Nothing Personal, Just Making an Example
The City of Stockton, California, is reported to be at the brink of declaring bankruptcy. Naturally, the commercial media "news" is making every effort to "spread the fear" among residents of any other city which may be facing a similar necessity in the future. (Read an article here.)
There may, in fact, be an unexpectedly long list of municipalities across the country which presently face this fate or may soon face it. Conditions vary. In some regions the Great Republican Recession of 2008 has actually only caused minor economic difficulties, but in others, the impact has been grave. Those teetering on the edge of bankruptcy this early in the cycle -- cities such as Stockton -- offer a glimpse into both the fundamental causes of "being so vulnerable" and the likely flow of "inescapable consequences" representing the effect of that vulnerability as the consequences gradually become material.
This could be a post which concentrates on the details of this "cause" and "effect" phenomenon, but it is not. This post is, instead, a "doubling down" repetition of a MeanMesa idea which seems to have never excited the interest which it might deserve. Events in Stockton present an excellent opportunity to demonstrate this idea.
Of course, it would be quite nice indeed to be offering up some sort of quick solution to the dilemma, but that is not the point. What is offered here is a possible course which might well prevent similar catastrophes.
The "Perfect Storm"
If we had taken a look at the financial plan of Stockton in 2007, we would not have noticed much which forewarned on the city's dire state in 2012. However, the five years between 2007 and 2012 brought incredible, unanticipated external forces to bear on the city and its economic plan. In 2007 city planners had undertaken a very routine collection of development tasks, none of which could be particularly criticised as an "over reach."
There were a couple of bond financed projects, notably an athletic stadium and a small boat harbor, both of which seemed thoughtful and promising.
Ambitious and optimistic? Yes. Over reaching? Not particularly.
Likewise, the "day to day" financial profile of 2007 Stockton was similarly non-provocative. Labor contracts with city employees may have shown a bit of the "enhanced generosity" which is typical to California municipalities, but nothing outrageous. City maintenance and operation costs might have been considered a little high for a conservative farm community in Idaho, but for a relatively healthy city of 300,000 in California, they were also comfortably close enough to normal.
In 2007 the whole economy of the city was puttering along at an acceptable level, too. The main elements of sustainable growth, reasonable appreciation of both commercial and residential real estate and fairly good prospects for additional investments and jobs were a solid foundation for positive estimates of the city's future health. City property tax revenues, while not the best in the state, were still quite "doable."
Charts and Graphs Right here, we can take advantage of significant research from a variety of sources. Probably because of Stockton's unenviable future prospects, a good body of data is available about the city economy's recent past. Take a look. These are presented here as "background information" for the proposition which follows. Several are dated from a year or two back and some topics are not covered, but this collection still shows many, convincing dimensions of the "perfect storm."  |
| http://westbrookrei.com/?p=198 |
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| http://www.cityrating.com/crime-statistics/california/stockton.html |
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| http://www.abcrealestatedirectory.com/prices/areas/StocktonCA.htm |
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| http://www.city-data.com/zips/95202.html |
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| http://www.city-data.com/city/Stockton-California.html |
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| http://www.altosresearch.com/blog/categories/6-Housing-Bubble |
The economy of the whole world -- especially with current examples in EuroUnion countries such as Greece, Ireland, Portugal and Italy -- tells this same story on national scales. Immediately at the first hint of troubles, every destructive idea of austerity and economic contraction -- no matter how thoroughly disproved in the past or simply "road weary" from over use and consistently bad results -- rushes to the forefront of "plans" to mitigate such disasters. These will inevitably be appearing momentarily as "absolutely necessary, unavoidable solutions" for the "Stockton bankruptcy problem."
Reviewing the diagrams above, it is clear that Stockton "started hurting" as the shamefully unregulated, rampaging Bush housing bubble began to shatter. With home prices careening to unimagined lows, banks eagerly foreclosing mortgage assets right and left, unemployment increasing and incomes plummeting for those who still had jobs, Stockton's "property tax take" became abysmal.
Now, there were plenty of other factors "waiting in the wings," all ready to add their own pain to Stockton's problems. However, way down at the fundamental level of the crisis, the vaporizing property tax revenue was the boot on the city's throat. If the devastating effect of this sudden reduction in city revenue could have been avoided, the other factors might have been survivable.
We see two primary factors at play in Stockton's property tax problem. Both are -- and will continue to be -- inevitable so long as the existing property laws remain in place.
Let's take a closer look at each.
The typical arrangement for the payment of property tax is no secret to anyone who has ever owned a home. There is a property appraisal to establish the value of the property. The local government establishes an annual budget for the operation of the city. The budget is totalled, and the property appraisals are totalled, then the sums are divided yielding the property tax rate. Shortly after this, property tax bills are sent to property owners for payment.
However, when properties are foreclosed, theoretically "no one" owns the property. The foreclosed property is no longer a part of the appraised "tax base" of the city, immediately reducing property tax revenues. Look at the charts.
This presents an interesting "disconnect."
MeanMesa asks why the bank which foreclosed the property is not the "new owner" and liable for the property tax payments while the property is in its ownership? If we stopped right here, MeanMesa would be able to hear the howls of Stockton's eager foreclosure "owners" all the way out in Albuquerque. Rush Limbaugh would probably even get around to saying something about the plan.
Move the process of paying property tax into being an addition to the mortgage payment. Every mortgage payment includes enough "extra" to pay the property tax at the end of the year. When the home owner is foreclosed, and the property is once again owned by the bank, the property taxes continue, but they are paid by the bank.
Stockton might have less money, but Stockton won't wind up with no money.
If you live in Saudi Arabia, and part of your "portfolio" includes a nice chunk of the securitized mortgage packages which were on sale during the Bush autocracy, you don't actually care very much about neighborhood schools, roads, bridges and police cars. You may not even care that much about foreclosures -- they may be a little dark at the moment, but when the economy comes back, you'll wind up owning a bunch of valuable houses.
And, you won't be the only one in the chain to make money. As Stockton collapses, flirting with austerity and privatization schemes, more folks will have a chance to buy stadiums, bus lines, city property and even entire subdivisions at "bargain basement" prices set by desperate city councilmen. If you've got enough dough to out last the recession, you'll come out of it "smelling like a rose."
But, but, who has enough dough to out last the recession?
Try to remember. Just at the end of the autocracy, American banks received an involuntary "blood transfusion" of tax payer money. Since banks make money by having money, most of these banks, predictably, did just swell with the sudden infusion of cash. Further, they didn't "do well" in a normal way for banks. They "did well" because they were throat deep in capital right in the middle of a very convenient recession.
They are still, to this very day, "doing well" at an unprecedented level, and, of course, cities such as Stockton have been led to the slaughterhouse to help them "do well."
If the new owners of foreclosed houses had to pay property taxes, they would become very interested in whether or not the neighborhood was sustaining the value of their "new houses." Believe it or not, the bankers might even be interested in trying to help keep house prices high in the first place. Foreclosure mania would cease to look like free candy. Good business might include doing whatever was possible to even, wait for it, prevent foreclosures!
In bad times, initiating this plan would be political suicide. But in good times, the transfer of property tax payments to become part of mortgage payments would be painless and invisible.
This might not help Stockton all that much, but what about your town or city?
The MeanMesa Suggestion
Reviewing the diagrams above, it is clear that Stockton "started hurting" as the shamefully unregulated, rampaging Bush housing bubble began to shatter. With home prices careening to unimagined lows, banks eagerly foreclosing mortgage assets right and left, unemployment increasing and incomes plummeting for those who still had jobs, Stockton's "property tax take" became abysmal.
Now, there were plenty of other factors "waiting in the wings," all ready to add their own pain to Stockton's problems. However, way down at the fundamental level of the crisis, the vaporizing property tax revenue was the boot on the city's throat. If the devastating effect of this sudden reduction in city revenue could have been avoided, the other factors might have been survivable.
We see two primary factors at play in Stockton's property tax problem. Both are -- and will continue to be -- inevitable so long as the existing property laws remain in place.
1. The "Connection" Between Property Ownership and Property Taxes
2. "War Profiteering" from Tsunami Waves of Foreclosures
Let's take a closer look at each.
1. The "Connection" Between Property Ownership and Property Taxes
The typical arrangement for the payment of property tax is no secret to anyone who has ever owned a home. There is a property appraisal to establish the value of the property. The local government establishes an annual budget for the operation of the city. The budget is totalled, and the property appraisals are totalled, then the sums are divided yielding the property tax rate. Shortly after this, property tax bills are sent to property owners for payment.
However, when properties are foreclosed, theoretically "no one" owns the property. The foreclosed property is no longer a part of the appraised "tax base" of the city, immediately reducing property tax revenues. Look at the charts.
This presents an interesting "disconnect."
MeanMesa asks why the bank which foreclosed the property is not the "new owner" and liable for the property tax payments while the property is in its ownership? If we stopped right here, MeanMesa would be able to hear the howls of Stockton's eager foreclosure "owners" all the way out in Albuquerque. Rush Limbaugh would probably even get around to saying something about the plan.
Move the process of paying property tax into being an addition to the mortgage payment. Every mortgage payment includes enough "extra" to pay the property tax at the end of the year. When the home owner is foreclosed, and the property is once again owned by the bank, the property taxes continue, but they are paid by the bank.
Stockton might have less money, but Stockton won't wind up with no money.
2. "War Profiteering" from Tsunami Waves of Foreclosures
If you live in Saudi Arabia, and part of your "portfolio" includes a nice chunk of the securitized mortgage packages which were on sale during the Bush autocracy, you don't actually care very much about neighborhood schools, roads, bridges and police cars. You may not even care that much about foreclosures -- they may be a little dark at the moment, but when the economy comes back, you'll wind up owning a bunch of valuable houses.
And, you won't be the only one in the chain to make money. As Stockton collapses, flirting with austerity and privatization schemes, more folks will have a chance to buy stadiums, bus lines, city property and even entire subdivisions at "bargain basement" prices set by desperate city councilmen. If you've got enough dough to out last the recession, you'll come out of it "smelling like a rose."
But, but, who has enough dough to out last the recession?
Try to remember. Just at the end of the autocracy, American banks received an involuntary "blood transfusion" of tax payer money. Since banks make money by having money, most of these banks, predictably, did just swell with the sudden infusion of cash. Further, they didn't "do well" in a normal way for banks. They "did well" because they were throat deep in capital right in the middle of a very convenient recession.
They are still, to this very day, "doing well" at an unprecedented level, and, of course, cities such as Stockton have been led to the slaughterhouse to help them "do well."
If the new owners of foreclosed houses had to pay property taxes, they would become very interested in whether or not the neighborhood was sustaining the value of their "new houses." Believe it or not, the bankers might even be interested in trying to help keep house prices high in the first place. Foreclosure mania would cease to look like free candy. Good business might include doing whatever was possible to even, wait for it, prevent foreclosures!
In bad times, initiating this plan would be political suicide. But in good times, the transfer of property tax payments to become part of mortgage payments would be painless and invisible.
This might not help Stockton all that much, but what about your town or city?
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