The State of Local Real Estate: Making Sense of Recent Property Tax Issues

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Over the last five years, home prices have risen sharply due to an unprecedented national housing shortage, triggering increases in property taxes and insurance premiums. Tax rate increases were levied by Fayette County Public Schools in 2018 and 2022, followed by an increase from LFUCG in 2023. Homeowners received unexpected second or supplemental property tax bills — one in September, followed by another in January — two years in a row, triggering huge swings in mortgage payments and escrow balances, and this year’s bill will include the new parks tax. It’s been one thing after another, and with the school district’s recent kerfuffle over a proposed bump in the occupational tax, the community’s collective patience seems to be thinning. And to be honest, the public deserves an explanation for some of these changes. 

Kentucky’s property tax system is complicated, and in my experience, you don’t have to wade very far into the weeds before eyes start to glaze over. But with so much happening and so much at stake, it’s a good time for a refresher on what homeowners should know and what to be watching.

Let’s start with a little political theater focusing on how our property tax process came to be and why it’s often referred to as “House Bill 44.”

Prior to a 1992 constitutional amendment, Kentucky’s lieutenant governor was elected independently of the governor. The two could be from different political parties, and the lieutenant governor had more substantial constitutional duties including the power to act as governor anytime the elected governor was out of state. Can you imagine the possible shenanigans if this were still the case?

In December 1978, Gov. Julian Carroll, who had been traveling extensively as chairman of the National Governors Association, was presiding over a training session for new governors in Georgia. While he was gone, Lt. Gov. Thelma Stovall — a political firebrand with her own ambitious plans to run for governor the following year — seized the moment, called the Kentucky General Assembly into a surprise special session, and passed a series of tax-cutting measures, the most significant being a limit on how much property tax revenues can increase in any single year. The mechanism for managing that cap guides how public schools and other taxing districts set their tax rates to this day. In case you’re wondering, Gov. Carroll was supposedly blindsided and furious, but I’m mildly skeptical. Either way, House Bill 44 was born.

What Does HB44 Actually Do?

In short, HB44 limits how much tax revenue from existing property can increase from one year to the next — specifically, no more than 4% — without giving voters a say. It’s worth emphasizing this is not a 4% limit on your individual tax bill increase. Unfortunately, there is no cap on how much your own bill can go up. The 4% rule applies to the overall revenue increase a taxing district (like the school board, or LFUCG) can take in from existing property — new construction and major improvements are excluded from the limit.

The 4% increase in revenues may result from an increase in property values through the PVA’s reassessment process, an increase in the tax rate, or a combination of the two. In very simple terms, if property values shoot up as they have done recently and have done in the past during unusual economic conditions, the tax rate adjusts downward to help prevent large windfalls in revenue at the taxpayer’s expense.

The accompanying chart isolates and compares the tax rates set by FCPS, the state, and LFUCG’s urban and general services. It is worth noting that half of LFUCG’s general services rate is merely a passthrough to the Lexington Public Library. Very little of LFUCG’s general fund is serviced by property taxes compared to the school district’s budget. The state’s and city’s rates are more representative of a “compensating tax rate.” Notice they have either decreased or remained flat, whereas the school’s rate has increased 24% over the last 12 years.

But remember, property values have also increased substantially over that same period — by more than 65%, resulting in a doubling (100% increase) in the schools’ revenue from property taxes since 2012. That’s an average annual rate increase of about 6%. This is possible because rate increases are not just one-time hits; they have a compounding effect by becoming the base upon which subsequent years’ 4% increases will be expected and taken.

So How Do Rates Actually Get Set?

Every year between late April and early May, PVAs publish the updated assessment rolls and send notices to property owners. If property owners disagree with the new value, that’s the time to protest with appeals and board hearings concluding in late June. In July, the State Department of Revenue certifies the PVA’s tax roll and sends it to the Department of Local Government and the Department of Education. Those agencies then provide a menu of tax rate options for each taxing district, typically including:

• The compensating rate (keeps total revenue flat year-over-year)

• The 4% rate (the maximum increase allowed without a referendum)

When property values are rising as quickly as they have in recent years, tax rates are generally expected to go down. But if a taxing entity chooses to increase the rate, it must allow time for public notice and discussion. And if they set a rate that generates more than a 4% increase, then a petition can be circulated to place the question on the ballot at the next election.

The constraints of HB44 have played out in a few notable scenarios recently. In 2018, the Fayette County School Board voted for an additional “nickel tax” for security, on top of the regular property tax rate, which resulted in an increase in revenues above 4%. A group of citizens organized and circulated a petition, coming close to but falling short of the required number of signatures to get the rate hike on the ballot. A petition was also circulated in 2022 when the schools again raised rates above the 4% threshold, but it failed too.

By 2022, we were deep into a hot real estate market that had seemingly sprung up during the pandemic without warning. Median home sale prices in Lexington had jumped from an annual growth rate of around 5% to a shocking 10-12%, producing large enough increases in property values to easily provide the school district its 4% increase in revenues over 2021 levels. In fact, the 8% growth in the county tax roll in 2022 would not only have guaranteed the schools their 4%, but would have resulted in an overall tax rate lower than the previous year’s — notice in the chart, the other district rates declined by 3% in 2022.

Since properties are reassessed once every four years and only one-fourth are reassessed in any given year, 75% of property owners would have received a tax cut in 2022. The timing of the school’s 3% rate hike, combined with an 8% spike in the tax roll, resulted in an 11.3% increase in the school’s property tax revenue — nearly triple the intent of HB44.

The Second Tax Bill and Its Unintended Consequences

The far more significant fallout from that rate increase by the schools — and, coincidentally, LFUCG’s 2023 increase for urban services — wouldn’t be felt until more than a year later. It was decided by the various agencies involved to mail the first bill at the regular time in late September, but only include the portion of the property taxes not subject to a petition, leaving the portion subject to recall to be collected through a second bill to be sent months later. In fairness, nobody could reasonably have been expected to foresee the problems a second bill would cause.

Most homeowners don’t pay property tax bills directly; their mortgage companies pay them out of escrow. And a surprising number of mortgage companies — with all kinds of automations in place — either had no idea what to do with these second tax bills, or their systems simply mishandled them. Thousands of bills became delinquent and reverted to the county clerk’s office to be sold as liens to third-party investors, as hundreds are each year. However, the confusion surrounding these bills, most of which were for less than $50 in face value before interest and fees, was so significant that the bills were withdrawn from the lien sale until additional efforts could be made to collect from the property owners and mortgage companies.

But it gets worse. Of the secondary tax bills that were paid on time by mortgage companies, untold hundreds, or perhaps thousands, were misinterpreted, resulting in wild and poorly explained fluctuations in mortgage payments. The most common scenario goes something like this: the second, much smaller tax bills were misinterpreted as the properties’ new annual tax assessments. Excess escrow balances were refunded to homeowners, and monthly mortgage payments were recalculated to reflect much smaller expected tax bills, sometimes just $30 or $40.

Then, almost a year later, the real tax bills arrived, only to find escrow accounts thousands of dollars short. Monthly mortgage payments were once again recalculated, sometimes doubled, to quickly replenish the funds in escrow.

Most of us would be profoundly impacted by a sudden doubling of our mortgage payment. The only consolation is that monthly payments will likely be recalculated back to a more normal level with the next cycle of tax bills. I continue to hear from property owners who either have no idea what caused the disruption, or worse, are given the wrong explanation that it was due to increased assessments or insurance premiums. But the bottom line is this: an unintended and unforeseen side effect of these additional bills caused real pain for taxpayers, some of whom were, and some still are, at serious risk of defaulting on their mortgages.

Looking Ahead

Regardless of where we stand on future tax rate hikes, let’s at least agree to stay far enough ahead of these proposals to preserve every option for getting the entire tax liability included on the first — and only — tax bill. What little revenue it extracts is simply not worth the havoc it can wreak. So please have your antenna up in August — property tax rate setting season. Ask the usual questions like is the increase necessary? But also ask, will this increase result in a second bill, and is THAT necessary?

View the breakdowns of Lexington residential statistics below.

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