Many of us aware of the budget problems of local governments; they hit “close to home” and when services are cut and roads not repaired, we tend to notice it fairly quickly. As we watch for the economy to improve, we are also watching for state and local budget conditions to improve. However, as noted by the National League of Cities (NLC), local governments usually have an 18 month time lag within economic shifts, due to the nature of tax collections. This time lag could mean that the worst is yet to come for local governments.
In early September, the NLC released its annual report, “Cities Fiscal Conditions in 2009,” which details how cities are experiencing a decrease in income tax and in sales tax collection. Pared with the housing decline affecting property tax assessments, many cities are finding it difficult to meet their FY 2009 budgets, and the report predicts even worse financial conditions for 2010 and 2011.
Included in the findings of the NLC report:
- Final numbers for 2008 show city expenditure growth (4.9 percent) was greater than city revenue growth (3.4 percent);
- City finance officers predict that 2009 revenues will decline(-0.4 percent), but spending will increase by 2.5 percent;
- City sales tax revenues (-3.8 percent) and income tax revenues (-1.3 percent) are predicted to continue to decline through end of 2009;
- Property tax revenues increased by 6.2 percent in 2008 (reflecting rising housing values in previous years), but are predicted to slow to 1.6 percent growth by the end of 2009.
In addition, state governments are not fully, if at all, funding local mandates and other local government aid. To deal with the shrinking revenues, many cities are raising fees or increasing taxes in addition to cutting spending and instituting hiring freezes, furloughs and/or layoffs. And with the 18 month time lag, recovery for local government may be years away.
Indiana Governor Mitch Daniels (R) recently wrote an op-ed in the Wall Street Journal titled “The Coming Reset in State Government,” focusing on the possibility that states are facing a permanent revenue reduction that will require states to reduce the size and scope of their governments. In looking at the decline in housing markets and property values, one can only wonder if a “reset” is also coming at the local government level.