, or to raise taxes enough to offset the 2012 assessment’s inability to keep up with the market.
All the options on the table are painful, but the least bad is this: Harrisburg must mandate regular, statewide assessments to bring fairness and predictability to the property tax system.
But right now, the city and its school district are staring down financial ruin, and County Executive Sara Innamorato will likely be stuck managing a countywide reassessment of nearly 600,000 parcels.
Doomsday
The Downtown write-downs are staggering. The iconic U.S. Steel Building was taxed at a value of $233.2 million in 2022 and 2023, but the county’s Board of Property Assessments and Appeals ruled it should have been $141.5 million. The brand new Tower at PNC Plaza was taxed at $147.2 million, but that was reduced to $72.3 million. And Three Gateway Center: $62.7 million, down to $35.5 million.
Altogether, these three appeals alone took nearly $200 million in value off the tax rolls. As a result, Allegheny County will owe $1.8 million in refunds, and will lose $917,000 in annual revenue. Pittsburgh will owe $3.1 million, and lose $1.56 million going forward. And PPS will owe nearly $4 million, and annual receipts will drop about$2 million.
And that’s based on only three appeals. There are dozens more skyscraper appeals still pending.
The county, which has the lowest tax rate of the three, and the least exposure to Downtown real estate, is in the best position to handle the financial stress — though the refunds will likely take reserves below the statutorily mandated 5% of expenditures. Pittsburgh’s healthy but declining reserves will be hit harder, accelerating the onset of fiscal distress the Editorial Board has previously described. PPS is most exposed of all, and likely doesn’t have enough unrestricted reserves — the adopted budget projects only $15 million by the end of the year —to cover the refunds.
All three taxing bodies made their budgets work by forecasting growing tax revenues in 2024 and beyond. This will only be possible with eye-watering tax increases that shift the burden to residential properties.
A CLR primer
The collapse in commercial property assessments is also due to an arcane calculation known as the common level ratio (CLR). The CLR is the multiplier counties use to determine assessed value — that is, taxable value — based on market value on appeals in the years between assessments. A higher CLR means higher assessments when they are appealed, which commercial owners do habitually when the market dips and/or the CLR drops.
Allegheny’s situation is particularly dire because the county worked under an artificially high CLR for years, which helped keep tax receipts artificially high and tax rates artificially low. Whether the CLR miscalculation was due to data entry errors or fraud is disputed, but the result was the same: A court dropped the ratio for 2022 and 2023 from 0.875 to 0.635 — a massive cut. And the CLR for 2024 is even lower: 0.545.
That means assessed commercial values for the last two years are set to drop more than 25% on top of the market-value declines due to COVID, then another 14% for 2024. And because Allegheny County uniquely and senselessly handles its appeals for the year past, millions more in 2024 refunds will be coming down the pike for the three taxing bodies. In fact, commercial property owners are already preparing their 2024 appeals based on the new,lower CLR.
It’s easy to say that the county wouldn’t be in this situation if former County Executive Rich Fitzgerald had ordered more regular assessments. Butbesides being a political poison pill, assessments can be expensive and destabilizing to the county’s government, housing market and business climate, with hundreds of thousands of appeals dragging on for years. It’s far from an easyor painless fix.
Unsolvable problem
The trouble is it’s like an active fault: The longer it lies dormant, the greater the tension that builds up, and the more destructive the resulting earthquake. And make no mistake: There’sa big one coming.
A countywide reassessment won’t avert the coming Downtown doomsday, but it will reset the system on firmer foundations. County Executive Sara Innamorato needs to make preparations now, whether she orders the assessment or, more likely, a courtforces her hand.
But Allegheny County will never break this chaotic cycle until Pennsylvania brings its system into line with nearlyevery other state’s property tax system: regular statewide reassessments. Only that will assure consistency and fairness, while smoothing out the chaos of an intrinsically chaoticmethod of taxation.