AGA Today
Housing Slump Strains
Budgets Of States, Cities
By AMY MERRICK
Wall Street Journal
September 5, 2007; Page A1
Tremors from the
housing market's slump are straining the budgets of state and local
governments from coast to coast, sending officials scrambling to plug
gaps.
Rising defaults
on subprime home loans are boosting the inventory of unsold homes and
driving sale prices lower. That's cutting into housing-related revenues
from building-permit fees, taxes on contracting and recording property
transfers, and even sales taxes.
As a result,
legislators in Florida, which was at the forefront of the housing boom,
plan a special session this month to consider deep budget cuts to offset
a projected $1.5 billion funding gap. California forecasts a shortfall
of at least $5 billion in next year's budget. And Chicago faces a $217
million gap in its $5.6 billion budget for 2008.
In the Kansas
City, Mo., area, more than two dozen agencies that serve the homeless
are likely to lose at least some of their funding this year. Meanwhile,
the tiny town of Sultan, Wash., near Seattle, has had to lay off the
janitor at City Hall, forcing office workers to take over
bathroom-cleaning duties.
In many cases,
budget officials knew that the fast pace of housing-related revenue
growth in recent years wasn't sustainable, but the extent of the
slowdown has sometimes surprised them. Unlike the federal government,
states and local governments generally balance their budgets. That means
sudden revenue shortfalls can translate into serious cutbacks in
spending plans.
"Our forecasts
for the last couple of years have been building in a decline" of revenue
as the economy headed toward a soft landing, says Amy Baker, coordinator
of the Florida Legislature's Office of Economic and Demographic
Research. "What we discovered, when we met in 2006 and then spring 2007,
is that the decline was actually occurring more rapidly than we
thought."
Among other
effects, the housing slump has caused a decline in revenue from
real-estate transaction taxes, which are based on sales prices.
Such taxes
typically account for a small percentage of state income, but can
contribute enough for a sudden shortfall to turn a surplus into a
deficit. Collections are down amid a decline in the overall number of
home sales and an increase in houses in foreclosure, which typically are
sold for less than homeowners might otherwise have received.
Sales-tax
revenues have also declined, a side effect of the housing slump that has
blindsided many states and municipalities. States are collecting less in
sales tax -- which can account for as much as 15% to 20% of their total
revenue -- partly because builders have cut back on buying construction
materials and fewer homeowners have been withdrawing equity from their
homes to remodel or buy furnishings. Homeowners struggling to pay
mortgages have even less incentive to splurge. States blame weak
real-estate sales for lower-than-expected spending on cars and other
big-ticket items.
Their budget
problems could worsen when property-tax assessments catch up with the
rapid decline in housing prices over the past year or so, something that
hasn't yet happened in most parts of the country.
Still, the
outlook for states doesn't appear as dire as in 2002. Then, following
recession and the Sept. 11, 2001, terrorist attacks, 37 states had to
slash a total of $13 billion from their budgets. Some even saw their
annual budgets decline from the previous year. The fiscal problems were
largely resolved by 2005, helped by a general economic rebound, a
real-estate boom and higher revenue from corporate income taxes.
More than half of
states recorded higher-than-expected revenue last year, allowing them to
undertake new spending projects and build up rainy-day funds. Much of
the spending increase has gone toward health care, which accounts for
about a third of state expenditures in various forms. States also had
been reversing significant, across-the-board cuts made from 2002 through
2004.
This year,
however, many state budget officials have been preparing for slower
growth and recognize that rising expenses for such things as health
care, education, employee pensions and infrastructure may get tougher to
meet, according to a June report from the National Governors Association
and National Association of State Budget Officers. In most places the
next stage is more likely to be slower spending growth than an outright
spending cut. In the longer term, however, leaner times may lie ahead.
Even though some
data show home prices are falling sharply, homeowners in most parts of
the nation have yet to see their property taxes decline. In states like
California and Indiana, some counties already are seeing a record number
of homeowners protesting their assessments. Residents are upset that
their property taxes are still rising as market prices decline.
In the
Indianapolis area, disgruntled homeowners have held rallies outside the
Indiana governor's residence to protest property taxes. In response, the
governor has set up a commission headed by a former state Supreme Court
justice to try to streamline local government and fix problems with
property-tax assessments, which residents complain can seem arbitrary
and inconsistent.
"For its size and
population, Indiana has far too much local government," and thus too
many people collecting property taxes, according to a report from the
governor's office. The state has more than 1,100 officials responsible
for property-tax assessments.
Lower assessments
would cut into property-tax receipts, a crucial source of funding for
local governments but which rarely account for more than 10% of
state-level tax collections. "As a nationwide trend, you'll probably
start to see property-tax revenues begin to fall next year or the year
after," says Gerald Prante, an economist with the Tax Foundation, a
nonpartisan research group in Washington.
Reduced
assessments are already causing budget problems in some areas. In
Virginia's Fairfax County, where almost 60% of county general-fund
revenue comes from real-estate taxes, housing prices fell last year for
the first time in 10 years. Foreclosures have jumped, and the county
wants to hire more appraisers to perform new assessments.
Chicago,
meanwhile, is grappling with lower-than-expected revenue from
real-estate sales, rising personnel costs and expenses stemming from a
harsh winter. As home sales have slowed, Chicago has fallen short of its
projections for its real-estate transaction tax, a levy of 0.075% on
property sales that is paid by a buyer. Collections of this tax jumped
to a record $242 million in 2006 from $108 million in 2001. Though the
city had expected a slowdown this year, revised projections show the tax
raising only $204 million, $31 million below plan.
In May, Chicago
announced a broad hiring freeze, a furlough day for managers making more
than $55,000 and a cut in nonpersonnel spending. In July, the city
ordered an additional 2% spending cut. Last week, Mayor Richard M. Daley
told 2,000 city managers who earn more than $75,000 to take another
unpaid furlough day this year. Because these steps saved the city just
$17 million, Chicago has to go much further to balance its budget, as
required by law.
"While we can't
control the housing market, there are other things we can control," city
budget director Bennett J. Johnson III says. "Right now we are looking
at everything on the table to find out how we can close this gap."
In Kansas City,
agencies that serve the homeless get funding from a $3 surcharge Jackson
County collects on real-estate sales documents. The county awarded
$750,000 to the agencies in February, but revenue is falling far short
of projections. A legislative auditor warned the fund could exhaust its
balance by the end of the year and face a $135,000 deficit, which would
force drastic cuts. He suggested increasing the fee by as much as $10, a
move that would require a public vote.
Smaller locales
are getting hurt, too. Sultan, a city of roughly 4,500 people about 40
miles from Seattle, had been expecting three new subdivisions this year,
producing fees from 70 building permits.
But instead,
Sultan has issued just three permits. All three subdivision projects
have been delayed, so the city is likely to receive $280,000 less in
building-permit fees than it had expected. In the Northwest, housing
prices have been stable or rising, but Sultan city administrator Deborah
Knight says she is hearing about a large supply of homes on the market.
Sultan cut back
its building-inspector position to part-time to save money, but that
alone didn't bridge the gap. Now Sultan can't afford to employ a
custodian at City Hall, either.
On June 30,
Virginia ended its 2007 budget year with tax collections that were $234
million below its target, and the state is expected to miss its
current-year estimate by $407 million. Virginia Gov. Tim Kaine, in a
recent address to the state legislature, said taxes levied on
property-transfer records fell 16% below the previous year's level. He
asked state agencies to draw up plans for a 5% spending cut.
Sales taxes, too,
have been affected. In Virginia, one-quarter to one-third of all sales
taxes is connected to housing, such as taxes on construction expenses
and furnishings, says state Secretary of Finance Jody Wagner.
After meeting
with housing-industry executives this summer, she said she doesn't
expect a quick recovery. "If we thought we only had to deal with '08 and
then go back to normal, we wouldn't be as concerned," Ms. Wagner says.
"But we think it's going to be a prolonged slowdown."
Some of the
states facing the largest shortfalls are those that had the biggest
housing booms over the past few years. In Florida, the $1.5 billion
shortfall -- $400 million for the last fiscal year and $1.1 billion for
this year -- is nearly all due to the weak housing market, says Ms.
Baker of the Florida legislature's research office. Though economists
knew the state's housing run-up over the past five years wouldn't
continue forever, the decline now appears to be sharper and
longer-lasting than they had expected.
In the three-week
special session scheduled to convene Sept. 18, state senate committees
would like to cut the state's $71 billion budget by 4% in big-spending
areas such as education and social services. Meanwhile, local
governments in Florida are considering everything from laying off
elementary-school crossing guards to raising bus fares.
"People kept hoping that the good times
would continue," Ms. Baker says. "When the bubble has burst and we're
returning to more normal levels, and even a little below -- it's just a
rude awakening."