As 2011 begins, I reflect on the past 3 or so years and wonder what will be the next shoe to drop. With conditions unlike anything since the great depression there are many things that come to mind. One thought is the municipal bond market and government bond in general. I have always been told that during the depression the greatest amount of wealth was lost not in the initial crash of the stock market but in the midst of the depression and in the bond market.
Here I just take a look not at the federal or state level but all the way down to the heart of America the communities themselves and what possible effects we can see on the average household in the near future. Most of this I have taken from an article by the CBO (Congressional Budget Office). This is about the 3,000 counties, 36,000 municipalities, 37,400 special districts and 14,600 public school systems throughout America.
Much like my brain works, all of this has been constructed on the fly and likely fragmented with plenty of random thoughts. But hey, it’s not like I get paid for this so, take it for what it is.
According to the CBO, nationally, house prices fell 27% from year ending June 2006 to the year ending 2010. Property tax collections increased 31% over that same period. A decline in house prices implies that collections will probably fall in the coming years as local governments gradually update property tax assessments to reflect lower market values. On average, collections of property tax revenues lag behind changes in house prices by three years. Even small declines in collections could cause fiscal stress when the cost of providing public services is growing.
Property tax makes up just over 25% of revenue to local governments. State government provided 30% of local government in 2008. State revenues have plummeted during this weak economic period. States primarily get their revenue from income and sales tax both of which are down significantly. States have and will continue to reduce spending in part by cutting amounts provided to local governments. The fiscal stress to both State and Local government is occurring simultaneously cutting aid to local government when it is needed the most.
Local funds allocated to education average 38% of the budgets, without question the largest cost to local government. According to another survey, 40 states cut spending for K-12 education in fiscal year 2010 and 31 governors proposed to cut such funding in 2011.
Concurrently, as States and local government face economic contraction, there is increased demand for a host of public services. Unemployment, reduced work schedules, cause many to lose access to health insurance putting stress on public hospitals and clinics ; crime increases, placing more demand on police protection and the unemployed often opt for less-expensive modes of transportation like public transit. As unemployment increases more demand is placed on all social services such as job training and welfare.
Local governing bodies will find themselves frequently at odds with each other due to political dynamics dominated by different political parties. Deficits may occur. Making arrangements with public employee groups and unions will be a factor. Bankruptcies will occur because of the inability to control labor cost.
Businesses will move to more favorable economic environments should cost increase to support local governments who fail to control labor cost. Communities with high unemployment will see demographic shifts when moderate income households move from local jurisdictions due to relocation of businesses out of these cities. As the businesses move out the local tax revenue drops further. Over time the call for more public services increases and personal income falls leading to more unemployment.
Larger communities may see ever growing deficits and the financial markets will become reluctant to finance them.
The locals and State officials will be at odds as the States will require the local governments to comply with budgetary controls and audits.
It is likely the only option to local governments will be to decrease spending and increase taxes and fees. We can all see this happening no matter what locality we live in. There is nothing exempt or outside the reach of government as a source of income. We can look for increases in almost fee or service provided locally, and not just a couple percent here and there but in almost everything.
What does this all mean? It means first of all local spending will be cut. I would think that with education representing 38% of most local budgets that will be a starting point and a hot battle will erupt in communities all across the nation.
The only other options I see available are sharp increases on property tax and unbelievable increases on all other fees, licenses and penalties under the localities’ jurisdiction. Even this would not allow the communities to maintain the status quo and would further exasperate fiscal problems for individuals which, in turn will lead to further revenue loss as businesses and people often vote with their feet.
So, one of the unpalatable options of fewer government employees at much reduced rates, and more efficient educators in lesser numbers along with reasonable increases in property tax and local service fees are likely what some will see. Many other jurisdictions will continue to remain in denial and in the process of trying to keep everyone happy the politicians will place their communities in default.
This leads to my next scenario; municipal bond defaults. Long considered the safe bet, these bonds could just be a ticking time bomb for investors not paying close attention.
Or maybe I’m all wet here and the President and Congress will decree jobs for all and a chicken in every pot soon. A declaration that all this is simply a bad dream and we will awaken soon is just as likely. The noise coming out of Washington is just that……. noise keeping all the factions at odds with one another while we all ride the FED’s printing press into hyper-inflation and lower standards of living.
Make no mistake of it, we are witnessing history in the making. Enjoy the ride.
