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Q

There has been much dialogue about commercial real estate being the next implosion on the markets and the devastating effects it could render. Certainly muni bonds that rely on real estate taxes and probably sales taxes may be suspect acquisitions at this time. What is the consensus thinking at FMS on this subject?

A

James A. Klotz responds:

Assessed values have dropped significantly in many communities, as you point out. However, in many areas, the property tax has become less relied upon by local governments than it once was. The increasing use of fees and assessments to provide funding for services where the specific benefit a citizen receives can be measured and priced has become a major source of revenue. Fees for sanitation, fire services and other traditional government services have replaced the property tax as that tax has become increasingly unpopular. So, the lessening role of property taxes also means that there is greater insulation from any volatility associated with that tax, and the impact of lower valuations has been somewhat reduced.

Despite this change, local governments everywhere are feeling the pinch from reduced revenues in this period of economic difficulty. Nevertheless, as local governments wrestle with out-of- whack budgets, debt service remains a high priority and is rarely, or never, targeted for cuts.

Those communities hardest hit are likely to see bond rating cuts and decreased service levels for their citizenry. But, defaulting on bond obligations, and the ramifications it would bring, still is a major taboo in local government finance.