Fundamentals Dept: American Cities in Financial Crisis

You may have been distracted by the 500+ point Dow Jones drop on Wall Street, or the bankruptcy of Lehman Bros., or Bank of America’s absorption of Merrill Lynch, or Senator John McCain’s insistence that American economic fundamentals are strong. But the National League of Cities issued a report today on the bleak financial situation common to American cities that seems quite at home amidst the general malaise.

The report found that the decline in property tax revenues (3.6 percent from the prior year, in inflation-adjusted terms) is having an impact on the fiscal health of local governments. Unlike the previous economic downturn in 2001, when property tax revenues were able to buffer the effects of declining income and sales tax receipts, the weak housing market is likely to affect city budgets until 2010.

Moreover, the report found that other sources of revenue are headed downward as well, with sales tax receipts declining by 4.2 percent and income tax revenues expected to decline by 3.3 percent in inflation-adjusted dollars in 2008 compared to 2007.

As a result, 64 percent of city finance officers surveyed expect cities to have a harder time meeting fiscal needs in 2008, and 79 percent forecast even bigger problems ahead in 2009.

“Even if economic conditions improved immediately, the nation’s cities are likely to be realizing the effects of the current downturn through 2010,” said Michael A. Pagano, co-author of the report and dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago. “The sharp decline in property tax receipts erodes a critical buffer that has helped cities through economic downturns for the last three decades.”

On the spending side, increases of 3.0 percent in 2007 were met with flat or declining revenues, according to the report. Taken together, city finance officers project a budget gap of 2.8 percent in 2008, with revenues declining by 4.3 percent and spending declining by 1.5 percent in inflation-adjusted dollars over 2007.

The areas affecting city budgets most heavily include prices and inflation (including energy prices), which were identified by 98 percent of respondents. Increases in infrastructure (85 percent) and public safety spending (83 percent), and employee-related costs for wages (95 percent), health care (86 percent), and pensions (79 percent) were also cited as budget-busters.

Fear not, people. I am sure we can pray our way outta this mess.

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