Almost all U.S. cities are cutting spending to compensate for declining revenues, but the worst may be yet to come, according to a report released Tuesday by the National League of Cities.
Finance officers from cities across the country are expecting their revenues to fall a combined 0.4 percent by the end of 2009, while costs are expected to rise by 2.5 percent.
The fiscal health of the nation's cities represents more bad news for the national economy, said the report. The state-local sector of the economy is now in the midst of a downturn that will be several years in length.
Changes in the economic conditions of cities lag those of the national economy because property tax bills are set when the value of real estate is reassessed. In some cities that reassessment is annual, but in others, it happens less frequently.
The housing downturn that began in the middle of 2007 and led to the longest recession in the United States since the Great Depression did not impact property tax revenues for cities until this year. Property tax revenues increased by 6.2 percent in 2008 and likely only grew 1.6 percent this year, according to the NCL.
But the full weight of the decline in housing values has yet to be experienced by many cities, and property tax revenues will likely decline in 2010, 2011 and 2012 as declining property values are reflected in city property tax rolls, said the report.
The NCL, a nonprofit group representing more than 19,000 cities, villages and towns that it regularly surveys, forecast that city sales tax revenues will drop 3.8 percent this year, while income tax revenues will decline 1.3 percent.
Still, city income tax receipts have been negligible for most of the past decade, because cities tend to tax income and not capital gains. Because the recovery from the 2001 recession was jobless -- employment did not increase as the country returned to economic growth -- cities did not make any gains in income tax.
With unemployment expected to reach 10 percent this year, they are unlikely to experience a boost in revenues in the near future, said the NCL.
On the cost side, cities are grappling with rising employee and pension spending as well as increased infrastructure and public safety needs.
The $787 billion economic stimulus plan passed in February included funds and bonding programs to help cities pay for police officers or foster economic development. It also dedicated billions to improving infrastructure such as water and roads.
Still, some three-fourths of city finance officers in the NCL survey said infrastructure costs were dragging on their budgets.
Much of the stimulus money was supposed to trickle down from the states to local governments, but one in two of the city finance officers surveyed said they were hurt by decreasing aid from state governments.
Because cities are required by law to balance their budgets, citizens can expect further spending cuts and tax and fee hikes to deal with the ever-shrinking pool of revenues.
Already, almost half of the cities in the survey have raised fees for services, while 27 percent have expanded the types of fees they charge.