Municipal finances begin to rebound but economic shocks could cause backslide


According to the latest data from the National League of Cities (NLC), municipal revenues are beginning to rebound and cities are getting on stronger economic footing overall. However, even the slightest shock to city economies could send them tumbling back into recession – or worse. The 28th annual City Fiscal Conditions report shows this improved outlook comes from increased sales and income tax revenue, and improved local economic health.

While conditions are improving, city budget capacity remains limited with revenue and expenditure projections pointing to a continued slow recovery. Property tax revenues are registering a decline for the third year in a row. Nearly one in two finance officers also express concern over the uncertainty in federal and state budgets and cuts in aid and transfers.

In an effort to support dwindling city budgets, user fees for services like licenses and permits have been on the rise two in five (39%) city finance officers report that their city has raised fee levels this year. Additionally, around one in four cities increased the number of fees that are applied to city services (22%), and one in five (19%) cities increased the local property tax in 2013. Increases in sales, income or other taxes are even less common than property tax increases, and this continued to be the case in 2013. Reducing the size of the municipal workforce is the most common action cities have taken to decrease their costs.

Going into 2014, infrastructure will be the top concern for city officials. However, even basic maintenance may be difficult to achieve as budget fights in Washington set the stage for even less federal and state aid which is already at historic lows. More municipal bankruptcies are also clouding the horizon. As federal budget negotiations remain at a standstill, city officials are starting to get nervous. “External shocks and economic uncertainty could undermine optimism and progress at the local level,” said Christiana McFarland, Interim Director for City Solutions and Applied Research at NLC and co-author of the report.

“Because cities operate under an annual balance-budget requirement, they are constantly making adjustments and trade-offs as they adapt their budgets to changing economic conditions,” said Michael Pagano, Dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago and co-author of the report.

The report shows that a 72% of city budget officials feel better about their ability to cover bills and budget items which is an increase from last year when just over 50% made the same claim. Pension and health care costs are also leading budget decisions as state and local governments prepare for what has been called the “silver tsunami” as nearly half of public sector workers near retirement.

These concerns, coupled with federal uncertainty are forcing budget directors to make more cuts and keep greater amounts of cash on hand. In the immediate aftermath of 2008, cities took to using their rainy-day funds to make up for tax base and aid gaps. Those funds haven’t seen much in the way of recovery since then, and continued budget pressure means local residents may continue to see increases in user fees, if not more cuts in city services, as officials hold back spending in the face of continued uncertainty.