WASHINGTON — Municipalities continue to suffer from the lingering effects of the economic downturn, though local and regional economies are improving and tax bases are gaining strength, the National League of Cities says in a new report.
The report,
"Revenue and spending shifts in 2012 and 2013 paint a mixed fiscal picture for America's cities," the report states. "General fund revenues declined in 2012, the sixth straight year-over-year decline going back to 2007. However a very small increase in general fund revenues is projected for 2013, suggesting that city finance officers are expecting little change in revenues from 2012 to 2013."
Tax revenues are a similarly mixed bag, and the NLC study notes that it is important to understand the differing performance of property, sales, and income taxes in evaluating the factors driving city revenue figures. Virtually all cities use a local property tax, while more than half also rely on local sales taxes, the study states. Fewer than 10% of cities rely on local income or wage taxes.
Property tax revenues fell 0.4% in 2012, the third straight year of decline, and are projected to decline again, but only 0,2% this year, the NLC paper shows.
"The effects of the downturn in the real estate market in recent years continue to be evident in city property tax revenues in 2012-2013," the report states. "However, improving housing markets in many parts of the country suggest an improving outlook beyond 2013."
Sales taxes have proven to be more robust providers of revenue, growing 6.2% in 2012. They are projected to rise again when 2013 figures are tallied, though by a more modest 1%. The study attributes the improved outlook to stronger confidence among consumers, resulting in more spending on taxable goods and services. The fall in the projected rate reflects "ongoing caution" about the pace of the economic recovery, according to the NLC.
While income taxes have mostly been flat or declined over the past decade, finance officers reported 4.4% income tax growth in 2012 and expect a 2.3% advance in 2013, according to the NLC.
"Looking to 2014 and beyond, all indications point to improving conditions for city budgets, with national economic indicators pointing to continued slow growth," the report concludes. "External factors, however, could easily undermine cautiously optimistic projections, including most notably the possibility of federal budget cuts."
Finance officers overwhelmingly named health benefit costs and pension costs as the budgetary factors that have increased over the last year, with 84% of them saying health benefit costs increased and 80% saying pensions did.
When asked about the positive or negative impact of various factors, 80% of the finance officers named health benefits costs and 75% named pensions as negatives. Positive impacts included the health of local economies and local tax bases.
Health benefit reductions, pension restructuring, and municipal employee hiring freezes were common actions among municipalities in 2013, the study shows. About one in five cities reduced health care benefits or pension benefits, while 38% used hiring freezes, the data shows.
"Many cities used some combination of these types of actions in an effort to reduce personnel costs," the NLC report explains.
The generally improving situation is allowing cities to rebuild their fund balances, according to the NLC. Cities often maintain such balances as set-asides for projects or as rainy day funds. Rating analysts and underwriters look at fund balances as an indication of fiscal responsibility and strength. Fund balances in 2012 were reported at 21.5% of expenditures, and survey respondents indicated an expectation of balances being at 20.1% of expenditures for 2013. Final figures often exceed projections, according to the study.
