Municipal Budget Shortfalls
While the budget difficulties facing states and the federal government are getting a lot of attention, we hear much less about the fiscal woes of cities and other local governments. This is partly because following 50 states is easier than tracking almost 90 thousand local governments (including over 19 thousand cities, 17 thousand townships, 3 thousand counties and over 14 thousand school districts). But these local governments provide critical public services and even though the economy is improving, cities and other local governments are probably facing their toughest year yet.
When the National League of Cities surveyed members in 2009, it estimated that the municipal sector would face a budget shortfall of $56-$83 billion in the 2010-2012 period. Nearly 90 percent of city finance officers reported difficulties meeting their fiscal needs in 2009, and three-quarters of city officials reported that overall economic and fiscal conditions had worsened in 2010. Conditions are especially bad in the West, where 91 percent are reporting worsening conditions, compared to 76 percent of Northeast cities.
Part of the problem facing cities has to do with their revenue sources. Property taxes are “backward looking,” so it took some time for the declines in house prices to translate into declining property tax revenues. But it also has to do with shrinking payments from other levels of government. When states face budget shortfalls one of the things they cut is money to local governments. According to the National Council of State Legislators, about 14 states cut local funds in 2010 and 2011. Connecticut, Maine, New Jersey, Rhode Island and New York cut municipal aid, New York further limited the ability of cities to make up the difference through raising property taxes. Virginia cut local aid to cities and counties and North Carolina’s governor has told counties to spend the money in their “surplus’ accounts. The only problem is that the funds in these accounts aren’t really surpluses –just money needed for later in the fiscal year.
This has forced cities to cut programs, lay off workers and shut libraries, fire stations and schools. Washington DC’s mayor, facing a $322 million budget shortfall earlier this month proposed a budget that included city layoffs and cuts to social services and a tax increase. And cities and other local governments are in an especially tight spot because the extent of state actions is not yet known. So they’re trying to come up with their budgets (which for about half of them are on the same schedule as their state) without knowing how big the cuts from the states will be.
I originally posted this on the Urban Institute’s new MetroTrends blog, which features researcher commentary about issues and challenges facing metropolitan America.
DC is a bit different, since it does not have a state to back it up. Further, most states have been quite willing during this crisis to raise tax rates as property values fall to stay close to even on revenues. Even if empty properties don’t pay taxes right away, they are paid eventually as a tax lien is slapped on them – one that many lenders will pay off just to make sure the title is clear.
States can’t do such things with income and sales.
Only those cities whose government is idealogically conservative, rather than fiscally so, are coping badly with this issue.
I agree DC is different – in part I singled it out because I was going to talk about how much worse things would be for DC if there was a government shutdown. The whole issue of the Federal role in DC governance and finance is interesting if a little sad for those of us who live here. As for cities being able to raise property tax rates – there has been some push back from voters and the presence of tax limits leave some cities and counties especially vulnerable to last minute state budget manuevering (think California).
There is less pushback if only rates increase but the actual payment is the same or declines slightly.
Anyone who is too afraid to raise a rate to recoup at least some of the taxes lost to the housing crunch will earn the ire of voters more for cutting services than for raising taxes.
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They are not all the city of Bell, California, but local governments are still overspending. Pensions and benefits are far better than in the private sector. Taxpayers will resent paying more until that disparity is addressed.
In today’s world the government can no longer afford to spend tax money unwisely. Between cutting benefits for the needy, raising taxes on the public, and cutting benefits for government employees to market levels, the choice is clear. Everyone knows what the public will vote for if they are given the chance. California is likely to see some anti-SEIU voter initiatives that will make Proposition 13 look mild.
Thanks Tracy. If nothing else, I should’ve learned from the federal government that having the President and the Senate agree to something doesn’t make it so. We’ll see if property tax limits end up getting passed.
Great blog, Kim. Except I think that New York’s enacted budget in the end did not include the property tax cap. However, the proposal is still alive in the latest rent control skirmish. Stay tuned!