Report Indicates Fiscal Pressures for Cities On the Rise

Over the past few years, annual surveys from the National League of Cities (NLC) have reported grim findings on the fiscal status of cities across the nation with little hope for turnaround in the near future.

In 2003, the NLC survey found that cities faced the worst fiscal conditions for municipalities since NLC began its survey of city finance managers in 1985 (see the May 30, 2003 issue of the Digest). And in 2004, the survey found a majority of cities still suffering from the recession, with 75 percent of respondents from the West and 74 percent of respondents from the Midwest reporting deteriorating fiscal conditions (see the Oct. 4, 2004 issue of the Digest).

Homeland security, public safety, education and health care remain top priority for cities, leaving little left over for anything else. As budgets are continually squeezed and expenditures increase, where will municipalities find future funding to finance tech-based economic development?

A new report from the Brookings Institution Metropolitan Policy Program finds the challenges to city finance are both structural and cyclical. Without the deficit financing option available at the federal level, and lacking the revenue options and broader base of state government, city officials face a difficult balancing act, the report says.

Budgeting for Basics: The Changing Landscape of City Finances examines the finances of 162 cities from 1977 through 2000. The years of measurement are significant because it begins the year before 1978, which marked the passage of California's Proposition 13 that spawned a modern day tax revolt aimed primarily at the property tax, the report says. Also, 1978 was the peak year for federal aid to cities. Key findings include:

• Spending in cities grew more slowly than any other level of government. Per capita spending grew 35.1 percent from 1977-2000, compared to 73.4 percent for states;
• While direct federal aid to cities has declined since 1978, it has largely been supplanted with state aid. The majority of that aid is directed toward education;
• Cities that levy only a property tax (i.e., no income tax) received the largest increases in state aid and increased user fees faster than average; and,
• The number of "property tax only" cities fell from 64 to 50.

The second half of the report looks at how 54 sample cities have responded to fiscal pressures generated by the recession of 2001. Although cities increased spending in the 1990s, they also built reserves, according to the report. Reductions in state aid were the leading source of fiscal pressure, and to cope, cities most frequently cut general government expenses followed by education. Responding finance officers indicated that from fiscal year 2003 to 2004, their cities' fiscal conditions declined while budget pressures increased. The problem was characterized mostly as a structural one, despite the recent economic downturn.

A majority of city officials would like to see their revenue base diversified. However, this diversification has both an upside and a downside, the report notes. While increasing user fees may be a good way to collect additional revenue, an over-reliance on fees limits the flexibility of city officials to use these resources for general expenditure needs. Rather than proposing a solution, the report seeks to inform several groups including federal and state legislators responsible for designing urban policy, city officials, and taxpayers.

Budgeting for Basics: The Changing Landscape of City Finances is available at: http://www.brookings.edu/metro/pubs/20050823_budgetingbasics.htm