Cities, states begin to feel economic downturn

The troubles are already serious in California, which is facing a wave of foreclosures and tumbling home prices that have sapped equity from millions of homeowners. Governor Arnold Schwarzenegger has few good options to plug a $17 billion budget hole and has already angered teachers' unions and health-care advocates with his proposed cuts. Those proposals include big reductions in the state's health insurance program for the poor.

"That's the conundrum of all of this," says Nick Johnson, director of the state fiscal project at the nonprofit Center on Budget & Policy Priorities. "When people are facing economic hard times they turn to state governments for assistance, and that's also the time when governments are under pressure to cut the exact same services."

Finances are also tight at the local level. In California's Stanislaus County, which has one of the nation's highest foreclosure rates, the just-released property assessment roll for Jan. 1, 2008, showed a drop of $3 billion, or about 6.87 percent, which eclipsed the county's worst year in recent decades, a 1 percent drop in the 1990s, says county assessor Doug Harms.

Revenues will likely shrink further next January. There's an inherent lag between the time home prices fall and property tax revenues decline because of the time it takes for homes to be reassessed. (In California, counties calculate their property assessment rolls once a year.)

Even school budgets, which politicians fight hard to protect, have been feeling the pinch. Public schools are generally funded through a combination of local property taxes, sales taxes, and state aid.

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The Palm Beach County school district in South Florida is also having to make do with less as it searches for tens of million of dollars in possible operating cuts. Joseph Sanches, chief of facilities management for the district, says the county needs to cut nearly $653 million from its $1.9 billion five-year capital budget.

But the county no longer has to deal with a growing student population as it did during most of the boom. The county's population began falling by a few hundred people per year after the hurricanes of 2004.

"The timing could have been worse," Sanches says of the revenue slump.

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