Arizona lawmakers pass bill to ease the sting of Maricopa County tax refunds

The Arizona Legislature wrapped up its session Saturday, passing legislation to mitigate the impact of a $329 million property tax refund to be paid by Maricopa County governments and school districts, as well as a fiscal 2025 budget that tackles a two-year deficit.

The refunds resulted from a stipulated judgment issued in February for class-action litigation that dates back to 2016, according to the treasurer's office in Arizona's biggest county, which notified taxing districts in April that the refund process will take place between this July and June 2025. 

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"Refunds issued to taxpayers will result in a reduction in cash from property tax revenue for those taxing districts who levy a property tax," the notice said.

The refunds affect property tax levies for operations and debt service and go as far back as 2015. The estimate of $329 million, which includes interest that continues to accrue at 8% annually until paid in full, was calculated up to February 2024, according to data released by the county treasurer.

Lori Trevino, a Moody's Rating analyst said last week the impact will vary depending on how much of an issuer's revenue comes from property taxes versus other sources, noting most Arizona cities are more reliant on excise tax revenue, while some school districts may be able to tap their cash on hand for the refunds.

"I don't see any immediate credit concerns, but this list is so long we're going to have to look at each one individually just to be sure," she said.

A bill that passed both the House and Senate on Saturday would allow Maricopa County governments and schools that estimate the judgment would result in a property tax increase of 4% or more to issue tax anticipation notes payable over four years, according to a bill summary. The entities could ask the state loan commissioners to issue bonds to redeem or refund the notes.

For affected school districts in the county, the bill directs the Arizona Department of Education to recalculate basic state aid, with districts reducing their levies accordingly. 

That recalculation is expected to boost state funding by about $50 million, according to Chuck Essigs, government relations director at the Arizona Association of School Business Officials. 

Schools would also be able to pay for refunds using unbudgeted fiscal 2023 cash balances from maintenance and operations and unrestricted capital funds that were not budgeted for fiscal 2024 under the legislation.

The bill summary also noted any limitations on school district tax levies for tax refunds resulting from the litigation "shall not be construed to prevent school districts from levying sufficient property taxes to pay required debt service on general obligation bonds." 

The lawsuit, Qasimyar v. Maricopa County, which was filed in Arizona Tax Court in 2016, claimed the county erroneously assessed and collected property taxes. The dispute centered on whether a classification change from an owner-occupied home to a rental home, non-primary residence, or non-primary residence leased to lodgers or vice versa, constituted "a change in use," which would affect the property's assessment for tax purposes. 

The tax court ruled that a reclassification is a change in use and ordered the recalculation of affected properties. The ruling was upheld by a state appeals court in 2021. 

A state law passed in the wake of the final ruling, clarifying the classification change does not constitute a change in use, took effect starting with the 2023 tax year, according to the county assessor's office.

The biggest refund — nearly $59 million — is owed by Maricopa County, which has not finalized a repayment plan, Fields Moseley, a county spokesman, said last week. 

Phoenix faces refunding an estimated $13.3 million. Adam Waltz, a city spokesman, said the $8.2 million reduction in primary property tax revenue, which is used for operations, is not significant. 

"It is common to have unexpected expenditures or drops in revenue throughout the year and the Budget & Research Department will monitor this going forward, identify solutions/options and work with the City Council and community next fiscal year to ensure the budget is balanced as required by state statute," he said in an email.

As for the $5.1 million hit to the secondary property tax, which covers debt service on general obligation bonds, Waltz said it can be covered with GO debt service reserve funds. 

At $27.6 million, the Scottsdale Unified School District has the largest refund among the county's school systems, which collectively owe nearly $147.8 million.

"We are not a state aid school district, so recalculation is not an option for us," district spokeswoman Kristine Harrington, said in an email last week. "We are still weighing our options as we continue to learn more." 

The Maricopa County Community College District, which owes an estimated $44.7 million, did not immediately respond to a request for comment.

As for the state budget, the legislature's Republican majority hailed the $16.1 billion spending plan for the fiscal year that begins July 1 as responsible and balanced. 

"At a time when Arizonans are having to tighten their financial belts, so is state government," House Speaker Ben Toma said in a statement. "The Arizona House of Representatives has passed a fiscally conservative, structurally balanced state budget that solves the nearly $1.5 billion deficit, without touching the rainy-day fund or using budget gimmickry."

Most state agencies would see "a healthy and manageable 3.5% reduction in spending," according to a statement from Senate Republicans.

Budget cutting also hit the state's long-term water augmentation fund, which received no appropriation and lost $97 million in a fund sweep, a spokeswoman for the Arizona Water Infrastructure Finance Authority said.

Gov. Katie Hobbs included $33 million a year between fiscal 2025 and 2027 in her proposed budget. The water fund was created under a 2022 law that called for $1 billion in funding over three years, but was only fully funded with $333 million in fiscal 2023.

Arizona Attorney General Kris Mayes chastised lawmakers for tapping funds from an opioid settlement with drug manufacturers and pharmacies to reduce the deficit — a move she said is an unlawful use of money that is earmarked for prevention, education, and treatment.

"This is an egregious grab," she said in a statement posted on the X platform. 'I will do everything in my power to protect these opioid settlement funds for all Arizonans."

In January, Moody's Ratings, which rates Arizona Aa1 with a stable outlook, said closing the fiscal 2024 and 2025 budget gap, along with maintaining a sound fiscal position will be crucial for credit quality, adding that the state was "well positioned" to address the challenge.

The legislature left the state's universal school voucher program intact, while passing what Toma called "commonsense reforms that improve this popular school choice program and increase accountability." 

The escalating price tag of Arizona's empowerment scholarship accounts is a concern for public school advocates. A report this month from the Grand Canyon Institute estimated the expansion of the vouchers to all students, which began in September 2022, will cost the general fund $332 million in fiscal 2024. That amount represents more than half of the state's projected budget shortfall and the cost is on pace to reach $429 million in fiscal 2025, the report said. 

School districts are currently battling the state in Maricopa County Superior Court over capital funding in a case that spotlights districts' unequal access to local property taxes and bond issuance.