SAN FRANCISCO — A sluggish housing market in California will delay economic recovery for local governments by several years, Fitch Ratings said in a new report.
Because local governments in California rely on property taxes for roughly one-quarter of their general revenues and have limited abilities to increase tax rates, fiscal recovery will depend on significant and sustained improvements in the local housing markets, according to the report, released this week.
“We don’t expect to see what occurred during the boom when property tax revenues grew by 9%,” said Stephen Walsh, a director in Fitch’s San Francisco office. “We don’t think they will get back to that for a long time — if ever.”
The combination of slower home-sales activity and lack of new construction mean that fewer new assessments are triggered, limiting growth of the tax roll, Walsh said.
The assessed values declines have been less dramatic than housing price statistics might suggest, because California’s Proposition 13 — which restricts growth in an individual property’s assessed value to 2% annually unless it is sold — helps to modulate the peaks and valleys in the housing market.
The tax limits restrict potential assessed-value growth during the pre-bust boom, but also protected many local governments from sharp revenue declines after the bust.
New construction and sales activity for existing homes contributed to robust assessed-valuation growth during the boom, despite Proposition 13, but the rate lagged behind the remarkable growth in home prices, Fitch analysts said.
At the end of 2011, housing price declines from peak levels exceeded 25% in every California county except San Francisco, according to the Fitch analysis, but assessed values retained most of their gains both during and after the recent recession, with a relatively modest 3.7% decline of $172 billion statewide between fiscal 2009 and 2012.
The impact on cities throughout the state varies based on whether they have the ability to raise revenues from other sources.
Property taxes provide 22% of revenues for California counties, 25% for cities, and 22% for K-12 schools, on average, with the balance of funding from state and federal aid, sales and use taxes, other local taxes, user charges and a variety of additional revenues, according to the Fitch report.
The state’s coastal areas did not experience as significant a decline in assessed values from the housing bust as in the inland areas.
California’s property tax base lost $172 billion in value between fiscal 2009 and 2012, a 3.8% decline, but more than half of California’s tax base loss during that period can be attributed to just four of the state’s 58 counties: Riverside, San Bernardino, Sacramento and Contra Costa, according to the report.
“We do expect places that had the largest declines in assessed value, which includes Riverside and San Bernardino counties, Contra Costa and Sacramento, will have the slowest recovery,” Walsh said.
Assessed values for California’s inland counties fell by 10% between 2009 and 2012, the report said, while coastal counties experienced losses of less than 2%.
Fitch analysts said they expect assessed value and property tax growth for most California local governments to be modest over the next several years, with significant regional variation and a potential for further declines in areas with the weakest housing markets.
Walsh described the housing markets in California as “still fragile,” adding that Fitch analysts are not convinced they have reached the bottom.
“We have a model that looks at the housing market in terms of sustainability — and the model says prices are still not sustainable,” Walsh said. “The prices could still go down.”
Housing markets statewide experienced improvements in the first two quarters of 2012, but overall Fitch analysts expect prices to decline by another 5% to 10% statewide, he said.
