Falling home values mean budget crunches for cities

December 25, 2011

The nation’s housing crisis is five years old, but for local governments across the country, the worst of the reckoning might only now be at hand.

Because of the time it often takes for property assessments to reflect falling home values, the bust that began in 2007 has just begun to ravage tax revenues in communities from coast to coast. The problem is unlikely to subside soon.

For instance, Baltimore collected $815 million in property taxes during the most recent fiscal year, according to Bill Voorhees, Baltimore’s director of revenue and tax analysis. Next year, the figure is predicted to shrink to $803.5 million. The following year, $773 million. The year after that, $735.7 million. The year after that, $729.4 million.

Only in 2016 do city officials anticipate tax revenues increasing again.

“I don’t see any quick fixes over the next four or five years, to be honest,” said Voorhees, noting that Baltimore already faces a budget deficit of more than $50 million next year. “Obviously, it means we have much lower revenues than we had in past. It’s creating gaps in our budget. . . . It’s a very large problem.”


Because many states require officials to reassess properties only every so often — the laws vary widely, but a common time frame is every three years — communities generally see a significant lag time before property taxes reflect the true value of a home.

That’s good news for homeowners during boom times, when their tax bills typically don’t immediately reflect skyrocketing values. It’s not so great during the unprecedented bust of recent years, when many homeowners have protested that their taxes haven’t fallen as rapidly as their property values. But in many places, the assessments are beginning to fall now.

State governments, which rely heavily on sales and income taxes, saw massive hits to their bottom lines early in the crisis as unemployment skyrocketed. But those revenues have begun, ever so slowly, to recover.

Meanwhile, many local governments weathered the early years of the financial crisis in part because the property tax revenues they rely upon so heavily held steady or actually increased as a result of assessments that still reflected inflated prices. Many municipalities are now being forced to recognize the collapse in home prices and the shrinking tax base that comes with it. At the same time, they are seeing state and federal aid dry up.

“We’ll see, over the next few years, the real impact of the recession and housing crisis on local governments,” said Andrew Reschovsky, a professor of public affairs and applied economics at the University of Wisconsin at Madison who has studied the effects of the recession on city finances. “I think the case can be made that we have not yet seen the worst of the impact on local governments. . . . That seems to be accelerating.”

Tighter municipal budgets

Recent statistics provide a window into the ongoing struggles in many cities. Local governments have lost more than half a million employees since the financial crisis hit in September 2008. Through November, local governments had shed an average of 9,300 jobs each month this year, offsetting some of the job growth generated by the private sector.

A survey of city finance officers conducted by the National League of Cities found that more than 40 percent said their city was cutting services, such as parks and libraries. More than a third reported altering employee health-care benefits to save money. Nearly three-quarters said they had instituted hiring freezes, and a third had been forced to lay off workers.

“The fiscal condition of cities continues to weaken,” a report by the National League of Cities concluded in September. “Cities are continuing to cut personnel, infrastructure investments and key services.”

For example, even after Las Vegas instituted a four-day work week for city employees, cut hundreds of positions and won concessions from labor groups, the city faces millions in projected budget shortfalls in coming years. Officials in Schenectady, N.Y., have continued to dip into the city’s “rainy day” fund to stave off steep budget cuts or tax increases. A sheriff in Marion County, Ohio, recently handed out layoff notices to nearly half his deputies. This fall in Chicago, new Mayor Rahm Emanuel proposed cutting library hours, closing several police stations and raising water and sewer fees to help close a budget gap.

As a whole, the Washington region has fared better than many others, thanks to below-
average unemployment and a housing market that has remained relatively stable.

That said, losses in property values have caused shortfalls in some local budgets. Prince George’s County, for instance, continues to wrestle with the fallout from shrinking property values, and officials there have been searching for ways to rein in spending.

Local governments, much like homeowners themselves, long assumed that property values would at worst stay steady over time. Many states, including California and Florida, long ago adopted provisions that cap the amount that a homeowner’s property taxes can rise in any given year as a way to shield taxpayers from rapidly escalating tax bills during times of growth.

“Storm has not yet hit”

Even when prices did level off or decline in the past, housing itself usually led the way from recession to recovery, and local tax revenues barely felt a bump in the road. But the sharp and sustained losses of recent years have resulted in a harrowing situation for many municipalities.

Thomas Fitzpatrick, an economist at the Federal Reserve Bank of Cleveland who co-authored a recent study called “Municipal Finance in the Face of Falling Property Values,” said many cities will have little choice but to make deep cuts. He added that “you will see it most for firefighters, police and teachers.”

“It appears that the dramatic fall in property values across the country will accelerate the financial distress of municipalities in the wake of the Great Recession,” he wrote in the report. “If creative ways to make up for this lack of revenue are not found, local governments may face the undesirable choice of either raising property taxes or reducing funding for essential services.”

Municipalities are using various approaches to make up for dwindling tax revenues, not to mention cuts in state and federal funding. Simply raising local millage rates could offset the falling appraisals, but the idea of tax increases gets about as chilly a reception on Main Street these days as it does on Capitol Hill.

Instead, towns across the map have relied on an array of maneuvers to cut costs — renegotiated pensions, furloughs, salary freezes, hiring freezes and layoffs. Many also are charging higher user fees for garbage pickup, recreation centers and other services. And many cities have explored entering into shared service agreements with one another to save money.

The worst may be yet to come.

“That storm has not yet hit,” Frank Alexander, a professor and housing law expert at Emory University, said of the looming decline in property tax revenues, which he and others agree will last years. “It’s beginning in 2011, but it’s really going to hit in 2012 and 2013.”

Brady Dennis is a national reporter for The Washington Post, focusing on food and drug issues.
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