WASHINGTON – The fiscal outlook of U.S. cities continues to weaken, according to the latest report from the National League of Cities.
“Cities are squarely in the center of the economic downturn,” said Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago and co-author of the report, which was released Tuesday. “What we may be seeing in this report is evidence of a new normal.”
The annual survey, completed by 272 of the nation’s city finance officers, found that city revenues are declining, with an estimated 2.3 percent decrease by the end of the year. It is the fifth consecutive year of falling revenue. Further declines are projected in 2012.
The main factor behind the revenue decline is the suppressed housing market, which is causing a dip in property-tax revenue. Income-tax receipts are also decreasing, while sales-tax receipts remained generally flat.
Cities are responding with reduced spending: 72 percent are cutting personnel, 60 percent are delaying infrastructure projects, 41 percent are increasing service fees and 36 percent are modifying employee health care benefits. The report defines a city as a municipal corporation with a population of at least 10,000.
Donald Borut, executive director of the National League of Cities, said local officials are acting prudently and responsibly with the cuts in personnel and infrastructure. “City officials are making difficult decisions and are working hard to find innovative solutions to reenergize their communities,” Borut said.
According to Christopher Hoene, director of the Center for Research and Innovation at the National League of Cities and co-author of the report, the solutions include increasing shared services between cities and counties, contracting and outsourcing work to the private sector if it will perform more efficiently, and allowing the public to participate in the budget process.
Hoene said that the uncertainty about the health of the national economy is still the biggest question for cities. “If regional housing markets, unemployment and consumer confidence struggle, city revenues will continue to lag, city leaders will face more cuts, and those decisions will act as a drag on the economy.”
A separate report released Tuesday painted a somewhat brighter picture of local finances. State and local tax revenue rose 6.9 percent to $344.5 million in the second quarter, the seventh straight quarter of year-on-year gains, according to the Census Bureau.
Though individual income taxes shot up 17.4 percent, property taxes dropped for the third consecutive quarter, falling 1.2 percent. State and local tax revenue also is 2.1 percent below their 2008 peak.
“The uphill battle for revenues is far from over, and the road may get steeper as recent signs of weakening economic activity will weigh down on the tax base,” said Gregory Daco, principal U.S. economist at IHS Global Insight, in a note to clients.