The Coming Muni Crisis

There's a WSJ article about state shortfalls in tax revenues, because of lower home sales, high gas prices. My city makes about 75% of its revenues from property tax assessments. Every year I have been here they would go up 7% a year, in addition to all the new houses being built. This year, it actually assessed me at a 7% decrease, and house construction in my city came to a halt. Now, this was assessed in March 2008, and is for taxes payable in 2009, which are paid in March and September. As my city had a heck of a time cutting 2% off a projected increase of 5%, I wonder what they will do if revenues actually decline? I imagine they will borrow in the short run but that isn't a long term solution because the 7% valuation is permanent: they aren't going to raise my assessment 14% next year because yearly assessment increases are capped at 8%.

I imagine lots of cities will have this problem, and they won't do anything prior to a crisis, because all their money has interest groups that won't let them. The key trigger event for bankruptcy is not recognizing you have a failed business model, but rather, having a failed business model AND running out of cash, because at that point outsiders won't lend to you. Cities seem to increase expenditures as if they don't have to face the vagaries of business, but that was before the housing crisis. I haven't heard any peeps yet, but next year at this time, everyone will be howling. And I'm sure some cities will default. After all, the biggest housing decline in 30 years will catch more than just Wall Street off guard, but those humble public servants as well. Right now, it's best not to think of it.