NLC survey shows the start of a fiscal slowdown for localities

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WASHINGTON – City finance officers see the beginning of a “fiscal contraction” in the municipal government sector following several years of post-recession growth, according to a report on the findings of an annual survey released Tuesday by the National League of Cities.

The NLC conducted the survey, its 32nd, through queries sent in the mail and online to finance officers in U.S. cities during the spring and summer of this year.

“Several major findings taken together signal a slowdown on the horizon, including waning confidence of city finance officers, slowing local revenue and spending trends and insufficient post-recession revenue recovery,” NLC said in the report.

While 69% of the finance officers were confident in the fiscal position of their cities, this was down from the widespread optimism that hit its peak in 2015, the group said.

General revenues grew by only 2.61% in 2016 over 2015, compared to a peak post-recession growth of 3.26% in 2015, according to the report. Cities have budgeted for only a 0.9% increase in revenues for 2017.

“This minimal growth projection is the result of slowing revenue growth overall, a return to higher levels of inflation in 2017 (2.1%) and the typical conservative approach that finance officers take for revenue estimates,” NLC said. “For these reasons, actual 2017 revenues will likely be somewhat greater than estimates.”

But overall, cities’ general fund revenues “still have not fully recovered from the recession and stand at less than 98% of 2006 levels,” NLC said.

Expenditures are following a similar trend, with a 2.18% growth rate in 2016 and an anticipated increase of only 2.1% in 2017, the report found.

Property tax revenues grew by 4.3% in 2016 due to the strengthening of the real estate market in recent years. Finance officers have budgeted for a much lower growth rate of 1.6% for 2017, according to the report.

Sales and income tax revenues grew at a slower rate, at 3.7% and 2.4% respectively, in 2016. Finance officers are projecting declines of 0.2% in sales tax revenues and 2.7% in income tax revenue, the survey found.

“These indicators of slowing local fiscal growth come on the heels of continued national economic expansion,” NLC said. “Divergence between fiscal conditions and national economic indicators calls into question the alignment between city fiscal structures and the drivers of the economy, as well as the sustainability of the continued patchwork of solutions to cities’ most pressing issues – namely, infrastructure.”

Going forward, the NLC said, “Costs that can no longer be delayed such as those for infrastructure and for employees and retirees, as well as cuts from federal and state partners, will contribute to the fiscal uncertainty facing cities.”

“Although national economic indicators are on the uptick, fiscal challenges in the local and state government sectors will materialize in downward pressure on gross domestic product,” NLC said.

State and local government spending constitutes about 20% of GDP, according to the report.

The report warned that “drastic economic and technological changes occurring in the most recent recovery period, as well as over the past 30 years” make clear that a re-examination of conventional thinking is needed to gauge the ability of city finances to buffer against economic downturns and to capture revenue growth during periods of economic expansion.

The most obvious example of this is the restructuring of the retail industry and the legal challenges for cities capturing retail sales tax on all online transactions, the report said.

“At the end of the day, local governments will balance their budgets and make the hard choices needed to serve their communities,” the NLC said. “These forced choices, however, have consequences and threaten the competitiveness and quality of life of our nation’s drivers of economic and social vitality: its cities.”

The surveys were emailed to finance officers for a sample of 1,018 cities with populations of great than 10,000. The survey also requested budget and finance data from all cities with the exception of the 100 largest by population. Data from those cities were collected directly from online budget documents. The 2016 data, in total, was drawn from 261 cities for a response rate of 26%.

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