DALLAS - Amid the deepest budget cuts since the Great Depression, the once-booming cities of the Southwest are bracing for an extended period of austerity as they seek to retain their strong credit ratings.
In addition to the current cuts, the region's major cities are planning to keep tightening their belts for as long as the next five years. That trend is hardly limited to the Southwest, according to a report from the National League of Cities entitled "City Fiscal Conditions in 2009."
"Cities face the burden of confronting the effects of the downturn for years after any recession ends," writes Michael A. Pagano, a professor at the University of Illinois at Chicago. "This means that cities will be navigating the implications of the downturn for a while longer, even if the business climate turns around immediately."
The annual NLC report shows that cities nationally face an average budget gap of 2.9% due to falling revenue, including an average 3.8% decline in sales tax collections.
While nine out of 10 finance officers nationally said that their cities were less able to meet fiscal needs in 2009 than in 2008, "finance officers in the West are slightly more likely to say that their cities are worse off in 2009 than finance officers in cities in other regions," according to the NLC report.
"The current economic situation is wreaking havoc on city budgets," said National League of Cities president Kathleen Novak, mayor of Northglenn, Colo., a suburb of Denver. "Although we are beginning to see signs of a possible recovery in the national economy, city officials will need to be more proactive than ever in terms of monitoring their budgets, reevaluating budget priorities, and identifying new revenue and savings opportunities."
While some cities are in worse shape than others, all have struggled to keep pace with falling revenue while softening the blow to their citizens. Despite the struggle, ratings in the region are remarkably strong. Of the 10 largest cities there, the lowest on Standard & Poor's scale is Tucson, rated AA-minus. Half of the 10 largest cities in the region enjoy triple-A ratings.
Denver, one of those triple-A cities, has cut spending by $206 million over the past two budgets, including the 2010 spending plan that Mayor John Hickenlooper submitted to the City Council last week.
"Our city has never experienced the kind of the economic downturn we have seen in the past year," Hickenlooper wrote to the council. "More of our citizens are out of work and more of our businesses are failing. Sales tax revenue, which makes up half of the city's revenue stream, is projected to decrease 7.8% ($33.8 million) this year and total revenues are anticipated to decrease 5.6% ($48 million)."
In the budget for fiscal 2010 that begins Jan. 1, Denver is planning to spend $1.5 billion, a 4.7% decrease from the current year. To balance the budget, Hickenlooper is proposing spending cuts of $121 million.
While that is a steep drop, it is not as bad as Phoenix's budget woes. The largest city in Arizona expects to reduce its current budget by another $65 million before the current fiscal year is completed. The city's $1.1 billion budget is already 6.1% below the previous year's after $156 million in spending cuts were approved for the fiscal year that began July 1.
With Arizona's budget still running a $1 billion shortfall, Phoenix faces a further threat from cuts in shared revenue from the state. Lawmakers have proposed balancing the state budget by withholding revenue that has been shared with local governments since the 1940s.
"If cuts in state-shared revenue are part of the Legislature's budget solution, the impact to community services will be severe," warned Phoenix city manager Frank Fairbanks in an introduction to the budget.
The largest city in the region, Houston, is beginning to feel the recession as the petrochemical sector weakens. One of the city's major taxpayers, the chemical firm Lyondell, has been operating in bankruptcy since January, leaving the city wondering if it would pay its taxes.
Houston's budget shortfall is somewhere between $92 million and $103 million, according to different city officials. At a recent City Council meeting, city Controller Annise Parker shot down attempts to sugarcoat the situation.
"The administration seems to be having a discussion on whether the glass is half full or half empty," she said. "I want to convey to the council that the level of liquid is going down."
To the north, Dallas is preparing to enact a $2.7 billion budget that comes after $190 million in spending cuts. For the fiscal year beginning Oct. 1, the 2010 budget is 0.7% smaller than the current one.
The austerity measures should also have an impact on the city's bond plans, according to City Council members Angela Hunt and Ann Margolin, who proposed reducing next year's bond sale to $140 million from $355 million. The two council members said the reduction would save $24 million in debt payments. But other council members have rejected the reduction.
Nearby Fort Worth will see its budget increase slightly to $1.2 billion, but the general fund that covers most operating expenses will fall by $10 million to $528 million.
San Antonio, another triple-A city, recently passed a $2.3 billion budget that is 5% smaller than the current year's but spares popular city services such as libraries, which will remain open seven days a week.
Nearby Austin, also rated AAA by Standard & Poor's, managed to craft a $2.8 billion budget that represents a 2.8% reduction from the previous year without reductions in police or fire department spending. The city was also able to maintain many of the cultural services such as library hours.
Oklahoma's capital, Oklahoma City, has been watching revenues drop steadily this year, adding up to a potential shortfall of $10 million by year's end. The city's September sales tax check was about 12% below the target, making it the eighth straight month that sales tax revenue has fallen. Finance director Laura Johnson says the city will consider deferring any capital improvement projects.
In an economic downturn, local budgets are a lagging indicator, as property values begin to decline only after a recession has begun to deeply affect citizens' pocket books, officials say. On the flip side, city budgets typically recover after the recession is long gone.
While Federal Reserve chairman Ben Bernanke recently said that the recession is probably over, local officials are not ready to take that to the bank.
Tucson city manger Mike Letcher said he expects the city's budget deficit next year to be at least twice as big as this year's and to see budget deficits through 2013.
