Iowa Legislature’s property tax reform law penalizes growth in Newton, city says

The Iowa Legislature’s property tax reform law that Newton officials say was supposed to have a greater effect on faster growing cities is instead penalizing and putting a chokehold on communities with moderate to lower levels of growth, which is leading to earlier-than-expected budget discussions with council members.

Following the Aug. 7 council meeting, the City of Newton’s finance team held a work session to put their findings into perspective for elected officials. Over the past few months, similar work sessions have hinted towards a bleak budgeting season for council, with much of the blame being put on House File 718.

Signed into law by Iowa Gov. Kim Reynolds in May, the bill impacts many areas when it comes to property tax reform. Some of the most notable parts include tax breaks for veterans and exemptions for homeowners over age 65, which staff estimate is approximately 1,500 households in Newton.

While the tax breaks and exemptions will result in a loss of revenue for the city, staff is most concerned about the new general fund levy limitations.

The state law consolidates local governments’ general fund levies into one levy, which, for Newton, covers the $8.10 levy and the $0.27 library levy. As a result, Newton’s senior financial analyst Michelle Heisdorffer said the city will see a loss of $160,000 in revenue to start. City administrator Matt Muckler fears the worst.

Especially when considering the $8.10 levy covers many of the city’s essential services, like the fire department, police department, community services and parks, community development, the library and administration. It also covers employee salaries.

To make matters even more complicated for the city and its elected officials, the residential rollback — which is there to help ease taxpayer burden of alarmingly high property assessments — is anticipated to decrease from 54 percent to 47 percent. Muckler said it is the largest drop he has ever experienced.

“How do we pay people? How do we provide services? How do we staff appropriately? When you get back to what this covers, this covers the most important things that the residents rely on,” Muckler said. “…It covers the core services our residents expect us to deliver. That’s what they’re cutting.”

The Senate passed House File 718 in a 49-0 vote; and all but one legislator in the House voted in favor of it, too, ending in a 94-1 vote. Newton can survive the rollback, Muckler added, but he is still frustrated, saying the state does not understand local finances and the legislature did not understand the bill.

“They told us they were going to reel in the hyper-growth, 30 percent or 20 percent, out-of-control people. But those cities don’t care. Because instead of getting a 33 percent increase they’re going to get a 30 percent increase,” Muckler said of faster growing cities’ revenues. “They don’t care. But they’ve hammered us.”

REFORM WAS RESPONSE TO HIGH ASSESSMENTS

In an effort to get a handle on skyrocketing property assessments, the Iowa Legislature introduced this bill as a first step in true property tax reform. But Muckler said the problem is the people who wrote the bill do not understand how the Iowa state property tax system works.

For instance, Muckler argued cities already have a mechanism in place to control out-of-control assessments.

“It’s called the rollback,” he said in an interview with Newton News.

If assessments rise at a higher-than-expected rate statewide, the rollback adjusts so that Iowans are not hammered by those increases to their taxes, Muckler said. Newton uses that rollback to calculate budgets for the upcoming years. It is that rollback, he argued, that does what the property tax reform bill was trying to do.

Finance officials for the City of Newton calculated that at a 54 percent rollback, the city’s revenue increase from the previous year to the next would be 16.4 percent. At a 47 percent rollback, the city’s revenue increase from the previous fiscal year to the next would be at 4.8 percent.

“But we don’t get a 4.8 percent increase. We have to roll that back 2 percent, because if we’re between 3 and 6 percent growth we lose 2 percent of our growth,” Muckler said of the law. “So we end up with a 2.72 percent increase for next year; an increase in dollars that flow into the $8.10 and the $0.27 levies.”

The way the bill accomplishes this decrease in revenue from 4.8 percent to 2.72 percent is by decreasing the city’s tax levy, Muckler added. Instead of the $8.37 per $1,000 of taxable value the city levies for a number general fund operations expenditures, the law sets the maximum to $8.10, cutting off $0.27.

“I don’t think that the average legislator wanted to penalize people that had 4.8 percent growth,” Muckler said. “They wanted to penalize cities that were growing by, say, 30 percent or these astronomical, big numbers. They wanted to reel in the growth. So it affects different cities depending on how much you grow.”

Newton has only grown 1.65 percent annually in its $8.10 levy over the past 10 years. Still, the loss in revenue means there will likely be cuts.

NON-CORE SERVICE REDUCTIONS

To decide how the city will make cuts, Muckler said staff will have to identify the core services paid for out of the $8.37 levies. The city administrator would suggest the core services to be public safety, parks, library, community development and financials and payroll; the “basic guts” of city operations.

For residents, he expects they would prioritize public safety, parks and library. Anything that is not a core service, the city has to scrutinize and possibly make reductions. Partner contributions to various community organizations would be an example of what Muckler sees as a non-core service.

Newton YMCA, Main Street, United Way, Newton Development Corporation and Newton Housing Development Corporation are frequent partners with the city.

“We’ve supported the YMCA for years. Our police can’t be everywhere and can’t do everything. So one of the strategies we’ve had is to partner with United Way so they can provide services to people that need it, that take a burden off our police department, whether that’s mental health or other services,” Muckler said.

The city council made it clear that they want to make Newton a destination, and the residents agree with that sentiment, as outlined in the comprehensive plan. Muckler does not want to make any reductions to events. Perhaps the city will have to look for more efficient ways to contribute, like donations from the public.

Fee schedules are also being looked at. Muckler said the council has shown it does not want to go there, but that is still something the city will have to consider.

“All of these things have to be on the table.”

From there, the city will have to look at service reductions.

“It’s unfortunate that the legislature thinks they know how to budget better for Newton citizens than the council the Newton citizens have elected,” Muckler said.

FRUSTRATIONS OVER LAW ONLY GROW

With the general fund levies consolidating to what the law now calls an “adjusted city general fund levy,” or ACGFL, the result of a community vote many years ago that levied taxes specifically for the library will effectively become null and void. The $0.27 levy will get absorbed into the new $8.10 levy, ACGFL.

“The legislature shouldn’t undermine what the residents of this community voted to do, and that was to put in a $0.27 levy to support their library,” Muckler said. “This legislature has just undermined the vote of the people on that issue. Which is ridiculous. It’s arrogant.”

Muckler suggested it is hypocritical of lawmakers to chastise the federal government for wanting to be able to control their state and not have politicians in Washington, D.C. making those decisions for their state. Yet they will turn around and do the same thing to the small cities within their state, Muckler said.

Newton likely is not the only community that could be negatively impacted by the law. Muckler wants to know how many communities in Iowa have less than 3 percent growth and which communities would have the highest growth of revenue. In Iowa, 44 percent of cities have less than 3 percent growth.

“We know that two-thirds of the cities are losing residents,” he said. “…It’s just frustrating when the bill doesn’t come close to accomplishing what they told the public they were trying to accomplish … And it’s frustrating when our residents have to pay for misguided legislation.”

Muckler also condemned the bill and its formulas for being illogical.

“Here is how illogical the bill is: It’s better for me to grow 2.75 percent, than 4.5 percent. That’s better,” he said. “At 2.75 percent I don’t get penalized by the bill. At 4.5 percent I get penalized by 2 percent. So instead of getting that, I get 2.5. You’re better off growing slightly less than 3 percent than between 3 and 6.

“It doesn’t make sense.”

TAXPAYERS HAVE BEEN WANTING RELIEF

Rep. Jon Dunwell of House District 37 said the bill was passed unanimously through the Ways and Means Committee. When it came time for lawmakers to vote on the piece of legislation, only one legislator opposed the bill: Rep. Elinor Levin of House District 89.

The Des Moines Register’s Stephen Gruber-Miller reported on May 2 that Levin voted against the bill because although it “may lower property taxes for a small percentage of Iowans, it also makes our property code much more complicated and hurts local communities.”

Still, there was strong, bi-partisan concern about property tax reform. Even more so with the significant increases in assessed values that Dunwell said were not necessarily allowing for declining property taxes. Voters felt like “cities were capturing all of that gain and not asking the question: What about the taxpayer?”

While Dunwell admitted he does not know Newton’s specific situation, he conceded no law is perfect; there are benefits and there are challenges.

However, Dunwell contends Newton taxpayers have been fairly concerned and upset about their taxes over the past few years. Dunwell said in 2019 his taxes were about $4,400. In 2022, they increased to about $5,600. Other residents are seeing their tax payments increase, too.

“It all has to do with if the net aggregate taxable value of a community goes up a certain level, some of that is given back to the taxpayers,” Dunwell said of the new law. “It’s not allowed for a taxing entity to keep … There would still be a higher collection of taxes, it just means that their levy would have to drop.”

Dunwell said all taxing entities need to learn the impact on taxpayers. From what he has gathered campaigning in the community, there are a lot of people that are concerned about “making their $4,000 to $5,000 tax payments” every year while living on a fixed income.

“They’re asking hard questions like, ‘Hey, what’s the priority of that taxing entity?’ They ask the same questions of the state, the county and the city. And I do believe we always are making priority decisions and we’re always looking for where we can save money,” Dunwell said.

The representative was also critical of the city’s decisions to not collect taxes on properties, which the council approved as an incentive to have builders complete projects like Hotel Maytag and Lions Gate Apartments. Dunwell questioned if the city is getting a return on investment for these projects.

“Are we getting a return on investment on that? I hope so. Those are hard decisions that our city council and our city administration to work through. I think they’re important discussions to have, and that’s what they do,” Dunwell said. “Those are questions every community, every state should ask.”

Dunwell said the cost of some of these tax subsidies is it sometimes takes a while for the city to catch up on growth.

HOW WILL LESS REVENUE TO CITY IMPACT RESIDENTS?

Over the past 30 years, Muckler said the city has worked tirelessly to become more efficient; even more so in the past five years. Staff numbers are lower than they were three decades ago. But for some departments, the work has only increased; the city is stretched thin.

The fire department, for instance, is responding to 47 percent more calls. Twenty years ago, there were 27 firefighters employed in the station; the city these days is short two firefighters. Muckler said the fire department is understaffed, and he worries for the safety of residents if more cuts are to come.

“We’re doing more with less than we ever have in the history of our city,” Muckler said. “At some point you can’t keep providing the service levels that you do with less people and more work.”

Crime states show the city is down 41.12 percent in property crimes since 2018; there were 625 property crimes in 2018 and 368 property crimes in 2022. Muckler credits the positive data to the city’s commercial D&D program, which removed the problematic Newton Inn that fostered much of the city’s crime.

“The Newton Inn property was a pipeline of drugs and property crime into our community,” Muckler said. “We had over 100 calls there. We were averaging about that number of calls towards the end. Our police were being pulled off of patrolling our streets and they were going out to the Newton Inn.”

Muckler also credits police department for increasing its staffing levels, although overall the city is still operating with less officers than it was 30 years ago. Partnerships with community organizations have also helped the city to address homelessness, property crimes and substance abuse issues.

“How do I keep crime rates down at the lowest possible levels they’ve ever been in the history of Newton when I can’t staff my public service agencies at the levels I’m able to now?” Muckler said. “So the concerns we have with this bill now is: Where are we going to be five years down the road?”

To put pressure on the city even more, administration is currently in negotiations with union contracts, and Newton has effectively turned itself into a pipeline for officers and firefighters who oftentimes leave for higher paying jobs in the metro.

“We’re never going to be able to compete dollar-for-dollar with a Des Moines or a West Des Moines. Ultimately, if people choose to go to the metro because that fits their lifestyle or for whatever reason, I’m never going to be able to pay people to stay. So we’re going to be lower. But we have to be in the ballpark.”

But in order to raise wages for union employees or encourage first responders to stay in Newton, the city needs adequate revenues. Of course, staff can budget a 6 percent increase in wages, but it will likely come at a cost over the next few years. Muckler is adamant to not make cuts to these core services.

“I don’t want to have to go to my police chief or fire chief and tell them when someone leaves they can’t replace that position,” Muckler said. “That’s my nightmare scenario where I have to say, ‘Sorry, Rob. You can’t fill that spot.’ And instead of going down we see our property crime rates going back up.”

There is also library and parks amenities that are clearly important to residents. Recent reports from the library director showed children and adult programming attendance increased by 21 percent and 14 percent, respectively. The park bond vote in 2022 showed the community overwhelmingly in favor of parks projects.

“How do I maintain our parks when I got the legislature reducing our revenue?”

MOVING FORWARD, BUDGET DISCUSSIONS WILL GET SERIOUS

Newton City Council was ready to reduce its overall tax levy, which has not increased above $17.14 for nearly eight years.

Here is what makes up the $17.14 levy:

• $8.10 – General Fund

• $0.56497 – Liability Insurance

• $0.04220 – Support of Local Emergency Management

• $0.27 – Library

• $1.75391 – Police and Fire Retirement

• $1.18242 – FICA/IPERS

• $2.88042 – Other Employee Benefits

• $2.34608 – Debt Service

Other than the general fund levy, the city’s finance team said the other amounts that make up the $17.14 tax levy could change from year to year. Muckler said council and staff decided at the end of this past fiscal year budgeting session that it will no longer tax citizens at $17.14 per $1,000 of taxable value.

“We were on the path of reducing the levy,” Muckler said. “That’s where we were headed. The problem is now council doesn’t get to make that determination for its residents. Somebody in Des Moines is doing that for us. We know what it’s going to be. It’s going to be $0.27.”

Theoretically, it is possible for the Iowa Legislature to convene early next session and develop a bill that supersedes House File 718 and fixes the issues. Possible, but unlikely. But Muckler believes lawmakers will instead make it worse for cities and counties. Lawmakers were just wading in the waters this year.

Next year, they’ll be ready to dive in head first.

“What they should do is stop penalizing people that have 3 percent growth, because that doesn’t make sense,” Muckler said. “I gotta pay my cops 6 percent more. And you know what? They deserve it. If I don’t pay them that they’re going to go to West Des Moines. And my people won’t have any police protection.”

Muckler agrees with the premise of the bill. If there are communities in Iowa with out-of-control property taxes raising 10 to 20 percent each year, and if the legislature wants to provide some relief to those taxpayers, Muckler said he is all for it. But the bill does not accomplish that, he said.

“They shouldn’t penalize communities like Newton that are struggling to keep police officers on the street and firefighters to respond to EMS calls and fires,” Muckler said. “What about my library with all-time highs on program numbers? … How do I keep it open five years from now when I’ve got these limits?”

Editor’s note: The use of the term “larger cities” has since been changed to “faster growing cities” to better match the intention of the claims made by the city; in addition, the term “smaller cities” has been changed to “communities with moderate to lower growth.” Muckler’s claim that 75 percent of cities in Iowa have less than 3 percent growth has been corrected to 44 percent. Other minor clarifications were also included in this updated draft.