Real Estate Crash Catches Up to Cities as Property Taxes Slide

The real-estate crash is catching up to U.S. municipalities.

Cities, counties and school districts had been sheltered from the full impact of the slump because of the lag between when realty prices fluctuate and values are reset by local tax assessors. That’s changing as property rolls are adjusted to the current market and residents push to have their taxes cut.

Local officials are now facing the consequences. Property- tax revenue dropped in the last three months of 2010 at the fastest pace since home prices slipped from their peak more than four years ago, the Census Bureau said yesterday. The decline may continue as values fall further, adding strains to cash- strapped localities that already fired workers, halted projects and cut spending because of the recession that began in 2007.

“The story had been a question about why property taxes weren’t declining,” said Christopher Hoene, research director for the Washington-based National League of Cities. “What the census is picking up is that’s been happening and it’s likely to keep happening for the next few quarters.”

The decline for local governments contrasts with a recovery for U.S. states led by income and sales taxes. Their collections in the fourth quarter climbed by $13 billion to $177.8 billion, the biggest jump since 2006, according to the census data released yesterday.

“Cities are by no means out of the woods,” Hoene said. “They have got another year or two of dealing with either declining revenues or pretty slow growth.”

Western Values

In Maricopa County, Arizona, the county assessor reported last month that values of all property dropped by 12 percent for the next tax year, the second straight double-digit decline. In Los Angeles, the second most-populous U.S. city, property taxes for the year ending June 30 are projected to fall 1.7 percent to $1.42 billion, according to a March 1 report by the controller.

The strain may mean credit-rating cuts this year for local- government debt, which trades in the $2.93 trillion municipal bond market, Moody’s Investors Service said in a report this month.

“This is the first year that most local governments are seeing a decline in their property-tax revenues,” said Julie Beglin, a vice president with Moody’s public finance group in New York.

Local and state property-tax revenue slid $5.3 billion, or 2.9 percent, in the fourth quarter from a year earlier to $177.1 billion, the Census Bureau said. All but $3.7 billion went to municipalities. The slump in the most-active period for real estate revenue outpaced a 2.5 percent drop in the first quarter of 2010, the only other significant decline since prices peaked in 2006.

Urban Decline

Residential real estate prices in 20 U.S. cities dropped by the most in more than a year in January, a report yesterday showed. The S&P/Case-Shiller index of property values fell 3.1 percent from January 2010, the biggest year-on-year decrease since December 2009. That’s prompting homeowners to seek reductions in the assessed value of their properties.

“One of the symptoms of a depressed real estate market has been a proliferation of successful tax appeals,” said William Dressel, executive director of the New Jersey State League of Municipalities. They’ve come “after a municipality has already assessed a property, collected taxes and made payments to local school boards and county governments,” he said.

Workers Let Go

Montclair, New Jersey, officials had to remake their budget when tax appeals reduced revenue to $51 million from an expected $53 million in the current budget year, Town Manager Marc Dashield said in a telephone interview.

“We were forced to stop providing additional books and periodicals in our library, abolish community pre-kindergarten and lay off 12 municipal workers,” he said.

Only 15 percent of counties raised property taxes to make up for the lost revenue, according to a survey by the National Association of Counties.

Such a strategy can draw voters’ ire, as Carlos Alvarez, the former mayor of Miami-Dade County, Florida, found out. He was thrown out in a recall election on March 15 after he boosted property-tax rates last year to make up for a drop in home values.

“We’re hearing from many government officials they feel this isn’t a time when they can raise tax rates on their citizens,” said Beglin, the Moody’s analyst.

Anticipatory Cuts

Hoene, the National League of Cities analyst, said local governments have been anticipating the revenue slide and cutting budgets to compensate. They’ve eliminated 377,000 jobs, or 2.7 percent of payrolls, since employment peaked in September 2008, according to the U.S. Labor Department.

“They’ve been making a whole series of significant cuts to balance their budgets,” said Hoene.

In Florida, after four years of falling property values, cities are cutting into core services like police, said Ken Small, a finance and tax analyst at the Florida League of Cities.

“It’s not, ‘We’re going to cut travel.’ That was already done,” Small said in a telephone interview from Tallahassee. “It’s eliminating departments or making serious cuts to services.”

To contact the reporters on this story: William Selway in Washington at wselway@bloomberg.net and Henry Goldman in New York at hgoldman@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.

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