City Revenue Drops for the 6th Consecutive Year

A new report on city finances says local governments are still struggling and may continue to do so for years.
by | September 13, 2012 AT 10:00 AM

City governments suffered their sixth consecutive year of revenue decline in FY 2012, according to a new report by the National League of Cities that paints a bleak portrait for localities and offers little reason for optimism.

The annual report, based on data collected from more than 300 cities, finds that cities are still reeling from the effects of the recession that began in late 2007 and still haven't started to recover.

It's a stark contrast to the rebound being enjoyed by states, which are projected to finally return to pre-recession levels of revenue during FY 2013.

The discrepancy is due to a couple of factors. Cities, unlike states, rely on property taxes as a key source of revenue. That means they're especially susceptible to the sluggish downturn in the real estate market. And because of the way property values are assessed and collected, there's typically a delay between when property values start to decline and when that decline actually results in less tax reveue.

Another sign of trouble for cities: they've erased nearly half their reserves in an effort to plug their budget holes. Before the recession, cities collectively had ending balances of about 25 percent. In 2012, they're projected to be just 12.7 percent. Those balances, which have been slashed, have historically been used by ratings agencies and others as a barometer to measure a city's fiscal health.

More bad news for cities: the sluggish situation could continue for years to come, according to the report. "Looking to 2013, all indications point to continuing challenges for city budgets, with national economic indicators pointing to slow growth and the possibility of federal budget cuts that may further dampen economic recovery," the authors write.

City finance officials projected they'll see an overall 3.9 percent decrease in revenue for the 2012 fiscal year, which ended this summer or will end this fall in most places. Expenditures were projected to be up just 0.3 percent.

Interestingly, the trend seems to have occurred for so long that finance officers are adjusting to a new normal. About 57 percent of city finance officers said their cities are better able to meet their fiscal needs this year than they could in 2011 -- despite the decrease in revenues.

More than 40 percent of city finance officers reported that their city had increased fees to help increase revenue. And 22 percent increased local property taxes (the authors note that historically, that's typical, regardless of the state of the economy).

Across the nation, cities are cutting back on personnel -- typically through hiring freezes -- as well as delaying infrastructure work and slashing services to deal with their revenue declines.

FInance officers blame the cost of pensions and health benefits for their workforce and its retirees as a primary driver of their fiscal strain.

Going forward, those costs will continue to compete for scarce resources, meaning elected officials will have to make tough choices, like whether to increase taxes and fees on residents, or cut city services, in order to compensate employees and retirees, according to the authors.