Jon Muller is a semi-retired public policy analyst and sporadic blogger at jonathonmuller.com.-promoted by Laura Belin

Governor Kim Reynolds’ March 20 proclamation related to the COVID-19 pandemic suspended provisions of Iowa law imposing penalties and interest on late property tax payments.

Iowa’s 99 county governments collect property taxes and distribute the funds to themselves and other taxing authorities, such as school districts, cities, community colleges, or townships. The taxes paid by property owners are technically due on March 1 and September 1 of each year. Normally, penalties and interest begin to accrue on April 1 and October 1, respectively.

This proclamation ends just before midnight on April 16, 2020. Thus, penalty and interest will begin to accrue on April 17. If you are a property owner, Reynolds in effect gave you a couple extra weeks to make your payment, provided you don’t pay through escrow.

I spoke with the office of the Polk County Treasurer regarding the practical implication for local governments and taxpayers. The vast majority of homeowners make an escrow payment each month through their loan servicers. The proclamation has no impact on those taxpayers. Polk County administers the tax collection system for eleven counties in Iowa. They have an agreement with the escrow administrators to remit payment prior to the deadline.

With a rare bit of luck for local governments these days, all of those escrow payments were submitted right under the wire, prior to the proclamation. It’s unclear whether they would have delayed payment had the proclamation come earlier, but perhaps that should be clarified if Reynolds extends this proclamation or issues a similar one in the future. There’s no reason the proclamation should apply to escrow accounts into which homeowners have already made payment.

In the case of Polk County and the other ten counties, the lion’s share of the money has already come through the door, with a rough estimate of 85 percent of the amount that would normally come in through the end of the month. Of the remaining 15 percent, I would be surprised if much of that arrives until April. For the other 88 counties, I expect similar arrangements with escrow payments, and doubt there will be a material impact. If you know of a county facing specific challenges or very late property tax payments, please comment below and I will follow up.

The impact on other local governments will be somewhat varied, but generally minimal, as long as the proclamation isn’t extended or renewed. Iowa Code 331.552(29) requires county treasurers to make payments by the 15th of each month for the collections in the previous month. Schools, cities, and other taxing authorities would generally get the lion’s share of the semiannual property tax payment by April 15. In at least eleven counties, that will still be the case.

Additionally, schools and other governments have the ability borrow between various funds (ie. General Fund, Capitals, Debt Service). Or they can even “stamp warrants,” a throwback concept in which the government provides an IOU paying an interest rate set by the Treasurer of State. We’re a long way from stamping warrants.

Additionally, if payments are delayed for a long period of time–that is, if the spread of COVID-19 prompts a protracted suspension of penalties for late payments–local governments can issue Tax and Revenue Anticipation Notes (TRANS). Those are bonds sold at tax-exempt rates, then deposited in an interest-bearing Guaranteed Interest Contract (GIC) until it needs to be drawn for cash flow. At today’s short term interest rates, it’s unlikely there would be much arbitrage opportunity (the GICs normally pay a higher rate than the government pays on the TRANS notes). But Iowa’s local governments might want to prepare to use that vehicle.

Some small school districts may rely heavily on taxes on agricultural land and buildings. Those taxpayers typically pay semi-annually when due. While I have not completed any new research, I’d be surprised if the number of farmers who pay taxes early vastly exceeds a number you could count to on your fingers and toes. But again, provided the governor does not extend her proclamation beyond April 30, that should not present a problem for most local governments. Most of their money will still come in by May 15, and most local governments tend to have adequate reserves or processes to weather the storm, if there is one.

If the proclamation continues as is, it could create or exacerbate some unintended consequences–more for the bond market than the local governments themselves. Indeed, after conversations with individuals from firms that work with the majority of school districts, it already has. They’ve already received inquiries about the implications of the delays. Schools in particular typically make two payments a year. Most often, they’ll make an interest payment in December and then a principal/interest payment on June 1.

There is very little chance those June 1 payments will be disrupted. They’ve already received 100 percent of the September property tax payment and most of the March payment too, or will in a few weeks. And while school districts don’t often hold large reserve balances in their Debt Service funds, they have the ability to interfund borrow to support the cash flow, if necessary.

The worst-case scenario, mentioned above, is they stamp warrants. They would hand out IOUs, probably to bondholders first, and then to suppliers and employees. Employees and suppliers can typically redeem these warrants at their local bank, which would likely be all too happy to receive the high-interest warrants, provided they have sufficient liquidity. But as soon as that happens, the credit markets would become even more skittish, which would increase borrowing costs for new municipal bond issues.

A better approach would be for the state of Iowa to provide the short-term liquidity to schools and other local governments, if Governor Reynolds intends to continue the delay. It’s less expensive for state government to issue short-term debt than for local governments to do so.

A better approach still would be to amend the order for property taxes. That policy might include simply suspending all tax sales for delinquent taxes. Or, the state could start the clock ticking on interest charges, but lower the overall penalty/interest amounts. The trick is to retain some incentive for those who can to keep making property tax payments, create a big penalty if escrow companies don’t make timely payments, and still provide some low-cost liquidity to Iowa’s property owners who are suffering economically.

Overall, in the context of all we are going through together with COVID-19, the property tax suspension should be relatively benign for local governments, and of limited benefit to the taxpayers. I would encourage the governor and county treasurers to do what they can to remind taxpayers that the suspension is not indefinite.

Top image: On left, the main Polk County administrative office building in Des Moines. On right, Davenport City Hall in Scott County.