Wednesday, July 23, 2008

The Coming Muni Crisis

There's a WSJ article about state shortfalls in tax revenues, because of lower home sales, high gas prices. My city makes about 75% of its revenues from property tax assessments. Every year I have been here they would go up 7% a year, in addition to all the new houses being built. This year, it actually assessed me at a 7% decrease, and house construction in my city came to a halt. Now, this was assessed in March 2008, and is for taxes payable in 2009, which are paid in March and September. As my city had a heck of a time cutting 2% off a projected increase of 5%, I wonder what they will do if revenues actually decline? I imagine they will borrow in the short run but that isn't a long term solution because the 7% valuation is permanent: they aren't going to raise my assessment 14% next year because yearly assessment increases are capped at 8%.

I imagine lots of cities will have this problem, and they won't do anything prior to a crisis, because all their money has interest groups that won't let them. The key trigger event for bankruptcy is not recognizing you have a failed business model, but rather, having a failed business model AND running out of cash, because at that point outsiders won't lend to you. Cities seem to increase expenditures as if they don't have to face the vagaries of business, but that was before the housing crisis. I haven't heard any peeps yet, but next year at this time, everyone will be howling. And I'm sure some cities will default. After all, the biggest housing decline in 30 years will catch more than just Wall Street off guard, but those humble public servants as well. Right now, it's best not to think of it.


  1. The entire state of Arizona has this problem. I imagine other states do too.

  2. Anonymous1:37 PM

    I was sitting on my porch the other day watching my telephone wire bounce up and down on a windless day. I looked down the telephone wire all the way to the junction with the "main wire". Nothing on it to make the wire move. I kept searching down the wire. Finally, about 200 feet down I saw a squirrel. The squirrel walking a great distance away had sent a transverse wave cascading in all directions.

    This is the same story with City revenues, except that they have multiple squirrels - mortgages, pensions, and high costs, all walking on the wires. So, I would expect to see cities try to raise taxes as a solution (e.g. Chicago just raised their sales tax to 11.25%). On the flipside, a whole new industry of trying to save heating costs at public institutions will emerge.

  3. Anonymous3:02 PM

    heed terminator's solution,0,7487129.story


  4. Anonymous3:02 PM

    heed terminator's solution,0,7487129.story


  5. Anonymous4:28 PM

    Given how many, if not most, cities calculate property taxes, I'm not sure how this will have the effect you think.

    Here's my understanding of how the process works:
    1) Assessor figures out the value of all property property in city. Let's say that is = AV (assessed value).
    2) They figure out what their budget is. Let's call that B.
    3) They calculate that the rate. B/AV.
    4) You are then assessed the value of your propert *B/AV

    Anonymous thinks the contribution from sales tax revenues is more unpredictable.

    But Anonymous is no expert in public finance.

    Anonymous likes it when they build new buildings in his town, to spread out the tax burden and provide more money for schools.
    Most of Anonymous's neighbors reflexively complain about development. Anonymous has learned to keep his mouth shut around his neighbors.

  6. Anonymous11:18 PM

    (1) When the per capita public student expenditure is $14,000 like it is in my town, it may be "hard" in one sense to cut the budget, but it's not hard to figure out what needs to change. E.g., teacher salaries are > 50% of our property taxes.

    (2 - related) Our church is doing its annual appeal; the pastor said "our expenses have gone up 100% in the past 5 years and contributions have only gone up 40%, we desperately need more money". It made me give less, because obviously there is no discipline there - giving more would just enable the awful habit.