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City Fiscal Conditions in 2012

City Fiscal Conditions in 2012

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Published by L. A. Paterson

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Published by: L. A. Paterson on Oct 22, 2012
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By Michael A. Pagano and Christopher W. Hoene
 Te nation’s city nance ocers report that the scal condition of cities in 2012 continues to reect the prolonged eectsof the economic downturn.
Local and regional economies characterized by struggling housing markets, slow consumerspending and high levels of unemployment continue to drive declines in city revenues. In response, cities cut personnel,infrastructure investments and key services. Despite these challenges, a majority of city nance ocers report that theircities are better able to meet nancial needs in 2012 than in 2011.Findings from the National League of Cities’ latest annual survey of city nance ocers include:
  As nance ocers look to the close of 2012, they project the sixth year in a row of year-over-yeardeclining revenues;
  Tere is a continued decline in property tax revenues in 2012, reecting the inevitable and laggedimpact of real estate market declines;
 Ending balances, or “reserves,” have declined by over 25% in four years and, while still atmodestly high levels, are projected to decline as cities use these balances to weather the effectsof the downturn; 
Fiscal pressures on cities include declining local tax bases, infrastructure costs, employee-relatedcosts for health care, pensions, and wages and cuts in state and federal aid; and,
 Confronted with these pressures and conditions, cities are reducing personnel commitments, delayingor cancelling infrastructure projects, and cutting local services.
1 Michael A. Pagano is Dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago. Christopher W. Hoene is Director of the Center for Research and Innovation at the National League of Cities. Christiana McFarland is research mangerand Program Director, Finance and Economic Development. The authors would like to acknowledge the respondents to this year’s scal survey. The commitment of these cities’ nance ofcers to the project is greatly appreciated. The authors are also grateful to ShuWang, doctoral student in the Department of Public Administration at UIC, for her assistance in collecting general-fund data on the nation’s largest 75 cities & Will McGahan, Outreach Associate for his administration of the survey. The nancial support of the John D.and Catherine T. MacArthur Foundation is greatly appreciated.2 All references to specic years are for scal years as dened by the individual cities. The use of cities or city in this report refers to municipal corporations.
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pmb 2012by michael A. pagano, Christoher W. Hoene & Christiana mcFarland
Rr Br 
Aerica’s Cities
City Fiscal Conditions in 2012
The City Fiscal Conditions Survey is a national mail and online survey of nance ofcers in U.S. cities conducted in thespring-summer of each year. This is the 27th edition of the survey, which began in 1986.
ReseaRch BRief on ameRica’s cities
Rvn and Spndn TRndS
Revenue and spending shifts in 2011 and 2012 continue to paint a stark scal picture for America’s cities. Te projecteddecline in 2012 general fund revenues represents the sixth straight year-over-year constant-dollar decline going back to 2007.
Over the same period, year-to-year expenditures have declined or remained at. In constant dollars (adjustedto account for inationary factors in the state-local sector), general fund revenues in 2011 declined -2.3% from 2010revenues, while expenditures declined by -4.0%.
Looking to the close of 2012, city nance ocers project that generalfund revenues will decline by -3.9% and expenditures will grow slightly, by 0.3% (See Figure 1).In comparison to previous periods, the past twelve years were marked primarily by challenging city scal conditions.Recessions in 2001 and 2008-09 were followed by anemic economic recoveries. Since city revenue collections typically lag economic transitions, it is likely that city scal conditions will remain weakened in 2013. (For more on the lagbetween economic changes and city revenues, see page 9.)
 Tax RvnS
 Te scal condition of individual cities varies greatly depending on dierences in local tax structure and reliance. Whilean overwhelming majority of cities have access to a local property tax, many are also reliant upon local sales taxes,and some cities (fewer than 10% nationally) are reliant upon local income or wage taxes. Understanding the dieringperformance of these tax sources and the connections to broader economic conditions helps explain the forces behinddeclining city revenues.
3 The General Fund is the largest and most common fund of all cities, accounting for more than half of city revenues across the municipal sector.4 Constant dollars refers to ination-adjusted dollars. Current dollars refers to non-adjusted dollars. To calculate constant dollars, we adjust current dollars using the U.S. Bureau of Economic Analysis (BEA) National Income and Product Account (NIPA) estimate for inationin the state and local government sector. Constant dollars are a more accurate source of comparison over time because the dollars are adjusted to account for differences in the costs of state and local government.5 For more information on variation in local and state tax structures, see Cities and State Fiscal Structure, (NLC, 2008) at http://www.nlc.org/File Library/Find City Solutions/Research Innovation/Finance/cities-state-scal-structure-2008-rpt.pdf.
Change in Constant Dollar Revenue (General Fund)Change in Constant Dollar Expenditures (General Fund)Recession trough 3/91Recession trough 11/01Recession trough 06/09
Figure 1:
Year-to-Year Change in General Fund Revenues and Expenditures (Constant Dollars)
city fiscal conditions in 2012
Property Taxes.
Local property tax revenues are driven primarily by the value of residential and commercial property, with property tax bills determined by local governments’ assessment of the value of property. Property tax collectionslag the real estate market, because local assessment practices take time to catch up with changes. As a result, currentproperty tax bills and property tax collections typically reect values of property anywhere from 18 months to several years prior, depending upon the city. Te eects of the downturn in the real estate market in recent years are increasingly evident in city property tax revenuesin 2012. Property tax revenues in 2011 dropped by -3.9% compared with 2010 levels, in constant dollars. Property taxcollections for 2012 continue to register the downturn in real estate values, projected to decline in constant dollars by -2.1%, the third year in a row of year-over-year property tax revenue declines. Property tax revenues will likely declinefurther in 2013 as city property tax assessments and collections continue to catch up with the market (See Figure 2).
Sales Taxes.
Changes in economic conditions are also evident in terms of city sales tax collections. When consumercondence is high, people spend more on taxable goods and services, and city governments with sales tax authority reapthe benets through increases in sales tax collections. For much of the past decade, consumer spending was also fueledby a strong real estate market that provided additional wealth to homeowners. Te struggling economy and the decliningreal estate market reduced consumer condence, resulting in less consumer spending and declining sales tax revenues.However, in 2011 and 2012 , as the national economy started to recover and consumer condence returned, city sales taxreceipts increased over previous year receipts by 1.6% and 2.4%, respectively.
Income Taxes.
 City income tax receipts have been fairly at, or have declined, for most of the past decade in constantdollars. Local income tax revenues are driven primarily by income and wages (not by capital gains). Te lack of growthin these revenues suggests that economic recovery following the 2001 recession was, as many economists have noted,characterized by a lack of growth in jobs, salaries and wages. Projections for 2012 city income tax collections arefor a decrease of -0.8% in constant dollars, as wages and salaries continue to reect local job losses and a nationalunemployment rate hovering around 8%.
3.6%3.4%6.0%2.4%2.8%-5.3%-3.4%-3.2%1.0%0.5%3.0%-0.3%2.3%-6.6%-8.4%1.6%2.4%-0.1%1.2%4.2%0.9%-0.1%-0.2%-5.1%-4.7%-2.3%-1.1%2.3%-2.5%2.2%1.3%-1.0%-2.5%-0.8%1.3%2.0%1.5%1.4%1.0%2.0%4.4%0.6%3.3%2.2%4.0%6.3%6.2%4.2%-2.0%-3.9%-2.1%-10%-8%-6%-4%-2%0%2%4%6%8%10%1996 1997 1998 1999
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011budet2012
Sales Tax Collections Income Tax CollectionsProperty Tax Collections
Figure 2:
Year-to-Year Change in General Fund Tax Receipts(Constant Dollars)

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