Despite Cities' Fiscal Optimism, There Are Reasons to Worry

Municipal finances look stable on paper, but cities still struggle with slow revenue growth and rising costs, according to a new report.
by | September 30, 2015
St. Paul, Minn. (Flickr/Jonathan Miske)

City finances continue to improve following the Great Recession, but the slow recovery from the downturn has suppressed revenue growth while rising spending pressures are squeezing budgets, according to a new report released Wednesday.

City finance officers are more optimistic than ever before about their fiscal stability -- 82 percent say they are better able to meet their needs than they were last year, according to the National League of Cities’ annual fiscal conditions report. It’s the most optimistic response in the 30-year history of the NLC’s survey of more than 19,000 cities, towns and villages.

But in context, that cheery outlook now is thanks to cities having weathered the deepest recession in generations and scaling back finances to adjust to a new fiscal reality. City incomes have not fully rebounded, however. Budgeted revenues for 2016 on average are about 92 percent of what they were in 2007. By comparison, it took city budgets six years to reach full revenue recovery following the 2001 recession and five years following the 1990 recession, according to the report.

“The Great Recession has had an unprecedented impact on city budgets,” said Christiana McFarland, a co-author of the report, at a press conference. "But," she added later "city budgets are proving resiliant even with limited fiscal tools and revenue raising capacity."

Revenues in 2015 are still slated to increase from last year but only slightly, by one-third of a percent, the report said. Meanwhile the report predicts that expenses will increase by more than 2 percent. Long-term costs like infrastructure, employee pensions and retiree health care continue to weigh down budgets and leave less flexibility for funding services.

As a result, cities say they are turning to fees more and more to raise revenue. Many officials find that raising fees is politically easier than raising taxes. But increasing fees does't raise as much revenue as hiking taxes. Even more frustrating from a financial perspective: The fees that citizens and businesses pay for things like drivers licenses, permits and inspections don’t even come close to the cost of those services.

“If you really tried to get cost-recovery out of your fee system, you’d quickly be kicked out of office,” said St. Paul, Minn., Mayor Chris Coleman during a panel discussion at the event.

Coleman added that decreased state aid to cities has played a big role in the increased budget pressure. St. Paul’s aid from Minnesota is still below 2003 levels when adjusted for inflation and the city has struggled to make up the difference, he said. State aid to localities has fallen across the country as Congress has cut back aid to states thanks to austerity measures and rising concerns about the federal deficit on Capitol Hill.

The NLC event was held in New York City this year, headquarters of the country’s capital markets. The change in locale from Washington, D.C., is a reflection of the growing concern from ratings agencies and municipal analysts -- many of whom were in the audience -- about the continued distress of high-profile cities.

Ratings agencies have downgraded Chicago’s credit rating several levels this year. One agency ranks it at junk status. The city is $63 billion in debt, including retiree obligations, and is hamstrung by rapidly rising pension obligations. New Jersey Gov. Chris Christie assigned an emergency manager with ties to Detroit’s bankruptcy to take on struggling Atlantic City’s finances earlier this year. And this summer, the small town of Hillview, Ky., declared bankruptcy after being unable to pay a court award.

Since 2008, seven local governments have entered Chapter 9 bankruptcy, marking an unprecedented time for American cities. Detroit in 2013 was the nation’s largest municipal bankruptcy filing in history, declaring $18 billion debt. The crisis in San Bernardino, Calif., has dragged on the longest in the post-recession era -- it declared bankruptcy in 2012 and the case may stretch into 2016.