How the loss of advance refundings is hurting cities

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WASHINGTON – The growth of tax revenue in the nation’s cities is slowing while the termination of advance refundings at the end of last year is already having a negative financial impact on more than a third of them, the National League of Cities found in its annual survey this year.

The report released Thursday at NLC’s headquarters in the nation’s capital found that 61% of the 341 finance officers who participated in the survey anticipate negative future impacts on the financial health of their cities from the loss of advance refundings, while 35% said they already have seen negative impacts.

“We’d like to get Congress to put advance refundings back on the table,” said NLC President Mark Stodola, the mayor of Little Rock, Ark. “It’s big money to every city.”

Stodola said he was able to give workers in his city a raise last year because of the $1.5 million in savings it realized from a 2017 advance refunding.

In contrast, Little Rock is going to have to come up with an extra $3 million or $4 million to balance the budget this year because revenues are not as much as had been projected, Stodola said.

The controversial $10,000 cap on the federal deduction for state and local tax was viewed as having an immediate negative impact by only 7% of the finance officers while 28% of them saw it as having a negative impact in the future. But 83% of them saw no immediate impact of the SALT deduction cap and half saw no impact in the future.

The overall impact of the Tax Cuts and Jobs Act has had no observable impact on city finances, according to 79% of the finance officers. Only 4% of them found an immediate positive impact while 9% found it to be immediately negative.

The good financial news for cities is the anticipated result from the Supreme Court’s June ruling in South Dakota v. Wayfair, Inc., which overturned a physical presence requirement that had limited state and local governments from requiring out-of-state retailers to collect sales taxes from online purchases.

“Hopefully next year when the survey comes in, there will be a lot more robust sales tax revenue coming in,” said Natalie Cohen, managing director of municipal securities research for Wells Fargo.

Cohen, who participated in NLC’s news conference unveiling the results of its survey, said she also expects cities to benefit in the future from increased revenue because of the Supreme Court ruling legalizing sports betting and the tax revenue from legalized marijuana sales.

However, the NLC survey found the growth of overall general fund revenue in the nation’s cities is expected to slow for the fourth consecutive year in 2018 to about 0.4% after growing only 1.25% in fiscal 2017. The earlier increases were 2.61% in 2016 and 3.26% in 2015.

The three major sources of tax revenue – property taxes, sales taxes and income tax – all grew slower in fiscal 2017 than the year before, the survey found.

Property tax revenues grew 2.6% in 2017, down from 4.3% in 2016, while sales tax growth slowed to 1.8% from 3.7% the prior year. Income tax revenue increased 1.3%, down from 2.4% the year before.

The NLC survey also found regional variations in the financial condition of cities. In the South, 81% of financial officers said the cities were better able to meet their financial needs compared to 74% in the North, 71% in the West and 62% in the Midwest.

“There are a lot of good things happening in our region,” said John Kinnard, a city council member from Waco, Texas, who spoke at Thursday’s event.

Kinnard said a variety of sectors of the economy have grown and property values have increased, but businesses and residents are being stretched to keep up.

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Government finance Refunding bonds Sales tax Income taxes Property taxes Tax reform State and local finance Government finance Online sales tax E-Commerce NLC Washington DC Arkansas
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