WASHINGTON — The revenue picture for cities is bleak and is likely to last a couple of years, according to an annual report released Wednesday by the National League of Cities.
Tax revenues from residential and commercial property fell in fiscal 2010 and probably will continue to fall because the sluggish housing market’s effect on appraisal values is usually a couple of years behind the curve, said Christopher W. Hoene, director of the NLC’s Center for Research and Innovation and co-author of the report.
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 NLC’s survey, according to the report. Cities have cut personnel, delayed or cancelled infrastructure projects, reduced services, modified health care and pension benefits, and renegotiated debt, it said.
“We know we’ve still got a couple years of property tax declines coming,” Hoene said.
Sales tax revenues 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 revenues at the state level have 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 and either ended Sept. 31, or will end Dec. 31, for the rest.
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 officers 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 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 officers in Western states leaned slightly more than other states toward not being able to meet fiscal needs, while officers in Northeast cities were more likely to say they were better off in fiscal 2010.
Cities 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 that cities may be reluctant to issue debt if they are concerned about having to service that debt. 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 state budgets start recovering in fiscal 2011 and continue upward through 2013, cuts in state aid to cities will probably be less severe, Hoene said.
