Recession hits US cities’ finances

Recession hits US cities’ finances
By Nicole Bullock in New York
Copyright The Financial Times Limited 2009
Published: September 1 2009 13:44 | Last updated: September 1 2009 13:44
http://www.ft.com/cms/s/0/1e6e2d8c-9666-11de-84d1-00144feabdc0.html


The finances of US cities continue to deteriorate as the ripple effects of a national recession reach local revenues, according to research.

For 2009, 88 per cent of city finance officers said their cities were less able to meet fiscal needs than in 2008, amid declining house values, restrictive credit markets, slowed consumer spending and rising unemployment, a survey conducted by the National League of Cities and released on Tuesday shows.

Nine out of 10 predicted the situation would be worse in 2010.

The reading is up from 64 per cent last year and puts pessimism about cities’ ability to meet fiscal needs at its highest level since the research firm began surveying city finance officers 24 years ago.

“Despite our ability to absorb major cuts and the hits we have taken in this crisis, municipal officers are all sitting on edge,” said Joseph Curtatone, the mayor of Somerville, Massachusetts, a working class city north of Boston. “Have we hit bottom? Have we turned the corner? We just cannot predict that.”

The difficulty may be just beginning, since city finances tend to lag behind changing economic conditions by 18 months to several years.

Because of assessment cycles, for example, it often takes several years for city property taxes to reflect changes in property values. For this reason, cities will feel the deeper effects of the recession beyond 2009, with the worst years being 2010 and 2011, the survey predicted.

That dynamic poses a potential headwind for a national economic recovery, as local governments lay off workers and scrap projects to cut costs.

“One out of seven jobs in the US is the state and local government sector,” said Christopher Hoene, director of the NLC centre for research and innovation. “It suggests that this sector is large enough to drag the economy down.”

It represents about 12-13 per cent of national gross domestic product, equivalent to the tourism sector, Mr Hoene said. “This is a big sector of the economy: they hire, they spend, they invest and not in inconsequential ways.”

Fiscal conditions of independent US cities vary depending on local tax structures. Most cities set property taxes, but many also rely on local sales and income tax. Many cities get a large chunk of revenue from state aid, which states are cutting to deal with their own shortfalls.

Officials in Somerville, Massachusetts, had to craft the 2010 budget without more than $11m in state aid. Cuts include giving holidays to more than 300 employees and raising fines and fees, like parking meter rates and building permits.

In New Haven, which also saw a drop in state aid as Connecticut still has not agreed a budget, John DeStefano, the mayor, says the city has cut about 5 per cent of the workforce, closed three centres for the elderly and one school building.

Finance officers predicted revenue in 2009 would fall an inflation-adjusted 0.4 per cent, while spending would increase 2.5 per cent from declining local economic health; rising costs of services, public safety and infrastructure; and the costs of healthcare, pensions and wages for workers.