Sidewalks, park benches and local bridges. Libraries, stormwater drains and arts centers.
These are just some of the items local governments borrow money to pay for. And they use local property taxes to pay back the loans.
"Property tax base is kind of the key revenue source that's driving a significant amount of the revenue that they're pledging to repay in a timely and in full their debt obligations," said Tom Zemetis, director at the credit rating agency S&P Global.
Importantly, local governments pledge future property taxes to pay for all types of projects today by borrowing billions of dollars to be paid back, often using property tax money. But the future of property taxes in Florida is up for debate.
Gov. Ron DeSantis has made it a priority for the upcoming legislative session to reduce or eliminate some local property taxes.
Only voters can do that and the governor wants one proposed constitutional amendment to appear on next year’s ballot.
What that proposal will be is up in the air and that uncertainty makes it impossible to figure out how any changes to property taxes could impact local government bonds.
There are several limitations on property taxes already in place in Florida. Property taxes can’t go up by more than 3% a year for owner-occupied homes and condominiums. There are several exemptions that reduce the taxable value of those homes and condos, as well.
The predictability factor is important.Oscar Padilla, S&P Global
"Property taxes historically are a more stable type and predictable type of revenue stream," said S&P Global Director Jennifer Garza. "It's a fixed tax rate on the taxable assessed value of the entirety of the property base for that local governmental entity."
The predictability of property taxes, even in Hurricane-prone and housing market boom-and-bust Florida, is what attracts investors to buy bonds of local governments when borrowing tens or hundreds of millions of dollars at a time. It's also what allows local governments to budget and borrow money for big projects that otherwise would be tough to pay for.
There are other tax sources local governments pledge to borrow money such as sales taxes, but those can be more vulnerable to ups and downs.
"The economically sensitive types of revenue streams can inherently be more volatile and less predictable than property tax revenue," Garza said.
Garza's colleague at S&P, Oscar Padilla, contrasted the stability of Florida's property tax trend to property in Texas — where it is more susceptible to the whims of commodity prices.
"Florida (doesn't) have minerals that they're extracting like you would in Odessa or Midland or anywhere in the Texas Panhandle," he said. "The predictability factor is important."
READ MORE: ‘If we gut the system, communities get gutted’: Lawmaker's warning on cutting Florida property taxes
Overhauling the long-established property tax structure as the governor has talked about is a wildcard for cities and counties, said Zemetis. The eventual changes, assuming there are big changes, may require a "paradigm shift" for local governments and their approach to borrowing money, Zsaid.
"They may need to rethink how they're spending their money to what extent maybe they need to dial back certain services or offerings, if in the event that they're unable to match that with corresponding increases in the revenue sources," he said.
Opponents of wholesale changes to some property taxes in Florida have focused their criticisms on questioning how local governments would pay for services if non-school property taxes were reduced or eliminated.
Supporters of cutting or getting rid of most non-school property taxes have concentrated on their philosophical opposition to property taxes for primary homes and condos, and their desire to examine local government spending.
It’s important to note what property taxes seem to be at the center of the debate. It is taxes that are not levied by public school districts, nor taxes used to pay for police. The primary focus is on general property taxes paid by home and condo owners on the homes and condos in which they live.
Still, a lot is up-in-the-air with Florida lawmakers debating what could be significant and historic changes to property taxes that are often used to pay for everyday services and big spending projects when local governments borrow money and use property taxes to pay back those loans.
"I think a lot of that is going to depend on how these local governments are able to balance their budgets and where they're able to cut in order to still have the funds necessary to make those bonds stand on their own two feet," House Speaker Daniel Perez told The Florida Roundup.
A special Florida House committee formed to lead the effort examining local property taxes has held four meetings. Local government borrowing and the potential impact on changes to the credit worthiness of local governments has not been mentioned. Yet, property taxes play a key role in determining how much local governments can borrow and at what price.
The credit rating of a county or city depends on a number of factors. That credit rating — like a consumer's credit score — helps determine how much the borrowed money will cost. The better the credit rating, the lower the interest rate, and the cheaper it is to borrow the money.
The effect of substantially cutting some property taxes or getting rid of them entirely would be new territory for the market of municipal bonds.
"(It) would be pretty material if (lawmakers) decided to say, 'Okay, as of tomorrow, everything that's supported by property tax, you don't have a funding source for the debt,'" said Garza, though she does not anticipate that is what will come out of the legislative session for Florida voters to decide next November.
