Tensions Grow in Municipal-Federal Relationship

By Michael Behm, Senior Vice President at Stateside Associates

The growing tensions between the nation’s cities and towns and the federal government over anticipated budget cuts and nearing Supercommittee deadlines were on display last week at the National League of Cities (NLC) Congress of Cities and Exposition in Phoenix, Arizona.

NLC attendees railed against perceived Congressional indifference toward the country’s municipalities during NLC’s Community and Economic Development (CED) Committee meeting. The CED Committee develops NLC’s federal policy and advocates on behalf of the participating cities and towns. Committee members promised to oppose Supercommittee actions that could further impact the already deteriorating fiscal conditions of America’s local governments. Congress’ Supercommittee faces a November 23 deadline—just a week away—to achieve a gargantuan $1.2 trillion in deficit reduction. Missing the deadline will mean that both domestic and defense programs face dramatic, across the board cuts that go into effect January 2013. Local government officials fear their programs and personnel could bear the brunt of those cuts.

“We just can’t take any more cuts; it’s almost as though they [Members of Congress] have no idea what we’re going through…,” said one committee member during the CED meeting. Another committee member shouted, “we’ll ‘occupy’ the Hill and maybe then they will listen,” to a chorus of laughs and cheers.

The nation’s cities are now in the deepest part of the economic downturn, according to the recently released annual City Fiscal Conditions report—a broadly-focused NLC survey on the fiscal health of cities with populations exceeding 50,000 and a wide sampling of smaller municipalities. The report reveals that most city leaders are now looking to 2013 for any sign of an upturn. In fact, local revenue officials forecast another 2.5 percent drop in revenue collections, on average. This follows on already big hits in property tax collections (expected to decline by 3.7% with further drops likely in 2012 and 2013); fewer revenues coming from income tax collections (expected to decline by 1.6%); and flat local sales tax collections in 2012.

Cities are responding to the downturn by doing the undesirable—more than 70% of the municipalities surveyed cut staff and other personnel; more than 60% are delaying or eliminating badly needed infrastructure projects; and more than 40% are increasing fees and fines. Once sacrosanct local government pension programs and healthcare coverage will soon come under more serious scrutiny and many will face cuts, according to NLC staff. More than one third of cities are already making modifications to their employee health care coverage.  Many local governments are also considering merging city and township functions, such as fire, police and waste removal, with neighboring jurisdictions, adding to the stress placed on first responders and other essential city services. State budget cuts are adding to the pressure. NLC reported that general funding to cities has been cut in half since 2009 and shared revenues have been reduced by more than 40%.

During the CED Committee meeting, and other sessions throughout the conference, officials and NLC staff pledged to become more active during the next several critical weeks as the Supercommittee meets and until NLC convenes in March in Washington, DC for its Congressional City Conference. Among the congressional priorities that were discussed during last week’s NLC Congress of Cities and Exposition:

  • Preventing elimination of the tax exemption for municipal bonds. Eliminating the tax exemption, which incentivizes community investment, is one proposal before the Supercommittee. NLC argues that eliminating the exemption would deliver a devastating blow to state and local investment. One city mayor attending the meeting called the idea, “just plain stupid” (NLC staff noted that the Administration had initially supported eliminating the exemption but recently abandoned support under strong local pressure; however, the proposal remains on the table in Congress).
  • Overturning the Percent Withholding law, which requires state and local governments with annual expenditures in excess of $100 million to withhold three (3) percent from payments for goods, services and payments made to government contracts and remit those withholdings to the federal government toward future tax liability. NLC federal relations staff calls the law “just plain bad policy.”
  • Supporting a two-year version of transportation authorization legislation and pressing Congress to move beyond the injurious continuing resolution (CR) process. NLC staff contend that momentum exists to pass a new bill, but they recognize the federal government is short on the revenues to pay for it.
  • Supporting continued, level funding for the Community Development Block Grant program (CDBG) at $3.5 billion, as it exists in the current House bill. NLC staff expressed concerns about the Senate bill which includes $485 million less than its House companion and is the lowest amount proposed for the program since 1990.
  • Supporting the recently introduced Streamlined Sales and Use Tax Legislation, passage of which would enable state governments to collect sales tax from so-called remote sellers. Several NLC staff and members expressed concern about how much money enactment of remote sales tax collection would actually deliver to the cities, but it remains a priority for NLC’s federal advocates.
  • Opposing federal efforts to enable or require state collection and administration of local telecommunication taxes.

Adding to the concerns expressed by many of the local officials and speakers at the NLC meeting were both the dizzying number of deadlines and priorities currently in front of Congress and fierce partisan gridlock. As the pressure grows to meet the deadlines, NLC’s lobbying staff raised concerns that they and others will be locked out of the behind-closed-doors discussions. “We will lose our influence [over the process] when this occurs,” stated Carolyn Coleman, NLC’s Center Director, Federal Relations, speaking to the Corporate Partner Leadership Council at the meeting. During the same meeting, Arlington, Texas Councilmember Sheri Capehart told corporate sponsors that the nation’s cities and towns are working more closely together than their federal counterparts, “we don’t care about partisanship–we’ve got serious problems that we need to work beyond.”

If you attended last week’s NLC meeting, what were your observations? How is your local government relations program adapting to the ongoing changes in the municipal-federal relationship? How do you anticipate federal cuts to local programs will affect your business?

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