Little-noticed home buying risk — a city's financial problems

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 homebuying process is full of due diligence — title searches to make sure you will actually own what you are paying for, appraisals to make sure you're not overpaying — 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 health care 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 are buying into more than just your own property. You are investing in the community. It's important to know what you are 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.

A handy summary of financial conditions is included for each city.

Then, go to the listing of state financial conditions, because you will be on the hook for those obligations, as well. Chicago's is $36,000 per taxpayer, and the obligation for Illinois is $52,600. (Minneapolis is $2,100 per taxpayer; the obligation for Minnesota is $200.) Unfunded pension and health care 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 health care costs are yesterday's expenses. They are 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.

Also worth noting is change in population. Growth means more workers, more homes and economic activity to tax. That usually boosts a local economy.

Chicago, far from the basket case Detroit became, nevertheless lost nearly 1 million residents from its 1950s peak to today's roughly 2.7 million population, where it has leveled off.

A shrinking (or already shrunken) population is a warning to look more closely at a city's finances. You can start by searching "city name population" and check the long-term trend.

You can check city and state tax levels — property, sales and gas tax, and other levies — easily. If you are weighing cities in which to live, your combined tax obligation is a critical consideration. Again, the current level of taxes is important, but so is the rise in tax rate. Some Illinois property tax rates have skyrocketed to keep the state and its municipalities afloat.