Mortgage crisis takes a bite out of states and cities

Tax revenue is down considerably across the nation, creating budget shortfalls and forcing hard choices on what to cut.

By Stephanie Simon, Los Angeles Times Staff Writer
December 31, 2007

DENVER -- Dozens of states, counties and cities across the nation will enter the new year facing deep and unexpected budget holes as the widening mortgage crisis cuts sharply into tax revenue.

Elected officials, scrambling to adjust, are trimming money for public schools, reducing grants to help the homeless, even asking police to dry-clean their uniforms less often.

"We're talking about a pretty tough fiscal environment for the next four or five years," said Christopher W. Hoene, the director of policy and research for the National League of Cities. "Libraries, parks, after-school programs . . . you'll see lots of questions raised about cities' abilities to fund them."

What makes this all so painful is that up until a few months ago, many government officials felt certain they could weather the storm. They knew property values wouldn't soar forever. So they factored a downturn into budget calculations. They built up sizable emergency funds.

But the rainy day they prepared for turned out to be a monsoon.

"We had predicted a slowdown -- but not this much," said Tim Nash, finance director for Greeley (population 90,000), a college town in a heavily agricultural region of north-central Colorado. Nash thought he was being prudent when he budgeted for 200 new housing starts in the city this year, down from 310 last year.

He wasn't even close.

Instead of the $2.6 million that Nash expected in sales taxes on new construction, Greeley will collect $1.2 million. As a result, Greeley has left vacant 49 city positions, most of them building inspectors whose services are, abruptly, no longer in demand.

The effects of the housing slowdown are not being felt evenly across the nation; in states such as Wyoming, Alaska and Texas, they're more than offset by the boom in oil and gas prices. But in a recent survey, 24 states reported that their tax collections had taken a hit because of the housing crisis.

The 10 most affected states, including California, Nevada and Arizona, will lose a combined $6.6 billion in tax revenue next year, according to a report prepared for the U.S. Conference of Mayors.

"We're at the early stage of a problem that's going to get worse," said Corina Eckl, an analyst for the National Conference of State Legislatures.

The mortgage crisis cuts into tax revenue in several ways.

The most obvious victim is property tax collection. Homeowners in foreclosure don't pay taxes on time. And as foreclosures spread, property values drop -- dragging down assessments and collections.

To take one example: In wealthy Fairfax County, Va., property values were jumping 20% a year. Now values are flat or falling. The number of foreclosures has exploded, from fewer than 200 two years ago to about 4,000 this year. The resulting $220-million budget shortfall has officials warning of significant cuts in services, including spending on public schools.

"Instead of having a soft landing, we've crashed," said Edward L. Long Jr., a deputy county executive.

When the housing market is flat, governments also lose out on the many transaction fees tacked onto real estate sales. This revenue stream is down in several states, in a few cases by 20% or more.

Even more distressing to budget planners is the decline in sales tax revenue. If people aren't buying homes, they're not buying refrigerators and washing machines to furnish them. Nationwide, orders for durable goods have been flat for the last four months. (November saw the first slight uptick: 0.1%. Economists had been hoping for 2.2%.)

On average, states receive about a third of their revenue from sales taxes. So it hurts -- deeply -- when families don't have reason to splurge on the new sofa and coffee table that will make a just-purchased house look like home.

Jacqueline Byers, director of research for the National Assn. of Counties, said she had taken to wondering, as she drove past yet another vacant house: "Does that translate into the library's going to close at 6 p.m. instead of 9? Little things like that are all affected. It's a phenomenal impact."

The fallout has been most severe in California, where officials are grappling with a $14-billion gap. Gov. Arnold Schwarzenegger has ordered agencies to immediately trim spending by 10%.In Florida, the Legislature recently took emergency steps to close a budget shortfall estimated at $2.5 billion over the next 18 months. Lawmakers raised tuition at state universities by 5%, sliced money for long-term nursing home care for the indigent, and requested that state law enforcement officers take their uniforms to be cleaned less frequently.

In Nevada, Gov. Jim Gibbons this month ordered a 4.5% across-the-board cut.

In Arizona, state Sen. Bob Burns will spend his holiday poring over a budget that looked balanced six months ago but is now in the red -- with spending nearly 10% above what the state can afford, given the anemic pace of tax collection.

"We're not even sure we're at the bottom yet," said Burns, a Republican who chairs the Senate Appropriations Committee.

"Education and healthcare are usually politically untouchable, but we have to put those on the table now. We have to include just about everything, really," Burns said. "If we don't make some serious moves in '08 and '09, we'll be out of savings. And out of gimmicks."

Though such cuts may sound dire, fiscal analysts emphasize that for most states, counties and cities, the belt-tightening follows several years of expansion. It pinches, for sure. But in many, if not most, cases, services will still be better-funded than they were during the last fiscal crises, in the late 1990s and after the terrorist attacks of 2001.

Many of the cuts are more aptly described as scaling back than slashing: States defer road improvement projects; counties close libraries an hour or two earlier; cities cancel plans to build new schools or modernize recreation centers.

"Everyone here understands that we had five incredible years when everything was escalating and revenues were free-flowing," said Amy Baker, who runs Florida's legislative office of economic and demographic research. "We couldn't continue at that pace. This is a correction."

But half a continent away in Kansas City, Mo., the correction feels like a crisis to Evelyn Craig, the executive director of reStart Inc., an interfaith ministry to the homeless. Missouri levies a $3 recording fee on all real estate documents. That money -- about $5 million in 2007 -- is used to support programs such as reStart, offering free shelter, hot meals, addiction counseling, parenting classes and other services for the homeless.

The demand for such services is rising fast as more and more families lose their homes to foreclosures. But at the same time, the state is collecting many fewer $3 fees on home sales and refinancing. Just before Christmas, Craig was notified that she would lose up to half of her organization's funding for the coming year.

"The cut's going to be just staggering," she said. "What will we do? I can't tell you."

http://www.latimes.com/news/nationworld/nation/la-na-budget31dec31,0,1654836.story?page=2