For First Time in Seven Years, Cities Anticipate Revenue Decline

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By Liz Farmer, fiscal policy expert and journalist

In the Los Angeles suburb of Bellflower, California, officials are getting the city budget ready for a slowdown by tightening spending and beefing up reserves. For the past five months, the state’s fiscal health index has been trending downward, a shift that Mayor Pro Tem Juan Garza said weighs heavily on the city’s own forecasting. “For California to be experiencing that,” he said, “it’s an indicator of not only what California is going to experience, but also the rest of the country.”

In fact, for the first time in seven years, cities across the country are collectively anticipating a decline in revenue as rising concerns over trade, weakening economic indicators, and increasing spending pressures are taking their toll on city budgets.

What’s more, nearly two in three large city finance officers say they believe an economic downturn will occur within the next two years. Garza said Bellflower, a city of 80,000, has a forecast model showing a slowdown in one-to-three years. Even so, three out of four finance officers across the country also remain confident in the ability of their local government to address expenditures and meet the financial needs of their communities.

The findings were some of the key takeaways in this year’s National League of Cities’ 2019 City Fiscal Conditions survey, which comes as the current economic expansion —the longest in U.S. history — may be showing signs of slowing.

“Eventually there will be a downturn whether it’s a collapse as in 2007 or much more moderate,” said Michael A. Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago. “[City finance officers in the survey] are at least forecasting something is going to be happening soon.”

City Fiscal Conditions presentation.jpg
Pictured: NLC Director Christiana McFarland and Michael A. Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago

The more negative outlook comes as major economic indicators are weakening, including in manufacturing, agriculture and service sectors, home sales and business sentiment. But unlike many previous slowdowns, there doesn’t seem to be a singular economic event — such as the dot com bust in 2001 or subprime mortgage collapse in 2007 — at play.

While trade has caused uncertainty, NLC Research Director Christiana McFarland noted that the slower revenue growth trend started back in 2015. “So it may be that general economic trends — slower-moving trends — are underway and that’s affecting city budgets.”

In fiscal year 2018, total revenue growth inched up by just 0.6 percent, largely due to slowing income tax and property tax revenues. When they close the books on fiscal 2019, which ended for most cities on June 30, finance officers on average are estimating that revenues will decline by about one percent in real terms.

That comes in the face of increasingly higher spending pressure. In fiscal year 2018, total city general fund expenditures increased by 1.8 percent and officials expect it to climb higher — by 2.3 percent — for fiscal year 2019. Infrastructure needs, public safety spending, and pension costs are among the top budget drivers.

The trends vary dramatically across different regions. The declining fiscal conditions are sharpest in the Midwest as overall general fund revenues in cities there declined by 4.4 percent. Much of that appears to be driven by large drops in big cities. Chicago recorded an 11.7 percent revenue decline in fiscal year 2018 while Minneapolis dropped by 9.6 percent.

Dan Gilmartin, executive director and CEO of the Michigan Municipal League, said many Midwest economies are not keeping pace with the rest of the country in part because many places are struggling to keep up with globalization.

“We see people and jobs and entire industries going to places that are providing things in the way of amenities for people,” he said at a panel discussion following the report’s release. “So if our state governments and, to some degree, our federal government aren’t going to join with local units and actually invest in these places, it’s not going to be a great outcome. We’ve got to figure out a better way to do that.”

City Fiscal Conditions panel
Left to right: Kim Hart (Axios managing editor), Melanie Hertzog (NYC Budget Director), Juan Garza (Mayor Pro Tem of Bellflower), Dan Gilmartin (executive director and CEO of the Michigan Municipal League)

Looking at 2019, however, Northeastern and Western cities — which saw the strongest revenue growth in 2018 — are the two regions driving the expected revenue declines this year. Cities in the Northeast have collectively budgeted for a 2.8 percent drop in revenue while cities in the West are expecting a 1.5 percent drop. The Midwest and South are expecting nominal revenue gains in 2019.

That tightening is one of the reasons Bellflower’s Garza said the city is looking to tap more non-traditional revenue sources, such as cannabis taxes, to help buffer the budget.

“We’re just really trying to be a little more entrepreneurial,” he said. “I think at some point, we’re going to have to start reimagining what local city economics are and addressing it that way.”

On the positive side, the record-long economic expansion has also given cities more time to build up their reserves and give their budgets a cushion from the next revenue squeeze. New York City, for example, has increased its reserves to nearly $6 billion, according to Budget Director Melanie Hartzog.

“The continuous growth in reserves as a percentage of general fund expenditures,” said Pagano, “suggests that cities are well positioned to weather a downturn in the underlying economy and that’s how they’re preparing for it.”

Liz-Farmer-headshot.jpgAbout the Author: Liz Farmer is a fiscal policy expert and journalist, writing about the many ways state and local governments spend our taxpayer money. Her areas of expertise include budgets, fiscal distress, and tax policy, and she is currently a research fellow at the Rockefeller Institute’s Future of Labor Research Center.