FINANCIAL MANAGEMENT/City fiscal conditions worst in a decade

For the first time in nearly a decade, most city officials say that, financially, they are worse off today than they were in the previous fiscal year. That, according to the most recent National League of Cities’ (NLC) survey of city finance officers.

Since 1993, most respondents to NLC’s annual survey have reported being better able to meet financial needs in the current fiscal year than in the previous one. In 2002, however, 55 percent of respondents say they are worse off financially than they were in 2001.

Slower-than-expected growth in consumption-based revenues — from sales taxes, tourist-related taxes and income taxes — is fueling the current fiscal decline. Over six quarters ending March 31, 2002, sales tax collections were 3 percent below projections, tourist tax collections were 9 percent below projections, and income tax collections were 10 percent below what city fiscal officers budgeted.

While city officials had predicted a slowing growth rate in revenues this fiscal year, actual receipts for the two quarters following Sept. 11, 2001, were substantially below projections. Sales tax collections were 8 percent lower than expected; tourist-related tax receipts fell 18 percent below projections; and income tax revenues fell 11 percent below expectations.

Cities are spending more money after Sept. 11 in three key areas: public safety, health care and infrastructure. Nearly seven of 10 survey respondents said increasing demands for public safety drove expenditures in that area throughout 2002. Rising health care costs, noted by 88 percent of respondents, and increased spending on infrastructure, cited by 67 percent of respondents, were among the factors having the most negative impact on their budgets.

The tough fiscal climate is reflected in the survey respondents’ predictions of revenue and expenditure growth. General Fund revenues grew nearly 6 percent in 2001, but survey respondents predict they will increase by only 1.2 percent in 2002. On the other hand, General Fund expenditures increased by just more than 5 percent in 2001, and survey participants predict they will grow 5.6 percent in 2002.

Seeing those trends continue, local officials are predicting that fiscal conditions will worsen in 2003. Approximately two-thirds of survey respondents believe that cities will be less able than they are this year to address financial needs in fiscal year 2003.

The survey yielded one bright spot, however. Final figures for 2001 revealed that year-end balances, often called reserve funds or surpluses, reached the highest point since the fiscal survey was first administered in 1985. Surpluses could dissolve, though, due to a worsening economy or the effects of underlying structural problems with the finance system.

Local revenues and expenditures are being affected by:

• a shift from a goods-based economy to a services-based economy, and increasingly to a knowledge- and ideas-based economy;

• intergovernmental pressures from reduced federal and state aid to cities, preemption of local tax authority, and lack of funding for federal and state-mandated programs and services;

• new and increased demands for services, such as additional public safety; and

• tax exemptions for specific groups resulting from competitive pressures and the rise of nonprofit and other tax-exempt activities.

• The 2002 survey was sent to 1,200 city finance officers, including all cities with populations greater than 50,000. The results are drawn from responses from 308 cities that are statistically representative of cities nationwide.

  Hoene is the research manager for the National League of Cities, based in Washington, D.C. Pagano is a professor of Public Administration for the College of Urban Planning and Public Affairs at the University of Illinois in Chicago.