Signs of a Financial Slowdown for City Governments

WASHINGTON — There are signs that U.S. city governments could be headed toward their first financial slowdown after a period of post-recession growth, according to new research.

The National League of Cities, in its latest City Fiscal Conditions survey, found receding confidence among municipal financial officials about the fiscal positions their cities are in, as well as lagging growth in revenue and spending compared to previous years.

Results from the research were outlined in a report published Tuesday. This year’s survey findings are based on responses from municipal finance officers in 261 U.S. cities.

“The fiscal winds seem to be shifting a bit at the local level,” Christiana McFarland, research director at NLC’s Center for City Solutions, said at an event here on Tuesday.

Among city finance officers surveyed, 69 percent reported that their cities are “better able” to meet financial needs this year, compared to 2016. That’s a majority. But it also marks a decline. The comparable figure last year was 81 percent and it was 82 percent in 2015.

McFarland noted that the latest survey marks “the first time post-recession that we’re seeing such a significant decline in the proportion of finance officers doing better this year over last.”

The survey also examines general fund revenue and spending trends.

General fund revenues grew by about 2.6 percent in 2016, over 2015. Spending increased at a rate of 2.1 percent. Projections for this year suggest revenues will stagnate, with just 0.9 percent growth, according to the findings of the NLC survey. Expenditures are expected to rise again by about 2.1 percent.

A general fund is typically the main budget account a city uses to cover basic government operations, such as police, fire and public works.

While growth may be cooling for city revenues, experts aren’t predicting an imminent, sharp economic downturn in the U.S.

“It is very unlikely that we have another recession anytime in the next 12 to 24 months,” said Dan White, an economist at Moody’s Analytics, who works on fiscal policy research. “We’re not predicting a recession until about 2020, which is kind of a consensus view.”

“What really makes me worried is this ‘less able’ thing,’” he said, referring to the findings that city finance officers were less confident than in previous years that their cities could meet financial demands.

“I don’t think that this is necessarily a reflection of reduced revenues," White added.

An alternative explanation he offered is that cities are getting less financial aid from states, and states are getting less aid from the federal government and “crap rolls downhill.”

U.S. Rep. Dan Kildee, a Michigan Democrat, was also on hand at Tuesday’s event. He hails from Flint, Michigan, a city that has seen steep economic declines, and experienced a public health crisis after its water system became contaminated with lead.

“We all know that there’s a subset of these American cities that are experiencing really serious fiscal stress,” he said. “So far, the coping mechanisms that state governments in particular have provided have been very much focused on balance sheet solvency.”

“There’s another definition of solvency and it has to do with service levels that are being provided in these communities,” Kildee added.

Property taxes are an important revenue stream for many cities. Although some rely to varying degrees on sales and income taxes.

For this year, the survey found strong gains in property tax revenues and weaker sales and income tax revenue growth. Projections show property tax growth slowing in 2017.

The NLC survey also found that general fund revenues have yet to fully recover from the Great Recession, which hit in late 2007, and are still shy of 2006 levels.

Chris Morrill is executive director and CEO of the Government Finance Officers Association and used to be the city manager of Roanoke, Virginia.

Roanoke is a place that, he said, was able to transition away from having an industrial economy, to one that is more “knowledge-based,” while also reversing population declines, seeing upticks in high school graduation rates and cutting crime.

But, despite gains like these, revenues in the city continued to slip. “The challenge is we have a 19th century local government revenue system in a 21st century world,” he said. Something he said would help: policy changes enabling cities to get internet sales tax payments.

Tom Kozlik, a municipal strategist with PNC Capital Markets, said that the trends presented in the NLC report resembled those he’d seen in recent years. After the recession, Kozlik said, some local governments were not restoring balance to their budgets as swiftly as he expected.

“We’re talking about a new fiscal reality,” he said, noting the cost of pensions for retired public employees as a significant, growing source of pressure for local government budgets. “Overall revenues are not keeping pace with expenditure demand.”