US Cities Face Revenue Crisis

by Leroy Baker, Tax-News.com, New York

04 September 2009

City governments in the United States are in the early stages of registering the effects of the nation's economic downturn, and are being forced to raise taxes and cut spending in order to meet budget targets, according to an annual report by the National League of Cities on fiscal conditions.

The report reveals that cities face significant budget gaps (-2.9%) this year, due to the decline of income tax (-1.3%) and sales tax (-3.8%) collections.

These taxes are typically the earliest source of city revenue to decline as job losses increase and consumer purchases decrease.

In addition, property taxes, which make up the bulk of city revenue nationwide, are beginning to slow (1.6% growth) as real property assessments are adjusted to reflect declining housing values, the report showed.

It additionally found that the ability of cities to meet their financial needs will only worsen through 2010 and beyond.

Because most city tax revenue is collected only at a few specific points during the year, or over the course of several years in the case of property tax revenue, there is usually a time lag of 18 months to several years before economic shifts have an impact on city fiscal conditions.

Co-author of the report, Michael A. Pagano, professor at the University of Illinois at Chicago, cautioned that:

“Cities face the burden of confronting the effects of the downturn for years after any recession ends. This means that cities will be navigating the implications of the downturn for awhile longer, even if the business climate turns around immediately.”

In the face of declining revenue and increasing expenses, city finance officers are pessimistic about cities’ abilities to meet their financial needs. Nine in ten (88%) say this year will be difficult in meeting fiscal needs, while 89% expect the same in 2010. This is the worst outlook the report has detailed in 24 years, according to the NLC.

Under state law, most cities are required to balance their budgets, which means that their expenses cannot exceed revenues in a given budget year. According to the report, to meet projected budget shortfalls, cities are taking a number of steps to cut back expenses or raise revenue.

To raise revenue, according to the report, cities are increasing the fees charged for city services, or increasing taxes. Four in ten (42%) cities are increasing the level of fees they charge and 25% are creating new fees for some services. The report further indicated that 25% of cities have increased property taxes.

“The current economic situation is wreaking havoc on city budgets,” observed National League of Cities President Kathleen Novak, mayor of Northglenn, Colorado, continuing:

“Although we are beginning to see signs of a possible recovery in the national economy, city officials will need to be more proactive than ever in terms of monitoring their budgets, reevaluating budget priorities, and identifying new revenue and savings opportunities.”

The report also called for a greater coordination of effort among local, state and federal governments in responding to these challenges.

“It is imperative that as the national economy recovers, the nation keeps its attention focused on the recovery of our cities,” argued Donald J. Borut, executive director of the National League of Cities. “The fiscal health of our cities is essential to keeping our nation innovative and competitive on the world stage.”

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