WASHINGTON (Reuters) - For local governments in the United States, the housing crisis is far from over.
The bust in the housing market that began nearly three years ago has hit them like a slow-moving avalanche, first striking with abandoned properties and rising homelessness. Some also saw drops in sales tax revenue as people, feeling poorer after the slide in home values, pared back on shopping trips.
Now, property taxes are falling. The housing slump pushed down property values but that has only recently affected property tax collections, as there can be as much as a three-year lag in assessing properties. Cities, counties and school districts chiefly rely on property tax revenues to fund services such as police and fireman and teacher salaries.
That has meant spending cuts. And with recent data showing the real estate sector remains weak, local governments could face declining revenues for years, preventing them from increasing spending or forcing them to cut even more.
With the country’s unemployment rate stuck above 9 percent residents may be reluctant to pay higher taxes to reinstate slashed services.
California’s San Bernardino County, the largest county in the continental United States, closed a budget gap of $84.9 million for the fiscal year that started on July 1. Already it is foresees a $48 million deficit for the next fiscal year.
According to budget documents, the number of mortgage delinquencies and defaults have dropped in the county, which means the number of people paying taxes may be stabilizing. But the values of real estate have fallen, keeping revenues down.
“Even if the housing market were going to turn around tomorrow it would take several years for the county to see an increase in property tax revenue,” said David Wert, public information officer for the county’s administrative office.
Worried that the largess from the housing boom wouldn’t last, administrators for the county, which employs 19,000 people, started freezing positions and offering early retirements to drive down spending a couple of years ago, Wert said.
When the bubble burst, the county was able to forestall slashing services. But alongside wiping out 562 positions this year, which entails laying off 85 people, it is now weighing cuts at libraries.
“The bottom line is that there are counties looking at many lean years ahead,” Wert said.
WAITING FOR 2013
In May nearly half of 800 counties surveyed by the National Association of Counties said the decline in income from property taxes was a major reason for revenue shortfalls.
“I’m not looking for a real improvement, or just a beginning of a comeback, until our 2013 budget year,” said Glen Whitley, president of NACo and County Judge of Tarrant County, Texas, a role akin to head of the county commission.
Most counties begin their fiscal years in July.
Counties hope housing values hit bottom this past January and commercial property values will stop dropping by next January, Whitley said.
The value of properties in Tarrant had been increasing by about 4 percent annually for more than a decade, but this year values fell 4 percent, the first-ever decline, he said. The county closed its budget gap through savings in salaries, but other places in Texas are cutting sheriffs, closing libraries and swimming pools, and limiting spending on public safety.
Residents are not fighting spending cuts.
“It’s difficult to raise property taxes at the same time folks are fighting off unemployment,” Whitley said.
CAUGHT IN A LAG
From January 1, 2009 to the start of this calendar year Wisconsin property values dropped $16 billion, the state’s Department of Revenue said last week, noting it “fared better than most other states last year.”
Values fell $49 billion over the year in Michigan, a state hit hard by the economic recession and by the housing crisis due to its reliance on the automotive sector. Nevada, Oregon and Arizona have seen property values decline by at least 10 percent and Minnesota and Illinois have had drops of at least 7 percent during the last year.
The plunge is a recent development. The U.S. Census reported property tax revenue dropped in the first quarter of this year compared to the same period a year ago, the first such decline in seven years.
“Property tax collections are still at a relative high, but the signs are that we’re starting to head down the curve we’ve been expecting to see,” said Chris Hoene, research director at the National League of Cities.
Most local governments’ property assessments lag by two to three years, according to the league, and many cities levied taxes last year based on values set in 2007. Now they are using values starting in 2008, when housing prices dropped.
Moody’s Investors Services has had a negative outlook on local government for two years, said Bob Kurtter, managing director of the agency’s state and local government ratings. He added, though, that when compared to sales and income taxes, property tax revenues have been relatively stable.
The impact of the property tax decline has not been spread evenly, he said. States like California and Maryland cap how much taxes can increase each year. During the housing bubble local government revenue in those states did not rise very high and, therefore, did not have far to fall.
The county association’s Whitley said the caps also meant that counties could not use rising revenue during the bubble to build up reserves. That means that now they cannot rely on “rainy day funds” in lieu of tax hikes and spending cuts.
Kurtter called finding the assessed value of real estate “a byzantine process” differing from taxing district to district, which means that some governments’ assessments could lag changes in market values by as much as five years.
Even when housing values stop fluctuating they could reach equilibrium at such a low level that cities and counties have to cut services, he said.
“Yes, there’s uncertainty for sure,” Kurtter said. “The stress is not going to go away.”
Editing by Andrea Ricci
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