Cities Guardedly Optimistic About Fiscal Health
Cities Better Able to Meet Financial Needs in 2006, But Ongoing Budget Pressures Remain
Like the millions of Americans they represent, U.S. cities were able to pay their bills this year but are concerned about how rising costs will affect their long-term financial stability. In fact, despite a more optimistic view of fiscal conditions, cities have yet to recover fully from the effects of the 2001 recession once changes in city revenues are adjusted for inflationary factors, according to a report released by the National League of Cities (NLC).
More than two in three city finance directors who responded to the City Fiscal Conditions Survey in 2006 said their cities were better able to meet financial needs during 2006 than in the previous year, yet many city officials cite numerous negative factors that are affecting the solvency of their budgets.
“The factors having the most negative impact on our ability as municipal leaders to meet our cities’ needs are the same ones our citizens face at home: rising health care costs; increasing pension costs; and the costs of constant maintenance and upkeep,” says NLC President James C. Hunt, councilman from Clarksburg, W. Va. “Faced with the economic impact these issues have on our city and individual budgets, we must work together to find solutions that will strengthen cities’ fiscal outlooks and the quality of life for our citizens.”
Cities experienced a record 6.8 % growth in city revenues in 2005 over 2004 revenues, the highest growth in more than a decade. When adjusted for inflationary factors, however, revenue growth actually shrunk to 0.9%, with city spending slipping even further (-2.0%). An overwhelming majority (92%) of city finance directors cited prices, inflation and cost of living as factors affecting their city budgets.
Fiscal conditions varied depending on revenue sources. Only one-third of cities that rely on income taxes saw improving conditions, compared to three of four cities that use sales taxes and more than one-half that rely on property taxes. Those cities that relied on property tax revenues in 2005 saw increases of 2.2% (adjusting for inflationary factors).
But cities will need to remain cautious in the coming years given looming federal deficits and other factors, said Michael Kasperzak, councilman from Mountain View, CA, and chair of NLC’s Finance, Administration and Intergovernmental Relations (FAIR) Committee.
“Slowing or declining housing markets could have serious consequences on budgets in cities that rely heavily on property tax revenues,” Kasperzak says.
Other important contributing factors to the overall fiscal conditions of cities include:
–Health care and pension costs, two of the factors identified by city finance officers as having the largest negative impact on their ability to meet needs, are increasing at a faster rate than city revenues.
–Three out of four city finance officers reported increased public safety spending in 2006, while 55% reported increased infrastructure spending, 48% saw increases in productivity and 34% reported increases in the size of the city workforce.
–Eleven percent of respondents reported decreases in property taxes in their cities.
–The most common action taken to boost city revenues during 2006 was to increase fees and charges for services (50% of respondents’ cities took this step).
–77% of city finance officers in cities with a population over 300,000 reported improving conditions, while only 45% of city officials in cities smaller than 50,000 reported improvements.
–Three in four city officials in the South (76%) and West (75%) reported improving conditions, compared to 52% in the Midwest and 36% in the Northeast.
Given that cities today receive approximately one in four dollars from federal and state sources compared to the one in three dollars they received 25 years ago, municipalities are finding they must also become more self-reliant in terms of funding, says Brian Murphy, councilman from Cambridge, MA, and chair of NLC’s CityFutures Panel on Public Finance.
“Considering these funding trends and the current fiscal situations of municipalities, cities will have to remain vigilant in making sure they are prepared for future changes in economic conditions,” Murphy says.
The City Fiscal Conditions Survey is a national 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. The 2006 survey data are drawn from 385 responding city finance officers and allow NLC to generalize about all cities with populations of 10,000 or more.
Click here to download the survey: http://www.nlc.org/content/Files/06_FiscalSurveyBrief.pdf