To calculate your estimated market value, the City Assessor looks at how much houses like yours sold. They look at characteristics like house size, number of bedrooms, number of bathrooms, garage, etc and then compare your house to the sales price of similar ones.

However, when they do this calculation, they leave out lender-mediated sales, i.e. bank sales. These are situations where people have defaulted on their mortgages and banks are now selling the homes to pay off the mortgages.

In normal times, this is no big deal because they are such a small portion of the total sales. But now, they are a substantial number of the sales that are occurring. For example, in Longfellow neighborhood, my neighborhood in Minneapolis, bank sales made up 41% of the total sales. The percentage varies around the City, with 65% of North’s sales being bank-mediated, with only 17% of Southwest’s sales being bank-mediated.

See your neighborhood’s details here: http://www.mplsrealtor.com/downloads/market/Lender-Mediated/Main.htm

The reason that this is important is that bank sales are typically made at much lower prices than regular sales. In Longfellow, the average sales price for homes sold the traditional way was $200,000. Bank sales however, averaged $118,000. The 40% of home sales that averaged $118,000 are left out of the calculations for estimated market value, arguably overstating the market value of a large number of homes.

This is through state policy. But it seems to me that for a buyer, there is no difference between one method of sale and other, other than I can buy a home much much cheaper one way than another. It seems to me that state policy should be changed to include lender-mediated sales since today they make up so much of the market in some locations. The policy benefit to this (besides fairness) would be to provide tax relief in areas that are hit hardest by the home value meltdown. This would also provide a benefit not just to persons who made bad investments (for whatever reason) but would also recognize persons who did the right thing but have been impacted by bad decisions by persons around them. It could also help people who are on the margin to stay in their homes.

In full disclosure, the Assessor’s Office doesn’t like this idea because typically lender-mediated sales are of properties that have some problems.  In Minnesota, banks are required to give homeowners six months to “reclaim” their homes after foreclosure, a holdover from the Great Depression.  The problem with this policy is that in those six months, bad things often happen.  Copper and architectural features gets stripped.  Squatters move in. Vandals visit.  So sometimes, these lower sales are warranted.  It would be an extra burden on the assessors to inspect these properties to see if they had substantial damage but overall it would be fairer if they were included in the valuations.

That was my reaction Wednesday when I left our Board of Estimate meeting.

The short explanation goes like this. The City has about $85 million in Local Government Aid now. The governor is recommending cutting $35 million dollars in local government aid from the City’s budget in 2010. That is $35 million on-going every year. One has to expect given the trajectory that we have been on, that in six or seven years that LGA will simply disappear. That leaves us with an $85 million loss on-going.

Now to put that into perspective, I pulled numbers for the property tax and LGA-supported portions of various budgets. These numbers are not exact but close enough to give you a sense of the magnitude of these two figures – $35 M and $85 M.

Assessor $3.9 M

Attorney $7.1 M

Clerk/Council $7.1 M

City Coordinator $41 M

Civil Rights $2.5 M

CPED $2.4 M

Fire $49.2

Health Department $3.7

Mayor $1.4 M

Police $112. M

Public Works $28.2 M

Park Board $66.5 M

Now let me make this a bit more complex. The public works budget has already been bled dry. Our streets are not being maintained at a sustainable level (the pavement condition index is declining). The Fire Department is pretty much arrayed so no one is more than four minutes away from a fire station. The vast majority of runs are for medical issues and the fire fighters are keeping people alive. The further away the firefighters are, the more people will die. Police and parks folks get. The other stuff, like the Finance Department and the Human Resources Department (buried in the City Coordinator budget) are needed to support the Police Department, Fire Department, Public Works etc and can only be cut if you cut these other departments. You need an assessor to get the property tax revenues. You need the attorneys to prosecute bad guys and help run the City. You need a Clerk and you need an Elections Department that makes up a big part of their costs.

Now lets assume that after 8% a year property tax increases coupled with the crash in home values (which makes us all poorer) plus possibly having commercial property values crashing which will shift a larger burden onto homeowners, that you can’t raise property taxes any faster than inflation. You have to find the $35 M and eventually the $85 M just from cuts. What would you do?

Now let me also layer onto this the problem that we were already facing a need for an additional $25 M in five years for the pension systems and now they have lost one-third of their value. I have not yet seen numbers that would resolve this but some estimates are much much higher than the $25 million we were already looking at. I believe that employees deserve fair pensions but this has to be balanced with the other needs within the City.

Now you understand why I started this e-mail by saying, “Holy Crap”.

In a crisis of this magnitude, I think that radial ideas, ideas that we have not wanted to entertain, will have to be implemented. I think that there are some departments that provide services that are duplicated elsewhere would have to be eliminated. I think that some things that we do not want to lose will be lost. But in the end, I don’t think this will generate enough money.

I also think that the relationship between the City and the State will have to be renegotiated. If there is a divorce with the LGA partnership, we need to also look at no longer taking care of state obligations. The Convention Center is a state asset and should be paid for by the State. The Target Center is a state asset and in essence being subsidized through property taxes. The Chain of Lakes is a state park and should be funded by the State. The costs of the 150,000 people who flood into the downtown and the costs of the largest concentration of poverty in the state should not be borne by the City taxpayers. There has to be some consideration by the State for these things. One obvious place is for the State to take over the costs of the Convention Center (capital and operating and the “Meet Minneapolis” costs which are really promotion of tourism in Minnesota) and let the City have the half cent sales tax and the other associated sales taxes to partially offset the losses in LGA. This would be a start. We need to also think of other costs that are really state costs and have the state pay for them.

These are just a few of my thoughts and I look forward to the ideas of other folks on how to radically reduce the City’s budget.

Four major things are funded out of property taxes: Cops, firefighters, public works (primarily street-related items like fixing potholes, running traffic lights and paying for streetlights) and parks. After that, there are a bunch of small things that are needed to provide the four big tax-supported costs – the Finance Department, the Human Resources Department, the City Clerk, the Attorney’s Office, etc. These things have been bled dry as the City has adjusted services downwards to match LGA revenues. We have finally gotten our cops back to somewhat reasonable levels but the streets and parks are falling apart. Pretty soon we are all going to be driving on gravel if we don’t change those trends.

So where can we find more funds to deal with the state cuts? I think that the questions that need to be asked are about money that is “fungible.” “Fungible” is a finance term for money that can be swapped around. Typically, money is collected in one pot but can be moved around to another pot. The problem with keeping money in separate pots is that when it comes time to figure out what should get money, each pot is evaluated separately. So one pot can go to really important things while another pot gets spent on less important things because the stuff in the different pots don’t get weighted against each other. This is why the City needs to evaluate its options more holistically. If so, I think it would choose different options. I have listed some examples below.

One option is opening up the sales taxes to other expenses. Right now, the sales taxes can only be used for Convention Center-related expenses. I think that police costs in particular should be eligible for funding from the 1/2 cent sales tax. That sales tax exists to tax visitors to the City, both short-term visitors and people who come into the city for employment. I think that the Meet Minneapolis software debacle would not have happened if more competition existed for those dollars.

The current budget assumes $1.7 M a year on-going to the Target Center. I don’t think any private money should be going to sports teams (sorry guys you are private businesses and should not be getting an on-going stream of tax money).

The Target Center green roof is another expense that I do not believe would have happened had those expenses been weighted against other priorities. Although I appreciate the importance of the environment, the amount of money spent on the Target roof was way out of proportion to the benefit received.

Other expenses in the Parking Fund should be more closely scrutinized. I do not think building a parking ramp that will never sustain itself by the Guthrie was a good idea, a ramp that needs an on-going subsidy from funds that are fungible with property taxes, in essence meaning it needs a property tax subsidy.

The City just voted to not make expensive improvements to the City’s water production process. This means that water rates will not go up as quickly as they might have. This is also an example of fungible money because these rates come out of the same pockets as the people who are paying taxes. The City needs to seriously examine these fee-based costs also to find ways of not overburdening citizens.

These are just a few examples of places where “fungible” money should be examined more carefully to help address our funding crisis.

- Set the maximum property tax levy for the City and the independent boards (now just the Park Board)

- Issue debt for the City and the independent board(s)

- Oversee the internal audit function

Unofficially however, the Board does three important things. One major thing this structure does is allow independent boards to be independent. If you want an independent board to truly be independent, they need to have some financial independence. Not total financial independence but enough that they are truly free to make their own policy decisions. If you put the City completely in charge of the purse strings, very soon you will not have an independent board. I can guarantee that. Very quickly there will be quid pro quos of “if you want a tax levy at all, you have to do the following things.” And the big, candid concern is that city elected officials, who receive a large number of campaign donations from developers, will sell off land or otherwise give sweetheart deals to developers on park property.

Conversely, you do not want independent boards to have complete financial independence. There has to be some coordination of the overall amount of taxes collected from citizens. If there wasn’t forced coordination, the Park Board would vote itself substantial tax increases, knowing that most citizens only look at the overall tax burden and not the components.

The Board of Estimate forces some coordination while still leaving substantial policy independence for both the City and the Park Board. If you don’t believe that the Park Board should have this independence, then you should argue that the Board of Estimate should also go. If you believe that the Park Board should have some policy independence, then you should also argue to retain the Board of Estimate.

Second, in the past, the Legislature did not trust Minneapolis and St Paul to make decisions about debt. For Minneapolis, this decision was vested in the Board of Estimate. In St Paul, the Legislature retained this decision for St Paul. This meant that St Paul would have to go begging to the Legislature every time it wanted to borrow money. The Board of Estimate should not be eliminated unless the Legislature vests this authority in the City. It would be very bad if the City had to go begging to the Legislature every time it wanted to borrow money.

Third, we take it for granted that government in Minneapolis is pretty clean. For the most part, we have very little corruption and graft, especially when you compare to other major cities (Chicago, New Orleans, Chicago, New Jersey, New York, Chicago, etc).  Part of this is because we have an independent audit function. It is important that as much independence in audit be retained. If the Board of Estimate is eliminated,at minimum, the audit function should report directly to the Council and not to a City Manager.

I appreciate that these are somewhat subtle points but I do believe that they are vital to keeping a strong Park Board and a strong city.

Without getting into an exhaustive discussion, one of the major arguments for the land value tax is the argument that improvements to properties would not be penalized. Likewise, LVT proponents argue that open land would be taxed at a much higher rate under LVT than it is currently, reducing speculation and providing an incentive for the development of underutilized vacant land. Also, in theory, it is supposed to reduce the burden on the poor because the poor live on lower value land although in my mind this may not be true because that depends on how progressive your current tax system is.

Although no major city in the United States has gone to a sole LVT system, Pittsburgh is probably closest. It had a system where land was essentially land carries a six to one weighting over property.

We have three distinct desires with any tax system.

a. We want it to be easy to administer and easy to understand.

b. We want to decide whether we want everyone to pay the same or we want people who can afford to pay more to pay more. This usually comes out as talking about how progressive (the richer pay more) or regressive (the poor pay more) a tax is.

c. We want to further social goals. (i.e. mini-donuts are tax free while regular donuts are taxable, providing an incentive for people to eat more mini-donuts)

Taking these one at a time, LVT is very hard to administer because almost no transactions involve just the sale of just land. Almost every sale involves land plus buildings so it is very hard to come up with comparable figures to see whether or not your own particular assessment is fair. This results in fights about how much of a sale actually was for land. This has been a huge issue in Pittsburgh, which (when I last read about it – I haven’t kept up recently) is close to junking their system in part because of this. People fight saying that a smaller percentage of their total sale was for land while the assessor argues higher. They’ve proposed setting the value of land at a fixed percentage of sale (15%), but this ends up defeating the whole purpose of a system based on land by calculating value on both the land and property. But when you have no actual land sales to measure your system against, what else can you do? Because of this, it is impossible to implement a land value tax in the real world. This is the biggest drawback with this taxing approach.

You can come down on one side or the other whether taxes should be progressive or everyone should pay the same. The property tax system is our oldest tax, dating back to when property was equivalent to wealth. Back then, it was a pretty progressive tax. But over time, with the advent of the wage system, property ownership has been come a less and less useful measure of wealth. The question is whether property or property + land is a better proxy for wealth. In reviewing the Pittsburgh case, there is a perception there that their system is a poorer proxy for wealth than property + land like we use here. I haven’t looked at detailed studies on this but it seems intuitive.

The question about furthering social goals with the tax system is one that we could debate for a long time. Minnesota’s tax system is complex because we are trying to encourage certain social goals. We believe that home ownership is one of the best ways of an individual building wealth so give a break for that. We don’t want to burden those least able to pay so we provide a break to persons with disabilities. We want to encourage agriculture so we provide a break for that. Businesses are the center of the creation of wealth and so we tax them more. We could argue all day if these are good things or not but under a strict LVT, this goes away. Every person is treated the same and every usage is treated the same.

So what is my quick read on LVT? Not bad theory but substantive implementation issues, there is a question of whether you really end up with a more progressive tax system, and you lose the ability to further social goals. And there is no free lunch regardless of the tax system you use.

Why is this? There are lots of things that have happened to bring us to this point and I might do a separate post on my contemplations on that. To some degree it doesn’t matter what got us here – it now matters what we do from here. The federal government stepped in and has tried to fix some of the problems. It gave an enormous amount of money to the banks to lend to people but the banks are not lending. It seems that the banks don’t think that alot of us are creditworthy – something that the folks that do the state projections seem to think too. And many of us are starting to believe that about ourselves. Regardless of our situation today, we can clearly see a future that is less prosperous, harsher and more empty.

It is Friday and I have a toddler and a partner. I’ve somehow slipped from being a young hipster to being a married lady and a mom without really realizing it. Tonight holds staying home, giving the little one a bath and maybe a movie with the one I love. As I was walking to my car, I thought it would be nice to have a bottle of wine to go with the movie – something for the end of a long work week. I’m a fan of this J Lohr Wildflowers wine, about $11. Nothing that would break the bank – a cheap treat at the end of the work week. But today it seemed that the whole future was hanging there. Should I spend the $11, fearing that I may desperately need $11 someday? I have to admit that I suffer from Bag Lady Syndrome, the irrational belief that you are on the verge of becoming a bag lady no matter your circumstances. I’m well educated, have a union-protected job, no credit card debt and know how to live cheaply. $11 shouldn’t matter that much. But I’m afraid. And I think a lot of other people out there are afraid too. And the problem is that fear is a self-fulfilling prophesy. The more that people are afraid, the more that they hoard their money. The more they horde their money, the worse things get. The worse things get, the more that people are afraid. And it feeds on itself. But the rational thing to do is to hoard, to save, to sock money away in case that time comes when $11 is all you have.

I stood there today in front of my $11 bottle of wine, having to make a decision. What future would I believe in? Would I let my Bag Lady Syndrome come forward? Should I just walk on? Or should I ignore everything that seems to be happening around me and spend the $11? Well, I bought the bottle of wine. The guy in the store seemed grateful as things were obviously very slow. But I am still scared. And I hope fervently that there isn’t a day that I wish I had $11.

Russian academic Igor Panarin has been predicting the United States will dissolve in 2010.  Mr. Panarin argues that mass immigration, economic decline, and moral degradation will trigger a civil war  which will collapse  the dollar. Around the end of June 2010, or early July,  the U.S. will break into six pieces, each under the control of a different part of the planet.

In case you were wondering where you would end up, I have placed a copy of a map of his ideas from the Wall Street Journal.

This may sound crazy but he also predicted the dissolution of the Soviet Union.  And in the Russia, they are taking him very seriously.  You can read more about his ideas here:

http://online.wsj.com/article/SB123051100709638419.html

As an American, my immediate reaction is that it is silly to think that we would let our country dissolve.  But it is even more interesting to ask what is it that holds this country together.  I have had the privilege of seeing a few different parts of the country and I have to say that we are a very diverse country.  We do speak the same language and we do have many of the same stores but as we have manufactured less and less, we are less reliant on other parts of the country for goods.  So economically, we are not that interdependent.

So what is it that keeps our country together? The Soviet Union broke apart.  Great Britain broke apart.  Czechoslovakia broke apart.  Why not the United States?  What is it that has kept us together?  Obviously one answer is that we did have some states try to leave but we had a vastly bloody war to keep the United States intact.  But that was a hundred years ago, out of the memory of today’s people.  So what keeps us together?  Well that is where the NFL comes in.  Professional sports are a big part of the glue that holds this country together. I have a connection to Chicago and New York and Miami and LA and Dallas (damn Cowboys…I’m still mad from a decade or two ago…) because of professional sports. February 1st, millions of us across this country will eat chili, drink beer, get together with friends, dress in silly outfits and watch football.    Probably nothing pulls us together like our mutual love of football. Hockey, baseball, basketball and college sports also contribute to this to a lesser extent. And it is interesting to think about what our country would be like without this shared experience to draw people together across our country.

I would much rather have public ownership of sports teams. That way all the benefits of investments would accrue to the public, as well as intangible benefits.   But I have to admit there are public benefit to our sports teams that we should consider when thinking about public investment in sports stadiums.