In his transmittal of recommended changes to the county’s capital budget, County Executive Marc Elrich dropped a bomb: forecasted school impact tax revenues had dropped by $121 million, half the amount projected just a year ago. That reflects a worrisome trend in housing construction and will force some very tough choices on county-financed projects.
The county’s capital budget is called the Capital Improvements Program, or CIP. It is a spending plan for county construction projects covering a six year period. In even-numbered years, full CIPs are recommended by the executive and decided by the County Council.
In odd-numbered years (like 2019), the executive recommends changes to the full plan which are also decided by the council. The CIP is funded by a variety of sources with the most important being bond issues. It also includes state aid, cash and other revenues like school impact taxes, which are charged on developers who build housing units and are dedicated to school construction.
With school impact taxes being written down by half – an unusually large revision – Elrich had some hard decisions to make. Indeed, he wrote, “These revenue reductions are so severe that funding for any new projects or funding for cost increases will have to be offset by reductions, with even further reductions required to balance the CIP.”
Despite the fact that school impact taxes may only be used for school construction, Elrich moved other money around to level-fund MCPS. School stakeholders may not be happy because they wanted more resources, but at least they are not getting a net cut. To protect MCPS, Elrich had to delay, cut funding for or cancel a number of other non-school projects, especially in transportation.
The county has now largely stopped building major road construction projects.
With Elrich’s deletion of Montrose Parkway East, the only road project left in the capital budget worth more than $20 million is a $48 million package of road improvements in White Flint. But that project comes with an asterisk: it is funded by special obligation bonds issued years ago that are to be paid off by White Flint’s tax district, which was established for the purpose of funding transportation projects there. This money cannot be moved to other projects.
Federal Realty, one of the major landowners in White Flint, is so upset at the lack of progress on these improvements that it has threatened to move some of its employees out of the county. Additionally, Elrich opposes M-83, the proposed new upcounty highway linking Clarksburg to Montgomery Village. That project will likely never get funding as long as he is the executive.
Why did school impact tax projections collapse? To answer that question, let’s recognize that school impact tax collections depend on two factors: the impact tax rate and the volume of housing construction. Let’s examine each of them.
School impact tax rates are fixed dollar amounts charged to builders of new housing units that are intended to pay for school construction projects. They vary among four types of housing: single family detached, single family attached, multi-unit low-rise and multi-unit high-rise. Generally speaking, they are intended to reflect the student generation rates of each of those types of housing. Housing types which tend to be associated with more school students are charged higher fees. Since 2007, school impact taxes have been changed on three occasions. Below is a table showing a comparison of rates in 2007 to the current rates, effective on July 1, 2017.
Single family detached rates have not changed very much, but rates for other housing types are WAY up. If rates have been raised that much, why are projected collections falling?
The answer lies in housing construction. The chart below showing housing permits was published by Park and Planning Chairman Casey Anderson using census data. Multi-family units appear in orange and single-family units appear in blue.
From 1998 through 2007, an annual average 4,311 housing units were permitted in MoCo. From 2008 through 2017, that annual average fell to 2,398 units. That overall decline includes a modest recovery in the 2011-2014 period followed by a drop to near-recession levels thereafter.
The combination of rising impact taxes and uneven housing construction has been directly reflected in the county’s school impact tax collections, which began in fiscal 2004. Goosed by tax hikes and the 2011-2014 housing bump, annual school impact tax collections peaked at a level of $46 million in fiscal 2014. Since then, collections have fallen to current levels of $21 million to $22 million per year. The revenue writedown in Elrich’s CIP is in line with this decline.
Some might argue that there is an upside to less homebuilding. After all, doesn’t housing construction lead to school crowding? That has not been the case in MoCo in recent years. MCPS enrollment was stable from 2002 through 2009, a period in which 3,210 housing units were permitted per year. The current enrollment rise occurred from 2010 on, when housing permits fell to 2,705 units per year. When housing construction goes down and school enrollment goes up, it’s hard to blame homebuilding alone for school crowding. Demographic change and neighborhood turnover matter too.
In his transmittal letter, Elrich offered an alternative explanation for dropping school impact tax receipts. He wrote, “In addition, it appears that recent changes to the impact tax law, to promote the increased production of affordable housing, are also having a serious negative impact on revenue collections. While well intentioned, the changes are producing tradeoffs that mean we cannot fund schools as we would like. We intend to investigate this more and propose legislative changes to address it.” Elrich is referring to Bills 8-15 and 36-17E, which exempted development projects from paying impact taxes if at least 25 percent of their units were moderately priced dwelling units (affordable housing). But the county’s Office of Management and Budget confirmed to me that only two projects took advantage of these bills, thereby depriving the county of $17 million in impact taxes. That’s a minor part of the $121 million writedown.
And so, the county’s housing construction slowdown is now forcing tough decisions in the capital budget. But there is a silver lining to all this.
We are not in a recession. Yet.
Adam Pagnucco is a writer, researcher and consultant who is a former chief of staff at the County Council. He has worked in the labor movement and has had clients in labor, business and politics.