City Budget Shorfalls, 2010-2012

“While the nation’s economy may be approaching the late stages of the worst economic downturn since the Great Depression, local government budget tightening and spending cuts over the next several years could well impose a significant drag on the nation’s economic recovery. Cities face layoffs, canceled contracts with small businesses and vendors, reduced services and sizable budget shortfalls for 2009 that are expected to grow much more severe and widespread from 2010 to 2012.1 With the pace of recovery still sluggish, the consequences of the recession will be playing out in America’s cities and towns, on Main Street and in the lives of families for years to come.”

— Christopher W. Hoene
Director, Center for Research and Innovation
National League of Cities

The National League of Cities has released a Research Brief analyzing the impact of the current sharp recession on City Budget Shortfalls and Responses: Projections for 2010-2012.

Along a number of important observations and statistics, the report emphasizes that “city fiscal conditions typically lag economic conditions, in much the same way that state fiscal conditions lag economic conditions and the unemployment rate lags overall economic recovery.

“For city budgets, this lag is typically two years, depending on the factors driving the changes in the economy and the depth of those changes. Current economic indicators suggest that the U.S. economy has recently passed the low point of the current recession, which means that the low point for city fiscal conditions will likely be experienced sometime in 2011.

“The lag is a function of tax collection and administration issues in cities, particularly for the property tax, which is the most common form of city taxation. Property tax bills represent the value of the property in some previous year, when the last assessment of the value of the property was conducted. A downturn in real estate prices may not be registered for one to several years after the downturn began because property tax assessment cycles vary across jurisdictions: some reassess property annually, while others reassess every few years, and many jurisdictions only reassess a portion of all property in any given year. Consequently, property tax collections, as reflected in property tax assessments, lag economic changes (both positive and negative) by varying periods of time, depending on the jurisdiction. Sales and income tax collections also exhibit lags due to collection and administration issues, although the lags are typically shorter.”

Specifically, this assessment concludes that “the municipal sector – as if all city budgets were totaled together – likely faces a combined, estimated shortfall of anywhere from $56 billion to $83 billion from 2010-2012. The range of the projected shortfall is wide because of the number of factors that can potentially affect municipal bottom lines. Chief among these is the impact of the economic recession on municipal revenue collections. In 2009, city finance officers surveyed by NLC reported that sales tax and income tax collections were declining, but property tax collections were relatively flat. Nationwide, housing values are down 9.5 percent since 2007, which eventually will translate into residential property tax revenue declines for cities – the brunt of which will hit in 2010, 2011 and 2012. More recently, the commercial property market also has been affected by economic conditions, which will result in declines in commercial property tax collections. At the same time, ongoing and increased demands from residents for municipal services and increasing municipal costs will make it difficult for city leaders to offset revenue shortfalls through spending cuts alone. Revenue declines and spending pressures will conspire to produce municipal budget shortfalls that will have to be filled through increases in fees for services, laying off workers or cutting back their hours, delaying and canceling capital infrastructure projects and drawing down municipal reserves.

“For 2009, based on NLC’s survey of city finance officers, cities faced an estimated budget shortfall of nearly 3 percent of total general fund budgets. Applying a similar shortfall estimate to each year of the next three years results in a combined, projected shortfall of $35 billion for 2010-2012. However, based on previous recessions, it is highly likely that cities will face larger shortfalls in 2010, 2011 and 2012 than they experienced in 2009.”

For more details, see the City Budget Shortfalls and Responses research brief.

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Published in: on January 15, 2010 at 1:31 pm  Leave a Comment  

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