WASHINGTON — The U.S. Conference of Mayors yesterday predicted that state and local tax revenues will suffer next year as a result of a projected $1.2 trillion decline in property values spurred by increased housing foreclosures — a scenario that may threaten the creditworthiness of some states and localities, analysts said. The projected decline in property values is expected to spark a drop in consumer spending and result in lower tax revenues for state and local governments, according to a report prepared for the mayors by Global Insight. “Rising home prices were once the fuel that allowed consumer spending growth to outpace real income gains,” the report said. “With declining home prices in effect, consumer spending will fall short of income growth.” Lower tax revenues could threaten the credit ratings of state and local governments, which depend on the revenues to repay general obligation bonds, credit analysts said yesterday. “We do expect that many municipal issuers will face fiscal pressures,” Fitch Ratings analyst David Litvack said. “The pressures will not be uniform, they will vary considerably by issuer. We are working with a number of market observers … to try and anticipate which issuers are likely to have the most problems.” California, Nevada, Florida, and Arizona are among the most vulnerable states because they have had “the greatest run up and now the greatest deceleration in [property] values,” Fitch’s Richard J. Raphael said. The report projects that California could be the hardest hit state with property taxes revenues possibly declining by $2.96 billion and sales tax receipts dropping by $994 million. Property tax revenue in New York could drop by $686 million and sales taxes by $97 million. In Florida, property tax revenue may decline by $589 million and sales tax income by $148 million, the report projected. Arizona could lose $158 million in property tax revenue and $69 million in sales tax dollars and Nevada may lose $49 million in property revenue and $19 in sales tax receipts. The reduction of property values is the result of a surge in the number of foreclosures around the nation due to an increasing level of defaults on subprime mortgages. The report predicts that foreclosures will increase next year by at least 1.4 million. “In recent years, millions of Americans were introduced to a new breed of mortgage — a flexible loan with rate resets in what at the time seemed like the far off and rosy future,” the report said. “Instead, they now face a marketplace where home prices have cooled, home values are shaky, and their flexible loans have become financially unfeasible. The wave of foreclosures that has rippled across the U.S. has already battered some of our largest financial institutions, created ghost towns of once vibrant neighborhoods — and it’s not over yet.” Other effects of the mortgage crisis, the report said, include a likely drop in consumer spending of 0.6%, or $72 billion next year, and economic growth of 1.9%, a full percentage point lower than it would have been had the subprime crisis not occurred. However, the report said that the economic fallout from the mortgage crisis can be held in check if lenders work with homeowners to work out new realistic payment plans. “The negative economic impacts cited in this report could also be significantly contained if mortgage holders, including holders of mortgage-backed securities, and loan servicers could agree to new payment terms with families who have the ability to pay, but were placed in inappropriate mortgage products,” the report said. “Such actions will help to lessen the number of foreclosures, thereby avoiding the further negative effects on local housing markets and on the broader economy.”

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