NLC: Growth In Cities Contracts For Second Year In A Row

NLC: Growth In Cities Contracts For Second Year In A Row

The latest fiscal conditions report from the National League of Cities shows that optimism is declining in cities across the US for the second year running. Several major findings from the report, signal a trend that was last seen in 2006 before the Great Recession, including waning confidence of city finance officers, slowing local revenues and insufficient post-recession revenue recovery.

Several key factors are trending negatively for city leaders. According to the report, general fund revenues are starting to decline. General Fund revenues grew by 2.61% in 2016, and revenues are projected to stagnate with just 0.9% growth in 2017.

Notably, cities’ General Fund revenues still have not fully recovered from the recession and stand at less than 98% of 2006 levels.

Municipal financial officers are also projecting a drop in property, sales and income tax going into next year. Finance officers have budgeted for 1.6% growth in property tax revenues in 2017, compared to 4.3% in 2016.

These statistics are significant given how uncorrelated revenue expectations are from the rapid growth in equities markets and some corners of the job market nationally. “Divergence between fiscal conditions and national economic indicators calls into question the alignment between city fiscal structures and the drivers of the economy, as well as the sustainability of the continued patchwork of solutions to cities’ most pressing issues—namely, infrastructure,” report authors write of the split.

According to the report, municipal finance officers hit their peak of post-crisis optimism about the state of city budgets in 2015. Now, a majority of finance officers believe that their cities are well capitalized, but optimism about the future is starting to diminish.

Among top financial concerns are the costs to maintain infrastructure, public safety, and employee health and retirement benefits in an era of ever lower tax revenue. Report data shows that as consumers shift to online purchasing, cities are losing out on tax revenue without a standard interstate regulatory authority over online shopping. Finance officials expect to lose -0.2% of sales tax revenue in 2017. Stagnant wage growth and the loss of middle class jobs is also limiting the prospects for increases in income tax revenue over the long-term.

Raising property taxes have been the go-to for cash strapped municipalities over the past decade, but state-level preemption laws are putting the breaks on big property tax hikes, which will limit that revenue tool for cities going forward.

Looking ahead, tax constraints may lead to a rise in user fees for city services and other more creative means of gathering revenue.

“Our findings raise cautionary flags, despite improvements in economic indicators, like productivity and unemployment,” said Christiana McFarland, Director of Research at the National League of Cities (NLC). “These countervailing trends point to the imperative to expand the fiscal tools available to cities.”

The full report is available here.