Tax revenues for states may be ticking up, but cities and counties are just starting to feel the worst effects of the economic downturn. As property taxes slide, cities are laying off workers, cutting benefits and charging higher fees for many services.
Cities and counties are in sorry shape. What's more, they may be among the last entities to feel like they've emerged from the recession.
Even as the economy makes what appears to be tentative recovery, local revenues are continuing to drop. The reason is that property taxes -- the main source of local tax dollars -- are typically readjusted over several years. That means assessments are just starting to reflect diminished home values, which have come down by 30 percent on average nationwide since the housing market’s peak in 2006.
"There isn't any way that this drop in values won't lead to significant property tax revenue losses," says Ethan Pollack, a senior fiscal analyst at the Economic Policy Institute, a labor-backed think tank.
"We don’t see evidence on hand right now that cities’ budget are bottoming out," says Thomas Ginsburg, who follows local finance for the Pew Charitable Trusts, a Philadelphia-based foundation. "I think they’re going to have to live with these problems a while longer."
More evidence of the effects is due today, when the city of Oakland is expected to announce the layoffs of about 80 police officers.
States' Sticky Fingers
Local governments are fond of complaining that they're last in line when it comes to getting financial help from other levels of government. Most federal grants that flow to cities and counties come by way of their states. The states are sometimes slow about pushing the money through and may take a cut first, charging administrative fees for some grant programs that can run as high as 15 percent.
States also have become less generous about sharing their own funds over the past couple of years. Given the billion-dollar deficits plaguing many of them, aid to local government has taken tremendous hits. States sent $78 billion to cities in 2009, but may cut that figure by as much as $30 billion by 2012, according to the National League of Cities.
Many states also place limits on how much cities and counties can raise in taxes themselves. "Just as state government situations are improving a little bit, local governments are worsening," says Ronald Fisher, a public finance expert at Michigan State University.
Things may get worse still. President Obama’s failure to persuade Congress to provide $50 billion in aid to states and localities will leave huge holes in many budgets.
Already, local governments have laid off 180,000 employees over the past two years, according to the Bureau of Labor Statistics. Pollack projects that figure will more than double over the next two years.
The Worst-Case Scenarios
Fewer than 20 cities and counties are staring at bankruptcy or receivership as their finances have spiraled badly out of control. It’s not an enormous number out of 19,000 local jurisdictions, but it’s still several more than during a typical year.
Their ranks include Jefferson County, Alabama, which includes Birmingham; Central Falls, Rhode Island; and Harrisburg, the capital of Pennsylvania.
In each case, there is some factor beyond the economic downturn that has pushed the locality deep into the hole. Harrisburg, for example, owes $68 million in payments this year on a deeply-indebted incinerator -- a figure larger than the city’s entire general fund budget. Jefferson County owes a fortune on excessive infrastructure, but also made mistakes dabbling in financial derivatives.
Because the teetering jurisdictions have "idiosyncratic" problems, they should not necessarily be taken as warning signs that other cities could slip under, says Christopher Hoene, director of research for the National League of Cities.
"What's made them the most extreme cases of the fiscal distress is some other set of decisions that probably aren't typical," Hoene says. "The more typical story for cities is that their budgets are down from previous years and they're cutting services and staff and looking for alternative ways to provide services."
But the fact that major cities such as Los Angeles and Detroit have talked about the potential for bankruptcy indicates that it's an issue too big to ignore, suggests Ginsburg, of the Pew Charitable Trusts. "It's a reflection of what's going on in the economy," he says.
Cutting Where They Can
Los Angeles Mayor Antonio Villaraigosa backed off from a plan to lay off 3,500 city workers -- but the city did let 232 workers go last week, on top of allowing hundreds of early retirements. The city has cut services and raised fees but still hasn't been able to open its new $70 million jail because it can't afford to staff it.
Similar stories can be told all over the country. Last month, Chicago's school board approved 2,700 layoffs in the face of a $600 million deficit. The district has since gotten some financial help from the state and permission to defer pension payments, but it still faces too big a hole not to let some teachers go. In Memphis, a court ruled that the city had to come up with $57 million for schools after having cut its contribution to the district.
The size of the budget gaps that cities and counties are facing means many have been able to force concessions from workers that would have been inconceivable just a couple of years ago. Pensions are under particular pressure, especially for new workers.
What’s A City For?
It's unusual for a city to cut that deeply into its police force. And it's bad timing for a city experiencing mass protests in the wake of a transit officer's shooting trial.
Typically in a recession, cities try to not to cut on education and public safety. This time around, many can't avoid it. "If we're facing a 10 to 15 percent downturn in our budgets over several years, you're not going to be able to leave those big pieces off the table," says Hoene, the National League of Cities official.
Because cities and counties will have to keep cutting, with very few jurisdictions talking about broad-based tax increases, they are starting to grapple with fundamental questions about their priorities. "When you’re talking about reductions this deep, there's really a lot of soul searching going on about what really is the core," says Michael Coleman, fiscal policy adviser to the League of California Cities. "What are the services we really can't do without?"
Cities are eliminating amenities such as summer camp facilities and school planetariums. But they are also trying to avoid wholesale elimination of such services as senior centers, parks and libraries.
"A city can't be just about police, fire and paving roads," Hoene says.
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