Tuesday, September 27, 2011

Sledding Remains Tough for Cities

Back in the real economy.....

While state revenue is still down about 8% from levels seen 3 years ago, it has improved somewhat from the depths of the Great Recession [Sep 1, 2011: Positive News - U.S. States' Q2 Tax Revenue Up 11.4%]  The situation at the city level is not faring as well, as the latter relies far more on property tax revenue.  That revenue actually help up better during the leading edge of this slowdown, as tax assessments have a long lag time, but with foreclosures and sales (and I assume a lot of property owners petitioning to get a far lower assessment) over the past few years, the actual impact has been hitting more recently.  Of course that is only one side of the ledger (inflows) - expenses continue to balloon as promises made during the heyday of the bubble (and earlier) come due.  Bloomberg takes a look at the situation at the local level.

  • For U.S. cities, the effects of the real-estate collapse and the recession it helped spark in 2007 are showing few signs of ending. More than half, 57 percent, of municipal officials said finances were worse in fiscal 2011 than in 2010, the National League of Cities said today, citing a survey of municipal officials. 
  • Inflation-adjusted revenue is headed for a fifth- straight annual drop, while worker health-care and pension costs rose for more than 80 percent. Half said state aid has declined.
  • The plight of cities has exerted a drag on the economy as local officials move to cut spending to cope with diminished tax collections and reduced assistance from states dealing with their own budget deficits, government data show. More than a half-million jobs have been cut from municipal payrolls in the past three years, according to U.S. Labor Department figures. States have slashed 1.3 million positions since August 2008.
  • The real-estate rout that’s pushed down home prices in major metropolitan markets by almost a third from the July 2006 peak has cut into property levies, while ebbing consumer confidence has curbed retail sales-tax collections by municipalities. They are also shouldering rising medical-care expenses for workers and face widening unfunded pension liabilities after tumbling markets led to losses in 2009. 
  • Local governments have only recently begun to feel the full brunt of the housing market’s drop because values used for taxes typically lag behind markets by 18 months or more, according to the League. Receipts likely will decline in fiscal 2012 and 2013 for the same reason, the group said.
  • On the whole, cities are paying their bills and balancing their budgets by eliminating jobs, canceling projects and charging more for services, Hoene said.  Half of cities cut or froze employee pay, 31 percent fired workers and 30 percent cut health-care benefits, the League said.
  • Three out of five municipalities delayed or canceled “capital infrastructure projects,” according to the survey. Mayors and city councils also took steps to increase revenue. Fees charged to residents were raised in 41 percent of cities, while 23 percent imposed new charges and 20 percent raised property-tax rates, the League said.
  • Given the direction of the economy, it may be two to five years before local revenue grows enough to let cities fully emerge from the slump spurred by the recession that ended in June 2009, Hoene said. A housing market recovery will be key to any rebound, given the dependence on real-estate taxes.
    • The survey of 1,055 municipal finance officers, including those in all U.S. communities with more than 50,000 residents, was conducted by mail and e-mail from April to June. The results are based on 272 responding cities.

[May 25, 2011: WSJ - State Tax Revenue Improving, but Local Governments Struggling]

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