Sell for More News is a weekly blog series with interesting information from the world of commercial real estate.
I’ve been telling our clients for a few years now that we expect a significant awakening to the risks of investing in states with high tax burdens.
States will increasingly be competing with other states. We’re already seeing investment dollars (and jobs) leaving high tax states and moving to low tax states. We think this is only the tip of the iceberg. Ten years from now the average investor won’t even consider states with high, and likely growing, tax burdens as these financial issues are sure to snowball.
We must also pay attention at the city level. Many of the cities on this list are essentially making minimum payments on their credit cards while their debt grows larger and larger. Eventually they’ll be forced to pay down unfunded liabilities…and they’ll do it by assessing more taxes.
So let’s quickly analyze the financial state of America’s largest cities:
63 out of America’s most populous 75 cities do not have enough money to pay all of their bills. Truth in Accounting (TIA), a municipal finance watchdog, states “To balance the budget, elected officials have not included the true costs of the government in their budget calculations and have pushed costs onto future taxpayers.”
TIA divides the amount of money needed to pay bills by the number of city taxpayers to come up with what it calls Taxpayer Burden. Based on this methodology, for the second year in a row, not a single one of the 75 cities received an ‘A’ grade.
A grade: Taxpayer Surplus greater than $10,000 (0 cities).
B grade: Taxpayer Surplus between $100 and $10,000 (12 cities).
C grade: Taxpayer Burden between $0 and $4,900 (24 cities).
D grade: Taxpayer Burden between $5,000 and $20,000 (31 cities).
F grade: Taxpayer Burden greater than $20,000 (8 cities).
The 75 most populous cities’ total unfunded debt is approximately $330 billion. Most of this debt comes from unfunded retiree benefit promises, such as retiree healthcare and pensions.
The cities in the worst fiscal condition are New York City, Chicago, Philadelphia, Honolulu, and San Francisco. These cities, like many states and cities in the U.S. have large unfunded pension liabilities, which are greatly affected by the volatility of pension assets. Unfortunately, to achieve higher rates of return, government pension plans have increased their allocation to riskier assets.
New York City remains in the worst financial condition of the most populated cities, because of its significant and growing liabilities. It only has $58.5 billion in assets to pay $244 billion in liabilities. This significant gap means that every New York City resident has a tax burden of $64,100.
Joining New York City with a failing grade is Chicago. Chicago only has $9.5 billion of assets available to pay its bills of $42 billion. This $32.5 billion gap means that each Chicago taxpayer would have to send $36,000 to the city to be current on its bills.
During the 2008-2009 downturn we saw many governments’ financial condition deteriorate largely due to a dramatic drop in the value of their pension plan assets. Because governments continue to invest in riskier assets, another economic downturn could bring about additional dramatic decreases in pension plan assets. The result would be further declines in the financial conditions of the governments that are already in bad shape.
Other notable cities on the list:
#8 Tampa: +$2300 Taxpayer Surplus
#40 Orlando: -$5,300 Taxpayer Burden
#52 Milwaukee: -$8,200 Taxpayer Burden
#62 Nashville: -$14,000 Taxpayer Burden
#63 Miami: -$14,200 Taxpayer Burden
It should come as no surprise that many investors and residents are already exiting Illinois and New York. We just don’t see a likely fix to these issues. We’ll continue to encourage our clients who own commercial real estate in high tax areas to proceed with caution.
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About Beau Beach, CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Prowess IRES which is a commercial real estate broker for sellers in the Nashville, Milwaukee, South Florida and Chicago markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 414.324.4938, 615.603.9770, click to schedule a call or Beau@ProwessIRES.com