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Liz Farmer: Little-noticed home buying risk — your city's financial problems

Liz Farmer, Rate.com on

Published in Home and Consumer News

Imagine if, months after settling in to your dream house, your local government began threatening to lay off police officers, close some schools and cut transit service? And on top of those reduced services, property taxes and other levies and fees began rising steeply?

It could happen if your chosen city is in deep financial trouble -- and those troubles can make a city unappealing, forcing down home prices as new buyers shy away from the mess. And that can make it hard for you to sell and leave. Even some employers flee, as the rising tax burden on business crimps profits.

That scenario is entirely possible in a handful of big U.S. cities. While the traditional home buying process is full of due diligence -- title searches to make sure you'll actually own what you're paying for, appraisals to make sure you're not over-paying -- it lacks any warning system about civic finances.

Take Chicago. The combined city and state debt bomb equals more than $88,000 per taxpayer. Those are costs already incurred but not paid for, mostly pension and retiree healthcare obligations, and the government will be seeking to collect those sums in some way in the years to come.

To be sure, Chicago has a lot going for it -- it's the third-largest city in the country, chock-full of amenities, cosmopolitan culture and historic architecture. It's also a relative bargain when it comes to home prices. But you should realize that when you buy a home, you're buying into more than just your own property. You're investing in the community. It's important to know what you're getting into.

With the resources I'm providing here, you can arm yourself with information about the city or cities you may be eyeing for your next big move.

 

For the 75 largest U.S. cities, the fiscal accountability nonprofit Truth in Accounting ranks cities by their taxpayer burden or taxpayer surplus. The taxpayer burden is the amount of money each taxpayer would have to contribute if a city were to pay off all of its debt. A handy summary of financial conditions is included for each city. Then, go to the listing of state financial conditions, because you'll be on the hook for those obligations, as well. Chicago's is $36,000 per taxpayer, and the obligation for Illinois is $52,600.

Unfunded pension and healthcare costs are different from debt taken on to build roads and schools, lay fiber-optic cable or amass other assets that make a city or state economy more productive and vibrant. The unfunded pension and healthcare costs are yesterday's expenses. They're important financial and moral obligations to the covered workers, but paying them won't be a boon to future economic growth.

Of the 75 cities, 12 report a taxpayer surplus: Irvine, Calif.; Charlotte, N.C.; Washington D.C.; Lincoln, Neb.; and Fresno, Calif., top the list.

Only a handful has per-taxpayer debt burdens above $20,000: New York; Chicago; Philadelphia; Honolulu; San Francisco; Dallas; Oakland, Calif.; and Portland, Ore. A debt burden under $20,000 per taxpayer isn't ruinous; it's possible for city leaders to enact a payoff plan over 10 or 20 years that wouldn't lean on taxpayers too much. But you should also check how large the state's unfunded obligations are and whether the city and state burden has been growing or shrinking. All this data is available via Truth in Accounting's reports.

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