California State and Local GO Bondholders Should Benefit from Higher Property Tax Valuations

Valuations used to calculate 2016-17 fiscal year property taxes in California showed another robust year of growth based on property tax data released by local county assessors after the commencement of the new fiscal year on July 1. State budget officials had estimated earlier this year that the growth of FY 2017 statewide property taxes would exceed 5.6%. Much of the growth in property tax valuations was driven by growth in northern California. Most Bay Area counties grew in the 7% to 8% range, and they were led by San Francisco, which increased by 8.8%. Valuation growth in southern California was strong, but not quite as vigorous, with Orange County and San Diego County reporting growth levels at 5.4% and 6.1%, respectively. Although the California constitution generally provides for an annual property tax valuation limit of 2%, the current valuations reflect higher growth levels because the valuation limits do not apply to new construction or properties that have changed hands. In the heart of the Silicon Valley, for example, 85% of the growth from new construction was in the form of commercial and industrial buildings.

The growth in property tax valuations is a credit positive for California local general obligation bonds and other property tax-backed debt, as well as for the State of California. The increased valuations strengthen the tax base and have the potential to reduce debt ratios for local government issuers. While property taxes are not directly allocated to state coffers, the state benefits from the higher values because an increase in property taxes collected by local school districts reduces the amount of support that schools need from the state. 

We also expect that FY 2018 property tax revenues will benefit from the recent trend of growing valuation levels due to the timing of property tax valuations. In California, property tax valuations are based on estimated values on the January 1 prior to the start of each fiscal year. We expect that valuations on January 1, 2017 will reflect an increase over January 1, 2016, based on real estate trends so far in 2016. While valuations could reverse their trend before January 1, so far this year the median price of California homes that have sold is up about 6% from the end of 2015. In 2015, median sales prices were up about 8%, which is reflected in this year’s valuation growth.

Source:  California Association of Realtors, California State Board of Equalization, Sacramento Bee, San Francisco Chronicle