U.S. Cities Expect Finances to Worsen as Property Taxes Slide

U.S. cities expect their financial strains to worsen as the slide in real estate prices that began four years ago cuts deeper into property-tax collections, according to a survey by the National League of Cities.

Eighty percent of city finance officers expect to have more difficulty balancing their budgets in the 2011 fiscal year, which began in June for most municipalities, than during the prior period, according to the survey. While housing prices have begun to stabilize, property taxes are expected to drop as home prices are reassessed to account for earlier declines.

“They’re in the eye of the storm right now,” said Christopher Hoene, the director of research for the association, a Washington group that lobbies for local governments.

The city officials’ expectations show how the economy’s emergence from the recession is leaving lingering financial difficulties for communities. Confronted with budget deficits, public officials have raised fees, cut spending for police and firefighters, and frozen employee pay to make up for the gaps.

The National League, which surveyed 338 cities from April through June, said general-fund revenue, adjusted for inflation, dropped 3.2 percent in the 2010 budget year. That was the steepest decline since the group began keeping track in 1986. Spending was cut 2.3 percent, the most since 2003.

Recession Impact

While the recession ended in June 2009, the unemployment rate is likely to remain above 9 percent next year as the economy fails to grow fast enough to add enough jobs for those seeking to rejoin the labor force, according to the median forecast of economists surveyed by Bloomberg.

“What we’re seeing is the effects of the recession, in terms of revenue collections, and then the spending cuts in response to those collections are intensifying,” Hoene said.

The mounting fiscal distress has stoked speculation that investors could be hit by defaults in the $2.8 trillion municipal bond market, a traditional haven of the U.S. securities markets.

Vallejo, California, filed for bankruptcy protection in 2008, while Jefferson County, Alabama, has been struggling for more than two years to avoid the same fate. Harrisburg, Pennsylvania, coping with debt it guaranteed on an incinerator, avoided default last month when the state provided advance aid to the capital. Some city officials are considering bankruptcy.

Still a Rarity

While the deficits are widespread, municipal bankruptcy has been discussed more on Wall Street than in city halls, said Hoene.

“Even if there are a few places that are flirting with bankruptcy as an option, it’s still overwhelmingly a rarity,” he said.

Most cities are responding with budget cuts, according to the National League’s survey. Some three-quarters have implemented hiring freezes, while more than half have frozen or cut wages for employees and 35 percent implemented layoffs. One in four raised fees or property taxes, the survey found.

Hoene said city budgets next year will be affected by cuts in aid from Washington, a step that may prompt states to withhold more cash from localities in order to salve their own financial problems.

“The real drop-off comes in 2011,” he said of the federal aid. “So some of the state cuts we would have expected to come sooner given that states are still facing fairly large deficits in a lot of places are still likely to be coming.”

To contact the reporter on this story: William Selway in Washington at wselway@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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