The DeHavilland Blog

Friday, December 12, 2008

Property taxes and education funding

According to The Lincoln Institute's recent report, The Property Tax-School Funding Dilemma, approximately 30% of the average K12 budget comes directly from property taxes. And according to everybody else, property taxes are going to take a major hit over the next several years for a couple of reasons:

Foreclosures
Earlier this month, the Mortgage Bankers Association announced that 1 in 10 homes were either delinquent on payments (7%) or in some stage of foreclosure (3%). Here's the chart for the past few years from USA Today:

And while experts expect this number to increase as unemployment increases and home values continue to fall, there's another ticking time bomb that hasn't gotten much attention: the Pick-a-Pay mortgages.


Most people know about the low-introductory-rate mortgages that allowed people to get into their homes cheaply before dramatically increasing monthly payments down the road. Most of those were scheduled to reset within a 2-3 year window, which means they've been resetting recently and will continue to do so over the next year or so.

Pick-a-Pay is a variation on that, allowing people to essentially choose how much they wanted to pay on their mortgages - including an option to pay only the interest, or even just a portion of the interest. As a result, people ended up buying much more home than they could afford, since they only had to pay some or all of the interest, never touching the principal. But as loan amounts increase (since the unpaid portion of each month's scheduled payment rolls back into the value of the loan), many of those will reset as well, but within a 5-year time frame.

Here's the chart from this MSNBC article:


So our foreclosure problems aren't going away anytime soon - which is not only a problem for generating property taxes, but also for the impact that foreclosures have on values for the rest of the housing market.

Falling home values
According to "Why home values may take decades to recover" in USA Today, home values nationally have dropped 19% from their peak two years ago (it's a bit higher - 22% - in an index of 20 major cities). It's scary to think that your $200,000 house is now only worth $162,000 - a $38,000 decline in just two years.

What's scarier, however, is to realize that it has further to fall if we're to get back to historical trends. Housing prices were stable (adjusting for inflation) from 1950 to 2000. Here's what it would take to get back to traditional levels:

So far, home values nationally have tumbled an average of 19% from their peak. As bad as that is, prices would need to fall as least 17% more to reach their traditional relationship to household income, according to a USA TODAY analysis of home prices since 1950. In that scenario, a $300,000 house in 2006 could be worth about $200,000 when real estate prices hit bottom.

Foreclosures and falling home values are obviously related: increased foreclosures will lower home values, and lower home values increase the rate of foreclosures (since it's easy for people to simply walk away from their homes when the owe more, perhaps substantially more, than their homes are worth).

And both have a major effect on property taxes and, therefore, on school funding.

So what do we do?

It won't help much to decouple school funding from property taxes. Revenue from all sources is down dramatically, and the funding capabilities of local and stage governments have been severely reduced as a result. Changing the source mix for school funding won't change the fact that revenues are down across the board, and that there are any number of uses for the money that does come in.

So it comes down to accepting that government funding, which has traditionally comprised close to 100% of revenue for schools in the past, can no longer be considered a sole source. Schools and districts must look beyond government coffers for support, and they must redefine what support looks like.

If they only look at support in the form of cash, they're likely to be disappointed: while some schools may be able to replace lost revenues from a particularly supportive local community, it is nearly impossible to replace significant portions of a $500 billion revenue stream with private dollars.

But if they look beyond the dollars and work to build a partnership-driven model of education, it will be possible (not easy, but possible) to build a vibrant network of supporters lending time, expertise, goods and services, hard resources, and even cash.

Again, it won't be easy - but it is possible. And given current circumstances, I don't know that there's any other choice.

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