Nationally there are several themes that keep recurring. The first big story is how the subprime mortgage crisis is only the tip of the ice berg. Apparently, it’s not just the subprime mortgage holders seeing a rise in foreclosures. The so called prime mortgages, often sold to “flipper” real estate investors are starting to alarm the financial market watchers. If there’s no secondary market to sell real estate backed securities, the availability of credit will shrink leading to less real estate transactions.
Which leads to the next big story emerging, which is the nationwide municipal budget meltdown. The LA Times ran a story yesterday about the impact on principally, high growth areas:
“We’re talking about a pretty tough fiscal environment for the next four or five years,” said Christopher W. Hoene, the director of policy and research for the National League of Cities. “Libraries, parks, after-school programs . . . you’ll see lots of questions raised about cities’ abilities to fund them.”
What makes this all so painful is that up until a few months ago, many government officials felt certain they could weather the storm. They knew property values wouldn’t soar forever. So they factored a downturn into budget calculations. They built up sizable emergency funds.
But the rainy day they prepared for turned out to be a monsoon.
“We had predicted a slowdown — but not this much,” said Tim Nash, finance director for Greeley (population 90,000), a college town in a heavily agricultural region of north-central Colorado. Nash thought he was being prudent when he budgeted for 200 new housing starts in the city this year, down from 310 last year.
He wasn’t even close.
Instead of the $2.6 million that Nash expected in sales taxes on new construction, Greeley will collect $1.2 million. As a result, Greeley has left vacant 49 city positions, most of them building inspectors whose services are, abruptly, no longer in demand.
The effects of the housing slowdown are not being felt evenly across the nation; in states such as Wyoming, Alaska and Texas, they’re more than offset by the boom in oil and gas prices. But in a recent survey, 24 states reported that their tax collections had taken a hit because of the housing crisis.
The 10 most affected states, including California, Nevada and Arizona, will lose a combined $6.6 billion in tax revenue next year, according to a report prepared for the U.S. Conference of Mayors.
The local impact is not that hard to figure out. Real estate transaction sales help pad the Norwalk municipal budget, and officials are already gearing for a tight budget even with dipping into the rainy day fund. Meanwhile city service expenditures are ticking upwards. This budget will reflect a series of hard choices in an uncertain local economy. With so much riding on collecting property tax revenues, Norwalk, as many municipalities will face increasing costs without the benefit of increasing tax revenues.
Mortgages alone is not the only leading indicator for economic problems. Another LA Times story chronicles the rise of 100% financing in auto loans.
Americans haven’t just been taking out risky mortgages for homes in the last few years; they’ve also been signing larger automobile loans for significantly longer terms than they used to.
As a result, people are slipping into a perpetual cycle of automobile debt that experts think could lead to a new credit crunch extending from dealerships to driveways and all the way to Wall Street.
Gone are the days of the three-year car loan. The length of the average automobile loan hit five years, four months in October, up more than six months from 2002, according to the Federal Reserve. And nearly 45% of loans written today are for longer than six years. Even some staid lenders owned by the carmakers, such as Toyota Financial Services and Ford Credit, are offering seven-year financing. And a few credit unions, particularly in the West, are tinkering with the eight-year note.
At the same time, the amount of money drivers owe on their cars is soaring. In October, the average amount financed hit $30,738, up $3,500 in just a year and nearly 40% in the last decade, according to the Fed. More troubling, today’s average car owner owes $4,221 more than the vehicle is worth at the time it’s sold — up from $3,529 in 2002, according to industry analyst Edmunds.
The longer loans are directly related to the higher balances. By extending the length of loans, lenders keep monthly payments down. But because these loans take longer to pay off, a much larger piece of the principal remains unpaid at the time the car is traded in.
The response of the automotive finance industry? Extend loans further and allow the indebted customer to roll what he owes into a new loan with little, if any, effect on his new monthly payment. In effect, the driver is paying a loan on two — or more — cars at once.
The economy will be the story dominating news in Connecticut. Unfortunately statewide political flunkies keep insisting that Connecticut has a budget surplus. In fact, Connecticut is essentially bankrupt with unfunded pension obligations conveniently left off the “books” that the legislature uses. Until accounting reform takes place in Hartford, all discussions relating to the state budget should be off the table. Last week Rell hinted at the revenue shortfall expected in a plea for state agencies to look for cost savings.
Despite the projected surplus for the fiscal year that ends on June 30, 2008, Rell said OPM believes that revenues from the state’s corporation tax will be $30 million less than first projected and that the state’s inheritance and estate taxes will dip $15 million.
She also said revenue to the state’s Special Transportation Fund have declined by $20 million since the budget was passed earlier this year. That fund, which covers the cost of the state Department of Transportation, is primarily financed by the state’s gasoline tax.
Besides changes in the revenue projections, state spending is close to hitting the constitutionally mandated spending cap. There is about $28 million worth of room under the cap for the new fiscal year, she said.
Connecticut is not alone in belt-tightening for the next fiscal year.
I am annoyed that the Courant kept the mythology going on a budget surplus. But then Rell vetoed a move to GAAP in June, and thus assumes direct responsibility for the ensuing continuation of false revenue reporting. In detail, CFO magazine reported back then:
The rejected bill had been passed unanimously by the state’s House of Representatives (148-0) and by a 22-14 margin by the Senate. The lawmakers could vote to override the veto, but no decision has been made as to whether that will take place.
In vetoing the bill, the governor noted that current law gives Government Accounting Standards Board the authority to determine which accounting standards are “generally accepted” in Connecticut. GASB is an independent, private-sector organization that sets GAAP standards and provides accounting-rule guidance for state and local governments.
“The plain language of this bill would allow the [c]omptroller to issue financial statements using whatever standards she prescribed,” declared the governnor. And while Rell conceded that Wyman does not intend to deviate from GAAP, the governor cautioned that “there is nothing in the bill that would prevent a future [c]omptroller from doing so.”
Rell praised GAAP accounting, noting that it is favored by “bond investors and those making economic decisions.” In fact, Connecticut uses GAAP to report financial results to bond-rating agencies, such as Moody’s Investors Service and Standard & Poor’s. But the state currently does not use GAAP for budget reporting. Instead, the comptroller uses a modified version of cash accounting, a practice Wyman wants to eliminate.
GAAP accounting – more specifically accrual accounting – is said to be more accurate and transparent than cash accounting, as well as harder to manipulate. Indeed, in her response to the governor’s veto, Wyman says that by refusing to sign the bill, Rell is helping to preserve “an accounting system that is full of gimmicks and wiggle room.” Further, Wyman charges that Rell has “missed [an] opportunity for the state to adopt a budget accounting system that better reflects fiscal reality.”
Under Connecticut’s cash-accounting system, certain revenues are counted before they are earned, and some corresponding expenses are not recorded until months after they are incurred. That lopsided accounting treatment leads to artificially low levels of state spending, says Wyman, and “can make the budget’s bottom line look much better than it really is.” As a result, Wyman wants to move to accrual accounting, a position that she’s been advocating since she took office in 1995. But switching accounting methods won’t be easy.
To move to GAAP immediately, Connecticut would have to recognize a $1 billion budget deficit on its books. By recognizing the deficit, the state would put its budget out of balance. But an unbalanced budget is illegal, according to the state constitution. The deficit was initially spawned when, in the early 1990s, lawmakers approved skipping one of the state’s monthly Medicaid payments. Later deferrals, combined with inflation and related interest expense inflated the budget gap to its current level.
A 1 Billion dollar debt erases teh so-called surplus. It’s time Connecticut legislators start dealing with real numbers instead of piling on added debt. Of course this is what I was saying exactly a year ago too.
source: LA TIMES, Mortgage crisis takes a bite out of states and cities: Tax revenue is down considerably across the nation, creating budget shortfalls and forcing hard choices on what to cut, By Stephanie Simon, December 31, 2007
source: LA TIMES, New cars that are fully loaded — with debt, By Ken Bensinger, December 30, 2007
source: Courant, Rell Asks Agencies To Find Savings
Despite Surplus, She Expects Dip In Revenue, By Susan Haigh, AP, December 26, 2007
source: CFO Magazine, Gov. Derails GAAP Use for Connecticut Budget; A veto of an accounting bill gives the governor a victory over the state’s comptroller–for now, By Marie Leone, July 9, 2007
