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Housing crisis starts to hit cities

Low assessments catch up with dip in home values

WASHINGTON - The nation’s housing crisis is five years old, but for local governments across the country, the worst of the reckoning 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 from coast to coast. The problem is unlikely to subside soon.

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For instance, 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. Next year, the figure is predicted to shrink to $803.5 million. The following year, $773 million. The year after that, $735.7 million. 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 that Baltimore already faces a budget deficit of more than $50 million next year. “Obviously, it means we have much lower revenues than we had in the past. It’s creating gaps in our budget.’’

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

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State governments, which 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 actually increased as a result of assessments that still reflected inflated prices.

Many municipalities are now 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 at 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. Local governments have lost more than half a million 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 a third reported altering employee health-care benefits to save money. Nearly three-quarters said they had instituted hiring freezes, and a 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.’’

For example, even after Las Vegas instituted a four-day workweek for city employees, cut hundreds of positions, and won concessions from labor groups, the city faces 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. This fall in Chicago, the new mayor, Rahm Emanuel, proposed cutting library hours, closing several police stations, and raising water and sewer fees to help close a budget gap.

Thomas Fitzpatrick, an economist at the Federal Reserve Bank of Cleveland who coauthored a recent study called “Municipal Finance in the Face of Falling Property Values,’’ said many cities will have little choice but to make deep cuts.

“If creative ways to make up for this lack of revenue are not found, local governments may face the undesirable choice of either raising property taxes or reducing funding for essential services,’’ he wrote.

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