Have City Finances Recovered?

No comments

At the release event for NLC’s annual City Fiscal Conditions, it was revealed that although the worst is behind, city finances have not yet reached full recovery.

CFC-Panel-Blog

Most accounts of the current state of economic and fiscal health go something like this: stabilizing but not yet returned to pre-recession levels. The media guys (and gals) hate it. There doesn’t seem to be much of a story when all we are seeing is incremental change. But when you think about persistently stagnant growth, the real question becomes, how far are we from full recovery?

At a release event today for NLC’s annual City Fiscal Conditions, it was revealed that although the worst is behind, city finances have not yet reached full recovery.

The cost and demands of services, pension, healthcare and infrastructure are on the rise. Federal aid and accompanying mandates are in flux and create uncertainty for local governments. Revenue options are constrained by economic conditions, state limitations and political culture.

Compounding these fiscal stresses are new demographic trends, housing and labor market changes, and the rise of new and disruptive industries, all of which underscore the misalignment between traditional revenue sources — property, income and sales taxes –and the economic activity that drives them.

So, how do we know how far city budgets are from full recovery? What are the key vital signs of city fiscal health?

The outlook of city finance officers, general fund revenues, workforce and personnel, and ending balances offer a unique window into recovery at the local level.

Outlook of City Finance Officers

Better Able Less Able-02

In 2014, 80% of city finance officers report that they are better able to meet the financial needs of their community this year than last. In fact, more city finance officers report a positive outlook this year than in the 29-year history of the survey.

On the flip side, this finding also means that 80% of cities across the country were worse off last year, indicative of magnitude of the recession and the depths to which cities sank throughout the recessionary period.

General Fund Revenues

General fund revenues grew modestly in 2013, and were the first post-recession year over year growth in revenues. However, revenues are projected to stagnate as cities close the books on 2014.

Chart 2 2006 base year-02

To gain more perspective on how the general fund revenues are faring pre and post-recession, we created an index using 2006 as the base year. 2006 was the pre-recession peak in revenues, the low came in 2012 when revenues were 88% of 2006 levels.

The first post-recession increase in revenues didn’t come until 2013 but in 2014 are still only projected to be around 90% of the 2006 revenue base.

Revenues are not yet at full recovery and the growth in revenues appears to be stagnating.

Tax graph-03

Another window in general fund revenues is to take a closer look at the drivers of the general fund: property, sales and income taxes.

During the recent recession, all three sources of tax revenue declined together due to the severity and length of the recession. Property tax revenue is anticipated to increase slightly in 2014 as collections catch up with improvements in the real estate market. This will be the first increase coming out of the recession.

Sales tax and income tax revenues continue to grow in 2013, but are projected to slow as cities close the books on fiscal year 2014. This is indicative not only of a harsh winter, but also the type of employment recovery we are seeing, with low wage jobs dominating growth.

Municipal Workforce

Speaking of jobs, throughout the recession, many cities implemented some combination of personnel and workforce-related cuts, including hiring freezes and layoffs, in an effort to reduce costs.

muni workforce-07 (2)

The good news: for the first time post-recession, more cities are increasing rather than decreasing the size their municipal workforces. The bad news: in the context of returning to full recovery, there are still ½ million fewer local government jobs today than there were in 2008.

This is particularly troublesome given the state of the mid-wage and mid-skill jobs crisis we are experiencing today.

Ending Balances

Ending Balances, or reserves, provide a financial cushion for cities to help balance budgets or to use toward a major planned project. Bond underwriters also look at a city’s reserves as an indicator of how likely the city is to make good on its debt.

Ending balance chart-02

Ending balances are on a positive trajectory, at almost 22% of expenditures in 2013. Prior to the recession, ending balances hovered around a high of 25% of expenditures, indicating that reserves have not yet hit pre-recession levels.

So, as we take stock key city fiscal vitals, we are starting to see city finances turn the corner coming out of the recession, but as revenues, workforce, and ending balances indicate, they have not yet returned to full recovery.

For first time since the recession, general fund revenues are increasing, but are projected to stagnate in 2014. More cities are hiring, helping to close the mid-wage, mid-skill gap, but we are still ½ million jobs away from pre-recession levels. Ending balances are showing a positive trajectory, but again, still have not caught up.

Cities were at the forefront of the Great Recession and are making their way back through tough choices, innovation and partnerships with the private sector, nonprofits, and others. Given persistent constraints on city budgets, however, the future is anything but certain.

christy-mcfarlandAbout the Author: Christiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.