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Pima County braces for big budget impacts, thanks largely to plunging real-estate values

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Plunging real-estate values aren't just causing Tucson homeowners major headaches; they may also cost Pima County's government millions in general-fund revenue, and greatly reduce the amount of the next general-obligation bond package to go before voters.

"Right now," says Larry Hecker, chair of the county's Bond Advisory Committee, "we're looking at an overall package of $700 million or so. But that may be too high."

These voter-approved bonds use secondary property taxes to pay for things ranging from neighborhood reinvestment and open-space conservation to public buildings and affordable housing.

Discussion about the next county bond election began a few years after voters approved a $582 million bond package in 2004. Three years later, the advisory committee contemplated a bond election in 2008 with a target of between $600 and $700 million worth of general-obligation bonds.

These figures are established using a number of factors, including the net assessed valuation of all property in Pima County, a secondary property-tax rate ceiling established by the committee, and the terms of the debt.

Since 1989, the net assessed valuation of Pima County for bond purposes has more than tripled, to almost $10 billion. It fell slightly during a four-year period in the early 1990s, but recent history showed three consecutive years of annual increases above 13 percent.

That trend, Pima County administrator Chuck Huckelberry predicted in 2007, was about to change. The shift, he pointed out, would have a substantial impact on the county's next general-obligation bond election.

"Given the present local economic conditions," Huckelberry warned in a 2007 memorandum, "it is likely we will be entering a period of no or low growth in the assessed value of the county beginning in 2010 and lasting at least three years."

Even those cautious words proved overly optimistic—and despite his concerns about assessed valuations, by 2008, Huckelberry was indicating that an election asking for up to $922 million in bonds might be possible for either 2008 or 2009.

Then reality struck.

In an October 2009 communication to the bond committee, Huckelberry offered a decade-long "official forecast of assessed value" for Pima County's secondary property tax. Starting in 2009, the projections fell substantially for four consecutive years, from $9.8 billion to $8.4 billion, and didn't exceed their initial level until 2019. What's even worse is that a recently released partial update of this forecast shows the loss in value being even steeper— declining to $7.8 billion.

The cause of this drop is readily apparent in the marketplace: plummeting real estate prices, and a virtual standstill in new-housing construction and population growth.

The impacts of this loss in valuation on the county's ability to borrow have been substantial. The bond committee lowered its sights to a package between $600 and $800 million, and the Board of Supervisors pushed off an election until at least November 2011.

But Hecker isn't certain it will happen even then. "The committee knows the timing may just not be right," he says.

That delay isn't so important, because for financial reasons the county wouldn't be able to sell any of the bonds until at least 2012. Dropping assessed valuations will, however, have an immediate and significant impact on the county's next fiscal-year budget, since property taxes make up a majority of its general-fund revenue.

In a January memorandum to the Board of Supervisors, Huckelberry reversed previous estimates that the county's assessed valuation for primary-tax purposes might actually increase.

"The drop in primary (valuation)," Huckelberry told the supervisors, "if it occurs as forecasted, would represent an 8.2 percent decrease in the tax base." That, he pointed out, "will cause future budget stress for the county."

Republican Supervisor Ann Day believes the drop in valuation during the upcoming fiscal year will result in the county being in "crisis mode."

"I prefer we start planning," Day says about looming budget problems. "We can look for savings from consolidation, either within the county or with the city of Tucson."

While consolidation may require personnel layoffs, Day observes: "If we don't consolidate, it's either get out the meat cleaver, or raise taxes."

Day says the outcome of the state sales-tax election on May 18 is also critical for the county.

"If it doesn't pass," she indicates, "state triggers get pulled immediately." These would include cuts in revenues shared with the state and transfers in fiscal responsibility for many prisoners from the state to the county, in addition to many other state budget changes that would adversely impact the county.

Elaborating on this possibility, Huckelberry in a memo issued last week predicted the county could suffer between a $30 million and $50 million impact if the tax increase isn't approved.

Because of that possibility, he informed the supervisors that by the end of April, he'll be offering two proposed budgets for the coming fiscal year—one assuming the tax increase passes, the other presuming it fails.

On a more positive note, Huckelberry speculates the decrease in property valuations may end relatively soon. "These contractions are forecast to occur again next year, with possible stabilization in (fiscal year) 2012-13."

Day, however, says property valuations are hard to forecast: "This has been such a deep recession; things may never look the same. We're learning we can do more with less, but nothing is sustainable in the way (the county is presently) doing business."

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