NLC: Limit on Tax-Exemption Would Mean Fewer Local Projects

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The number and scope of investment projects will decrease for state and local governments if a federal limit is placed on tax-exemption for municipal bonds, the National League of Cities warned in a survey released Thursday.

The group's third annual "Local Economic Conditions Survey," gauges the performance and fiscal health of local, regional and state economies based on city officials' assessments, is based on the responses of officials in 1,127 cities who responded to a series of questions. "Despite improvements, cities are still struggling in significant ways, signaling that growth is not keeping pace at a level that is needed for a sustained recovery," the six-page report stated. "Even worse, economic indicators that reflect the condition of cities' most vulnerable populations have resisted even a modest rebound in the face of broader national recovery."

For infrastructure spending and investment, the NLC report found that although there continues to be significant barriers to across-the-board economic growth, there is increasing confidence among local officials about their anticipated spending and investment activities.

More than one in two city officials, or 60%, anticipate increasing investments in 2013 in new infrastructure and capital projects and 53% expect to maintain existing infrastructure and capital, the report said.
"However, confidence can be expected to dampen if municipal financing mechanisms are limited," the report said. "If a federal limitation is placed on the tax-exemption of municipal bonds, 61% of respondents report that they would limit the number of projects undertaken and 54% report that they would reduce the scope of projects undertaken."

Only 23% of respondents would not make a change in projects undertaken and 12% would maintain the scope by raising taxes and fees.

State and local governments have financed more than $1.65 trillion of infrastructure investment over the past decade through municipal bonds.

"Protecting the tax-exemption on municipal bonds is just one of the ways federal lawmakers can support economic development in cities," said NLC first vice president Chris Coleman, mayor of St. Paul, Minn. "The report indicates that city leaders are ready to make infrastructure investments, but we must have the confidence from Washington lawmakers that we will be able to secure funding for these much needed projects that drive job creation and improve the quality of life for our citizens."

Coleman said that if Congress and the Obama administration eliminated tax exemption, it would make it "quite frankly impossible to do any infrastructure projects."

Barring a change in the status of municipal bonds, spending on physical assets will likely increase this year, but the majority of city officials anticipate no change in spending or investment in personnel-related categories.

"This report clearly reinforces the urgency for the federal government to accelerate the nation's growth through smart investments and strategic cuts that will help build healthy local economies," said Clarence Anthony, NLC's executive director. "Local leaders continue to press for investments in workforce education to train workers to compete in the next generation of jobs, and in infrastructure investments that put people back to work while improving the ability of business to move products around the country."

Fifty-two percent of city officials reported no change in anticipated spending or investment for health care benefits, 66% for pension benefits and 61% for the number of personnel.

Layoffs and furloughs at local governments are beginning to level off and many local governments have already made the necessary budget cuts through personnel reductions over the previous years.

Other significant findings in the report include tepid improvement in housing starts, commercial and residential property values, business activity and health of the retail sector.

"Coming in 2013, cities were experiencing the sixth year in a row of year-over-year declines in revenues," the report said. "These trends can be attributed, in part, to the underlying economic conditions that drive much of the fiscal health of cities and affect their ability to provide critical services to residents."

Over the past year, 52% of city officials reported an improved number of housing starts, 57% saw an improved number of building permits, and 47% reported improved residential property values.

Despite overall improvements, the relatively slow recovery in the real estate market is still a drag on local economic recovery. Commercial property vacancies, values and residential property vacancies and values are persistent problem for communities.

"This is compounded by the lag between economic cycles and property tax collection or the gap between when economic conditions change and when those conditions register on reported city revenue collection," the report said.

Finally, the report warns that local finance should be viewed cautiously, even though a rebound in consumer confidence has buoyed local sales taxes.

Forty-eight percent of city officials indicate that a key economic indicator of sales tax base and the health of the retail sector has improved since 2012. At the same time, 55% of city officials report that the retail sector health continues to be problematic for their communities.

Local income taxes have remained predominantly flat in recent years, reflecting the national economic recovery of slow income and job growth. The persistently high unemployment rate of 7.7% continues to cause economic and fiscal instability and is problematic for two-thirds of cities.

The report also highlighted that workforce skills are not keeping pace with employer demand and the basic needs of the most vulnerable populations not being met.

Some 53% of city officials reported that current local workforce skills are posing a problem for the economic health of their communities. And nearly nine in 10, or 88%, noted that the workforce alignment has not improved over the last year.

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