Los Angeles Mayor Antonio Villaraigosa’s call for a repeal of California’s Proposition 13 (at least as it applies to businesses), the 1978 referendum which placed restrictions on property tax increases, prompted some quick investigation on my part.
A review of Los Angeles’ fiscal 2010 Comprehensive Annual Report illustrates a point that my partner and I have been maintaining throughout the year: the full brunt of the 2008-9 recession has not yet hit municipalities. Consider a chart of the Los Angeles Case Shiller Index from May 2007 – April 2011:
The 15.3% decline in this index between May 2008 and April 2011 is in stark contrast to the 0.1% decline Los Angeles has seen in Assessed Property Value in FY2010 (see page 329), and that decline was after two years of increases.
It is no coincidence that the mayor of a city that has seen a peak to trough decline in real estate prices of 40.8% from 2007 – April 2011 should be calling for property tax reform. Absent substantial property tax increases municipalities across the country will soon feel the hammer blow of current real estate values in their property tax assessments.
With FY 2010 debt per capita of $4,692, a 67.5% increase from FY 2001, it makes perfect sense that the mayor of Los Angeles would boldly speak out in favour of a policy that offers the potential of substantial incremental revenue.
Our contention here at ACM Partners regarding the slow-motion distress in municipal finance is simple: we have thus far only seen the “hit the wall” situations. Taking a look at Central Falls, Hamtramck, Harrisburg, Jefferson County and Vallejo the common theme that arises is one of municipalities backed into a corner and having no options. That is only the first phase of this cycle.
The same thing happens in corporate distress cycles:
- The basket cases go first
- A second group of debtors hold on longer than they should and slowly descend into distress
- Finally, a group of debtors who see the writing on the wall and seek to preserve their freedom of action by filing preemptively join the distressed ranks
We are still in just the first phase, and the policy landscape will not survive this cycle unchanged. Challenges to pension and healthcare benefits, changes in tax policy and debt restructuring are all in store before this cycle is ended.
About the author:
David Johnson is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services to companies and municipalities. He can be reached at 312-505-7238 or at [email protected].