Financial Hardships for Most Cities to Grow in '09

COLUMBUS, Ohio - Declining property-tax revenues, high energy prices and other financial headwinds will create greater economic hardships in 2009 for most cities across the U.S., a new report says.

City budget officials say they anticipate more layoffs for municipal workers, cutbacks in parks and recreation programs and library hours, and higher fees for everything from garbage pickup to building permits.

"Cities for a long while now have been on the upside of the curve, generally experiencing pretty good growth in revenues," said Chris Hoene, director of policy and research for the National League of Cities, which collected data from 319 municipalities in its annual survey. "Now we're coming over the top of the curve and heading down the wrong side of it."

The housing crisis has already damaged municipal coffers in 2008, especially in the West, with rising foreclosures and falling home prices resulting in decreased property-tax revenues. Four out of five budget officials who responded to the survey of U.S. cities say next year is likely to be worse.

Small but fast-growing suburbs that used low tax rates to attract families are most vulnerable to budget constraints.

The three main sources of revenue for cities — income tax, property tax and sales tax — are all declining, the report warns. Meantime, health care, public safety and fuel are getting more expensive.

Two of every three cities with more than 50,000 residents say it's harder to meet basic city needs this year than last, the survey found. One in two budget officials responding to the survey say they have raised fees on city services during the past year.

The report follows a litany of gloomy financial news for the nation's local and state governments in recent months.

The Center on Budget and Policy Priorities reported Sept. 8 that midyear shortfalls opened in the budgets of at least 13 states in the current budget year. At least 29 states and the District of Columbia faced or are facing combined budget shortfalls of $48 billion in the fiscal year that began July 1.

The Rockefeller Institute for Government said in July that adjusted state tax revenues remained in decline for the third quarter in a row and that sales tax collections were flat for the first time in six years.

Cities that rely mostly on property taxes are in for the toughest ride because the loss of revenue from a foreclosed house today won't be felt in budgets for months.

Home prices for the 20-city Standard & Poor's/Case-Schiller index peaked in July 2006, and some economists predict prices won't recover until mid-2009 or later.

For cities already tightening their belts, the squeeze could get even stronger.

• In Columbus, the city is facing a $75 million budget hole and planning 100 job cuts, including about 40 layoffs. All spending over $1,000 is now under close review. Revenue from the city's income tax grew by at least 4 percent a year for 40 years, including the recession of the 1990s. Since 2000, that revenue has topped 4 percent only once.

• In Palm Bay in central Florida, one of the country's fastest-growing cities in recent years, officials have eliminated 32 jobs out of about 850, cut public-pleasing events like the annual Easter Egg hunt and are raising fees on the cost of renting ball fields and other park facilities.

• In Indianapolis, city officials ordered a 5 percent budget reduction this year and plan to continue it next year. A proposal to hire 100 additional police officers is on hold. Next year's budget includes a proposed reduction of the city's $1.5 million arts budget by a third and millions cut from the parks program.

"As we spend more and more on the public safety side, taking away from the investments in education and the developmental things, are we in fact creating bigger problems for ourselves down the line?" said Jackie Nytes, a city-county councilwoman.

Among the report's other findings:

• Cities on average are facing a 2.8 percent budget deficit this year, forcing fee increases, reduced spending or use of rainy-day funds.

• The biggest spending pressures on cities are coming from increases in fuel costs, maintaining roads, bridges and water and sewer systems, keeping up police and fire services and increases in employee costs, including wages and health care.

• Three of every four fiscal officers in Western states reported their budgets were worse this year. Conditions were most optimistic in the South, with one in every two budget officials responding to the survey saying conditions were worse in 2008.

In pothole-ridden Tacoma, Wash., officials planning a long-awaited street repair program were counting on $19 million during the current two-year budget cycle. But that figure is down to a projected $12 million as real estate tax revenue plunges, including a 50 percent drop from July 2007 to this past July.

One of the biggest problems for cities is that revenue from sales and property taxes are declining together for the first time in decades. As consumer confidence sags in the face of declining home values, people are less likely to make big-ticket purchases.

Fortunately, most cities have healthy rainy-day funds, filled as buffers in recent years as it became clear to local governments that state and federal funding was drying up.

Not every city's ready to raise fees or taxes.

In Riverside, Calif., in the state's inland region, the budget was cut by $10 million from 2007 to this year and numerous departments saw reductions, including fewer hours and staff at libraries. Riverside, with a population of 294,000, saw 2,500 foreclosures last year and could have another 7,500 homes at risk.

"If you take the premise this is the worst economy in the inland area since World War II, it's not good time to raise fees," said Mayor Ron Loveridge.