Infrastructure needs, pension funding and health-care benefits are most constraining to municipal budgets in 2015, the National League of Cities said in its 30th annual survey of fiscal conditions.
"Underfunding maintenance has reached critical proportions," the organization said, citing an estimated $3 trillion backlog in infrastructure investment. "Although borrowing costs are quite low for most municipalities, the repayment schedule often means that debt repayment competes with basic operating needs of a city."
The league was scheduled to discuss its findings Wednesday at a press conference at the Yale Club of New York. Annually it surveys finance officers in U.S. cities in the spring and fall.
Overall, the fiscal condition of U.S. cities continued modest improvement, the organization said, though recent gains have not been enough to restore revenue declines of the previous six years.
"City finance officers are more optimistic than ever, driven largely by an expansion of general fund revenues," the league said.
Still, the effects of the 2008 recession are heavier than those in 1990 and 2001, "both in terms of depth and duration."
Cities taking advantage of low interest rates to reduce borrowing costs while being reluctant to take on longer-term expenditures reflects cautious budgeting, said the league.
"Lack of investment, however, combined with constrained local revenues and cuts in state and federal aid are concerning for the state of infrastructure financing,"
Revenues increased 1.3% in 2014 and are expected to nudge upward 0.31% in 2015, said the league, while property tax and sales tax revenues rose 2.4% and 3.1%, respectively, in 2014. Expenditures rose 1.5% in 2014 with continued growth anticipated into 2015, according to the survey.
About 48% cited infrastructure as most constraining to city budgets, followed by pensions and health care at 38% and 36%, respectively. Municipal officials cited the value of the city tax base as the most positive influence, followed by local economic health and gas and oil prices at 63% and 24%, respectively.
At The Bond Buyer's Mid-Atlantic Municipal Market conference last week in Philadelphia, Richard Kolman, the head of the municipal securities group at U.S. Bank, said municipal issuers have failed to take advantage of low-interest rates to shore up infrastructure needs through cost-efficient borrowing.
According to Kolman, while the investment-grade corporate market hit $1 trillion in 2014, while municipal issuance, new money and refunding combined, reached only $334 billion.
Kolman referenced the catastrophic breakdowns of Massachusetts Bay Transportation Authority trains in Boston last winter and the use of "catchers" to intercept concrete falling from Pittsburgh bridges as the consequences of underfunding.
Waiting makes fixes more expensive, he added.
"That's kind of typical," said Kolman. "Anybody who commutes from New Jersey to New York City every day, you're pretty much constantly delayed with New Jersey Transit. Why? Railroad problems, rail problems, wiring problems, basically deferred maintenance.
"That is the United States we're in right now."
The fiscal outlook for states varies widely, but revenue growth is sluggish for most of them, coupled with new and expanding expenditures, including Medicaid. State budget shortfalls will remain a challenge, said the league, because budget balancing at that level aggravates negative situations in cities.
The league cited the pension funding drama affecting Illinois and Chicago, with city officials exploring a property tax increase to help meet pension obligations.
"Chicago has a very diverse and robust underlying economy and the tax capacity to address some issues," the report said.
"The major problem for Chicago is that the state of Illinois is cash-strapped, so any resource transfer from the state is unlikely. The court also has forced the state and the city to address its financial problems but not on the backs of pensioners."
