Bloomberg News

Colorado Housing Hangover Saps Taxes as School Obligation Grows

July 13, 2012

Colorado’s Housing Crisis

A "New Price" sign stands outside a previously owned home on the market in Denver, Colorado. Photographer: Matthew Staver/Bloomberg

Six years after the housing crisis hit Colorado, Claire and Alan Pegg are at risk of losing their home in the Denver suburb of Brighton. Left without an income after their tree farm failed, Claire says she isn’t sure her family will be able to keep the ranch-style house they’ve owned for eight years.

“We have no savings and nothing to fall back on,” said Claire, a 39-year-old mother of two who does voiceover work by day and waits tables at night. “If things go well for a few years we’ll get back on our feet, but if anything else happens we’ll be out.”

While housing prices in the Denver area bottomed out last year and are now posting modest gains, thousands of homeowners are still trapped in homes worth less than they paid, and foreclosures continue to sap property-tax revenue in hard-hit Denver suburbs, forcing the state to raise its share of funding for public schools in those areas and statewide.

The same factors are putting pressure on state governments and school districts nationally, as the lingering effects of the housing crisis are expected to chill property-tax collections into next year and beyond. That’s because home prices remain far below pre-crisis levels, and reassessments raising taxes lag behind upticks in property values by as long as three years.

“Property-tax revenues are projected to be essentially flat at the national level,” said Tony Yezer, a professor of economics at the Elliott School of International Affairs at Washington-based George Washington University. “That means in real terms, adjusted for inflation, they are down. That’s very unusual.”

Stagnant Revenue

Stagnant property-tax revenue in states hardest hit by the housing crisis are forcing lawmakers to use general-fund money to prop up local school districts. In Florida, a 3.6 percent drop in property-tax collections in fiscal 2013 led the legislature to allocate an additional $247 million in state funds to its 67 county school districts.

In Nevada, where property-tax revenue is down 24 percent from the assessed value’s peak in 2009, legislators used $111 million in lodging taxes to shore up basic support for the state’s 17 districts and increased a sales tax dedicated to schools by 15 percent. Nevada is the only state in the country in which net homeowner equity is negative, meaning that in the aggregate, every house in the state is worth less what owners owe, according to data compiled by CoreLogic Inc.

In Arizona, where a district’s bonding capacity is set at a percentage of its property values, some districts are unable to issue more securities until they pay down existing debt, or their assessed real estate values improve.

$71 Million

“We have $71 million in voter approved bonds that we can no longer access,” said A. Denise Birdwell, superintendent of Higley Unified School District in Gilbert, Arizona, about 22 miles (35 kilometers) southeast of Phoenix. “We are a growing district with approximately 650 new students yearly. We will have five schools over capacity next year with no ability to build.”

In Colorado, the decline in property-tax revenue, coupled with a falloff in sales and income taxes, meant schools got $1 billion less than they needed to cover expenses over the past four years, Leanne Emm, assistant commissioner of public school finance for the Colorado Department of Education, said in an interview.

Foreclosure sales in Colorado fell to 19,600 in 2011, down 22 percent from a peak of 25,054 in 2007 and the lowest level since the housing crisis began in 2006, according to data from the Colorado Division of Housing. Housing prices in the Denver metro area, meanwhile, rose 3 percent since last September and are down 8.5 percent from their peak in March 2006, according to the S&P Case-Shiller Index.

Hard-Hit

In four of the Colorado counties hit hard by foreclosures - - Denver, Douglas, Adams and Arapahoe -- the state expects to contribute $39.4 million more in fiscal 2013 than it did a year earlier to counter plunging property-tax revenue and assist with rising per-pupil counts. The extra state contribution in those counties isn’t enough to compensate for the decline in revenue since the recession began in 2007.

“We’re underfunding schools by over $1 billion this year,” Emm said. “Nobody is generating enough money to fully fund the needed increase year over year in school finance.”

Arapahoe is among the counties struggling to cope with the declines in tax revenue. In the county’s Deer Trail School District, home values plummeted 24 percent last year, forcing the school superintendent to do the jobs of three people.

‘Saved Costs’

“We’ve saved costs by me absorbing the principal position,” said Superintendent Robin Purdy, who runs Deer Trail’s single school, which serves 147 students in kindergarten through 12th grade.

“I will probably take on the athletic director position next year,” added Purdy, whose office is about 54 miles southeast of Denver. “What’s next? Mowing the lawn?”

Given its declining home values and student population, Purdy’s tiny district is expected to suffer the state’s largest drop in per-pupil funding between fiscal 2012 and fiscal 2013 -- $179 per student, according to an analysis conducted by the Colorado Department of Education. Blame for Purdy’s dilemma rests on Arapahoe County’s continuing wave of foreclosures -- the highest in Colorado in 2011, said Tom Thibodeau, academic director of the University of Colorado Real Estate Center.

“A high incidence of foreclosure actually dragged down the market value of properties through entire neighborhoods,” he said. “I suspect we’ll continue to see declines in assessed values for the next year or two before prices in places like Arapahoe County level off.”

Won’t Compensate

While housing prices may rise in the coming fiscal year, it won’t compensate Colorado for the costs of the housing collapse, Henry Sobanet, director of Governor John Hickenlooper’s Office of State Planning and Budgeting, said in a telephone interview.

“Right now, a little bit of growth is expected in 2012- 2013, but I don’t think we’re close to making up the losses from during the down years,” Sobanet said. “The effects of the recession can linger.”

The impact of declining housing values on Colorado’s state budget and county school districts is surfacing now because counties assess real estate values every two years.

“Much of the deterioration of the real estate market and the economic downturn had not yet occurred by June 2008, the reappraisal date for the 2009 assessment year,” wrote Colorado’s nonpartisan Legislative Council in its December 2011 revenue forecast. “The 2011 assessment year captured much of the decline in value that occurred during the recession.”

Battling Foreclosure

The foreclosure struggle of the Peggs and thousands like them caused the market value of Colorado housing to fall 9 percent in 2011 to $488.3 billion from $536 billion, according to the Colorado Division of Property Taxation’s 2011 annual report. The decline marks only the second time in almost 30 years that residential values dropped.

For many Colorado homeowners, the lingering housing crisis continues to depress home values, causing them to owe more than their houses are worth and putting them at risk of foreclosure.

Realtor Marilyn Allen, 66, is $55,000 in arrears after she stopped paying her $2,200 mortgage in November 2009 when her business declined.

“I couldn’t keep going, I stripped my home equity lines and I was in debt up to my ears,” said Allen, who’s filed paperwork for a loan modification 10 times with her lender and faces an Aug. 1 foreclosure sale of her 2,600-square-foot home.

With her home worth 30 percent less than the $405,000 she paid for it in 2004, its assessed value and property tax collections are also likely to fall next year -- bad news for Arapahoe County schools and the state budget.

-- Editors: Jeffrey Taylor, Daniel Taub

To contact the reporter on this story: Jennifer Oldham in Denver at joldham1@bloomberg.net

To contact the editor responsible for this story: Jeffrey Taylor at Jtaylor48@bloomberg.net

A "New Price" sign stands outside a previously owned home on the market in Denver, Colorado. Photographer: Matthew Staver/Bloomberg July 13 (Bloomberg) -- Marilyn Allen, a realtor in the Denver suburb of Aurora, talks with Bloomberg's Jennifer Oldham about her efforts to stay in her home amid Colorado's lingering housing slump. Six years after the housing crisis hit Colorado, Allen faces an Aug. 1 foreclosure of her home. (Source: Bloomberg)

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