Budget & Finance

Cities Pass Low Point and Are Slowly Improving

WASHINGTON — Confronted with declining tax revenues, high levels of unemployment and budget cuts, U.S. cities have been forced to make personnel cuts, delay or cancel infrastructure projects and slash local services, according to a new report.

However, there are some signs of fiscal improvement with 57% of cities saying that this year that they “are better able to meet fiscal needs than in 2011,” the National League of Cities found in its 27th annual City Fiscal Condition report.

“While there are signs of improvement, it is still too early to say that cities have turned the corner,” said Chris Hoene, co-author of the report and director of the center for research and innovation at the NLC.

The annual survey of 324 city finance officers found that “fiscal conditions have passed the low point of the effects of the recession, with conditions beginning to improve relative to previous years, which were the trough of the Great Recession.”

Still, the 12-page report projects 2013 will continue to present challenges to city budgets due to a weak housing market, looming federal budget cuts and stubbornly high unemployment.

It’s likely local governments, especially those highly dependent on property tax collections, will feel the belt-tightening for years to come as the housing market slowly recovers and home prices show modest gains.

“Cities have been making significant cuts to their budgets for several years now, and that trend will continue,” said Michael Pagano, co-author of the report and dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago.

“These are serious times for cities and their residents. Difficult, but manageable, financial hurdles for cities will remain for the foreseeable future,” he added.

Weak and declining tax revenues continue to plague cities.

Finance officers project the sixth straight year-over-year decrease in revenues, while at the same time year-over-year expenditures have declined or remained flat, the report said.

General fund revenues declined 2.3% in 2011 from 2010 and expenditures decreased by 4%.

Property tax revenues continue to reflect the downturn in the real estate market and are projected to fall for the third year in a row, by 2.1%.

Income tax revenues are expected to drop 0.8%, as wages and salaries continue to reflect local job losses and a national unemployment rate that has been above 8% for 31 straight months.

In an attempt to ensure appropriate funding levels for services and budget requirements, 43% of cities have raised fees, 48% have shrunk their workforce, and 25% have reduced spending for services other than public safety and such things as parks, recreation and libraries.

One in three finance officers reported delaying or canceling capital infrastructure projects.

Some 22% of cities increased local property taxes in 2012, the report found. However, since the mid-1990s, regardless of economic conditions, the percentage of city finance officers reporting increases in property taxes has remained consistent, reflecting state and voter-imposed restrictions on local property tax authorities and the political challenges of raising property tax rates.

There are a host of factors that determine revenue performance, spending levels and the overall fiscal conditions of cities.

The report also that found health care benefit costs and pension costs were the two leading factors effecting revenues that had the largest negative impact on the ability of cities to meet their employees’ needs.

Half of the respondents said decreased levels of federal and state aid was another serious drag on their overall economic recovery.

Lastly, city ending balances or rainy-day funds have declined by over 25% in four years, and while still at relatively high levels, they are projected to decline as cities use the balances to weather the economic downturn.

City governments reduced their ending balances to 18% of expenditures last year and are projected to reach just 12.7% of expenditures for 2012, according to the survey.




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