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Originally published Sunday, December 25, 2011 at 10:05 PM

Tax revenue: Housing bust hits home for cities

The nation's housing crisis is 5 years old, but the worst of the reckoning for local governments might only now be at hand.

The Washington Post

quotes The problem in a nutshell? During the boom years with all the phony property... Read more
quotes The article is very misleading at least here in Washington. The assessed valuation is ... Read more
quotes In three years the federal government has expanded 6-7%. And this in the midst of the... Read more

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The nation's housing crisis is 5 years old, but the worst of the reckoning for local governments 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 revenue in communities nationwide. The problem is unlikely to subside soon.

For example, Baltimore collected $815 million in property taxes in the most recent fiscal year, according to Bill Voorhees, the city's director of revenue and tax analysis. The figure is predicted to shrink to $803.5 million next year. In 2013, $773 million. The year after that, $735.7 million. And the year after that, $729.4 million.

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

"I don't see any quick fixes over the next four or five years, to be honest," said Voorhees, noting Baltimore already faces a budget deficit of more than $50 million next year.

Because many states require officials to reassess properties only every so often — 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 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 property values. But assessments in many places are beginning to fall now.

Most state governments that rely heavily on sales and income taxes saw massive hits to their bottom lines early in the crisis as unemployment skyrocketed. But that revenue has begun, ever so slowly, to recover.

Meanwhile, many local governments weathered the early years of the financial crisis in part because the property-tax revenue they rely upon so heavily held steady or increased as a result of assessments that still reflected inflated prices. Many municipalities now are 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, 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."

Recent statistics provide a window into the ongoing struggles in many cities. Local governments have lost more than 500,000 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 one-third reported altering employee health-care benefits. Nearly three-quarters said they had instituted hiring freezes, and one-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."

In Las Vegas, for example, even after the city instituted a four-day workweek for city employees, cut hundreds of positions and won concessions from labor groups, officials face 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. Chicago Mayor Rahm Emanuel last fall proposed cutting library hours, closing several police stations and increasing water and sewer fees to help close a budget gap.

The picture is somewhat different in Seattle. While property-tax collections have remained relatively stable, an overall $25 million revenue shortfall led to a 2012 budget that lays off 74 city workers, eliminates 85 unfilled positions and trims hours and staffing at community centers, among other things. City leaders also warned that projected budget cuts in the coming two years could imperil social-service programs.

Local governments, much like homeowners, long assumed that property values at worst would remain steady over time.

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

Some are using various approaches to make up for dwindling tax revenue, not to mention cuts in state and federal funding. Simply raising local millage rates could offset falling appraisals, but the idea of tax increases receives a chilly reception on Main Street these days.

Instead, cities have relied on an array of maneuvers to cut costs — renegotiated pensions, furloughs, salary freezes, hiring freezes and layoffs. Many are charging higher user fees for garbage pickup, recreation centers and other services. And others 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 revenue. "It's beginning in 2011, but it's really going to hit in 2012 and 2013."

Information from Seattle Times archives is included in this report.

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