The recession that wiped out thousands of jobs in Central Texas also erased $6.5 billion from the market value of Travis County properties.

The 5.3 percent drop in values from 2009 was the first decline since 2003, according to preliminary figures from the Travis Central Appraisal District.

The news means tough decisions for local government leaders, who must decide whether to raise tax rates, cut budgets or both to compensate for tens of millions of dollars in lost property tax revenue.

It means more belt-tightening, said Travis County Judge Sam Biscoe, who presides over the Commissioners Court. It'll probably be some combination of cuts and small tax increases.

The drop does not necessarily mean lower tax bills for all homeowners. Housing prices declined only slightly last year, despite the recession.

Meanwhile, the commercial market suffered more, with rising office vacancies and foreclosures or bankruptcies for some large properties.

Chief Appraiser Patrick Brown estimated the total market value of the property in the county at $116.9 billion , down from $123.4 billion last year.

These are predictions, not promises, said Brown, who is still analyzing the figures before sending out notices to taxpayers in a few weeks.

Residential property assessment increases are capped at 10 percent, no matter what happens to market values, under a state law that cushions homeowners during hot real estate markets.

But the law also requires that assessed values continue to rise until they eventually catch up to market values.

Many people have been getting assessed values below market for three or four years, Brown said. In those instances, many homeowners will see an increase in assessed values, even though market values aren't climbing.

The preliminary 2010 valuation is hardly unexpected, given the state of the economy, but declines have been rare for Central Texas in the past three decades.

The last decline was 5.3 percent in 2003 , reflecting the tech bust. That year, the county's market value dropped by $4 billion, to $71.9 billion. The decline in taxable values was half as large, in part because of the effect of the 10 percent cap.

The 2010 estimate says more about where the economy has been than where it is going.

Last year, home sales fell off across Central Texas, and builders cut back on starting new homes. But home prices only dipped slightly.

Brown credited the $8,000 federal tax credit for first-time buyers and the region's continued population growth for cushioning the residential market.

The commercial market suffered more. Office vacancy rates continued to rise, with some newer suburban complexes having few or no tenants.

In Bee Cave, the Hill County Galleria went into bankruptcy last May and was sold in January for $75 million — less than half of what developers had borrowed to build it.

The worst is behind us in terms of commercial values dropping, but the appraised values are reflecting transactions from last year, when they were still declining, said Charles Heimsath, president of Capitol Market Research , an Austin real estate consulting firm.

Heimsath said the apartment market, where occupancy rates have hovered around 89 percent, will probably be less affected than suburban office buildings and industrial properties, where the rates are lower.

Total property values are not yet available for Hays and Williamson counties, but Chief Appraiser Alvin Lankford said Williamson County's value might be down slightly.

There is a possibility of a loss, but I'm not prepared to say how much, Lankford said. A drop would be the first in the decade he has been with the appraisal district.

Property values in Bastrop County are expected to increase about 4 percent, said Chief Appraiser Mark Boehnke. He credited new development for offsetting any softness in property values.

If you are in Central Texas, the market was pretty good, Boehnke said. I think that's hard for some people to understand, given what they were hearing on the news about the recession.

In Travis County, the estimated rate of decline varies among taxing jurisdictions.

The estimated drop in taxable property values — factoring in homestead exemptions and other deductions — for the Austin Independent School District, for example, is nearly 5 percent, while the City of Austin's decline is about 6.4 percent.

City of Austin officials, who are expected to disclose budget options in a couple of weeks, declined to speculate what the drop will mean.

I certainly wouldn't want to be in (City Manager) Marc Ott's position, Heimsath said. He's going to have to find places to cut in the city's budget and probably have to make a recommendation to the council to raise the tax rate, and that's very challenging, particularly in bad economic times.

At the Austin school district, Chief Financial Officer Nicole Conley-Abram said officials had anticipated a drop in property values. But it's certainly not good news.

All school districts in the county are at the state-allowed maximum property tax rate, although they can seek voter approval to go above that cap.

Falling property values also could add to the state's projected $11 billion-plus shortfall when lawmakers convene next year. Under the school finance formula, state aid must increase as local revenues drop.

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