Local governments must plan for revenue decline

Media News, Contra Costa Times and Oakland Tribune

Editorial

July 13, 2010

AS LOCAL government leaders in California plan for the future, they must recalibrate their expectations to match a long-term era of declining revenues.

At the same time, residents need to adjust their thinking to expect fewer services, and public employees need to face the new reality that rich salary and benefit increases are a thing of the past.

We've seen the financial contraction of the public sector for a few years now, but the latest property assessment numbers in the East Bay leave little doubt: We won't be climbing out of the hole anytime soon.

Property tax is usually the largest pot of discretionary money available to run local government. So, as the real estate market has undergone a major realignment, our local governments have had to make due with less. We don't see that changing for many years to come.

Each year at this time, county assessors issue their assessments of property values. The numbers for this year are based on the values as of Jan. 1, 2010, and apply to the tax upcoming bills for the 2010-11 fiscal year.

Because of Proposition 13, the 1978 landmark voter-approved property tax-cutting initiative, California uses a unique formula for assessments that doesn't fully capture property value increases and tempers the effects of market declines. For years, local officials assumed the formula would insulate them from having to face property tax revenue declines.

But last year, they were proved wrong. The real estate market downturn was so severe that the overall assessed value of the state's residential and commercial property shrunk. And if the East Bay is any indicator, that statewide downward trend could be repeated again this year.

In Contra Costa, values were off 3.38 percent countywide. Two cities, El Cerrito and Lafayette, saw slight increases of about 1 percent. The 17 other cities saw declines, ranging from 0.35 percent in Orinda to 12.82 percent in Richmond.

In Alameda County, the decline will be about 2.5 percent. The picture is more mixed there, with the greatest increase in Piedmont, up 3.0 percent, and the greatest decline in Hayward, down 8.1 percent.

San Joaquin County, which became a national poster child for the foreclosure crisis, is expected to report at the end of this week its third year in a row of assessment declines. This year, the total will be down about 3.7 percent, says Assistant Assessor Les Flemmer.

Most of the declines affect the tax bills of property owners who bought near or at the market peak of the mid-2000s and have since seen a dramatic decline in the values. But a quirk in the rules of Prop. 13 is contributing to a first-time decline for other property owners as well.

Under the rules, assessments for those homes can increase no more than the California inflation rate or 2 percent, whichever is less. In only five previous years since the passage of Prop. 13 has the inflation rate been less than 2 percent. This year marked the first time that the applicable inflation rate was negative. As a result, most long-term homeowners will see a 0.237 percent reduction in assessed value.

If there's good news for local government, it's that the overall declines this year in all three counties will not be as severe as 2009-10. But local officials should be cautious. Alameda County Assessor Ron Thomsen and Contra Costa Assessor Gus Kramer are both forecasting another wave of foreclosures as temporary mortgage rates some homeowners have been enjoying reset. That will likely drag down the market.

And no one is expecting a speedy recovery in the housing market when it finally does arrive. It's clear that property was way overvalued and it will take many years to return to the price levels we saw at the peak in 2006.

The message for local government: Plan accordingly.