Hillsboro will have to tap reserves thanks to Genentech property tax ...

(this story was updated with a response from Genentech)

HILLSBORO --? One of Hillsboro's most valuable properties is no longer as valuable after an unexpected and significant property tax revision, and the city's general fund will take a hit because of it.

Genentech, the South San Francisco-based biotechnology company with a Hillsboro facility, successfully appealed its property taxes.

The decision between the company and the Oregon Department of Revenue last August resulted in a $162.6 million reduction in assessed value, according to Hillsboro Finance Director Suzanne Linneen.

"This is why we have reserves," Linneen said. "This is exactly why, so we don't overreact and we don't do anything in haste."

The city tries to keep 15 percent of its budget in reserves, but that's unlikely this coming year. Hillsboro has roughly $10.2 million set aside, according to a budget snapshot, which is about 11 percent.

The revision bumped Genentech from the second highest property taxpayer in the city to fifth, behind Intel, Verizon Northwest, Pacific Realty Associates and Portland General Electric. Genentech opened its Northwest Evergreen Road and Brookwood Parkway facility in April 2010.

At the city's first Budget Committee meeting of the year on Wednesday, Linneen said staff first learned of the revised value and its estimated $850,000 hit to the city's general fund in late September or early October.

Genentech's plunge in property taxes wasn't the only bad news the city got Wednesday.

Hillsboro budgeted for a four percent growth in assessed value for the 2012-2013 fiscal year. In reality, the growth was 0.3 percent, an "unheard of" number for Hillsboro, Linneen said.

The city already anticipated a $300,000 shortfall last May, but the Genentech decision and decreases in value for other major Washington County businesses -- Frontier Communications, Intel, and SolarWorld USA --adds another $2 million in differences.

"We didn't hit it," Linneen said of the assessed value estimate on Wednesday. "We didn't hit it by a lot."

The general fund receives 60 percent of its cash flow from property taxes and pays for the city's parks, public safety and community services. Debt service obligations are primarily paid out of the Strategic Investment Program funds, Linneen said. Payments associated with the $12 million in full faith and credit bonds issued for the new baseball ball park could also come out of the general funds as a last resort, she said.

The assessed value shortfall is another reality check for the city, as revenue and expenses are not matching up, Linneen said. "The expenses are outpacing our revenues at this point, especially in the general fund."

Finance officials are now scrambling to reassess the anticipated growth for the coming fiscal year. Linneen said she's tentatively budgeting for three percent growth, but that is a moving target, too.

"I would advise that we're very cautious," Linneen said, as the city plans for its 2013-2014 budget.

Budget Committee Vice-Chair John Godsey echoed that concern.

"My fear is that given the tax situation and the adjustments that have been made, you might see another decrease next year," he said. "And be down 11 percent."

Linneen said the city is concerned about the compounding impact in coming years. Departments are preparing five- and 10-percent reduction scenarios as an "exercise" she said.

So how did Genentech's property values drop so dramatically?

Property taxes are largely handled on the local level, but the Oregon Department of Revenue assesses industrial property worth more than $1 million.

"From time to time we will have an industrial property that will appeal their assessments," Dennis Thompson, public information officer with the Oregon Department of Revenue, said. "And we have had some pretty big changes in the amount."

But he said the Genentech situation was "not commonplace" and said the revisions obviously affect "any place that relies on property taxes."

Genentech's appeal dates back to the value of its property in January 2010, Thompson said.

"They over-reported the cost of the property," Thompson said as the 340,000-square-foot facility was under construction. "They over-reported their assets, and they also reported some assets that weren't taxable."

Thompson said the non-taxable items pertain to software, vehicles or other assets that aren't subject to property taxes. The company has a 15-year Strategic Investment Program agreement with Hillsboro and Washington County to abate property taxes on up to a $250 million investment. Genentech agreed to pay taxes on the first $25 million of real market value with a three percent annual increase. As part of that agreement, the company also pays a "community service fee" to the county, equal to 25 percent of the exempted property taxes, but not more than $500,000 annually.

Thompson said there is another appeal currently in litigation centering on the same 2010 Genentech assessment.

Thompson declined to comment on the case. He said the property's real market value dipped from $441 million to $268 million. The company has some $226 million in property tax exemptions, Thompson said, referring to SIP and enterprise zones.

Linneen said there could be good news coming down the pipeline in future years, as Intel's 1999 SIP agreement expires and the city anticipates additional values from enterprise zones.

She said the city is also hopeful that Gain Share funds, will continue in future years. Those funds, some $11.5 million in Washington County, were income taxes the state pledged to return to certain jurisdictions that took advantage of property tax abatement programs.

But beyond the Genentech appeal, the city is also facing "significant" increases in public employees retirement system obligations.

Linneen said barring any state legislative action, rates will go up on July 1. PERS Tier 1/Tier 2 obligations jump from 12.5 percent to 15.6 percent of employee's salaries. The city's unfunded PERS liability was $32.1 million as of Dec 31, 2011, according to the city's comprehensive annual fiscal report.

(Genentech response: "Genentech is pleased to have reached an amicable property tax settlement with Washington County. The Hillsboro, Oregon site plays a key role in Roche's global manufacturing network and we are committed to ensuring that our presence has a positive impact on the community.")

-- Andrew Theen

Source: http://www.oregonlive.com/hillsboro/index.ssf/2013/02/hillsboro_will_have_to_tap_res.html

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