Cities Hurt by Housing Crash May Be Ailing for Years, NLC Reports

Cities with declining financial conditions driven by the housing market downturn and lower tax collections in 2008 have not seen the worst of it and will still face difficulties during the next few years, the National League of Cities warned in a new report this week.

"It's the first evidence of what's likely to be a two-, three-, four-year long cycle of really tight fiscal conditions for city governments," Chris Hoene, co-author of the report, said in an interview this week. "Everything that's happened since June - everything that's happened in the last few days, in fact - is only going to make it worse."

The NLC report, the latest in a series of annual reports published since 1985, gathered information from 319 cities with populations of 10,000 or more from April to June. According to the report, 64% of city finance officials in 2008 said their cities were less able to meet fiscal needs than in the previous year and that percentage increased when they talked about 2009.

"It is not surprising that four in five city finance officers forecast that their cities will be less able to meet needs in 2009 than in 2008," the report said. "The economic downturn will continue to translate into reduced city revenues, while demand for services and increases in costs will continue to put pressure on the spending side of the ledger."

"Then when you think, 'Wow, this information is just from April to June,' " Hoene said. "It points to this as an early harbinger of where we're headed. It's going to be a struggle for several years."

The report said that cities will likely see a further decline in 2009 of property, sales, and income tax collections, which are the major sources of revenue that prop up city budgets.

"With national economic indicators pointing to continued struggles, the impacts of those economic conditions on local revenue sources, and the lag between declining economic conditions and local revenue impacts, all indications point to a worsening city fiscal conditions in 2009 and 2010," the NLC report said.

Specifically, it noted that it's likely the full effects of the downfall of the housing market will not be felt by cities for another six to 12 months and that the negative impact on property tax revenues will continue through 2009-10, as property tax assessments and revenues catch up to changes in the market.

"The real estate market is not going to just turn around overnight, and the fact that it's going to take that market a while to recover means that the cities that rely on those property tax revenues are going to be in for a long haul," Hoene said.

The report also said that rising energy and fuel prices will push up costs and reduce the purchasing power of cities. Add to that rising health care costs and pensions, which are increasing at a faster rate than city revenues.

The federal government and state budgets are certainly having their own difficulties, which means less aid to local governments and more burdens on them, the report added.

The NLC report comes as more and more states have been reporting budget shortfalls and cuts over the past few months. The Center for Budget and Policy Priorities estimated recently that at least 29 states are facing a total budget shortfall of $48 billion in fiscal 2009 and that the federal government's deficit could reach $600 billion in fiscal 2009.

With the turmoil in the financial markets growing by the hour, Hoene said the reverberations will be felt by cities for the next several years.

"If you followed stories around the country, certainly we saw signs of the economy affecting cities," he said. "There were all these stories of cities cutting budgets here and there ... we knew it was having an impact. It just seems like it always takes a while for those numbers to show up nationally."

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