The Next Victim of the Real Estate Crisis
As the economy stalls, state and local governments will see less tax revenue roll in. Get ready for cuts in services
by Prashant Gopal
State and local governments were flush with tax revenue during the five-year housing boom. They pulled from bulging pools of property, income, and sales tax to expand education, law enforcement, health care, and infrastructure programs without needing to burden residents and corporations with tax hikes.
Those days are over. Home prices are falling, and foreclosures, gas prices, unemployment, and inflation are on the rise. At least 29 states, plus the District of Columbia, reported budget shortfalls that total about $48 billion as they finalized their 2009 fiscal budgets, which typically begin July 1, according to the Center on Budget & Policy Priorities.
States are facing flat or even declining revenues even as costs for salaries, fuel, and construction increase. And revenues will only plunge further as the housing slump and credit crunch begin to reflect more in lower property assessments and sales and income taxes. With fewer homes being sold, homeowners are spending less on new furniture, carpets, bathroom and kitchen fixtures, and other household costs. Americans struggling just to make mortgage payments and fill fuel tanks have less to spend on discretionary purchases. Income tax is down as a result of job losses and shrinking profits for corporations, including those in the construction business.
"The downturn in the housing market is a big factor as to why this has happened," says state representative David Lujan (D-Ariz.). "When one segment of the economy is going down, all other aspects are impacted as well."
An Abundance of Shortfalls
Arizona topped the BusinessWeek.com list of the 10 states that took the biggest tax revenue hits, compiled using data from the Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York. Arizona's tax revenue dropped 13.6% in the quarter ending March compared with the same period last year. On Thursday the Arizona legislature approved a budget plan for the coming year that eliminated a $2 billion shortfall by cutting spending for college construction projects and expanding revenue by beefing up photo enforcement and the state lottery.
Many of the states with the worst housing markets, including Florida, Nevada, Rhode Island, and California, also topped the revenue shortfall list.
Despite the revenue shortfalls, it could be some time before average taxpayers notice their garbage isn't being picked up as often or that their children are sharing a teacher with too many students.
"Governments have ways of muting and stretching out the effects of these things," Donald Boyd, a senior fellow at the Rockefeller Institute, says of the declining state and local tax money. "They take the easiest actions first. They will draw down reserve funds first. They came into this with historically good reserves…You will see spending restraint. But for outright cuts, prisoners released, and teachers laid off, you would have to see something truly significant."
Governments Affected Too
Many states are freezing new hires, borrowing for necessary expenditures and dipping into "rainy day" funds to fill budget gaps and avoid tax increases. But in many cases they're tapping out the reserve funds for the coming budgets and might need to make tougher choices when they put together their 2010 spending plans, especially if the economy worsens.
The troubles are already serious in California, which is facing a wave of foreclosures and tumbling home prices that have sapped equity from millions of homeowners. Governor Arnold Schwarzenegger has few good options to plug a $17 billion budget hole and has already angered teachers' unions and health-care advocates with his proposed cuts. Those proposals include big reductions in the state's health insurance program for the poor.
"That's the conundrum of all of this," says Nick Johnson, director of the state fiscal project at the nonprofit Center on Budget & Policy Priorities. "When people are facing economic hard times they turn to state governments for assistance, and that's also the time when governments are under pressure to cut the exact same services."
Finances are also tight at the local level. In California's Stanislaus County, which has one of the nation's highest foreclosure rates, the just-released property assessment roll for Jan. 1, 2008, showed a drop of $3 billion, or about 6.87%, which eclipsed the county's worst year in recent decades, a 1% drop in the 1990s, says county assessor Doug Harms.
Revenues will likely shrink further next January. There's an inherent lag between the time home prices fall and property tax revenues decline because of the time it takes for homes to be reassessed. (In California, counties calculate their property assessment rolls once a year.)
Busted School Budgets
Even school budgets, which politicians fight hard to protect, have been feeling the pinch. Public schools are generally funded through a combination of local property taxes, sales taxes, and state aid.
The Palm Beach County school district in South Florida is also having to make do with less as it searches for tens of million of dollars in possible operating cuts. Joseph Sanches, chief of facilities management for the district, says the county needs to cut nearly $653 million from its $1.9 billion five-year capital budget.
But the county no longer has to deal with a growing student population as it did during most of the boom. The county's population began falling by a few hundred people per year after the hurricanes of 2004.
"The timing could have been worse," Sanches says of the revenue slump.
The Real Estate Crisis in California and Lawsuits in the Wake of the Credit Crunch
R. Sebastian Gibson
Provided by Law Firm of R. Sebastian Gibson
The author of this article discusses some possible new problems the real estate market may face in California as the economic crisis and credit crisis grows. The article also focuses on some new construction law problems in California related to the credit crisis and the relates the type of calls attorneys are now getting from the public in fear of losing their homes.
All across Southern California and the nation, if you own real estate, you’ve seen the value of your home get a short haircut and your investment in the stock market has fallen through the basement. If you’ve tried to get a loan from your bank recently, the cost of a mortgage, if you can get one, and the requirements are much more burdensome.
While most attorneys are feeling the economic slowdown just like the rest of the country, some lawyers, real estate and bankruptcy lawyers among them, are seeing a host of clients seeking to file new lawsuits and filings in the wake of the credit crunch. And while the stock market may have a sharp rebound sooner or later, the real estate market is going to crawl back much more slowly.
Calls are pouring in to California real estate attorneys and CA property lawyers for help to fight foreclosures or to file foreclosure actions, for bankruptcies filings, landlord-tenant problems, homeowner association issues, contractors struggling to understand how their bank could cut off their credit in the middle of construction, individuals having their credit card limits slashed, and real estate buyers seeking help to get out of contracts and mortgages.
“I need help to save my home,” is a common plea all attorneys are hearing. It is painful to tell such callers how limited their options are.
According to a recent report, the latest problem is that delinquency rates are now rising dramatically on construction loans for single family homes. Consequently, builders are filing lawsuits against their lenders for the damages they are suffering from this freeze in credit.
More sub-prime related suits have now been filed in the 18 months that ended June 30th than in the savings and loan crisis of the 1990s. Class-action sub-prime related suits are soaring.
Class action lawsuits in California have been filed against some of the largest and now failed institutions alleging that their disclosures were misleading or that they practiced discriminatory lending practices.
It is expected that construction defect cases will be on the rise as well as builders try to cut corners to be able to make even a little profit on construction projects that have gone sour.
There is, however, no quick relief for anyone filing such lawsuits. The courts are jammed and the State of California has little money to hire new judges. Criminal lawsuits take precedence and in some jurisdictions, only lawsuits running up against a requirement that they be resolved in five years are being sent to trial.
Every day, it is reported that a new wave of litigants or people are being affected by the economic crisis, whether it is people with prime as opposed to sub-prime loans, or people who are no longer able to obtain credit and who can no longer borrow money on their credit cards.
No matter what Congress does or doesn’t do, the fallout from this crisis will last for many years and create a substantially different climate for business and real estate for the foreseeable future.
ABOUT THE AUTHOR: R. Sebastian Gibson
Sebastian Gibson graduated cum laude at UCLA in 1972 and received law degrees in the U.S. and the U.K., graduating with an LL.B. magna cum laude from University College, Cardiff in Wales and a J.D. from the University of San Diego School of Law.