City Fiscal Conditions – A Five-Year Review

In advance of the release of our annual City Fiscal Conditions report on September 13, this blogpost highlights recent historical trends in municipal finance.

The community of Bristol straddles the border between Tennessee and Virginia — one name, two cities, and two starkly different realities. And in today’s economy, Bristol, Tennessee, is thriving while Bristol, Virginia, is struggling.

We see a similar contrast farther up the border in Loudon County, Virginia, and Jefferson County, West Virginia — Loudon is prospering while Jefferson shrinks. These localities exemplify a larger trend: cities have not recovered equally from the Great Recession.

How a city’s fiscal health bounces back from an economic downturn depends on a few things: (1) the fiscal relationship with its state (taxing authorities and intergovernmental aid); (2) the alignment between its economic base and its fiscal structure; and (3) the demands of its citizens on services. Population growth can also have a big effect on these elements, given the number of people a city serves.

These broader factors shape the core of city finances — revenues and expenditures. Revenues include income from taxes and fees for the services cities provide, and other sources of municipal income such as from liquor stores. Expenditures include spending on services, such as transportation and police protection, as well as standard operating costs such as pensions and salaries.

NLC’s annual City Fiscal Conditions survey of city finance officers, which has been in the field for 33 years, tracks elements of cities’ general fund, which represents their primary operating budget, including:

  • property, sales and income tax revenues;
  • beginning and ending balances; and
  • total revenues and expenditures

In 2017, the survey revealed slowing revenues and expenditures as well as revenues that had not yet recovered from the recession. The focus on the Great Recession goes beyond simply the event itself; there is a need to understand its long-term effects and how they play out regionally.

To better understand the regional dynamics of these trends in the post-recession years, we examined 95 municipalities with at least 100,000 people using survey data from 2012 through 2017. These cities are regionally diverse, representing 12 cities from the Northeast, 40 from the South, 17 from the Midwest, and 24 from the West.

Our analysis reveals that cities in the Northeast and Midwest experienced greater decline in both revenues and expenditures than cities in the South and West. This is largely attributed to population and industrial losses that began before, but were accelerated by, the Great Recession. Given the close relationship between underlying local economies, population dynamics and fiscal health, this decline has two key implications: 1) cities’ tax bases are eroding with the loss of people, and as a result, 2) cities are also losing revenues, primarily from property and sales taxes.

The fiscal challenges of the Midwest, in particular, become even more apparent when we examine budget balances (revenues less expenditures, see Figure 3). While every region was operating with surpluses per capita in 2012, the Midwest and Northeast were operating particularly close surpluses. Five years later in 2017, every region continued their positive balances, but the South and the West saw dramatic improvements in the size of those surpluses.

While cities in the Midwest were similarly positioned with cities in other regions in 2012, the region has struggled to regain ground in the post-recession years. Looking ahead, the fiscal resilience of cities will depend on their ability to leverage growth, no matter how minimal, and to prepare for the next downturn.

About the Authors: Anita Yadavalli is the Program Director of City Fiscal Policy at NLC. Anita leads NLC’s Public Sector Retirement initiative, with a focus on research and education for city leaders on retiree healthcare benefits, as well as research and programming on other city fiscal policy issues. Anita holds a Ph.D. in Agricultural Economics from Purdue University, an M.S. in Food and Business Economics from Rutgers University, and a B.S. in Environmental and Business Economics from Rutgers University.

Spencer Wagner is a research intern with NLC’s City Fiscal Policy program. His research focuses on municipal revenues, expenditures and other fiscal conditions. Spencer graduated from Elon University with a B.A. in Political Science and Policy Studies.