Finance

Local Governments Strain Under Weaker State and Federal Aid

New York’s local governments are increasingly turning to local tax revenue to make up for sluggish growth in federal and state aid, a trend that experts say is occurring across the country.
by | January 17, 2013

New York’s local governments are increasingly turning to local tax revenue to make up for sluggish growth in federal and state aid, a trend that experts say is occurring across the country.

According to a report issued Wednesday by State Comptroller Thomas P. DiNapoli, the share of federal and state aid as a percentage of total local government revenue has slipped 2 percentage points over the decade from to 20 percent in 2011. Though total federal and state aid has grown at an average of 2.2 percent annually, that has been slower than the 2.4 percent rate of inflation.

“Federal and state aid have slowed at a time of rising local costs,” DiNapoli said in a news release. “What’s more troublesome, however, is that New York’s municipalities and school districts have been forced to rely largely on sales taxes and property taxes to make ends meet. These revenue sources can swing widely depending on the economy. When this model breaks down, it causes fiscal shortfalls and hits the pockets of local taxpayers.”

The report is the latest in a series of reports DiNapoli is issuing to highlight the causes of fiscal stress in New York’s local governments.

But New York’s case is being repeated all over the country, said Christy MacFarland, the National League of Cities’ interim director for research and innovation. According to a league survey, 45 percent of cities reported funding cuts from their state in 2012.

“With all of this, in addition to other stresses on local budgets, we’re seeing cuts in workforce and hiring freezes,” MacFarland said.

On the revenue side, cities are increasing fee rates and adding new fees, she said. But as the recession’s recovery has been slow across the country, many municipalities are dipping into their reserve to make up the balance. On average, those funds have been drawn down by 50 percent since 2007, according to the league. “As cities become more self reliant they’re having to look to their rainy day funds to get through, MacFarland said.

In New York, DiNapoli plans to issue fiscal profiles on select cities across the state to keep highlight some of the demographic and systemic pressures facing municipalities. His office also plans to start a new fiscal monitoring system that will devise and publish “fiscal stress scores” for municipalities and school districts across the state. The early warning system seeks to identify those headed toward fiscal crisis, giving local officials and the public enough time to consider options for turning things around.

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