Connecting state and local government leaders

NLC Report: City Finances Appear to Be Getting Stronger

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Connecting state and local government leaders

But there’s a caveat: Infrastructure and pension costs will weigh on municipal budgets in future years.

City government finances in the U.S. are strengthening, but worn-out infrastructure and large pension liabilities promise to pose substantial costs in the years ahead.

That’s a key takeaway from the National League of Cities annual city fiscal conditions report, which was released Thursday. Based on a national survey of city finance officers, the report shows city general fund revenues have recovered to about 96 percent of the level they were at before the Great Recession.

“Revenues and expenditures have been making a steady climb since drastic declines following the recession,” Christiana McFarland, research director for the National League of Cities, said on Thursday at an event in Washington, D.C. where she and others discussed the report.

General fund revenues grew 3.7 percent in 2015, according to the report. By comparison, the 2014 growth figure was 1.3 percent. 

A city’s general fund is typically used to pay for basic municipal operations and public services, such as police and fire departments and parks and recreation.

Recent sustained growth in revenues from property, income and sales taxes is notable, McFarland said.

“Following the recession,” she explained, “all three tax sources declined.”

The fiscal conditions survey found that in 2015 city property tax revenue went up 3.8 percent, sales tax revenue 5.5 percent, and income tax revenue 5.8 percent.

As revenues have improved, cities have seen healthier year-end general fund balances. This left over money is commonly carried forward to the next fiscal year. Similar to a reserve or “rainy day fund,” it can serve as a cushion to help cover declines in revenue during an economic downturn, helping to stave off service reductions and other cost cuts.

According to the NLC report, ending balances neared historic highs last year at 24.4 percent of general fund expenditures.

McFarland said revenues are expected to fully recover to pre-recession levels within the next year.

The time it has taken revenues to rebound, nearly a decade from when the Great Recession struck in late 2007, underscores the deep and long-lasting imprint the downturn left on many city budgets. Following previous recessions, revenues bounced back faster—in about five years after a 1990 economic slump, and in about six in the wake of the recession that hit in 2001.

The findings in the NLC report incorporate email survey responses from 277 cities, with populations that range from 10,000 to above 300,000. McFarland co-authored the report with Michael Pagano, dean of the College of Urban Planning and Public Affairs at University of Illinois at Chicago.

Pagano pointed out at Thursday’s event that while the report offers a window into what’s going on in the average city, “not all cities are average.”

“What works in Yonkers doesn’t work in Peoria,” he said.

Streams of general fund revenue vary city-to-city. And depending on how these revenues are affected by state law, local economic conditions and other factors, a municipal government could still very well be under significant financial pressure in 2016.

Assessing local government financial conditions in the U.S. becomes more complicated when taking counties into consideration. A National Association of Counties report issued this week found government revenues in hundreds of counties have been slow returning to pre-recession levels.

Hanging over local governments throughout the country, and states as well, is infrastructure in need of maintenance and upgrades, and underfunded pension systems that provide retirement benefits for public employees. “Those things are coming home to roost now,” Pagano said.

“Where there is any flexibility in a city’s financial structure it’s in the general fund,” he added. “As the general fund is getting better, there’s going to be a lot more pressure to provide support for those activities that we’ve postponed for decades, if not generations.”

Bill Lucia is a Reporter for Government Executive's Route Fifty and is based in Washington, D.C.

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