California’s housing crisis hit local government revenues


California’s real estate market experienced some wild swings that pushed housing prices up faster than anywhere in the nation before plummeting in response to the financial crisis. Local government revenues rode the same boom-bust cycle.

After the housing crash, a California state law, Proposition 8, allowed temporary property tax reductions for 3.2 million properties — about 2.6 million homes and 600,000 other properties. Under Prop 8, property assessments were allowed to be lowered to match the market value of the property. According to a recent legislative report, these reductions dragged down local government revenues by approximately 15 percent. As the housing market has rebounded, property assessments that had special treatment under Prop 8 have increased, providing a positive impact on local government budgets. The Sacramento Bee reports:

When property values were dropping sharply during recession, county tax assessors adjusted tax rolls downward, which then lowered property tax bills. Many property owners also applied for reductions.

The average homeowner saw a $1,600 property tax cut while those for commercial property averaged $7,500. ‘In total, temporary property tax reductions depressed local government property tax revenues by an estimated $7 billion in 2013-14, amounting to a 15 percent reduction statewide,’ the Legislative Analyst’s Office (LAO) says in a new report.


The income from Prop 8 property assessments is a huge plus for cash-strapped local governments, but it could come as a rude surprise to homeowners. From the LAO report:

‘Social impact bonds are well-intended, but they bloat bureaucracies’

When I first heard about “social impact bonds,” where private investors loan money to pay for social services and then are paid “success fees” for behavioral improvements, I thought they were overly complex and unnecessary. If social programs are not effective, just change them. It is inefficient to inject another layer of bureaucracy and oversight that social impact bonds seem to require.

Lynn Hume, a reporter at The Bond Buyer, covered a recent U.S. Senate hearing on social impact bonds that was chaired by Virginia Senator Mark Warner (click here for a video recording of hearing). Hume wrote:

Federal lawmakers’ first look at so-called social impact bonds resulted in more questions and concerns than support on Thursday.

The push and pull over Puerto Rico’s budget

Things are buzzing in Puerto Rico after Governor Alejandro Garcia Padilla gave his annual fiscal address in which he proposed his budget for fiscal year 2015. The government also held a conference last week to attract new investors.

Puerto Rico also filed notice with the MSRB that it is unable to complete its 2013 fiscal year financials on time. They will be published sometime later this quarter. Bond issuers are responsible to file their audited financials within 305 days after the close of the fiscal year. It is unusual for a state-level issuer to miss the reporting deadline. Bond investors don’t seem concerned, however, as they traded the new $3.5 billion general obligation bonds due 2035 near the original offering price of 93.

Shrinking muniland

Muniland continues to shrink, except for one small corner, seen in the fourth chart below. The charts are from SIFMA’s US Municipal Credit Report, First Quarter 2014:

There is one corner of the municipal market that is increasing in size — bank loans to state and local governments. I wrote previously about the estimates that Standard & Poor’s has made on the bank loans that municipal issuers have taken out:

Standard & Poor’s recently issued a comment piece that sheds more light on the shrinking municipal issuance story. They reviewed or rated 173 direct loan municipal deals totaling about $10.4 billion from 2011 through February of this year. After seeing these deals and talking with market participants, they estimate that direct bank loans to muniland might account for as much as 20 percent of new municipal borrowing.

A macro view of Puerto Rico

Puerto Rico Governor Alejandro García Padilla will present his budget tonight. He has promised that it will be balanced, it will not require layoffs of government employees and it will not provide subsidies to Puerto Rico public corporations like PREPA (the Puerto Rico Electric Power Authority) or the highway authority.

Bloomberg is reporting that, according to the governor’s chief of staff, there will be no borrowing from the capital markets and the budget will not include debt restructuring. If the proposal is enacted as described, it will likely have a slowing effect on the island’s economy.

Richard Carrion, the current chairman and CEO of Puerto Rico’s largest bank, Popular, Inc., said in an interview with Sincomillas:

Questions over $350 million in Detroit’s pensions

Detroit’s emergency manager Kevyn Orr took a victory lap of sorts at a bankruptcy conference in Washington, D.C. The Bond Buyer reported:

Detroit’s recovery will mirror the comeback of other major American cities like Miami, Washington D.C., and Cleveland, the city’s emergency manager Kevyn Orr said Friday.

Signs of Motown’s revitalization are already apparent, especially in the downtown area, where the occupancy rate is 97 percent and ‘you can’t find an apartment,’ according to Orr.

Puerto Rico’s electricity monopoly is worth half its debt

There is a reason that the uninsured revenue bonds of Puerto Rico’s electricity monopoly, known as “Prepa,” have been trading around 60 cents on the dollar. The utility is only worth about half of its 6.9 billion of long-term debt. Caribbean Business reports:

A 2012 confidential report obtained by CARIBBEAN BUSINESS says government utility [Prepa] is worth half its long-term debt…

The Álvarez & Marsal report on Prepa found that the government utility was worth about half of its outstanding long-term debt. Its preliminary value range for Prepa was $3.5 billion to $4.1 billion at a time when its net debt was $6.9 billion. The report also found that its value could be increased by as much as $1.2 billion through a full implementation of performance improvements that would bring one-time savings as well as ongoing operating cost reductions.

China takes another step toward municipal borrowing

Last January, when I made my predictions for 2014, I wrote:

The biggest muniland story this year will be the development of the Chinese municipal bond market. It’s not often that you get to watch a government launch a bond market. And China’s will be massive. From the South China Morning Post:

The [Chinese] mainland’s quest to solve its $3 trillion-and-growing public debt problem by starting a domestic municipal bond market hinges on the one thing officials are most afraid of: transparency.

As markets absorb the results of the latest audit of state finances, Beijing’s long-standing vow to develop a municipal bond market to curtail rapid growth in other types of hidden public debt will take centre stage once more.

The fragile tax structure in Puerto Rico

The Puerto Rico government set a high hurdle for itself last year when it ramped up its 2014 tax revenue projection to $9.5 billion from the $8.3 billion collected in 2013. It did this by expanding the tax base for the sales and use tax (SUT) by approximately 26 percent, increasing corporate income tax rates and reversing reductions planned for the corporate excise tax (Act 154) paid by multinationals operating on the island.

The Act 154 tax rate was on track to be reduced to 2.5 percent in 2014 and then expire in 2016. Instead, the tax, which comprised 20 percent of 2013 revenues, was increased to 4 percent and extended to 2017.

The additional revenues from these tax increases allowed the government to borrow less for deficit financing in 2014, but created a high revenue threshold since the economy remains mired in an eight-year recession.

Pennsylvania should rethink tax on natural gas

In 2012 I wrote about the foolishness of Pennsylvania adopting an “impact fee” for companies drilling for natural gas in the Marcellus shale formation while it was being debated in the Pennsylvania General Assembly. Energy-producing states generally charge producers a “severance tax,” which is levied on the physical production of a well.

Pennsylvania, led by its Republican governor Tom Corbett, chose instead to apply a flat fee on natural gas drillers. I wrote previously:

There are shale gas fields covering more than half of the United States, but Pennsylvania has emerged as the rising star of domestic energy production with its ‘Mighty Marcellus’ fields. This is a great resource for Pennsylvania, but I’ve been confused about legislation that would impose an ‘impact fee’ on shale gas producers instead of the traditional volume-based royalty structure used by other states. The loss of revenues to the state over the next 20 years using the ‘impact fee’ could be approximately $24 billion using current gas prices. If gas prices double (they are currently at 10-year lows), losses to the state could exceed $48 billion or more.

  • # Editors & Key Contributors