Bacon's Rebellion

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Don’t Expect Increased Real Estate Assessments to Bail out Local Government

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by

James A. Bacon
in , , ,

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There’s bad news for local governments in Virginia that rely upon property tax revenues to support schools, public safety and other priorities. Property values for single-family homes, which account for a large majority of most jurisdictions’ total assessed value, will not increase much over the next few years, according to a new study by the Demand Institute.

Nationally, the picture  is dismal enough. “Double-digit increases in U.S. home prices over the past two years are not indicative of future trends,” states the report. “They were driven largely by investors buying up swaths of distressed homes to meet growing rental demand. Over the next five years, prices will grow over a much slower rate. We forecast existing single-family media home prices to grow at an average annual rate of 2.1 percent between 2015 and 2018 as supply and demand move into sustained equilibrium.”

But there will be significant variations among the 50 states. And Virginia drew the short end of the stick. Of the 50 states and District of Columbia, the Demand Institute ranks Virginia third from the bottom (D.C. is at the very bottom) for expected rebound in the median price for a single-family house between 2012 (the market trough) and 2018 — only 14%.

(There is a discrepancy in the numbers that I am at a loss to explain. Nationally, the median price of single family houses is forecast to increase at an annual rate of 2.1% between 2015 and 2018, or 6.3%.  Yet the report’s breakdown of the states shows every state but D.C. showing increases between 7% and 33% over the same period. If anyone can explain the difference, please let me know.)

There is even greater variation in the forecasts for Metropolitan Statistical Areas (MSAs). The Washington metro area ranks dead last, with anticipated price gains of only 7% between 2012 and 2018 — an average gain of little more than 1% a year.

Richmond is a laggard with only a 17% gain over the same period, while Hampton Roads shows a stronger housing market than most, with a forecast gain of 25%.

Bacon’s bottom line. Rising real estate assessments won’t bail out Virginia local governments like they did in the early 2000s. Meanwhile, localities are grappling with the cost of financing public pensions, meeting state and federal storm-water mandates and replacing aging infrastructure. Either tax rates will rise, government services will be cut… or government officials will have to do things differently. Of the three, the latter course of action is the most desirable, though probably the least likely.

What can we do? Move more aggressively to apply smart-city technologies to manage public facilities and infrastructure more efficiently. Encourage more compact development to maximize utilization of existing infrastructure without incurring the obligation to build and maintain more. Begin integrating online and computerized learning into K-12 curricula as appropriate.

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4 responses to “Don’t Expect Increased Real Estate Assessments to Bail out Local Government”

  1. TMT Avatar
    TMT

    Residential real estate assessments are up 6.5 % in Fairfax County, higher percentage increases for townhouses and condos. Commercial assessments are generally flat to lower. Fairfax County has the highest office vacancy rate since 1991. County Executive Ed Long’s budget relies on the increased assessments to fund growth. The Schools want a higher transfer that would necessitate a three cent increase in the tax rate. Personal incomes are not rising at this rate.

  2. larryg Avatar
    larryg

    Cities and Counties in Va can’t run deficits (in theory) but they can suffer from unfunded mandates and rule changes for pensions and health care, etc.

    The number one budget problem for cities and counties in Va is schools and Smart Growth – assuming would still have kids to educate unless the unspoken goal of Smart Growth is to send those with kids to the exurbs.

    We spend more on schools that we can afford and we won’t make the tough decisions that – we have to make if we are going to be fiscally responsible and you cannot have budgets that do not assume future cost increases for budgets or health care or even raises and step increases for employees.

    and yet that’s how many school budgets in Va work. The school boards come to the BOS asking for more money for what the schools characterize as “costs we do not control”. As if any business or the county itself or even citizens could use that excuse to get more funds.

    When virtually every penny of additional discretionary money in a county’s budget is considered to belong to schools and not transportation or anything else – we have evolved into a perverted system where everything besides schools becomes “optional”.

    I’m amused to no end – when I read School budgets these days as there is often a page or two of narrative discussion the county tax rate – and increased revenues from taxes – as if the schools are contemplating something as belonging to them… and not other county needs like transportation, Fire/EMS, etc.

  3. DJRippert Avatar
    DJRippert

    Jim:

    My best guess on your statistical anomaly is the difference between median and mean. If Bill Gates moved to Richmond the median family income would barely budge. However, the average family income might move quite a bit. I glanced at the report so I may well be off base. However, it seemed like the median is used for annual price increases while the mean may be used for the three year calculation.

    I think the supposedly poor performance in the Washington, DC area is more of a timing issue than anything else. DC area real estate didn’t fall as far and seemed to come back earlier than elsewhere. Lagging performance is now more about the rest of the country progressing to the mean.

    TMT’s observation about commercial vacancy rates is the big story that is being ignored by the mainstream media. I’ve been saying for years that I’ve noticed a lot of empty office space in NoVa – especially offices outfitted as SCIFs. I have also observed that Virginia Gross State Product would have shrunk if not for increased federal spending in Virginia in a number of recent years. And we all know that federal non-entitlement spending has been shrinking – especially with regard to non-salary expenses in the military.

    We may be seeing the perfect storm of bad events in Virginia.

    What happens when the money spigot of NoVa dries up? How do counties with artificially low real estate tax rates survive without the NoVa transfer payment? We may soon find out.

    1. larryg Avatar
      larryg

      If you are looking at costs – and the areas where cost increases are likely to be continuing issues from year to year – which, in turn puts pressure on the budget – and concerns about where increased revenues might be expected to help pay for most or all of the – and this is a key word – _anticipated_ increases, most fiscally responsible counties and cities will rightly recognize that pensions and health care are predominate.

      and this – if you are a local government – that has to balance your budget and you know that controlling your costs are the key to not seeking tax increases – then depending on your philosophy – you may think you are entitled to the increased revenues from higher assessment – or you might see your duty – to equalize the tax rate – i.e. lower it when assessments increase – as my county has indicated their intent.

      but back to controlling costs. If the county leaders do not want to pursue tax increases, then their most fruitful strategies are to try to cap or even lower your pension and health care obligations especially if they are anticipated to grow in future out years.

      and that means – measuring the need for new employees – with your ability to pay their and existing employees increasing costs of pensions and health care.

      If you county is like my county about 1/3 of your employees are “county” and 2/3 are schools.

      The question is – if you’re going to engage in proactive policies to LIMIT your out year budget/spending exposure:

      1. should both schools and the county have similar type policies with regards to existing hires, attrition, and new hires?

      2. – if they do not – and the county is expected to engage in that but not the schools – then how will you actually be successful in controlling costs when the expectation is for only about 1/3 of your employee costs are fair game for keeping costs under control?

      In my own county, the teachers this year got raises – not because the school board got more money but because for the past 3 years, the School Board has not replaced a good part of what was lost due to attrition – and new hires were limited to absolute necessities.

      Fairfax Schools are now considering similar strategies and it’s refreshing to see it – as long as it’s accomplished with not only no harm to 3rd grade SOLs but even improvements to 3rd grade SOLs – which ought to lead better graduation rates and less post 3rd grade remedial costs.

      You accomplish this in an environment of static or slightly increasing budgets by not only attrition but by prioritizing your remaining funds to focus on pre-k, K-3 core academics without regard to neighborhood.

      In other words, there are no schools that are demonstrably inferior to other schools in the same system.

      all of this lies, in my view, at the root of why counties and cities are under fiscal stress.. and why some of them do better than others – both at fiscal management but also school academic performance.

      But you cannot deal with fiscal challenges in counties and towns without confronting school costs.

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