NLC: City Tax Revenues Continue To Plummet With No Relief in Sight

City tax revenues are following the lead of state tax revenues, showing record-breaking declines that are not expected to improve this year or next, according to an annual report released Wednesday by the National League of Cities.

Tax revenue from residential and commercial property fell in fiscal 2010 and probably will continue to fall, according to Christopher Hoene, director of the NLC’s Center for Research and Innovation and co-author of the report. That’s because property tax appraisals are just now catching up with the poor housing market.

“We know we’ve still got a couple years of property tax declines coming,” Hoene said.

Sales tax revenue declined “dramatically” in 2009 and shrank again in 2010 as consumers cut back on spending and high unemployment persisted, according to the report.

However, sales tax revenue at the state level has bounced back somewhat and “may be a harbinger that the sales tax numbers [for cities] will start to come back,” Hoene said.

Fiscal 2010 ended June 30 for about half the cities; the rest ended Sept. 31 or will end Dec. 31.

The report, which was based on data from city finance officers for cities with more than 50,000 residents and a random sample of smaller cities, shows most officials are pessimistic about 2010.

Almost 90% of chief financial officers said their cities were less able to meet their fiscal needs in fiscal 2010 than the previous year.

The CFOs gave almost identical predictions last year, when asked to compare fiscal 2009 with 2008. That means they are still more concerned than in any of the previous 25 years that the NLC has conducted the survey. By comparison, only 30% of finance officers said their cities were less able to meet fiscal needs three years ago.

There were some regional patterns in the responses. Finance officials in Western states leaned slightly more than other states toward not being able to meet fiscal needs, while those in Northeast cities were more likely to say they were better off in fiscal 2010.

Revenue and spending patterns in fiscal 2010 were record-setting in their austerity. The revenue declines and spending cutbacks were the worst in the history of the NLC survey.

Cities have cut personnel, delayed or cancelled infrastructure projects, reduced services, modified health care and pension benefits, and renegotiated debt, it said.

Cities also have dipped into reserves to pay bills until the economy recovers.

“Nobody knows exactly what the danger point is” for using reserve funds and the potential downward pressure doing so may place on city bond ratings, Hoene said.

“You’re seeing a little bit of drawing down in reserves,” he said, “but probably not so much that you’re in the danger zone.”

Cities are being cautious about touching their end-of-year balances because they’re concerned about the way such a move might be interpreted by the bond market, according to Hoene.

He said cities may be reluctant to issue debt if they are concerned about having to service it. Or they could issue more debt in response to favorable interest rates and eager investors.

Market participants and economists are worried that states and cities will face tougher fiscal problems next year, after grants and programs created by the stimulus law are scheduled to end. That could happen, Hoene said, if states pull back on funds they could afford to give to cities when they had the stimulus assistance.

Because of that risk and because cities tend to lag behind states, fiscal 2011 will be a key year to watch state budgets. If they start recovering in fiscal 2011 and continue upward through 2013, cuts in state aid to cities will probably be less severe, Hoene said.

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Washington
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