FINANCIAL MANAGEMENT/Cities in recession

While economists announced the end of the economic recession two years ago, a fiscal recession continues in America’s cities. Ongoing economic struggles, combined with soaring health care and pension costs, continue to cause municipal fiscal problems.

In the Washington, D.C.-based National League of Cities’ latest annual survey of city finance directors, more than 63 percent of respondents said their cities were less able to meet financial needs during 2004 than in the previous year. Looking ahead, 61 percent say they expect their cities to be less able to meet 2005 needs, relative to the current fiscal year.

This year marks the third year in a row that constant-dollar (adjusted for inflation) revenues have declined. Constant-dollar revenues are projected to decline by 7 percent in 2004, after a 2 percent decline in 2002 and a 4 percent decline in 2003. The declines from 2002 to 2004 suggest the economic recession has had a deeper impact on cities than previous downturns. Revenues, for instance, did not decline year-to-year during the 1990 to 1993 recession.

Among available revenue sources, in current, unadjusted dollars, property tax revenues were expected to grow by 5.5 percent in 2004, while sales tax revenues were expected to grow by 2.3 percent, the strongest rate in four years. Income tax revenues were expected to grow by only 1.8 percent.

City finance officers said the biggest negative factors affecting budgets were the costs of city workers’ health benefits, pensions and wages; public safety needs; and infrastructure needs. Cities are responding by raising fee rates, imposing new fees and raising property tax rates, increasing productivity levels, and reducing the city workforce and operating costs. In addition, for the first time since 1992, cities have drawn down their ending balances — or rainy day funds set aside for emergencies — for two consecutive years and are expected to draw down ending balances again in 2004.

Even if the economy fully recovered tomorrow, cities would still be facing increased fiscal stress over the next year. Revenues would be slow to recover, similar to what the states are experiencing now. On the expenditure side, pressures would continue because of rising costs for employee health care and pensions, ongoing homeland security responsibilities, cuts in state aid to cover state shortfalls and continued need to invest in infrastructure. In short, the fiscal recession confronting cities has yet to subside, pointing to continued difficulties and tough budget choices for city officials in the coming year.

The City Fiscal Conditions Survey is a mail survey of finance officers in U.S. cities. Surveys were mailed to a sample of 1,059 cities, including all cities with populations greater than 50,000 and to a randomly generated sample of cities with populations between 10,000 and 50,000. Survey data are drawn from 288 responding cities, for a response rate of 27 percent. The responses received allow researchers to generalize about all cities with populations of 10,000 or more. This is the 20th edition of the survey, which began in 1985.

A copy of “City Fiscal Conditions in 2004” is available at www.nlc.org. The report may also be obtained at the Center for Research and Municipal Programs at the National League of Cities at (202) 626-3030.

Pagano is a senior fellow at the University of Illinois at Chicago, and Hoene is research manager at the National League of Cities.