City Budgets Finally Joining Economic Recovery

City finances are starting to turn a corner as a new survey has found that general funds should stop their long slide that began half a decade ago.
October 11, 2013
 

City finances are starting to turn a corner as a new survey has found that general funds should stop their long slide that began half a decade ago.

Seven in 10 city finance officers report that their city will be better able to meet its financial needs this year after years of shortfalls and service cuts, according to a report released Thursday by the National League of Cities. Additionally, 2013 marks the first year in which general fund revenues are expected to increase since 2007 with a 1.5 percent bump.

Although the national economy has been in recovery mode since 2010, city finances tend to lag behind economic cycles, said Michael Pagano, the report’s co-author. As such, revenues are starting to pick up, expenditures are stabilizing and ending balances have finally stopped declining. Any prolonged government shutdown could derail that upturn, but overall the dark days for city finances appear to be in the rear view mirror.

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“God knows what will happen with the shutdown now but [the national economy] seems to have turned a corner in the last year or two,” Pagano said at a press conference on the report in Washington, D.C. “So the lag effect means that municipalities will start to pick up in a year or two as well.”

Still, having the worst behind them doesn’t mean the good times before the recession will return. Cities grappled with less state and federal support during the recession and with ongoing battles in Washington over government spending, that financial support is likely gone for good.

And the financial improvements for cities in 2013 will be modest ones: an increasing income tax revenue is likely to be balanced with still more declines in property tax revenue as assessments lag behind the real estate market and many are still based in valuations made during the real estate crash. (A little more than half of cities rely on sales taxes as well as property tax revenue.) In 2012, property tax revenue decreased by about a half percent from the previous year while sales tax revenue increased by 6.5 percent.

Additionally, city finance officers report that the three factors in their budgets that have had the biggest increase over the last year – pensions, healthcare benefits and infrastructure – all have been a negative force.

They are strains that cannot be ignored, nor can they be tackled singularly, said James Spiotto, a municipal bankruptcy expert and a partner at Chapman and Cutler in Chicago.

“Addressing those issues is part of the solution,” he said. “You can’t crowd out healthcare or pensions … by not addressing infrastructure first. Because without infrastructure or essential services, you won’t have the money to pay healthcare or pensions.”

Last year, the most common way of reducing expenditures was to cut the size of the workforce. Cities also cut down on other personnel costs by implementing hiring freezes (38 percent), reducing healthcare benefits (24 percent) or pension benefits (22 percent). Certainly, pensions and healthcare benefit costs have been cited as big drains on city finances in prominent city bankruptcy cases like in Stockton or Detroit.

“Our sense is that, generally speaking, cities are heeding the warning of some of their colleagues across the country and taking a proactive review of pension fund benefits in communities,” said Christiana McFarland the report’s co-author.

The following chart shows the share of cities increasing or cutting expenditures in various areas, as reported by the NLC survey of city finance officers:

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