Fiscal Recession in Cities Expected to Continue into 2005

Ongoing economic struggles, along with rising health care and pension costs, have contributed to the bleak conditions of city budgets around the nation. The majority of America’s cities are still suffering from the recession and city financial officers are pessimistic on the financial outlook for the near future, according to an annual survey from the National League of Cities.

The survey, which consists of 18 factors affecting city budgets, was presented to city finance officers for the report, City Fiscal Conditions in 2004. Respondents were asked whether each of the factors had increased or decreased between 2003-2004 and whether the change had a positive or negative influence on the overall financial picture. For the first time in 10 years, more than half of the respondents reported their cities would be less able to meet their financial needs in 2005 than in the current year.

Health care and increased employee wages topped the list of factors that increased over the previous year. Following closely behind were infrastructure needs, employee pensions and city tax base. In response to the effects of the factors, 91 percent of respondents cited rising costs of employee health benefits as having a negative effect, and 89 percent cited employee wage increases as having a negative effect.

The amount of state aid to cities was cited as a negative factor by 55 percent of respondents, while the health of the economy was cited as negative by only 30 percent. At the same time, 74 percent of respondents said the local tax base had a positive effect on their ability to meet their cities’ overall needs, suggesting the continued strength of the real estate and property markets provided a lifeline for city finances. Other highlights from the report include:

• For the first time since 1989-1992, ending balances as a percentage of expenditures have declined for two consecutive years and are expected to continue declining to 16.8 percent of expenditures in 2004;
• General fund revenues increased by 3 percent between 2002-2003 while general fund expenditures increased by 2.5 percent;
• Seventy-five percent of respondents from the West and 74 percent of respondents from the Midwest reported deteriorating fiscal conditions, compared to 59 percent of respondents from the Northeast and 43 percent from the South; and,
• Financial officers in cities that rely exclusively on the income tax were more likely to report worsening conditions than those in cities that rely exclusively on property tax or sales tax.

As for city revenue actions, the report indicates that over the past 17 years, the most common action to boost city revenues has been to increase fees and charges for city services. More than half of all cities, 54 percent, took this route of action in 2004 while 25 percent opted for increasing property taxes, up from 17 percent in 2003. Only 7 percent of cities reported decreases in property taxes.

City budgets are also being squeezed with added expenditures, according to the report. Public safety expenditures, the data show, have increased by 4.8 percent per year between 2002-2004. Seven out of 10 city finance officers reported increased public safety spending in 2004, 43 percent reported increased infrastructure spending and 35 percent reported an increased growth rate in their operating budgets. Most of the mentioned actions were increases in productivity and in inter-local agreements and reductions in municipal employment and operating spending.

City Fiscal Conditions in 2004 is available from the National League of Cities at: http://www.nlc.org/nlc_org/site/