Skip to comments.The Coming Great California Pension Property Tax Earthquake
Posted on 08/17/2012 6:33:00 AM PDT by WayneLusvardi
The most widespread and persistent folktale about California is that some day the entire state will break away from the North American continent and fall off into the vastness of the Pacific Ocean. That day may not be too far off if what is unfolding in the growing number of municipal bankruptcy court cases in California plays out to its logical consequence without massive and politically legitimate pension reform.
As reported by urban economist Steven Malanga, municipal bond insurers may lose out in courts in their attempt to get bankrupt California cities to reduce pension costs. This may lead to more than just bondholders getting wiped out and much higher borrowing rate costs across the state.
If the courts uphold pensions as a constitutional right over bondholders rights, municipal workers will be entitled to earn more in pensions and health benefits than cities can currently pay. About 70 to 80 percent of municipal operating costs are allocated to salaries and benefits. And the lions share of salaries and benefit costs go to police and fire protection. There is little room for large budget cuts in most municipalities.
Some municipalities with pre-existing pension bonds may be able to refinance them without voter approval and shift the explosion in pension costs into long-term debt. Issuing brand new pension bonds would require voter approval. But such cities would have to have enough extra budget cash flow to handle the added debt.
Tax Flight: Voting With Their Feet
The only choice left would be to raise property taxes enormously. The inevitable result would be a tax flight to other California cities or out of state. What is called Tiebouts Law would prevail. People would vote with their feet rather than at the ballot box.
(Excerpt) Read more at calwatchdog.com ...
There was a town in, IIRC, Colorado that, 15 or 20 years ago incurred massive debt to support infrastructure for huge growth. But after the first few McMansion neighborhoods were built, none followed. They ended up having to jack up the property taxes something like ten fold (maybe more) and people just left.
It is getting harder for politicians to kick the can further down the road.
Politicians want money to run for another term, unions want more money for themselves, and so with a wink, wink, nod, nod, the unions get more of the taxpayers money and the unions pay a kickback in the form of campaign contribution.
The taxpayer is left holding the bag.
The one bright spot in all of this is that it can not keep going. The only question is how fast the train is going when it goes over the cliff.
There was a point (which I think we passed) where this could have been fixed without hurting too many people, but the greed of the unions and the corruption of the politicians have prevented any real reform.
Hang on people it is going to be a bumpy ride.
If there wasn't a Prop 13, my property taxes would have been around $6000-7000/year at the top of the real estate market as opposed to the ~2000/year they are currently (in a condo).
If they managed to get enough votes to overturn Prop 13 this place would empty in about 2-3 years max, you literally couldn't handle the tax increases that would immediately follow.
But if you sell your home and move to a different one in the state, doesn’t everything get based on the point at which you bought the new home? That is, does it kinda force you to stay in the same place?
Exactly, though I was indicating it kept people in state. There are also some allowances to keep old basis’ on moving to a different but similar priced home for the elderly I believe.
While the basis changes on a new purchase, the other aspect is that it cannot change, other than at purchase, more than like .5 or 1% per year. I’ve seen where it’s gone up 20-25% in a year in other states, it’s what destroyed agriculture around the DC area in Virginia back in the 70’s/80’s
It does. But the proper perspective is to recognize that it is the higher taxes elsewhere that creates the "force" and not the lower taxes on one's present property.
—It does. But the proper perspective is to recognize that it is the higher taxes elsewhere that creates the “force” and not the lower taxes on one’s present property.—
Kinda like rent control...