The fiscal condition of cities is continuing to weaken in 2011 and isn't likely to improve in 2012, the National League of Cities concluded in a report released Tuesday.
As a result, financially strapped cities are, and will be, reluctant to issue bonds, Christopher Hoene, director of the NLC's Center for Research and Innovation, told reporters during a conference call.
"A major factor is the overall fiscal health of cities and their sense of their ability to take on additional debt service from year to year," said Hoene, a co-author of the report.
As city finance officers look at the close of 2011 and 2012, they are projecting falling revenues with corresponding spending cuts in response to the economic downturn.
The NLC's survey said 57% of cities are "less able to meet fiscal needs" than in 2010. But for cities that rely more on property taxes, the figure was 75%.
Income and sales taxes begin to decline soon after the economy enters a downturn, but property tax revenue declines lag behind those, the report said.
Property tax collections follow behind the real estate market because local assessments take time to catch up with changing house prices.
The delay is typically 18 to 24 months but may be longer, depending on local assessment practices.
Property taxes fell 2.0% in 2010, the first year-to-year decline in 15 years, according to the report. They are expected to drop 3.7% in 2011.
The revenue effect of falling home prices has begun to show up in city revenues and is expected to continue.
"Property tax receipts do not appear that they're going to improve over the next year or two," said Michael Pagano, the other co-author of the NLC study and the dean of the College of Urban Planning and Public Affairs at the University of Illinois in Chicago.
When city officials begin to cut their budgets, they go first to personnel and second to delaying or canceling infrastructure projects, according to Hoene. Those two strategies have been the most prevalent over the last few years as cities have struggled to deal with the revenue situation, he said.
"We think there's a reason for that. Those are two primary areas where there are large amounts of money involved," he said. "Eventually, you have to go where the money is."
In times of fiscal decline, data shows that it's not unusual for cities to reduce their actual levels of capital expenditures as a way of maintaining services in their operating budgets, according to Pagano.
"The problem isn't so much that the bond markets aren't providing generous interest rates to the issuers, it's that the issuers and the municipalities aren't willing to go out and borrow because they have more pressing problems, such as maintaining service delivery levels," he said.
Cities also have been spending down their rainy-day funds.
Before the recession began, reserves reached a record high of 25.2% of cities' annual general fund spending, according to the survey. For 2011, the fiscal officers project a decline in their reserves to 15.4% of that spending — a 40% drop.
While cities build up funds for major projects as well as potential emergencies, they are important to bond underwriters and raters, according to the report.
"They often build them up as a sign of fiscal health to show the bond market and the investment community that they're fiscally doing very well," Hoene said.
State budget cuts have hurt city spending plans as well.
They are in their fourth year of budget cutting and city financial officers say they have suffered cuts of up to 50% in some kinds of state aid, according to the survey.
Meanwhile, IHS Global Insight, in a report also released Tuesday, said: "With federal assistance drying up, the state and local sector will have to tighten its belt. Hence, [we] expect this sector to constitute a substantial drag on real [gross domestic product] growth in the coming quarters."