CHICAGO — Cleveland Mayor Frank Jackson warned this week that the loss of state funding directed to local governments in Gov. John Kasich’s proposed 2012-2013 budget would force him to lay off up to 7% of the city’s workforce and would devastate Ohio’s largest cities.

Like most cities across the state, Cleveland is struggling to maintain fiscal stability amid falling income tax revenue and a weak housing market.

Fitch Ratings downgraded the city two weeks ago, citing Kasich’s proposed state aid revenue cuts as one of its top challenges.

State aid makes up just under 10% of Cleveland’s general fund revenue.

The debate underscores a trend among some states that are cutting aid to local governments to relieve their own fiscal problems. In the Midwest, governors in Wisconsin and Michigan have proposed deep cuts in local government aid to offset state budget gaps.

Even as states start to see some recovery from the national recession, municipal analysts warn that local governments are heading into a tough two-year period in which defaults could rise amid falling tax revenue and a drop in state aid.

Kasich’s $55.5 billion two-year spending plan, which the new Republican governor unveiled in March, cuts deeply into state aid, reducing it by 25% in 2012 and 50% in 2013.

In his budget address, Kasich defended the move by saying the cuts are accompanied with tools to help local governments cope.

The main tool mirrors Wisconsin Gov. Scott Walker’s move to limit public-employee unions’ collective bargaining rights.

Local governments across Ohio have been lobbying state lawmakers to reduce the size of Kasich’s cuts.

The Legislature is expected to hear testimony on a budget bill Friday morning with a possible vote scheduled for ­Monday.

“This proposed budget represents a decision to place the burden of solving the state’s budget deficit on Ohio’s urban centers,” Jackson told legislators in April. “The actions contained in the proposed budget will cripple the local governments’ ability to respond to the needs of its ­citizens.”

The mayor called on legislators to reduce Kasich’s proposed state aid cuts to 25%, down from 75%, for the two-year period.

In a press conference late Wednesday, Jackson said the city would lose $36 million in state revenue in 2011 and 2012 and that he would be forced to lay off up to 400 workers, or 7% of its workforce, to offset the loss.

Jackson said the city would slash services, delay some services such as garbage collection, reduce police patrols and close buildings.

Cleveland has $248 million of outstanding limited-tax general obligation bonds.

Fitch’s April 14 downgrade of the city to A-plus from AA-minus cited depleted reserves and the looming decline in state funding.

Moody’s Investors Service rates Cleveland’s GO bonds A1 with a stable outlook. It downgraded the city last year to A3 from A2 and assigned a negative outlook, later revising the rating up to A1 as part of an agency-wide public finance ratings recalibration.

Standard & Poor’s rates the city’s GOs AA with a stable outlook.

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