SAN FRANCISCO — Despite apparently alarming drops in many regional real estate markets around the country, most jurisdictions have built-in structural cushions that will offset the impact of lower assessed values on bond issuers, according to a report Fitch Ratings will release today.
“There’s fear out there because of dramatic declines in the real estate market nationwide; there’s a perception that falling real estate values will translate directly into property tax revenues,” said Fitch analyst Eric Friedland, one of the authors.
“Although that’s true in many cases, there are offsets in effect in many states,” he said. “In many places there isn’t a one-to-one correlation between property-value loss and tax-rate decline.”
Fitch analysts looked at the states “most associated with dramatic residential and commercial property value declines,” according to the report: California, Florida, Nevada, Arizona, Michigan, and Ohio.
Fitch rates tax-backed issuers in each of the states addressed in the report. It rates more than 200 such issuers in California, more than 50 each in Ohio, Michigan, and Arizona, more than 100 in Florida and fewer than 10 in Nevada.
“These are the states people are the most concerned about and what we found was in those states there are offsets in place,” Friedland said.
The best-known example, he said, is California’s Proposition 13 tax limit, which caps the tax rate at 1% and limits the annual increase of a property’s assessment to 2%, unless the property is resold, at which time it is assessed at the sale price.
That keeps many properties’ assessed valuations below their market price, even as the market is falling, though the impact is not even across regions. Some counties with a great deal of recent development have seen property tax rolls fall by more than 10%, because there wasn’t much of a cushion built up.
In Michigan and Ohio, the impact of falling property values is muted in part because property values never boomed the way they did in the Sunbelt states, according to the report.
In Michigan a constitutional tax limit reduces the volatility of property tax revenues, and entities in Ohio rely on other sources, such as sales and income taxes, for a sizable share of their funding.
But these states can expect assessed valuations to decline “for an extended period of time,” Fitch said, as they adjust to the decline in the manufacturing industry.
Declining property values in Nevada are mitigated by a 2006 property-tax abatement law that had the effect of stabilizing property tax levies.
Fitch expects governments to run out of abatement capacity in fiscal 2011, but the agency notes that the local governments it rates in Nevada have room to increase rates within the state’s rate cap. In Arizona, assessed valuations will decline substantially, Fitch found, but that will take longer to work through the tax system than in other states.
“The lag is more protracted in Arizona than in other states so there is an opportunity to respond,” said co-author Amy Laskey.
Florida has some of the worst real declines in property values, Laskey said, with assessed valuation in the state’s counties dropping an average of 8% in fiscal 2010. The buffer in Florida is that the issuers Fitch rates there are below the state’s tax-rate caps.
“You can raise the rates in Florida,” Laskey said.
