(April 2012) The state Department of Education and the Little Rock School District, Arkansas’ largest district, have no plan to respond to deflation in property values, a problem in states like California, according to documents obtained under the Freedom of Information Act by the Policy Foundation.

 

Deflation in property values is a macroeconomic problem that has emerged in numerous markets nationwide since a real estate bubble burst earlier this century.  It can lead to a decline in property values, assessments and tax collections.  Arkansas officials’ failure to develop a contingency plan means citizens could face tax hikes or a reduction in services if deflation emerges.

 

FOIA: Citizens Guardian

 

The Arkansas Freedom of Information Act1 explains it “is vital in a democratic society that public business be performed in an open and public manner” in making policy.  FOIA provides citizens with a powerful tool to understand how government officials are responding to a problem or whether they comprehend the potential for it to emerge in the future.

 

The Policy Foundation cited FOIA and asked to inspect any plans to respond to deflation in property values, defined as “a decline in prices.”  The state Department of Education, in response, stated “it cannot locate any records responsive to your request.”2  The Little Rock School District replied it “does not have any records pertaining to your request.”3

 

Deflation: Other Arkansas Officials Pay Attention

 

Public records and interviews reveal other Arkansas officials are aware of deflationary scenarios. Arkansas Gov. Mike Beebe, while state Attorney General, issued Opinion 2005-291, which cited the Policy Foundation’s research on deflation.  State Rep. Tim Summers, R-Bentonville, explained, “I’ve expressed my concern to several different people at various levels of government.”  Summers said the issue is “probably not” short-term.  “I’m talking about 10 years from now,” he said.

 

 

 

 

Deflation: Markets Aware of Issue

 

Financial markets are aware that deflation in property values has occurred in real estate markets in the United States, the world’s largest economy, post-2005; and Japan,4 the world’s third largest marketplace, post-1990. 

 

“Data through December 2011,” Standard & Poors reported Feb. 28, “showed that all three headline composites ended 2011 at new index lows.”5 The S&P/Case-Shiller Home Price Indices are the leading measures for the US residential housing market, tracking changes in the value of residential real estate both nationally as well as in 20 metropolitan regions.  Housing prices hit a new 10-year low in the March 27 Case-Shiller release.

 

Deflation: Fiscal Consequences in California

 

States with deflation in property values are experiencing some of the greatest revenue shortfalls in the ensuing post-bubble period. These include California, the bubble’s ground zero. Stockton, a Central Valley city illustrates the fiscal consequences. Stockton has defaulted on bond payments for some municipal debt,6 and bankruptcy is being discussed.7

 

Analysis: Reactive or Proactive Government?

 

Two approaches to solving problems are reactive and proactive.  The reactive approach denies or ignores the problem. The proactive approach prepares a solution for every contingency.  The state Department of Education and Little Rock School District’s lack of preparation for a possible deflation in property values sets the stage for a future crisis.  Arkansas citizens deserve better: a proactive solution to maintain educational services without future tax hikes.

 

–Greg Kaza

1  PA 93 of 1967

2  Correspondence from ADE General Counsel Jeremy C. Lasiter, September 15, 2011

3  Correspondence from LRSD CFO Kelsey Bailey, October 19, 2011

4 Deflation is sometimes termed kakada hakai, i.e., price destruction. Bank of Japan Governor Masaaki Shirakawa discussed the Japanese central bank’s efforts toward overcoming deflation in a February 7 speech posted at: http://www.boj.or.jp/en/announcements/press/koen_2012/ko120217a.htm/

5  S&P/Case-Shiller Home Price Indexes (http://www.housingviews.com/)

6  http://www.insurancejournal.com/news/national/2012/03/20/240179.htm

7  Feuerstein, Abram S.  “Stockton should consider bankruptcy as option.”  The Stockton Record, March 21, 2009

   Fitzgerald, Michael.  “City may be guinea pig for new law.” The Stockton Record, February 24, 2012

   Breitler, Adam.  “Council faces tough choices in meeting.”  The Stockton Record, February 28, 2012