Monday, September 10, 2007

State Budget Impasse Is Not The Biggest Problem Facing Local Governments

Local governments are complaining about the delay in passing a state budget.

So are loan-dependent state college students and others with a stake in state spending - - but the budget will get passed once the deals are cut.

The real threat to the health and welfare of upcoming local budgets - - and in a sense, this is tied to the outcome of the stalled '07-'09 state budget because that document will set the level of permitted local tax levy increases - - is the gathering decline in real estate values.

Assessments are at the heart of the local tax levy and thus the provision of huge chunks of village, town, city, county, school and other taxing boards and districts' service financing.

If property assessments drop steeply across the board, tax collections will fall unless tax rates are raised as a compensation, or if new fees and other taxes are raised or created - - all unpalatable, and thus pretty unlikely politically.

I mean, how much more money can you really squeeze out of a garbage cart pickup fee, or overtime parking tickets, or dog license costs?

I semi-facetiously asked a Milwaukee city government official a couple of years ago what the plan was if the real estate bubble burst - - it was a modest bubble in Milwaukee, to be sure, but still one that had grown with steady increases across the city, year-after-year.

"I don't want to think about that," came the answer.

But here we are, seeing the real estate market in Milwaukee and statewide gasping for air when it had been roaring along just 18 months ago, with solid annual increases in sales, prices and corresponding assessments more or less expected/guaranteed.

And the R-word - - for recession - - has been in the news, with optimists and nervous Republicans hoping for more Federal Reserve intervention in this, an election year, to stabilize the real estate market and the GOP's fast-fading fortunes at the ballot box.

If the '08 election rolls around, and "it's the economy, stupid" is resurrected while Republicans preside over a budget deficits and recession, their losses at the polls could be historic, catastrophic and both.

But back to what ails local governments and their fiscal planning.

Budget-and-spending problems in an economic downtown will likely be roughest in the older cities - - Milwaukee, West Allis, Racine, Beloit - - where there is relatively lesser growth and new construction - - but easier to bear in the faster-growing suburbs or exurban new towns - - places like Pewaukee, Franklin, and the like.

But don't expect a cakewalk out there in Sprawlville either, because the real estate market slowdown will bring with it a drop in the related retail, commercial and industrial expansion that follows residential growth to recently-paved cornfields.

So if local budget-crafters think the impasse at the State Capitol is a problem in forecasting future revenues and budget parameters, wait until next year.

If there is a recession and a more dramatic dip, or cratering, in home prices in 2008 and beyond, 2007's budget 'problems' will have been little more than a crack in the sidewalk on Easy Street.


Anonymous said...

How about a little optimism?

The biggest problem with budgeting in Milwaukee was and is the deep cuts to shared revenue from the State. That created the no-margin-for-error budgeting in Milwaukee.

Yes, if there is a recession--and housing values fall--Milwaukee is is in trouble. However I am optimistic that a 2008 victory by the Dems (or at least Rudy G) will help restore the funding to cities that has been cut over the last 7 years.

If Clinton-era spending on cities is restored, than maybe we might have a return to Clinton-era public safety, block grants, etc.

xoff said...

In all the years we have owned property I have never seen our assessment go anywhere but up. Frankly, I don't expect that to change no matter what the economy does.

Am I too cynical?

Anonymous said...

Look again -- and in the priciest area of Milwaukee, as I bet our blog host did.

Assessments are down this year, for the first time in many years, on many properties. Or some stayed the same and didn't go up, for the first time in many years. (Friends have a home there that has doubled in seven years and initially went up again this year, but the city assessor admitted -- finally -- that there was no reason for it and changed it to stay the same. That was a gift to the city, as most other properties in the area went down.)

So if that happened on the pricy upper East Side, it must be happening elsewhere in the city. But won't this simply mean the city dunning more per $1000 of assessed value? I.e., taxes will go up, even on a property going down?

James Rowen said...

One key factor in the assessor's valuation of a property is the sale price of nearby homes, and comparables. That's why a rising market pulls up assessments of properties even if the owners haven't made improvements, and why a declining market will pull down assessments domin0-style.

Decision-makers' options are pretty limited: cut spending, raise taxes and fees, or finagle more shared revenue or one-time grants out of the Legislature.

Anonymous said...

Yeh, I know.

But again, won't this just mean (as it has for me with homes elsewhere) a higher tax rate to raise the same or more amid declining assessed values?

Plus, yes, resort to other sources -- and thus more problems from further cuts to shared revenue, etc.