The Fiscal Future of Cities
Citing a perfect storm of rising home foreclosures, declining home values, and spiraling
costs such as the increasing cost of health care premiums, a report from the National
League of Cities identifies that the fiscal health of cities, especially in the West, is not
good and getting worse. It says “troubling developments” will likely affect the financial
health of cities over the next several years. 


                      

NLC’s report, City Fiscal Conditions in 2008, found that the decline in property tax revenues
(3.6 percent from the prior year, in inflation-adjusted terms) is having an impact on the fiscal
health of local governments.

Unlike the economic downturn in 2001, when property tax revenues were able to buffer the
effects of declining income and sales tax receipts, the weak housing market is likely to affect
city budgets until 2010,the report says.

Moreover the report found that other sources of revenue are headed downward as well, with
sales tax receipts declining by 4.2 percent and income tax revenues expected to decline by 3.3
percent in inflation-adjusted dollars in 2008 compared to 2007.

As a result, 64 percent of city finance officers surveyed expect cities to have a harder time meeting
fiscal needs in 2008, and 79 percent forecast even bigger problems ahead in 2009. “Even if economic
conditions improved immediately, the nation’s cities are likely to be realizing the effects of the current
downturn through 2010,” says Michael Pagano, co-author of the report and dean of the College of
Urban Planning and Public Affairs at the University of Illinois at Chicago. “The sharp decline in property
tax receipts erodes a critical buffer that has helped cities through economic downturns for the last three decades.”

On the spending side, increases of 3 percent in 2007 were met with flat or declining revenues,
according to the report. Taken together, city finance officers project a budget gap of 2.8 percent
in 2008, with revenues declining by 4.3 percent and spending declining by 1.5 percent in inflation
-adjusted dollars over 2007. 


                                                        
The areas affecting city budgets the most heavily include prices and inflation (including energy prices),
which were identified by 98 percent of respondents. Increases in infrastructure (85 percent) and public
safety spending (83 percent), and employee-related costs for wages (95 percent), health care (86
percent), and pensions (79 percent) were also cited as budget-busters. To meet budget shortfalls,
half of the cities responding (49 percent) have increased fees, while 28 percent have increased the
number or types of fees and 23 percent increased the level of impact and development fees.
Regionally, cities in the West are being hit hardest, with 74 percent of finance officers stating that their
cities are worse off in 2008, followed by cities in the Midwest (67 percent), Northeast (61 percent) and
the South (53 percent).

The situation also varies depending upon local tax authority. Finance officers in cities reliant upon property
tax were most likely to say their cities are worse off (75 percent), compared to cities that utilize a mix of
sales and property taxes (60 percent), or cities that use a mix that includes a local income tax (52 percent).
The pessimistic assessment is registered regardless of city size. Sixty-nine percent of the nation’s largest
cities reported a lessening ability to meet needs, 68 percent for cities with populations 100,000-299,999,
65 percent for cities 50,000-99,999, and 61 percent for cities with populations under 50,000.

“There is … only so much cities can do when faced with the macro-economics of a housing market in crisis,
flat revenues and soaring health care and energy costs,” says Donald Borut, executive director of the
National League of Cities. “It’s time we recognize that we must support strong cities if we are to expect
to benefit from a healthy, growing economy. Federal and state policies need to support local economies
if we want to improve the national outlook.”