City Finances OK for Now; Storm Clouds Ahead
by Sherry Conway Appel and Chris Hoene
The fiscal condition of the nation’s cities improved in the past year, according to a new report released last week by NLC. Seven in 10 city finance officers report that their cities are better able to meet fiscal needs during 2007 than in the previous year. Conversely, one-third of cities report they are less able to meet their fiscal needs. This was particularly true of Midwest cities, where just under half of cities reported they were less able to meet their financial needs.
The picture for 2008 is less optimistic with city officials predicting a slowdown in revenues and increased spending pressures. Concerns about the health of real estate markets and their potential impacts on property tax revenues, combined with increased calls for property tax relief from homeowners and residents, will cloud the picture in 2008. Health care and pension costs, in particular, are increasing at a faster rate than city revenues.
The NLC report, City Fiscal Conditions in 2007, found that when adjusted for inflation, city revenues grew only 1.1 percent from 2005 to 2006, while expenditures grew by 1.2 percent. Looking at 2007, revenue growth is expected to be less than 1 percent (0.4 percent) while expenditures are increasing by 3.5 percent, creating a revenue gap of 3.1 percent that cities would have to close by cutting services or raising revenue.
“City officials are going to be facing difficult choices in the coming years — both to plan for the future and to fill gaps in revenue and spending levels,” said NLC Executive Director Donald J. Borut. “The purchasing power of cities and towns is under tremendous pressure — with increasing costs for such staples as public safety and infrastructure as well as increases in health insurance and pensions for public employees. Cities are doing the people’s business — getting commuters to work, picking up the trash, keeping libraries open, making sure their streets are safe. And city leaders are being innovators. But it’s getting more difficult in the face of increased demands for more services from their constituents.”
Given the gap between revenues and expenditures, nearly half (45 percent) of all responding city finance officers reported they have increased fees and charges for services. Twenty-nine percent reported that their city opted for increasing property tax rates, while 17 percent reported reducing property tax rates. Increases in sales tax, income tax, and other tax rates have been much less frequent.
Looking at specific revenue sources, sales tax receipts improved in 2006 over previous year receipts, increasing by 3 percent, adjusted for inflation. Property tax revenues increased in 2006 by 4 percent when adjusted for inflation, and projections for 2007 indicate that they will continue to grow by 5.5 percent, reflecting historical highs and the strong real estate market in recent years. The current housing downturn, however, will likely affect cities’ revenue collections in the next few years as assessments catch up with market changes.
“The housing boom benefited most cities' treasuries over the last decade,” said report co-author Michael Pagano, dean of the College of Urban
Planning and Public Affairs at the University of Illinois at Chicago. “But now that the housing market's decline has taken hold in many neighborhoods and cities, property tax receipts will likely fall in 2008 unless tax rates are increased. We haven't seen a drop in real estate values like this for nearly 15 years.”
On the spending side, three in four city finance officers report increases in public safety spending in 2007, while 59 percent are increasing spending for infrastructure or capital projects, 52 percent are increasing the growth rate in their operating budgets to support a variety of new and existing services, and 39 percent report increases in human services spending, often referred to as social services programs.
Eight in 10 city finance officers cite prices and inflation, employee wages, and the cost of employee health benefits as having negative impacts on their budgets. Rising costs for public safety, infrastructure, and employee pensions are also affecting their bottom line. One in four city finance officers also say that changes in the amount of federal and state aid to cities are having a negative impact on city budgets.
According to the survey of city financial officers conducted between April and June 2007, the generally positive financial picture was reported by cities regardless of whether they relied on property, sales or income taxes or what size they were. Officials in the Midwest (51 percent), however, were less likely to say their cities were better off in 2007 than city officials in the South (79 percent), Northeast (74 percent), and West (73 percent).
NLC’s City Fiscal Conditions in 2007 is based on an annual survey of city finance officers, now in its twenty-second year. The survey is mailed to more than 1,000 city finance officers in cities over 10,000 in population and the 2007 responses are based on 359 responses to this year’s survey. The survey results are representative of city fiscal conditions of different sizes (for cities over 10,000) and in different regions of the country. References to years are for fiscal years as defined by the cities themselves. Generally, city fiscal years begin on one of three dates: January 1, July 1, or October 1. The survey asks for final revenue numbers for the latest fiscal year for which cities have finalized numbers (in this case 2006), about revenues, fiscal actions and factors affecting city budgets in 2007, and about the direction in which their city’s fiscal conditions are headed in 2008.Details: Click here to download the research report. For print- Visit www.nlc.org to download the research report. Click on Research and Analysis under Resources for Cities.
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