Report Finds Slow Recovery, Fiscal Headwinds for Cities

Earlier this month the National League of Cities issued the 2014 edition of its annual City Fiscal Conditions report, which found that cities remain early in their post-recession economic recovery, though they still face significant headwinds moving forward. The full report is available here.

On the revenue side, after six straight years of declining general fund revenues between 2007 and 2012, the uptick in revenues that began in 2013 flattened out in 2014, with a projected decline of 0.5%. This suggests a holding pattern in general fund revenues. Meanwhile, general expenditures are projected to rise 1.0% in 2014, a lower year-over-year rate compared to the 2.2% increase seen between 2012 and 2013. The report notes that we’re seeing a longer lag than usual between national economic recovery and city revenue collections, commenting that “it is clear that the capacity of city budgets remains weakened coming out of the Great Recession.”

For the first time since 2008, the report projects that the three major municipal revenue sources-property taxes, sales taxes and income taxes-will all see year-over-year increases in 2014, albeit modest ones. Property tax revenues are expected to rise 1.6% in 2014, with sales tax revenues and local income taxes projected to rise by 3.6% and 0.6%, respectively.

Despite the fledgling economic improvement, significant fiscal challenges loom. The researchers surveyed city finance directors on what they see as the most positive and negative factors influencing their city’s overall fiscal health and found that:

• The factors increasing in importance most over the previous year (positive or negative) were infrastructure demands, prices or costs of services, employee wages, employee health benefits, and pensions.
• All of these five factors were viewed overwhelmingly as having a negative impact. At least 73% of respondents cited these five factors as having a negative impact, compared to 6% or less citing them as a positive factor.
• The factors seen as having the most negative impacts-meaning they were cited as one of respondents’ three most impactful factors affecting the budget-were infrastructure demands, the cost of employee and retiree health benefits and the cost of employee and retiree pensions.

The report notes that, “these negative factors represent demands on local budgets that are likely to persist and hold back local budgets from full recovery for years to come.” This is consistent with the findings of other recent editions of the NLC report, suggesting that infrastructure, healthcare and pensions are going to remain persistent challenges facing the municipal sector and place increasing pressure on budgets moving forward.

Overall, the report’s findings suggest that fiscal headwinds will linger for cities, despite a tenuous economic recovery. This will place continued pressure on municipal policymakers to adapt through such means as reforming antiquated and financially unsustainable retirement systems, pursuing innovations in infrastructure delivery like public-private partnerships, and streamlining government operations through strategies like competitive contracting, shared service delivery, service optimization, and intergovernmental partnerships or consolidations.

Leonard Gilroy is director of government reform at Reason Foundation and is the editor of the Privatization & Government Reform Newsletter, available here. This article was featured in the October 2014 edition of the newsletter.