IE 11 Not Supported

For optimal browsing, we recommend Chrome, Firefox or Safari browsers.

Cities Forecast Bleak Futures for their Budgets

City finance officers express pessimism in being able to meet their city's financial needs.

WASHINGTON, D.C. -- The economic downturn and higher homeland-security spending will hurt city finances, according to the annual survey of city finance officers conducted by the National League of Cities.

"Lower sales and tourism tax revenues and higher security spending translates into hard times for cities," said Karen Anderson, president of the NLC and mayor of Minnetonka, Minn. "It means that in some cities, residents won't be getting the services they deserve because city budgets have been squeezed too tight."

More than 300 city finance officers responded to the survey, "City Fiscal Conditions in 2002."

Fiscal Conditions in 2002
For the first time since 1993, a majority of the surveyed finance officers (55 percent) said that their cities are less able to meet their city's financial needs in 2002, compared to 2001. The causes of the increased pessimism are slower than expected growth in revenue from sales, income and tourist-related taxes combined with new fiscal responsibilities for homeland security, rising healthcare costs and increased spending on infrastructure.

In addition, budget shortfalls in many states are reducing funds for municipalities.

Finance officers were also asked about the factors making it most difficult for them to balance city budgets: at the top of the list was rising health care costs (88 percent of city officials); followed by increased spending on public safety and security needs (69 percent); and infrastructure investment (67 percent).

Recession and Sept. 11
City fiscal concerns have been exacerbated by the terrorist attacks on New York City and the Washington, D.C., area on Sept. 11 and by the anthrax scare that followed shortly afterwards.

City finance officers were asked to provide quarterly budgeted and actual data for revenue sources for the six quarters beginning with October 1, 2000 and ending March 31, 2002.

During the entire six quarter period, actual sales tax collections were 3 percent below projections, tourist tax collections were 9 percent below projections, and income tax collections were 10 percent below what city fiscal officers budgeted.

For the two quarters following Sept. 11 -- October-December 2001 and Jan-March 2002 -- finance officers also reported that sales, tourist and income tax collections fell below budgeted levels. Sales tax collections were 8 percent lower than expected; tourist-related tax receipts were hardest hit, falling 18 percent below projections; and income tax revenues fell 11 percent below projections in October-December 2001.

Future Fiscal Conditions
Concerns about fiscal conditions in 2002, combined with actual tax collections that are well below budgeted levels have local officials even more concerned about fiscal conditions in 2003. Sixty-seven percent of city officials responding to the survey believe their city will be less able to address financial needs in 2003 compared to 2002.

However, cities' ending balances remained steady at the close of fiscal year 2001. The balances in 2001 were 19 percent, compared to 18.3 percent in 2000. One bright spot was property tax revenue, which rose by more than 5 percent over the previous year. The close of fiscal year 2001, for many cities, occurred prior to or just after the terrorist attacks of Sept. 11, and the economic and fiscal impacts of those attacks, in combination with the declining economy will challenge ending balances this year and next.

The Future of Public Finance
Current challenges to city fiscal conditions need to also be placed in the larger context of the system of public finance. The unprecedented economic growth of the past decade has masked underlying structural problems with the system, including:

- The shift from a goods-based economy to a services-based economy and, increasingly, to a knowledge-based economy;

- Inter-governmental pressures brought on by reduced federal and state aid to cities, preemption of local tax authority and lack of funding for federal and state-mandated programs and services;

- New and increased demands for services, such as additional public safety; and
-
Tax exemptions for specific groups resulting from competitive pressures and the rise of nonprofit and other tax-exempt activities.

Michael Pagano, professor of public administration at the University of Illinois at Chicago and author of the study, in conjunction with Chris Hoene