Revenue and Spending Trends

Revenue and spending shifts in 2010 and 2011 portray a worsening fiscal picture for America's cities.

  • A projected decline in 2011 revenues represents the fifth straight year-to-year decline going back to 2007.
  • Year-to-year expenditures have declined in three of the last four years.
  • In comparison to previous periods, the most recent decade, with recessionsin 2001 and 2007-09, continues to be characterized by volatility in city fiscal conditions.

With a national economic recovery that has been weak or stalled, and taking into account a lag between economic shifts and the effects for city budgets, it seems very likely that cities will confront further revenue declines and cuts in city spending in 2012.


 

Cities ended fiscal year 2010 with the largest year-to-year reductions in general fund revenues and expenditures in the 25-year history of the survey. In constant dollars (adjusted to account for inflationary factors in the state-local sector), general fund revenues in 2010 declined -3.8% from 2009 revenues, while expenditures declined by -4.4%. Looking to the close of 2011, city finance officers project that general fund revenues will decline by -2.3% and expenditures will decline by -1.9%.


The fiscal condition of individual cities varies greatly depending on differences in local tax structure and reliance.

  • Understanding the differing performance of local tax sources-property, sales, income and wage-and the connections to broader economic conditions helps explain the forces behind declining city revenues. 
    • Property Taxes. Local property tax revenues are driven primarily by the value of residential and commercial property, with property tax bills determined by local governments' assessment of the value of property. Property tax collections lag the real estate market, because local assessment practices take time to catch up with changes. As a result, current property tax bills and property tax collections typically reflect values of property from anywhere from 18 months to several years prior.
    • Sales Taxes. Changes in economic conditions are also evident in terms of changes in city sales tax collections. When consumer confidence is high, people spend more on goods and services, and city governments with sales-tax authority reap the benefits through increases in sales tax collections. For much of this decade, consumer spending was also fueled by a strong real estate market that provided additional wealth to homeowners. The struggling economy and the declining real estate market have reduced consumer confidence, resulting in less consumer spending and declining sales tax revenues.
    • Income Taxes. City income tax receipts have been fairly flat, or have declined, for most of the past decade in constant dollars. Local income tax revenues are driven primarily by income and wages, not capital gains. The lack of growth in these revenues suggests that economic recovery following the 2001 recession was, as many economists have noted, a recovery characterized by a lack of growth in jobs, salaries and wages.

 


 

City finance officers are predicting decline or little growth in all three major sources of tax revenue for cities in 2011. 

The effects of the well-publicized downturn in the real estate market in recent years are increasingly evident in city property tax revenues in 2011. Property tax revenues in 2010 dropped by -2.0% compared with 2009 levels, in constant dollars, the first year-to-year decline in city property tax revenues in fifteen years. Property tax collections for 2011 point to worsening effects from the downturn in real estate values, projected to decline by -3.7%. The full weight of the decline in housing values is now evident in city budgets, and property tax revenues will likely decline further in 2012 and 2013 as city property tax assessments and collections catch up with the market.

City sales tax receipts declined in 2010 over previous year receipts by -8.4% in constant dollars, the largest year-to-year decline in fifteen years. However, city sales tax revenues appear to have stabilized in 2011.  They are projected to essentially remain flat (increase of 0.3%) over 2010 levels.

City income tax projections for 2011 are for a decrease of -1.6% in constant dollars, as wages and salaries continue to reflect local job losses and a national unemployment rate hovering around 9%