Crystal MN home sales down 3% since January

The Star Tribune had an article this week about how declining home values are squeezing local city governments. Now why is that? City and county budgets rely on property tax dollars, which are tied directly to property values. When residents’ home values drop, the tax revenue drops as well. However, there is a lag between the drop in home prices and the drop in tax values. For example, statements issued in 2010, for taxes payable in 2011, are based on 2009 values. Because of this lag, many cities are just beginning to see the major drop in tax revenue. Minneapolis is likely feeling this pinch as well. My husband and I own a North Minneapolis rental property and just today we received the 2011 tax statement. The annual amount went down by about $600! While we personally liked seeing this considering it improves our monthly cash flow, drops like that across thousands of Minneapolis homes put city planners in a difficult situation. It could mean the loss of police officers, firefighters, services, etc. Any significant loss has the potential to impact the quality of life for Minneapolis residents. Of course the city could raise tax rates but that will do nothing but cause ire, especially in the face of an economic downturn that has sent home values plunging. Plus this is an election year so public officials aren’t going to be too keen on raising taxes and risk losing voter support.

This story just illustrates another effect of the decline in the housing market. Homeowners have had to make sacrifices and be more diligent with their spending because of the economy. While it may be unfortunate, city governments are also faced with a budget crunch, but just at a different level than homeowners. Given that this is an election year, why not let the voters decide? Put together a list of 5 to 10 services that could be cut or slimmed down and then let the voters choose. The reality is that city governments must find a way to balance providing quality services while not spending at an unsustainable level.

When Terry Seaton got his property tax statement the other day, the housing crash hit home — literally.

A house he bought in Bloomington eight years ago for $195,000, which by mid-decade was worth more than $230,000, is now assessed at just $177,000 — nearly $20,000 less than he paid for it.

“It was real eye-opening,” Seaton said. “That was a big nose dive.”

Imagine how Sue Kotchevar feels. The Eden Prairie finance chief just learned that the value of the homes and businesses in her city plunged by nearly $1 billion in one year.

Millions of similar situations in hundreds of cities are combining to create a crisis with profound ramifications for city and county budgets, which rely on property tax dollars. Property owners’ lost value means in order to balance their budgets, officials will need to raise tax rates in the teeth of a recession — or cut services at a time when the easy targets are already gone.

Total property values in counties across the metro area are down 6 percent or more. That may not sound like much, but in Ramsey County alone that adds up to $2.7 billion in lost value — which will translate into lost property taxes.

“We cut the flower pots last year,” said Mayor Pete Ewals of Jordan. “Now it gets down to the nitty-gritty. Our biggest expense is people, but we hate to lay anyone off when the last time we tried to hire a finance person, 100 people applied. It’s tough out there. But where else to cut? Maybe we need to wait to plow snow till daytime business hours, so we aren’t paying so much overtime.”

A year ago this month, people across the metro area were startled to find that sliding home values were not showing up yet on tax bills — or not nearly as much as they thought they should. Many were outraged and suspicious, accusing government officials of trying to finagle the system to keep the tax dollars flowing. Now the wheels of tax assessment have caught up — and a whole new set of anxieties is arising. Instead of citizen outrage, it’s city and county officials breaking out in a panicky sweat.

“I have three board members up for election. There’s no appetite for a property tax increase,” said Dave Hemze, the Carver County administrator. “The easy cuts are gone.”

‘It’s a catastrophe’

Average residential values are down 7 and 8 percent in many places, and by double digits in some. The commercial and industrial sector held steady last year, but now, with vast stretches of empty space, those too have dropped — by 5 percent or more, depending on the place.

“People have never lived through anything like this,” said Jim Miller, executive director of the Minnesota League of Cities. “It’s a catastrophe. The city of Brainerd is talking about losing six firefighters. It may go from 87 people to 66 in two years.”

The alternative is tax increases, but that’s a political loser. “People don’t like property taxes in the first place,” Miller said, “so when their value goes down and their taxes still go up? There is going to be real ire out there.”

In Scott County, administrator Gary Shelton is warning of “bitter medicine” in what he’s calling a “grim” year.

In Savage, which bristles at its high-tax reputation, the City Council has agreed to spend a large portion of its emergency funds to finance a last-minute survey asking voters how prepared they would be for a tax hike — or, if that’s off the table, what services they’re willing to do without.

All of it is happening in an election year. County commissioners and city council members will be making these decisions with their election opponents screaming at them from their websites and Facebook pages.

Lag time

The home value picture can vary dramatically from city to city.

In Hennepin County, assessor Jim Atchison said, values are sinking fastest in smaller outlying cities and places that have seen the most foreclosures. Hanover, Greenfield, Brooklyn Park and Brooklyn Center are all down 12 percent or more. Osseo is down 11 percent.

On the other end, Edina is down 5.4 percent and Wayzata and St. Louis Park slipped 5.6 percent.

At the root of the home-value issue is the lag between when values really change and when that change is reflected on property tax statements.

Statements issued in 2010, for taxes payable in 2011, are based on sales from 2009 or earlier. So it doesn’t help that the real-estate market may finally be recovering a bit.

Just pinning a 2010 value on commercial and industrial properties was tricky, assessors say, because there were so few sales to use as measuring sticks. Minneapolis assessor Patrick Todd said he usually has a couple hundred commercial and industrial sales to use when determining values. This year? Just 39.

“We hate that, as appraisers, because we’ve got less” to go on, said Mike Sutherland, the Anoka County assessor. There were just 27 commercial/industrial sales across the county in 2009, he said.

Perhaps because citizens imagine that falling values are good news at tax time, fewer are calling to complain or ask questions.

In Dakota County, where the assessor’s office fields an average of 850 calls over four days when the statements go out, there were 635 this year. “By the overall reaction, with the volume down, that probably tells me that they’re satisfied,” said Dakota County assessor Bill Peterson.

Or maybe, after being battered by waves of bad economic news, they’ve just accepted that the home values of yesterday are gone.

Put Erin Carlson in that camp.

She bought a Shakopee home with her husband in 2001. Now that their family has grown to five children — a set of triplets arrived in 2008 — they want to move. But they owe $188,000. Scott County values the house at $177,000.

“I didn’t have high hopes,” Carlson said. “I thought this year it would even out instead of continuing to drop.”

Now, she feels “depressingly trapped.”

That’s a feeling that local elected officials likely share.

Staff writer Laurie Blake contributed to this article.

Tags: foreclosure, Tax Value