Local governments in California are feeling the pinch of rising home foreclosures, falling home values, and delinquent property tax payments, but government finance officers have found an unlikely protector in the current downturn — their old nemesis, Proposition 13.

That was the conclusion of local government officials and municipal analysts who spoke at The Bond Buyer’s 18th Annual California Public Finance Conference earlier this week. Proposition 13 was passed in 1978. It limits local governments’ ability to raise taxes and sets property taxes at 1% of assessed valuation at the time of sale with a 2% maximum annual increase. Homes are reassessed to market prices only when they are sold.

The dramatic slowdown in the state’s once-booming housing market has cut into property transfer taxes and reduced sales taxes some, but it’s made little difference in property tax collection, which is a much larger part of local budgets.

“Proposition 13 has ironically been a bit of a help,” said Karen Ribble, a Fitch Ratings analyst.

“It has limited the rate at which assessed values could grow since 1979, and market values have now gone up way more than assessed values,” said Gabe Petek, an analyst at Standard & Poor’s in San Francisco. That’s left a large residue of untapped local property tax value to buffer local property tax collections during the downturn, the so-called “Prop. 13 cushion.”

“So we’ve actually had decreasing market values and increasing assessed values at the same time,” Petek said.

That means that the rating agency has only downgraded the hardest hit issuers, such as Stockton.

Local governments have seen sharp increases in property tax delinquencies, particularly on newer homes, as homeowners struggled to keep up with payments on variable-rate mortgages that have caused a wave of foreclosures across the state. 

“We’re seeing a tremendous amount of foreclosures,” said Dick Larsen, treasurer and tax collector for fast-growing San Bernardino County in Southern California. “We’ve had dramatic increases in the value of delinquent taxes.”

Foreclosures in the county rose to 13,631 in the first seven months of this year from 8,279 in all of 2007 and just 369 as recently as 2005. Delinquent tax payments rose to 7.8% last year from 3.9% in 2005.

San Bernardino is protecting local governments from that decline through its so-called Teeter program. It pays the local governments their taxes when they’re due to keep them solvent, but the county earns large penalties and interests when taxpayers finally pay up. Often, that’s when a bank forecloses on a property and pays its back taxes.

“It works out, it’s a shorter cash-flow issue,” Larsen said. He expects delinquencies and foreclosures to remain an issue for the county through 2009.

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