City finances continue to improve across U.S., but recession recovery incremental

Municipal finances have stabilized in the wake of the Great Recession, but its effects are still evident in city budgets across the nation, according to a new report from the National League of Cities.
 
The fiscal impacts of the 2007 recession “are much more substantial” when compared to similar downturns in 1990 and 2001, according to the 30th annual “City Fiscal Conditions” report, released on Sept. 30.
 
Modest improvements in city fiscal conditions, however, including an expansion in general fund revenues, led 82 percent of city finance officers to report their cities are better able to meet their financial needs than they were last year.
 
“This year’s report shows that cities are continuing – if incrementally – along the road to fiscal recovery after the lingering impacts of the Great Recession,” said National League of Cities CEO and Executive Director Clarence Anthony.
 
With 30 years of historical data, the report surveys city finance officers on their cities’ abilities to meet fiscal needs, factors impacting budgets, tax receipts, and revenue and spending trends. The report provides a context for how current fiscal conditions compare with previous recession and recovery periods.
 
Trends in general fund revenues tend to reflect the changing economic and fiscal environment of each city, according to the report. General fund expenditures increased 1.5 percent in 2014, with continued growth anticipated into 2015. This was driven largely by investments in employee wages, public safety, and capital projects and infrastructure.
 
Trends in tax receipts provide an understanding of the impacts of the broader economy on city revenues. Severely impacted by the recession, property taxes registered their first post-recession gains in 2013, and experienced moderate growth (2.4 percent) in 2014, with 1.2 percent growth expected to continue into 2015.
 
Sales taxes respond more quickly to economic conditions than property taxes, and they showed their first signs of post-recession growth in 2011. Sales tax receipts have grown every year since, but the pace of growth has slowed, with 2.3 percent growth expected in 2015.
 
Income taxes have been the most volatile tax source during the recovery period, but only about 10 percent of cities have access to an income tax. Income tax revenue growth reached a post-recession high in 2012 and income tax revenue is expected to grow by 3.6 percent in 2015.
 
A number of factors combine to affect the ability of cities to meet their financial needs. The biggest impacts on city budgets, according to responding city finance officers, come from the value of the local tax base (70 percent), the health of the local economy (63 percent), and gas and oil prices (24 percent). Infrastructure needs (48 percent), pension costs (38 percent), and health benefit costs (36 percent) had the most negative impacts on city budgets.
 
“City budgets have been put to the test, and [they] are proving resilient even with limited fiscal tools and revenue-raising capacity,” said NLC Research Director Christiana McFarland, the report’s author. “Looking to the future, cities will continue to face of major budget stressors like infrastructure, pensions and health care, and will need to make tradeoffs to maintain a fiscal balance.”
 
The report can be found at www.nlc.org/cfc.