Could the Dallas Real Estate Market Survive a 130 Percent Property Tax Increase?

Sold and For Sale Signs

As if the doom and gloom from the almost-over election isn’t bad enough, the city of Dallas has an economic crisis brewing that will most likely mean higher property taxes in the future. How would that affect our local real estate market? I was speaking to a prominent agent last week about the sticker shock our property taxes give most transplants even with the lack of a state income tax.

“These California buyers are starting to look at our property taxes and think twice about our so-called affordable living,” she said.

Last Thursday, Mayor Mike Rawlings was in Austin, sitting before the Texas Pension Review Board. He was pretty doom and gloom over unfunded liabilities in the Dallas Police and Fire Pension Fund that have also send our bond rating down, making it more expensive for us to borrow money. The fund was, he says, ripped off by a “Bernie Madoff scheme” in which fund members guaranteed themselves 8- to 10-percent returns on their investments, then took the money and ran. Of course, the police elected their board members and city councilmen from years past sat on the board.

Now the pension board wants the city to cough up $1.1 Billion (with a “B”) to replenish the police fund.

If we do that, Mayor Rawlings says the city would have no choice but to increase its current property tax rate by 130 percent to cover the difference.

Pension plans across the country are facing similar issues. The biggest drag on the DP&FP relates to the DROP drain. What is DROP? It was a plan conceived in the 90’s (when Laura Miller was Mayor) that allows “cops and firefighters with more than 20 years of service to take their accrued pension benefits and stick them in an account that guarantees at least an 8 percent annual interest rate, and up to 10 percent.  The plan was conceived in the 1990s as a way to keep veterans from doing their 20 years and quitting.” What a sweet deal!

That target was more feasible when there were fewer DROP members and the fund was pulling in bigger returns. But the system, like many others, took a big hit when the markets came crashing down during the 2008 financial crisis. And DROP, which has also been touted as a recruiting tool, has become an albatross on the pension system. In January (2015), DROP accounted for 42 percent of the entire fund. A handful have been getting wealthy in their advanced ages. Pension officials also said in January (2015) that one person’s DROP account had more than $3 million in it. An additional 13 had more than $2 million. And 283 had more than $1 million.

So because of wild-brained ideas more than a decade ago, we stand to pay through the nose for real estate taxes that will naturally send buyers scurrying.

Would a 130% increase on property taxes in Dallas hurt real estate values? I got my tax bill last week, and am now trying to figure out where the money to pay it will come from.

7 Comment

  • I think the 130 percent number was thrown out to induce panic. It assumes a one-time payment in 2017, not a replenishment over a number of years. Also, knowing how foolish DROP was, why hasn’t it been DROPPED? There are many years of data showing the 8-10 percent guaranteed returns were not happening, meaning someone would have to make up the difference. That said, we can not go back and claw back those promises (it’s illegal), all we can to is fix the problem going forward. Which it appears we haven’t.
    Dallas is not alone in these municipal promises coming home to roost (and courts ruling against breaking the contracts). But where were the mathematicians who would have modeled and predicted this catastrophe? (Obviously you can’t calculate mismanagement, but the returns over time compared to historical investment return averages would be quite simple to model for decades into the future and should have been adjusted regularly).
    As they’re saying, plenty of blame to go around. Too bad it’s just finger-pointing.

    • mm

      I believe DROP was suspended. Now it’s just a DRIP.

    • Don’t look now but almost EVERY pension in the US uses this kind of accounting that I consider fraud. http://www.forbes.com/sites/andrewbiggs/2016/06/01/u-s-state-and-local-pensions-couldnt-survive-under-tougher-international-accounting-standards/#2bb569094fb1 They are about $5 trillion (with a T) underfunded. I guess the US government thinks we Americans are too stupid to know/care. So far they are apparently right, as we just allow it to happen everywhere.

      • mm

        Absolutely. Why do we let this happen? “Governmental Accounting Standards Board – known as “GASB” – recently held a joint conference with the International Public Sector Accounting Standards Board (IPSASB). Both organizations are responsible for setting accounting standards for government employee pension plans. But if GASB and the U.S. state and local pensions industry looked at IPSASB’s pension accounting standards, they might be shocked: those standards precisely contradict the loose pension accounting rules that GASB promulgates and that the public pensions industry depends on. It’s no exaggeration to say that U.S. state and local pension may not be financially viable if they were required to live under the IPSASB accounting rules that other countries follow.” Same reason why the ratings agencies got away with murder during the housing bust: people look the other way when they are making money. It is hard for the unsophisticated investor to decipher these complexities. Everyone is squawking about the “bad real estate investments”, but the market cycled up. This DROP accounted for a huge part of the fund, 42%!

  • Last year the DISD passed a $1.6B bond issue for “school improvements” (because someone didn’t maintain the school buildings for 50 years, and spent all the money on something else?). This was on top of $1.2B in 2012. The plan was passed with a plan to fund it with “no tax increase.” Translated, this meant that DISD was betting on increasing property values to fund the bonds. But (and here it comes), if the property values don’t increase, the DISD has the ability (thanks to sleeping voters) to increase property taxes without so much as a vote. So if the taxes increase by 130%, property values will drop substantially, triggering a tax increase by DISD as well – and they are in debt far more than the pension fund.

  • Some people who can will do what we’re going to do, which is sell out our house. Thanks to the skyrocketing value and complimentary increase in property tax, we’re going to downsize. With these property taxes a high-value house is just not worth it unless you’re very well off (and we’re just well off). I’d rather have the money for travel and other enjoyable actives. We’re going to find a home that needs some love in a more reasonably priced neighborhood and pay cash. We’ll fix it up and pull a permit only when we absolutely have to so DCAD doesn’t know about the improvements and jack up our value. Wish us luck and don’t worry, I won’t let the door hit me on the way out!

  • Where is the accountability? Dallas Bernie Madoff scheme should have some people in jail and their property seized. Tax payers are easy targets everywhere.