Tough fiscal times continue for cities
At some point, the current era of municipal budgetary woes will end. Unfortunately, a recovery was nowhere in sight during fiscal year 2003.
According to a recent survey of more than 300 city finance directors by the Washington, D.C.-based National League of Cities (NLC), 81 percent of the respondents said their cities were less able to meet financial needs during 2003 than in the preceding fiscal year. That marked the highest negative response to the question since the annual survey began in 1990. As for the immediate future, the survey contained more bad news: 83 percent of those surveyed said they would be less able to meet financial needs during fiscal year 2004 than in 2003.
The financial pressure facing cities can be seen when comparing the growth of their revenues to expenditures in recent years. For example, in fiscal year 2002, general-fund revenues increased by only 2.4 percent, while general-fund expenditures increased by 5.5 percent, according to the survey. The survey was conducted before the end of fiscal year 2003, so the growth rates for that year are not available.
The survey asked respondents to list the three factors that had “the most negative impact” on their 2003 budgets. More than 60 percent (63 percent) cited the costs of employee health benefits. Other factors included the costs of employee pensions (listed by 30 percent), decreased state aid (29 percent), the local economy (25 percent) and infrastructure needs (25 percent).
Cities reacted in a number of ways in 2003 — ranging from increasing fees to reducing service — to alleviate the financial pressure. Approximately half (47 percent) of the cities surveyed increased fee rates; 29 percent reduced their workforce; 29 percent imposed new fees on services; 22 percent decreased capital spending; and 11 percent reduced service levels.
Recent economic troubles have taken a toll on municipal reserve funds, as cities have been forced to use up a significant portion of them in recent years and now have less of them to spend. In fact, reserve funds as a percentage of expenditures dipped to 17.9 percent in fiscal year 2002, the lowest rate in five years, the survey found.
Unfortunately, it appears that cities are poised to struggle for a while. Even if the economy recovered fully tomorrow, cities still would face increased fiscal stress over the next year. Revenues will be slow to recover, and the signs of a slowing real estate market bode ill for local property tax collections. On the expenditure side, pressures will continue because of rising costs for health care and pensions, responsibilities arising from homeland security and the federal No Child Left Behind Act, reductions in state aid, and the ever-present need to invest in infrastructure.
Christopher Hoene is the research manager for NLC. Michael Pagano is a professor of public administration at the University of Illinois at Chicago.