Research
Report
on
America’s Cities
City Fiscal
Conditions
in 2004
National League of Cities
Research
Brief
NLC’s “Research Reports” series consists of empirical studies about conditions
and policies in America’s municipalities. The series editor is William Barnes,
Director, Center for Research & Municipal Development, NLC.
• The State of America's Cities 2004: The Annual Opinion Survey of
Municipal Elected Officials
• Land Use and Development Challenges in America’s Cities
• Strengthening Families in America’s Cities: Youth Conditions and
Participation
• Strengthening Families in America’s Cities: Family Economic Security
• Strengthening Families in America’s Cities: Municipal Finance for Children
and Family Programs
• Strengthening Families in America’s Cities: Afterschool
• Strengthening Families in America’s Cities: Early Childhood Development
• Is the Federal-State-Local Partnership Being Dismantled?: Roundtable
Discussion
• The Impact of Federal Fiscal Policy on State and Local Fiscal Crisis:
Roundtable Discussion
• The Faces of America’s City Councils: America’s City Councils in Profile,
Part I
• Serving on City Councils: America’s City Councils in Profile, Part II
• Demographic Change in Small Cities, 1990-2000
• City Fiscal Conditions in 2003
• Local Elected Officials and the Internet
• Homeland Security and America’s Cities
• City Fiscal Conditions in 2002
• City Fiscal Conditions in 2001
• State of America’s Cities, 17th Annual Opinion Survey of Municipal Elected
Officials
• Toward a System of Public Finance for the 21st Century
• City Fiscal Conditions in 2000
For ordering information on these or
other NLC publications, contact:
Publication Sales
National League of Cities
1301 Pennsylvania Avenue, N.W.
Washington, DC 20004-1763
(202) 626-3000
www.nlc.org
Research
Report
on
America’s Cities
City Fiscal
Conditions
in 2004
Michael A. Pagano
Great Cities Institute
University of Illinois at Chicago
Christopher Hoene
National League of Cities
National League
of Cities
Research
Report
Table of Contents
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
City Fiscal Conditions in 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Appendices
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
City Fiscal Conditions in 2004
Copyright © 2004
National League of Cities
Washington, D.C. 20004
Research
Report
City Fiscal Conditions in 2004
Acknowledgements
The author would like to acknowledge the 288 respondents to this year’s
fiscal survey. The commitment of these cities’ finance officers to this
project is greatly appreciated.
Christiana Brennan, Research Associate at NLC, provided additional
support in monitoring survey responses, conducting follow-up mailings and
phone calls, and writing sections of the final report.
Connie Zhao, a research assistant at the Great Cities Institute at the
University of Illinois at Chicago, further cleansed the database and entered
survey data.
Christopher Hoene, Manager of Research and the Municipalities and
Transition Program at NLC, guided this research endeavor from the redesign of the survey instrument through its administration phase and
provided helpful and useful commentary on the analysis.
Michael A. Pagano
August 2004
i
Research
Report
City Fiscal Conditions in 2004
Executive Summary:
Fiscal Recession Continues in Cities
While economists announced the end of the economic recession two years ago, a
fiscal recession continues in America’s cities. Ongoing economic struggles,
combined with soaring health care and pension costs, marked declines in state aid
to local government, and other factors continue to cause serious fiscal problems
for municipalities across the country.
In the National League of Cities’ latest annual survey of city finance directors, more
than three in five respondents (63%) said their cities were less able to meet financial
needs during 2004 than in the previous year, regardless of population size, region
or taxing authority.1 Looking ahead, 61 percent say they expect their cities to be
less able to meet their 2005 needs, relative to the current fiscal year.
Cities are responding to the deteriorating fiscal conditions in a variety of ways.
The most common response has been to raise or institute new fees and charges
for services. Cities have also increased productivity levels and reduced city
employment, service levels and operating spending.
City Fiscal Conditions
Between the 2003 and 2004 NLC surveys, the share of city finance directors
reporting year-to-year deteriorating fiscal conditions decreased from 81% to 63%.
However, cities’ financial officers are still more pessimistic than they were in 2002,
the first time in ten years that more than half of the responding cities’ financial
officers (55%) believed that their city was less able to meet financial needs than in
the previous fiscal year.
Negative assessments of city fiscal conditions in 2004 varied somewhat according
to the size, location and taxing authority of the cities in the survey. For example:
o
o
o
Financial officers in cities that rely exclusively on the income tax were more
likely to report worsening conditions (83%) than those in cities that rely
exclusively on the property tax (58%) or the sales tax (52%).
Population size did not effect fiscal officers’ assessment of their cities’ ability
to meet financial needs in the current year compared to the previous year.
Between 62 and 63 percent reported being worse off in 2004 across all city
sizes.2
Three-fourths of responding financial officers in cities in the West (75%) and
Midwest (74%) reported deteriorating fiscal conditions, compared to 59
percent in the Northeast and 43 percent in the South.
When asked their assessment of their cities’ ability to meet financial needs in the
next fiscal year (2005) compared to the current fiscal year, more than three in five
finance officers (61%) reported that their cities will be “less able” to meet financial
needs in 2005 than in this year.
iii
1 All references to specific years are for fiscal years.
2 Throughout the report, comparisons are
drawn among cities of different sizes: cities
with populations greater than 300,000 are
referred to as the “largest cities,” cities with
populations between 100,000-299,999 are
referred to as “larger cities,” cities with
populations between 50,000-99,999 are
referred to as “medium-sized cities,” and
cities with populations below 50,000 are
referred to as “smaller cities.”
Research
Report
o
o
o
59 percent of sales tax cities, 61 percent of property tax cities and 68 percent
of income tax cities project that their fiscal condition will worsen in 2005.
Assessments of the future varied little by city size (57-64% noting worsening
conditions), except for slightly fewer of the nation’s largest city finance officers
(50%) expect conditions in 2005 to be worse than in 2004.
52 percent of cities in the South felt that their cities’ financial condition in
2005 would be better than it was in 2004, compared to 41 percent in the
Northeast, 33 percent in the West and 32 percent in the Midwest.
Factors Influencing Municipal Budgets
The survey presented city finance directors with a list of 18 factors that could
affect city budgets—everything from infrastructure needs to the costs of employee
pensions. Respondents were asked whether each of the factors had increased or
decreased between 2003 and 2004 and whether the change had a positive or
negative influence on the city’s overall financial picture.
Leading the list of factors that increased over the previous year were employee
health benefits (cited as increasing by 96% of respondents) and wages (cited by
93%). In addition, about 8 in 10 city officials cited increases in infrastructure needs
(78%), employee pensions (79%), city tax base (79%), prices, inflation and cost of
living (80%) and public safety needs (83%).
Asked about the effect of these and other factors on city finances, nine in ten city
finance officers cited employee health benefits (91%) and employee wages (89%) as
having negative effects. The next highest vote-getters in the negative category
were public safety needs (78%), infrastructure needs (74%), employee pensions
(74%) and prices, inflation and cost of living (73%).
The amount of state aid to cities was cited as a negative factor by 55 percent of
city officials, while only 15 percent said it had a positive effect. The health of the
local economy was cited as a negative factor by 30 percent, but by 39 percent as
a positive factor. At the same time, 74 percent of respondents said the local tax
base had a positive effect on their ability to meet their cities’ overall needs,
suggesting that the continued strength of the real estate and property markets
provided a lifeline for city finances.
When city officials were asked to identify three items that had “the most negative
impact” on their ability to meet city needs, the top vote-getters were the costs of
city workers’ health benefits (cited by 58% of respondents), the costs of city
workers’ pensions (31%), infrastructure needs (26%), reduction in state aid (22%),
and the strength of the local economy (13%).
Revenue and Expenditure Trends
Closing the books on 2003, city finance officers reported that general-fund
revenues increased by 3.0% between 2002 and 2003, while general-fund
expenditures increased by 2.5%. Cities’ 2004 budgets predicted general-fund
iv
City Fiscal Conditions in 2004
revenues would increase over 2003 levels by 2.6% and general-fund expenditures
would increase by 3.6%. Property tax revenues were expected to grow by 5.5% in
2004, while sales tax revenues were expected to grow by 2.3%, the strongest
growth rate in four years. Income tax revenues were expected to grow by 1.8%.
2004 marks an unprecedented third year in a row that constant-dollar (adjusted
for inflation) revenues have declined. Constant-dollar revenues are projected to
decline by 0.7%, while expenditures are projected to climb by a meager 0.3%.
In addition, for the first time since 1989-92, ending balances as a percentage of
expenditures have declined for two consecutive years and are expected to decline
again to 16.8% of expenditures in 2004.
City Revenue Actions. As in the past 17 years, the most common action taken to
boost city revenues during 2004 has been to increase fees and charges for
services. Over half of all cities (54%) took this step, including 70 percent of the
largest cities, 48 percent of large cities, 56 percent of medium cities and 52 percent
of small cities.
In other revenue actions, 25 percent of cities opted for increasing property taxes,
up from 17 percent in 2003. Seven percent reported decreases in property taxes.
Expenditure Actions. Public safety expenditures have increased by 4.8% per year
between 2002 and 2004. Seven in ten (69%) city finance officers report increased
public safety spending in 2004, while 43 percent increased infrastructure spending
and 35 percent increased the growth rate in their operating budgets. No dramatic
expenditure-action shifts in 2004 were reported, but the most mentioned actions
were increases in productivity and in inter-local agreements and reductions in
municipal employment and operating spending.
Quarterly Tax Receipts. The survey has tracked quarterly tax collections since the
4th quarter of 2000 (October-December 2000), comparing actual tax collections
to budgeted amounts in each quarter.3 Property tax projections were much lower
than actual receipts, which, on average, were 11 percent greater than expected.
Actual sales tax and tourist tax (lodging, restaurant, and amusement taxes) receipts
were slightly below their expected amounts and income tax receipts were nearly
identical to forecasted amounts. The forecasting accuracy for sales tax revenues
(98.3%) and tourist tax revenues (99%) were much better than for the earlier period
when actual collections fell short of forecasts by seven to ten percent.
Conclusion
Mixed economic signals in the stock market, employment gains, energy prices,
global issues, and housing starts reverberate in cities’ budgets. The challenges
confronting most of the nation’s municipalities in the next year appear to be quite
formidable, including:
o
The preponderance of municipal governments’ budgets – nearly 80% of
municipal spending – is supported by their capacity to generate their own
revenues. Until or unless municipalities’ tax rates and taxable bases improve
v
3 This year’s survey requested quarterly
budgeted and actual data for an overlapping six-quarter period, beginning with the
4th Quarter of 2002 and continuing
through the 1st Quarter of 2004.
Research
Report
dramatically or expand, the fiscal position of cities for the next fiscal year likely
will not be significantly improved over the 2004 fiscal situation.
o
o
o
Municipalities can continue to draw down their ending balances, but prudent
financial management requires ending balances that are large enough to carry
cities’ responsibilities for at least a few months (and also to demonstrate to
the investment community that they can retain cash for emergency purposes
and to retire debt). Reserves will most likely be drawn down further in the next
fiscal year, but certainly not eliminated.
In the absence of significant growth in municipalities’ taxable bases or tax
rates, there is room for intergovernmental aid to be augmented for the
purpose of supporting citizens’ demands, especially in the area of security and
public safety.
In the absence of enhanced financial resources, and because of budgetbalance requirements imposed on municipalities across the nation, cities will be
in the position of drawing up budgets for the next fiscal year with reduced
service levels.
In short, the fiscal recession confronting cities has yet to subside, pointing to
continued difficulties and tough budget choices for city officials in the coming year.
vi
City Fiscal Conditions in 2004
City Fiscal Conditions in 2004
Michael A. Pagano
Great Cities Institute
University of Illinois at Chicago
The purposes of this study are to detail cities’ fiscal situations in 2004 and over
the past two decades, to examine the effect of taxing authority and revenue diversity on revenue growth, to identify important factors affecting cities’ ability to balance budgets, and to delineate policy actions taken by cities in the past year that
were designed to address their fiscal needs.4
Overview of the Fiscal Environment
The fiscal impact of the recession that welcomed the 21st Century is, from the perspective of municipalities’ fiscal health, unlike any other for at least the last quarter century and possibly longer. During the revenue difficulties of the 1970s and
early 1980s, federal and state programs contributed a substantial share of municipalities’ overall budgets, helping to support cities in service delivery and infrastructure construction. General Revenue Sharing and UDAG were excised in the
1980s and federal aid was generally reduced, even as partial preemption statutes
and other mandates exploded during the decade. The combined effect of reduced
federal aid and increased federal regulations resulted in constraining cities’ capacities to meet the needs of their citizens.
The 1991-92 recession hit city budgets at a time when federal and state aid had
dropped to about 26 percent of total municipal revenues, well below the 38 percent that was registered in 1977, according to the Census Bureau’s data. At that
time, even though the impact of the recession lingered for several years, growth in
constant-dollar municipal general-fund revenues remained positive. Expenditure
growth slowed, cities drew down their ending balances and cut back on capital
expenditures. By 1995, however, cities were experiencing renewed and substantial
growth in wealth and income.
The 2000 recession began in March and lasted officially for only a few months.
But the drawn-out effects and the depth of the recession on municipalities’ fiscal
health differ in many respects from the earlier recessions. Federal aid during this
period has changed only slightly from the recession of the 1990s, but state aid to
municipalities in FY2004 was budgeted to decline by 9.2% on average across the
nation.5 Even more striking is that constant-dollar revenue growth actually
declined on average for cities nationally, not just for one fiscal year but for two
consecutive years, FY2002 and FY2003. And constant-dollar revenue growth in
FY2001, which amounted to only 0.2%, was only slightly above the no-growth
mark. This is a remarkable historical event in the annals of municipal fiscal history
not only because of the persistence of the flat-growth revenue line, but also
because finance officers’ projections for FY2004 indicate a further weakening in
revenues.
1
4 The data for this report were derived
from 288 respondents to a survey administered April to June of 2004 to all cities
with populations exceeding 50,000 and to
a sample of cities with populations
between 10,000 and 50,000. The response
rate was 27 percent (see Appendix A for a
discussion of the methodology). In this
report, the “municipal sector” refers to the
sum of all responding cities’ financial data
included in the survey. As a consequence,
when reporting on general-fund revenues
and general-fund expenditures for the
“municipal sector,” it should be noted that
those aggregate data are influenced by the
relatively larger cities that have very large
budgets and that deliver services to a preponderance of the nation’s cities’ residents.
“Cities,” on the other hand, refers to municipal corporations. Therefore, when averages are presented for “cities” (as opposed
to the “municipal sector”), the unit of analysis is the municipal corporation. Average
city spending, for example, is equal to the
sum of each city’s average spending level
divided by the total number of responding
cities. Thus, the contribution of a small
city’s budgetary situation on the average
statistic is weighed equally to the contribution of a large city’s.
5 Christopher Hoene and Michael A.
Pagano, “Fend-for-Yourself Federalism: The
Impact of Federal and State Deficits on
America’s Cities,” Government Finance
Review (October 2003): 36-42.
Research
Report
This unprecedented one-two punch of state aid reduction and anemic own-source
revenue growth makes for a challenging period for the fiscal futures of municipalities in the U.S.
Government Revenue Index
Growth in governmental revenues not only reflects policy decisions to raise or
lower tax rates, it also reflects the changes in the taxable base of the government
entity. The tax base for the federal government, due to its heavy reliance on the
personal income tax, is the earnings of individuals. As incomes increase, so does
federal revenue growth. Much of the surge in federal revenues in the 1990s was due
to the booming stock market and the resulting tax receipts on capital gains. When
the bear market pushed capital gains downward, the taxable base declined and as
the unemployment rate increased, tax collections on salaries and wages declined
as well. This decline in taxable wealth coupled with reductions in tax rates pushed
federal revenue growth downward, as Figure 1 clearly demonstrates.
States, on the other hand, employ on average a more balanced revenue structure,
taxing both income and retail sales. During the 1990s and until 2001, states rolled
back tax rates to the tune of $32 billion. Since 2001 when the recession was turning record budgetary surpluses into deficits, states responded by raising revenues
$18 billion (through FY2004). In addition to raising taxes, states tightened their fiscal belts by reducing support for programmatic activities as well as general support for municipalities and by drawing down general-fund reserves to under four
percent of general-fund expenditures, reaching the lowest levels since 1992 and well
under the 10.4% mark of 2000. Consequently, growth in states’ general-fund budgets inched up ever-so-slightly in 2003 by 0.6% (see Figure 1).
6 Calculation by author. General taxing
authority derived from Appendix A,
Michael A. Pagano, City Fiscal Conditions
in 1999 (Washington, DC: National League
of Cities, 1999) and revised by the author.
7 “Local Income Taxes on Nonresidents in
the Nation’s 25 Largest Cities,” memorandum from Nonna Noto, Congressional
Research Service, March 12, 2002
(draft);Tracy Von Ins, “Some Cities Turning
to Local Income Taxes for Revenue,”
Nation’s Cities Weekly, July 9, 2001, p.1.
Municipalities in many ways possess revenue structures as diverse as states’ revenue structures. States can control and influence municipalities’ access to revenue
sources, resulting in a diverse pattern of municipal revenue structures. Nearly all
municipalities are granted a property tax authority by their states, but authority to
tax consumption (sales) or income is not universal. For example, of the approximately 555 US cities with populations greater than 50,000, roughly 34 percent
have access to only the property tax, eight percent have access to the income tax
(in addition to having access to the property tax), and nearly 58 percent have some
retail sales-taxing authority.6 Besides nearly universal access to the income tax by
municipalities in Ohio, Pennsylvania, and Kentucky (and 24 or so in Michigan) most
other municipalities with an income tax authority tend to be among a state’s
largest (e.g., New York City, Kansas City, St. Louis) and are granted that authority
by a special action of the state legislature.7
Sales tax authority is granted to some or all cities in 28 states. In Oklahoma, cities’
general funds rely on the sales tax as the only source of general tax revenues. In
the other states, municipalities’ sales tax revenues are supplemented with one or
both of the other general tax revenues, namely the property tax and, when permitted by state law, the income tax.
2
City Fiscal Conditions in 2004
The predominant general tax revenue for some cities, then, is the property tax (e.g.,
Milwaukee, Portland, Buffalo, Boston), for others it’s the sales tax (e.g., Oklahoma
City, Phoenix, Shreveport, Dallas), and for still others the income tax (e.g.,
Columbus, Philadelphia, New York, Baltimore, Cleveland, Louisville, Cincinnati).
FIGURE 1:
Federal, State, and Municipal
General Fund Revenue Index
(1988=100)
To illustrate the revenue impact of tax reliance, Figure 1 presents a “revenue index”
for the federal government, state governments, and municipalities beginning in 1988,
which is pegged to 100. The federal government experienced considerable and
prolonged growth in revenues, especially since 1996, until the economy slowed suddenly in 2001 and tax rates were reduced. The index for the federal government’s
Federal Fund for 2000 was 231, meaning revenues grew 131 percent over their 1988
levels, but then dropped each of the next three years to 188 in 2003 due to reductions in the income tax rate and in taxable personal wealth. States also experienced
robust growth until 2002.8 The index in 2002 for states was 204 or more than
double the 1988 level, but only 205 in 2003. The revenue index for municipalities’
General Fund increased from 183 in 2002 to 189 in 2003, in large part – as will be
demonstrated later – due to a strong and robust real estate sector, even as income
and retail sales were stagnating. The revenue trendline for municipalities in Figure
1 masks the influence of diverse revenue structures.
The aggregate composition of municipalities’ General Funds for FY2003 is presented in Figure 2.9 This figure depicts the revenue composition of the fictitious
“average” American city in that no city’s revenue structure matches the average.
Although the property tax does represent the largest piece of the General Fund
pie (23%), the sales tax, the income tax, and “other” taxes taken together amounted to 36 percent of General Fund revenues, while fees (excluding utility fees which
for most cities are accounted for in enterprise funds) were 13 percent. State aid
(12%), “other revenue” (14%), and federal aid (2%) make up the balance.
3
8 General Fund revenue data are not
tracked by NASBO, but expenditure data
are. These expenditure data are used as
reasonable estimates of General Fund revenue data.
9 The General Fund is the primary annual
operating fund for cities. It is the largest
fund, accounting for an average of 50 percent of total city revenues in 2001.
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Financial Officers’ Assessments
FIGURE 2:
General Fund
Revenue Composition for
the Municipal Sector, 2003
Cities’ Chief Financial Officers were asked whether their cities were better able to
address their financial needs in the current fiscal year (2004) than in the preceding year (2003). They were also asked for the predictions of the budgetary climate
in the next fiscal year (2005). Last year (2003) the percentage of cities’ financial
officers who believed that their city was less able to meet financial needs in the
current fiscal year compared to the previous fiscal year rose to more than fourfifths (81%).
This year (2004) cities’ financial officers are reporting slightly less pessimism—63
percent believe that their city was less able to meet financial needs in the current
fiscal year compared to the previous fiscal year (Figure 3). However, cities’ financial officers are still more pessimistic than they were in 2002, the first time in ten
years that more than half of the responding cities’ financial officers (55%) believed
that their city was less able to meet financial needs in the current fiscal year compared to the previous fiscal year.
FIGURE 3:
Percent of Cities that Are
“Better Able/Less Able” to Meet
Financial Needs This Year
Than in Last Year
n Better Able
n Less Able
This persistent “negative” assessment is shown in more detail when the cities are
divided by taxing authority, size and region.
a)
Taxing authority: financial officers in cities with access only to the property
tax reported that their cities’ financial condition is in worse shape in 2004 than
in 2003 in approximately the same proportion to cities that have access only
to the sales tax (58% and 52%, respectively), but financial officers in cities that
only have access to the income tax reported a larger percentage (83%) of cities
being worse off (Figure 4);
b)
Population size: A city’s population size does not matter in fiscal officers’
assessment of their cities’ ability to meet financial needs in the current year
compared to the previous year. More than three in five (62% or 63%) reported being worse off in 2004 (Figure 5);10 and
10 Throughout the report, comparisons are
drawn among cities of different sizes: cities
with populations greater than 300,000 are
referred to as the “largest cities,” cities with
populations between 100,000-299,999 are
referred to as “larger cities,” cities with
populations between 50,000-99,999 are
referred to as “medium-sized cities,” and
cities with populations below 50,000 are
referred to as “smaller cities.”
4
City Fiscal Conditions in 2004
c)
Region: Three-fourths of responding city finance officers in the West (75%)
and Midwest (74%) noted deteriorating financial conditions in their cities compared with a smaller 59 percent of the nation’s Northeastern city officials and
43 percent of the nation’s Southern city officials (Figure 6).11
FIGURE 4:
Percent of Cities That Are
“Better Able/Less Able”
to Meet Financial Needs
This Year Than In Last Year
By Taxing Authority for 2004
FIGURE 5:
Percent of Cities That Are “Better
Able/Less Able”
to Meet Financial Needs
This Year Than In Last Year
By City Size for 2004
FIGURE 6:
Percent of Cities That Are
“Better Able/Less Able”
to Meet Financial Needs
This Year Than In Last Year
By Census Region for 2004
When asked their assessment of their cities’ ability to meet financial needs the next
fiscal year (2005) compared to the current fiscal year, more than three in five
finance officers (61%) reported that their cities will be “less able” to meet financial
needs in 2005 than in this year (Figure 7). Although not particularly hopeful, city
fiscal officers’ views have improved since last year (2003) when the pessimism of
city fiscal officers plummeted to its lowest levels (83%) since the question was first
asked in 1993.
The assessment of next year’s fiscal situation varied slightly by taxing authority
with 59 percent of sales tax cities, 61 percent of property tax cities, and 68 percent
of income tax cities reporting that their fiscal condition would be worse in 2005
than in 2003. This assessment of the future varied little by city size (57-64% noting worsening conditions), except for slightly fewer of the nation’s largest city
finance officers (50%) expected conditions in 2005 to be worse than in 2004.
However, 52 percent of the nation’s Southern cities felt that their cities’ financial
condition in 2005 would be better than it was in 2004, while 41 percent of
5
11 See appendix A for a description of
regional classifications.
Research
Report
Northeastern cities, 33 percent of Western cities, and 32 percent of Midwestern
cities predicted a better fiscal situation.
After four consecutive years of increasing pessimism, more financial officers this
year compared to the last two years now believe that their cities’ fiscal conditions
will not be as bad in 2005 than it was in 2004. Even with this change, these financial officers’ optimism is still a minority view.
FIGURE 7:
Percent of Cities That Expect
to Be “Better Able/Less Able”
to Meet Financial Needs
Next Year (2005)
Than in Current Year
City Responses To The Fiscal Environment
A set of 18 factors that could affect municipal budgets was presented to finance
officers in the survey. They were asked to identify whether the factor had
“increased” or “decreased” since 2003 and whether the change had a “positive” or
“negative” effect on the city’s fiscal profile. Figure 8 presents the results. Employee
wages and health benefits increased in over nine of ten (93% and 96%, respectively) responding cities. About eight in ten responding city officials identified increases in infrastructure needs (78%), employee pensions (79%), city tax base (79%),
prices, inflation and cost of living (80%) and public safety needs (83%). In addition,
while only 31 percent identified increases in education needs since 2003, none indicated that the need had decreased. Forty-two percent of respondents indicated
that the health of the local economy increased and 25 percent indicated that it had
decreased. Fifty percent indicated an increase in human service needs. The only
two factors which more respondents indicated had decreased than had increased
were the amount of federal aid (33%) and state aid (52%) to cities.
Survey respondents were then asked their assessments as to whether those factors in Figure 8 had a “positive” or “negative” impact on the city’s budgetary capacity to meet city needs. Figure 9 presents the results. “Employee health benefits”
topped the list of “negative” impacts with 91 percent of responding city officials citing it as a negative factor; close behind was “employee wages” at 89 percent. Other
“negative” impact factors included public safety needs (78%), infrastructure needs
6
City Fiscal Conditions in 2004
(74%), employee pensions (74%), and prices, inflation and cost of living (73%). The
“amount of state aid to cities” was cited by 55 percent of city officials as having
had a “negative” impact on the budget and was cited by 15 percent of city officials
as having had a “positive” impact. The “health of the local economy” was cited by
30 percent of city officials as having a “negative” impact on the budget, and it was
also cited by 39 percent of city officials as having had a “positive” impact. Threefourths of city officials (74%) noted that the “city’s tax base” had a positive impact
on their ability to meet cities’ overall needs, while only ten percent noted that it
had a negative impact.
7
FIGURE 8:
Change in Factors from FY2004
On City Fiscal Conditions
FIGURE 9:
Impact of Selected Factors on
FY2004 Budgets and Their Ability
to Meet Cities’ Overall Needs
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Report
When finance officers were asked to choose only three items from among the 18
factors that have had “the most negative impact” on the cities’ ability to meet city
needs, the trend from the previous year continues (Figure 10). First, while the importance and impact of “health benefits” has declined slightly since 2003, it is still at
the top of the “most negative factors” list. Nearly three in five (58%) of responding cities selected “health benefits” as one of the three “most negative” factors
affecting their budgets, which is much more pronounced as a negative factor than
any of the other factors listed on the survey. Surprisingly, the importance of the
performance of the local economy was cited by fewer finance officers in 2004 than
in 2003 as one of the three most negative factors affecting the city budgets with
only 13 percent of city finance officers identifying it. Infrastructure needs remained
approximately the same in importance in 2004 compared with last year, identified
by 26 percent of finance officers as among the three most negative factors.
FIGURE 10:
Percent of Cities Reporting Item
Has Had Among the Most
Negative Impacts on Budget
While the “health of the local economy” has been declining relative to other factors, two other factors have surpassed it as having the “most negative impact” on
cities’ ability to meet city needs in 2004. The amount of “state aid” was identified
by 22 percent of respondents as among the three “most negative” factors, and
“employee pensions” was chosen by 31 percent of the respondents as the “most
negative impact” affecting their city government in 2004.
Revenue Actions 2004
The most common revenue action taken by cities in 2004 and in the previous 17
years was to increase fees and charges for services (Figure 11). Over half of the
cities (54%) increased levels of fees and charges (Figure 12). Seventy percent of the
nation’s largest cities raised user fees, over half of the nation’s medium and small
cities (56% and 52%, respectively) raised user fees, and a slightly smaller percentage of large cities (48%) cities raised user fees (Table 1). Changes in property taxes
8
City Fiscal Conditions in 2004
have been less common, with only 25 percent of cities increasing property taxes
and seven percent reporting decreases in property taxes. Less than one-quarter
of all responding city officials increased the number or level of impact fees (22%)
with 50 percent of the largest cities, three in ten large (29%) and medium (32%)
cities, and only 11 percent of small cities taking this action. Three in ten city officials reported that their city increased the number of other fees or charges (31%),
36 percent of the largest cities, 28 percent of large cities and 32 percent of medium and small cities adopted the action.
FIGURE 11:
City Revenue Actions,
1987-2004
FIGURE 12:
Revenue Actions in 2004
9
Research
Report
TABLE 1
Actions That Cities Have Taken
During the Past Twelve Months
10
Expenditure Actions
TOTAL
Largest
Cities
Large
Cities
Medium Small
Cities
Cities
Increased public safety spending
Increased infrastructure spending
Improved productivity levels
Increased human service spending
Increased growth rate of operating
spending
Reduced size of city workforce
Reduced growth rate of operating
spending
Increased size of city workforce
Increased interlocal agreements
Reduced infrastructure spending
Increased education spending
Decreased education spending
Increased contracting out services
Decreased human service spending
Increased city service levels
Reduced city service levels
Decreased public safety spending
Reduced contracting out services
Reduced productivity levels
Reduced interlocal agreements
69.3
43.0
40.4
36.0
34.7
65
27
55
35
39
72
40
45
31
31
67
45
37
37
33
71
47
37
39
38
32.4
28.5
57
61
35
27
27
24
30
26
23.4
20.2
19.0
17.7
17.0
14.8
14.2
14.0
10.7
6.1
5.8
3.3
1.3
26
14
46
25
25
26
35
4
39
9
9
5
5
30
23
21
24
16
15
14
21
4
6
7
4
2
22
23
15
17
20
13
12
13
8
5
7
2
0
19
17
15
14
12
13
11
13
10
8
3
4
1
Revenue Actions
TOTAL
Largest
Cities
Large
Cities
Medium Small
Cities
Cities
Increased level of fees/charges
Increased Property Tax Rate
Increased number of other fees
or charges
Increased number/level of impact
or development fees
Increased Other Tax Rate
Increased Tax Base
Increased Sales Tax Rate
Increased Number of Other Taxes
Increased Income Tax Rate
Reduced level of fees/charges
Reduced Property Tax Rate
Reduced number of other fees
or charges
Reduced number/level of impact
or development fees
Reduced Other Tax Rate
Reduced Tax Base
Reduced Sales Tax Rate
Reduced Number of Other Taxes
Reduced Income Tax Rate
54.1
25.2
31.4
70
24
36
48
11
28
56
33
32
52
27
32
21.7
50
29
32
11
10.7
8.4
1.7
4.7
0.9
0.8
7.4
0.4
9
5
0
0
0
0
14
0
14
10
4
4
2
0
4
0
8
6
0
2
1
1
3
0
13
11
3
10
0
1
13
1
0.0
0
0
0
0
3.0
2.2
0.8
0.4
0.4
4
0
0
0
4
0
0
0
0
0
2
4
2
1
0
6
3
0
0
0
City Fiscal Conditions in 2004
Tax and Fee Rate Increases
Prior to 1995, the net revenue effects of states’ adjusting their tax rates had been
positive, meaning that more revenue was collected than would have been collected had the states not adjusted their tax rates. Between 1995 and 2002, states
reduced tax rates to such an extent that it generated $33 billion in tax relief. In
2003 and 2004, states raised tax rates rather substantially, generating $9.6 billion
in additional revenue in 2004 (and $8.3 billion in 2003).12
City officials were asked to report whether tax and fee rates were increased,
decreased, or maintained over the past year. Respondents were also asked to estimate the revenue-raising potential for each fiscal policy action. As a result of raising and lowering tax and fee rates, net tax and fee revenues in the responding cities
were expected to increase by $332 million over the previous year. This estimate
excludes new money generated as a result of natural increases in tax revenues due
to a growing tax base or more efficient revenue collection methods. It includes net
changes in revenue that are a direct result of increases and decreases in tax rates,
a conscious fiscal policy decision of city officials.
Tax and fee increases divided by the total number of inhabitants of all the responding city officials (43,699,526 people in 284 responding cities) yields an average
increase in taxes of $7.62 per city resident. The Bureau of the Census estimates
that approximately 135 million people live in municipalities with 10,000 or more
inhabitants (as of 1997). Multiplying this number by the average amount of per
capita tax and fee increases yields approximately $1.03 billion of increased municipal sector tax revenues as a result of net changes in tax and fee rates in 2004
(Figure 13).
11
12 National Association of State Budget
Officers, The Fiscal Survey of States, April
2004
http://www.nasbo.org/Publications/fiscsurv/2004/fsapril2004.pdf
FIGURE 13:
Net Revenue Effects of
Changes to State and Municipal
Tax Rates and Fees
Research
Report
Expenditure Actions 2004
Seven in ten city officials (69%) increased public safety spending in 2004 (Figure
14). Forty-three percent of all responding cities increased infrastructure spending
and over one-third (35%) increased the growth rate in their operating budgets.
Based on the data in Table 1, the nation’s small cities increased infrastructure
spending and the growth rate in operating spending more than other cities. Only
23 percent of cities increased the size of the city workforce, 14 percent increased
city service levels, 15 percent increased contracting out services, 40 percent
improved productivity levels and 20 percent increased inter-local agreements.
FIGURE 14:
Expenditure Actions in 2004
Figure 15 presents city responses to questions on expenditure actions since 1987.
There are no dramatic expenditure-action shifts in 2004, but the most marked pertain to productivity, municipal employment, inter-local agreements and operating
spending. Increasing productivity levels was cited by 40 percent of all cities, up
from 28 percent in 2003. The action “reduce size of city workforce” increased
from 29 percent in 2003 to 32 percent in 2004. The percentage of city officials
that identified “number and scope of inter-local agreements” has increased to 20
percent, from 17 percent in 2003. The percentage of city officials that identified
“reducing the growth rate in operating spending” rose to 29 percent from last
year’s level of 25 percent and is six times higher than 2001 levels of five percent.
The action “reduced growth rate of operating spending” showed notable variation
based upon city size in 2004 (Table 1). Sixty-one percent of the nation’s largest
cities reduced the growth rate of operating spending, while nearly one-quarter of
all other cities took this action (27% of large cities, 24% of medium cities and 26
% of small cities). Variation by city size in the “reduced size of city workforce”
action was also somewhat significant. Although only 32 percent of total city officials reported this action, over half (57%) of city officials in the largest cities
reported this action, but less than three in 10 of the nation’s small (30%) and medium (27%) cities reported this action, and slightly more large (35%) cities reported
the action. The action “improved productivity levels” on the other hand, did not
12
City Fiscal Conditions in 2004
display notable variation based on city size in 2004. Fifty-five percent of the
largest cities, 45 percent of large cities and 37 percent of medium and small cities
have improved productivity levels. Although the action “increased inter-local
agreements” did not vary much by city size, more large (23%) and medium (23%)
cities took this action than did the largest (14%) and smallest (17%) cities.
Growth in Revenues/Expenditures & Ending Balances
Between the end of the last recession (approximately 1993) and the beginning of
the current era of sluggish growth (approximately 2001), year-to-year growth in
(current dollar) General Fund revenue averaged 4.2%, peaking at 6.2% in 2000. In
2002, however, revenue growth slowed to only 2.4%, as shown in Figure 16, rising
slightly to 3.0% in 2003 and dropping to 2.6% in 2004. The year-to-year growth
in General Fund expenditures during the same period averaged a robust 4.4%.
While revenue growth was slowing, expenditure growth, due in part to heightened
demand for public safety after the 9/11 attacks and the war in Iraq, and escalating
health care and employee-related costs, remained strong at 5.5% in 2002, dropping
to 2.5% in 2003 and increasing to 3.6% in 2004.
In terms of the purchasing power of municipal revenues, the last four years have
hampered city revenue generation. Figure 17 deflates revenues and expenditures by
the State and Local Government index calculated by the Bureau of Economic
Analysis for the National Income and Products Account (NIPA). This figure is
slightly different from the constant-dollar figures produced in the City Fiscal
Conditions reports in the past. NIPA calculates two indices, one for “expenditures”
and a composite index that includes “investment.” Because municipalities’ General
13
FIGURE 15:
City Expenditure Actions,
1987-2004
Research
Report
FIGURE 16:
Change in General Fund
Revenues and Expenditures
(current dollars)
Funds do not often include investments (capital outlays are most often recorded
in municipalities’ capital improvement funds), the “expenditure” deflator is applied
to the General Fund revenue and expenditure data.
FIGURE 17:
Change in General Fund
Revenues and Expenditures
(constant dollars)
Applying the index to the data from Figure 16 provides a perspective on the real
value of revenues and expenditures for municipalities. In 2001 and 2002, cities
increased their constant-dollar spending by 2.7% and 2.9%, respectively, as their
constant-dollar revenue growth remained quite low at 0.2% in 2001 and it declined
by 0.2% in 2002. In 2003, both constant-dollar expenditures and constant-dollar
revenues actually declined by 0.9% and 0.4%, respectively. This marks the first time
since the Fiscal Conditions Survey has been conducted in 1985 that both constantdollar revenue and constant-dollar expenditure declined in the same year. The
prognosis for 2004 (a fiscal year that has concluded for nearly half the nation’s
cities) is equally disturbing. Constant-dollar revenues are projected to decline by
0.7% while expenditures are projected to climb by a meager 0.3%.
The year-to-year change in constant-dollar expenditures from 2001 through 2004
is 1.25%, while the year-to-year change in constant-dollar revenues for the same
time period is –0.275%. These figures illustrate not only that the fiscal recession
continues, even if economists have announced that the economic recession ended
a few years ago, but even more important is that this fiscal recession does not have
a recent analog.
14
City Fiscal Conditions in 2004
The aggregate average growth in revenues, however, masks enormous variation
across cities, depending in large part on a city’s authority to impose general taxes.
Nearly all cities have access to the property tax. National data indicate that housing sales and mortgage borrowing have been exceptionally strong, which in turn
helps buoy the fiscal position of cities that collect a property tax. Property tax
receipts, because of their relative stability over time, do not respond as rapidly as
sales or income taxes to changes in underlying economic conditions.
Yet, many cities generate the bulk of their own-source revenue from an income tax.
Municipalities in Ohio, Kentucky, Pennsylvania, some in Michigan and Indiana (which
allows counties to impose a local-option income tax and share it with cities within the county), and a few cities with a special authority to levy the income tax (e.g.,
New York City, Yonkers, Detroit, St. Louis, Kansas City [MO]) rely to a large extent
on the income tax. Yet, incomes have not improved in the last few years. The IRS
reports that for the first time Americans’ income declined for two consecutive
years in 2001 and 2002. Indeed, the IRS reported that income declined in only one
other year in the post-war era and that was 1953. Cities with a heavy reliance on
the income tax, then, are expected to be in a weaker fiscal position than they would
have had they been reliant on the property tax.
Moreover, retail sales have not returned to the high growth rates that were experienced in the 1990s. Consequently, cities that are highly dependent on the sales
tax have not seen in a strong boost to their sales tax collections. Cities that rely
on a sales tax will experience sharp upswings during economic growth years and
sharp downturns during recessionary periods.
Figure 18 charts the year-to-year growth in sales, property and income tax receipts
(presented in current dollars) to the general funds of municipalities. Data for the
year-to-year change in general fund revenue composition has been collected since
1996. Between 1995 and 2000, all three general tax sources generated fairly strong
receipts to municipalities, but none quite so robust as the sales tax. For two years
during this period, the year-to-year sales tax growth rate was nearly eight percent.
And it never fell below five percent. Year-to-year growth in property tax receipts,
on the other hand, was not nearly as strong, although it did reach 5.8% in 2000,
after four years averaging around four percent.
FIGURE 18:
Year-to-Year Change in
General Fund Tax Receipts
15
Research
Report
Since the economic recession in early 2000-2001, the trends have reversed. In the
post-1990s economic boom era, year-to-year growth in property tax receipts
reached a rate greater than five percent, reaching 7.1% in 2002. Budget forecasts
for 2004 place the growth rate at 5.5%. Sales tax receipts, on the other hand, have
plummeted. In 2001, the growth rate was negative (–2.3%) and again in 2002 it was
negative (–0.7%). After two consecutive years of declining growth, the growth rate
in 2003 was positive, but not impressive, at 1.5%. Budget forecasts expect sales tax
receipts in 2004 to reach 2.3%, the strongest growth rate in four years but still
below the consumer price index projection of 3.3%.
Income tax revenues have performed quite poorly during this period. After a generally strong performance in 2001 of 2.8% in constant-dollar terms, income tax
receipts in 2002 fell by 2.5%, did not change in 2003, and are projected to increase
by 1.8% in 2004. Although the projection is positive, again the growth rate in
income tax collections is expected not to keep up with the cost of living (as projected by the consumer price index).
Spending Adjustments
The 2004 fiscal survey marks the first time that data were collected on changes
in spending disaggregated by functional category. The survey asked for actual
expenditures in 2002 and 2003 on activities including public safety, roads/highways, parks and recreation (and libraries), health/hospitals, and community development/housing. The survey also requested budgeted expenditures for FY2004.
As shown in Figures 16 and 17, expenditure growth in current dollars has been positive, but not in constant dollars. Moreover, citizen and Homeland Security pressures to maintain public safety spending will probably not result in reductions to
that functional category, or at least the reductions are not expected to be greater
than for other categories. Figure 19 shows that year-to-year growth in public safety spending (current dollars) was 4.8% in 2002-3 and budgeted for 4.7% in 20034. Increases in spending for health and hospitals also were up by 4.1% in 2002-3
and 5.4% in 2003-04. City streets and highways registered an increase in 2002-03
of 3.9% and 1.2% in 2003-04. The relative losers were parks and recreation (and
libraries), which witnessed a reduction in spending by one percent in 2002-03 and
then a budgeted increase of 3.1% in 2003-04. Spending on community development/housing activities declined by 1.8% in 2002-03 and 1.1% in 2003-04.
Yet, the relative contribution of each of those functional categories to cities’ budgets varies. For example, the 4.8% increase in public safety spending in 2002-03 is
equal to an increase of approximately $600 million, while the increase of 4.1% in
health/hospitals is a much smaller $60 million. The reason for the difference is that
the base amounts for each category are quite different. Public safety constitutes a
large portion of city spending, while health/hospitals, parks/ recreation and the
others are much smaller. Moreover, the number of cities that offer health and hospital services is relatively small.
16
City Fiscal Conditions in 2004
FIGURE 19:
Year-to-Year Changes in
Functional Category Expenditures
(current dollars)
Ending Balances
Ending balances, or “reserve funds,” offer cities a pool of funds that can be used
for a variety of purposes, including for emergencies, natural disasters, and economic slowdowns. Cities can draw down these reserves to maintain service delivery levels during the lean years, and they can build them up as a “savings account”
during the strong years. Figure 20 presents the average ending balance for cities
grouped according to their population size. The small cities (population between
10,000 and 50,000) have reduced their average ending balance from over $6.1 million in 2002 to $6 million in 2003 and 2004. The nation’s medium-sized cities
(population between 50,000 and 100,000) increased average ending balances in
2003 to $14.3 million, and are expected to increase reserves in 2004 to $15.4 million. The nation’s large cities (population between 100,000 and 300,000) reduced
reserves ever so slightly from 2002 to $40.6 million in 2003, but expect to draw
them down to $39.6 million in 2004. And the nation’s largest cities (over 300,000)
reduced ending balances from $81.2 million in 2002 to $74.1 million in 2003 and to
$68.5 million in 2004.
FIGURE 20:
Average Ending Balance by
City Size for 2004
($000)
n
n
17
Small
Large
n
n
Medium
Largest
Research
Report
FIGURE 21:
Ending Balances as
a Percentage of Expenditures
(General Fund)
Figure 21 presents the historical picture of municipalities’ ending balances as a percentage of expenditures from 1985 through the current budget year, 2004. For the
first time since 1989-92, ending balances as a percentage of expenditures have
declined for two consecutive years and are expected to decline again to 16.9% of
expenditures in 2004.
In previous reports on City Fiscal Conditions, it was noted that over three-fourths
of all cities have adopted formal policies on the size of their ending balances or
that they had unofficial but generally accepted goals. Another 18 percent of the
responding cities have adopted informal ending-balance policies. Respondents to
the 2004 fiscal survey provide insight into the diversity of cities’ fiscal performance against established policy goals. Of the 220 cities that provided information
on the dollar value of their ending balance goals and on the dollar amount of their
budgeted ending balances in 2004, eighty-seven (40%) adopted budgets in which
their policy goals and budgeted ending balances were identical. Nearly two in five
(44%) adopted budgets in which their ending balances exceeded the policy goals.
And 36 (16%) adopted budgets with ending balances less than their policy goals. In
2003, 71 percent of the cities had exceeded their policy goals and in 2001, 75 percent exceeded their policy goals.
Forecasting Accuracy: A Long Slow Down
Finance directors were asked to provide quarterly budgeted and actual data for
four revenue sources beginning in the 4th Quarter of 2000 (October-December
2000). These results were released in the last two City Fiscal Conditions reports
in 2003 and 2004. This year’s survey requested quarterly budgeted and actual
data for an overlapping six-quarter period, beginning with the 4th Quarter 2002
18
City Fiscal Conditions in 2004
and continuing through the 1st Quarter 2004. Specifically, the survey requested
city finance officers to provide quarterly budgeted and actual collections of (1)
property tax revenues, (2) sales tax revenues, (3) lodging, restaurant, amusement,
and other tourist-related tax revenues, and (4) income tax revenues for the six
quarters beginning with October 1, 2002 and ending March 31, 2004.
Figure 22 illustrates the accuracy of forecasting in the six-quarter period.
Compared to the results in the last two reports, the difference between budgeted
(or predicted) collections and actual collections for the period covering October
2002 through March 2004 is much better than for the 10-quarter period covering
October 2000 through March 2003. Although the actual receipt of sales tax revenues and tourist tax revenues are slightly below their expected amounts, the forecasting accuracy for sales tax revenues (98.3%) and tourist tax revenues (99%) is
much better than for the earlier period when actual collections fell short of forecasts by seven to ten percent.
Income tax receipts were nearly identical to forecasted amounts, again a much better record than for the last two years, despite the overall poor performance of
income tax receipts. And finally, finance officers’ projections of property tax revenues were much lower than the actual collections, which were 11% greater than
expected.
A few observations are in order. First, the finance officers’ projections of general
tax receipts for the last six quarters have been quite accurate, except for the property tax forecasts. Here, it appears that the strength of the housing and real estate
market has surprised the cities’ finance officers. The general economy may be not
be surging, but the real estate market has helped municipalities immeasurably.
A second observation is that finance officers’ accuracy in predicting sales and
income tax receipts suggests that in 2003 when they were preparing their budgets,
they did not expect the economy to improve their cities’ fiscal conditions substantially in 2004. Earlier, it was noted that general fund revenues have been flat
or declining in constant-dollar terms. Finance officers’ predictions that tax receipts
would not increase substantially demonstrate both their forecasting models’ accuracy and their assessment that the economic conditions of their municipalities have
not returned to a growth mode. FY2004 was not expected to be the turn-around
year from where their assessment of economic forces.
Conclusion
Mixed economic signals in the stock market, employment gains, energy prices,
global security issues, and housing starts reverberate in cities’ budgets. The sluggish underlying economy has resulted in a longer-than-expected recovery period,
one that has been slower than finance officers have experienced in at least a generation if not longer. Municipalities’ general-fund own-source revenues have not
rebounded since 2001 to the positive side of the ledger, when discounted by the
inflation rate. General-fund expenditures, also expressed in constant-dollar terms,
likewise grew at a negative rate in 2003, after two years of increases approaching
three percent annually, and are expected to grow marginally by 0.3% in 2004.
19
FIGURE22:
Six-Quarter Forecast Accuracy
4th Quarter 2002 through 1st
Quarter 2004
Research
Report
As own-source revenues struggled, support from other levels of government –
state and federal aid – did not increase to cover the shortfall. Data on total federal aid and state aid were requested from the cities, including federal and state
support for non-General Fund activities. Responses from approximately 200 cities
illustrate that intergovernmental aid has not increased. Although federal aid
increased from $3.5 billion in 2002 to $3.9 billion in 2004 for the 190 cities that
responded, state aid declined from $9.5 billion to $8.8 billion for 205 responding
cities. The net change in combined federal and state (intergovernmental) aid over
the period, then, was a decline of two percent in current dollars.
The challenges confronting most of the nation’s municipalities in the next year
appear to be quite formidable:
o
o
o
o
The preponderance of municipal governments’ budgets – nearly 80 percent of
municipal spending – is supported by their capacity to generate their own
revenues. Until or unless municipalities’ tax rates and taxable bases improve
dramatically or expand, the fiscal position of cities for the next fiscal year likely
will not be significantly improved over the 2004 fiscal situation.
Municipalities can continue to draw down their ending balances, but prudent
financial management requires ending balances that are large enough to carry
cities’ responsibilities for at least a few months (and also to demonstrate to
the investment community that they can retain cash for emergency purposes
and to retire debt). Reserves will most likely be drawn down further in the next
fiscal year, but certainly not eliminated.
In the absence of significant growth in municipalities’ taxable bases or tax
rates, there is room for intergovernmental aid to be augmented for the
purpose of supporting citizens’ demands, especially in the area of security and
public safety. Yet, federal aid and state aid are trending in the opposite
direction.
In the absence of enhanced financial resources, and because of budgetbalance requirements imposed on municipalities across the nation, cities will be
in the position of drawing up budgets for the next fiscal year with reduced
service levels – meaning they will be less able to meet the needs and demands
of their residents.
In short, the fiscal recession confronting cities has yet to subside, pointing to continued difficulties and tough budget choices for city officials in the coming year.
20
City Fiscal Conditions in 2004
Appendix A: Methodology
This 2004 report on city fiscal conditions is based on a national survey of finance
officers in U.S. cities conducted from April to June 2004. Survey data for this
report are taken from the 288 city officials that responded to the mail survey, for
a response rate of 27 percent (see Appendix B for a list of all responding cities),
allowing us to generalize for all cities with populations over 10,000.
In April and May 2004, NLC sent surveys to all cities with populations greater than
50,000 and, using established sampling techniques, to a randomly generated sample of 507 cities with populations between 10,000 and 50,000. Questionnaires
were mailed to 1,059 cities. Respondents had a choice to enter the data on line
with a secure password or they could enter the information on the paper survey
form. Paper surveys were returned to the National League of Cities, where they
were compiled and coded.
The number of usable responses totaled 288, for a response rate of 27.2 percent.
The response rate was higher for larger cities than for smaller cities. Twenty-eight
of the 58 largest cities (>300,000 population), or 48.3 percent, responded as did
64 of 178 cities, or 36 percent, in the larger city category (100,000-299,999 population). Almost a third (31%) of the medium-sized cities (50,000-99,999 population)
responded, or 97 of 316. And 99, or 19.5 percent, of the remaining cities that were
sent surveys returned the form. Cities that responded to the survey are listed in
Appendix B. The responses received allow us to generalize about all cities with
populations of 10,000 or more. Due to lower response rates from smaller cities
and cities in the Northeast, any conclusions regarding those cities remain tentative.
Population groupings in this report are based on U.S. Census data.
City
Populations
Number of Cities
in This Class
Number of
Surveys Sent
Numbers
Returned
Response Rate
>300,000
100,000-299,999
50,000-99,999
10,000-49,999
58
178
316
2,079
58
178
316
507
28
64
97
99
48.3%
36.0%
31.0%
19.5%
TOTAL
2,631
1,059
288
27.2%
It should be remembered that the number and scope of governmental functions
influence both revenues and expenditures. For example, many New England cities
are responsible not only for general government functions but also for public education. Some cities are required by their states to assume more social welfare
responsibilities than other cities. Some assume traditional county functions. Cities
also vary according to their revenue-generating authority. Some states, notably
Kentucky, Michigan, Ohio and Pennsylvania, allow their municipalities to tax earn-
21
Research
Report
ings and income. Other cities, notably those in Colorado, Louisiana, New Mexico,
and Oklahoma, depend heavily on sales tax revenues. Moreover, state laws may
require cities to account for funds in a manner that varies from state to state.
Therefore, much of the statistical data presented herein must also be understood
within the context of cross-state variation in tax authority, functional responsibility, and state laws. City taxing authority, functional responsibility, and accounting
systems vary across the states.
The dollar amounts presented in this report are in either current or constant dollars. Nominal dollars are deflated using the state and local government implicit
price deflators.
The survey asked for the following statistical data for fiscal years ending in 2002,
2003, and 2004: FEDERAL AND STATE AID; REVENUE COMPOSITION of the
city’s General Fund (property tax revenue, sales tax revenue, income tax revenue,
other local taxes, fees and charges, state funds, federal funds, all other revenue);
LONG-TERM G.O. DEBT OUTSTANDING and LONG-TERM REVENUE DEBT
OUTSTANDING; COMBINED FUNDS BUDGET; and CAPITAL SPENDING. The
survey also asked for expenditure data for 2002, 2003 and 2004 for the following
categories: public safety (police, fire, and other), roads/highways, parks and recreation/libraries, sewer and sanitation, health/hospitals, public welfare, and community development/housing.
City finance officials were also asked to provide data on their city’s GENERAL
FUND. The General Fund is the largest and most common fund of all cities. The
following were requested:
Beginning balance: These are the resources with which the city’s General Fund
begins the year. If the city’s General Fund were a personal checking account,
this would be roughly equivalent to the balance carried forward from the previous month.
Revenues (and transfers in): This is the grand total of all taxes, fees, charges, federal and state grants, and other monies deposited into the General Fund. While
revenues are generally recurring items, the “transfers into general fund” also
lumped into this item probably are not. These transfers occur when, for a variety of reasons, a city brings funds from one of its other specialized funds into
the General Fund.
Expenditures (and transfers out): This is the total of all spending by the city’s
General Fund and may include both operating and capital spending. Transfers
out of the General Fund to other funds are also included here.
Ending balance: This is defined as the resources with which the city’s General
Fund is left at the end of the year. The ending balance of one year becomes the
beginning balance of the next. The ending balance is easily calculated as:
Beginning Balance + Revenues – Expenditures = Ending Balance
Reserves: This is defined as the portion of ending balances that cities have earmarked for a capital project or for any other purpose, rendering those funds
unavailable for genera- purpose spending.
22
City Fiscal Conditions in 2004
Cities were also asked to identify which of a list of 19 possible fiscal policy actions
were taken during the 12 months prior to receiving the survey (May 2003 through
May 2004), how many of a list of 18 factors inhibited or helped the city’s ability to
balance its budget, what three factors most adversely affected city revenues and
city expenditures, what three factors most positively affected city revenues and
city expenditures, whether the city is better able or less able to meet its financial
needs in 2004 compared with the previous year, and whether the city will be better able or less able to meet its financial needs in 2005 compared with 2004.
For this report, regional analysis is based on the Bureau of the Census’ definition
of regions:
NORTHEAST
MIDWEST
SOUTH
WEST
Connecticut
Maine
Massachusetts
New Hampshire
New Jersey
New York
Pennsylvania
Rhode Island
Vermont
Illinois
Indiana
Iowa
Kansas
Michigan
Minnesota
Missouri
Nebraska
North Dakota
Ohio
South Dakota
Wisconsin
Alabama
Arkansas
Delaware
District of Columbia
Florida
Georgia
Kentucky
Louisiana
Maryland
Mississippi
North Carolina
Oklahoma
South Carolina
Tennessee
Texas
Virginia
West Virginia
Alaska
Arizona
California
Colorado
Hawaii
Idaho
Montana
Nevada
New Mexico
Oregon
Utah
Washington
Wyoming
23
Research
Report
24
City Fiscal Conditions in 2004
Appendix B: Responding Cities
Anchorage
Juneau
Alabaster
Athens
Auburn
Dothan
Mobile
Fayetteville
Fort Smith
Little Rock
Chandler
Flagstaff
Lake Havasu City
Mesa
Peoria
Phoenix
Scottsdale
Tempe
Tucson
Yuma
Antioch
Bellflower
Berkeley
Brea
Burbank
Camarillo
Chula Vista
Colton
Compton
Concord
Costa Mesa
Davis
Diamond Bar
Encinitas
Fairfield
Folsom
Foster City
Fullerton
Glendale
Hawthorne
Hermosa Beach
La Mesa
Lakewood
Livermore
Lodi
Long Beach
Los Banos
Los Gatos
Milpitas
Montebello
Monterey Park
Mountain View
Oceanside
AK
AK
AL
AL
AL
AL
AL
AR
AR
AR
AZ
AZ
AZ
AZ
AZ
AZ
AZ
AZ
AZ
AZ
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
Orange
Palmdale
Palo Alto
Pasadena
Pleasant Hill
Pleasanton
Porterville
Redding
Redondo Beach
Riverside
San Francisco
San Jose
San Leandro
San Marcos
Santa Barbara
Santa Clara
Santa Monica
Simi Valley
Thousand Oaks
Tustin
Union City
Vista
Watsonville
Windsor
Colorado Springs
Commerce City
Denver
Greeley
Longmont
Louisville
Pueblo
Thornton
Cheshire
Groton
Stamford
Boca Raton
Cape Coral
Clearwater
Debary
Deltona
Greenacres
Lakeland
Melbourne
Miami
Miami
North Miami
Palm Bay
Royal Palm Beach
Sarasota
Tallahassee
Tampa
Tarpon Springs
Wellington
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CO
CO
CO
CO
CO
CO
CO
CO
CT
CT
CT
FL
FL
FL
FL
FL
FL
FL
FL
FL
FL
FL
FL
FL
FL
FL
FL
FL
FL
Albany
Augusta
Savannah
Honolulu
Boone
Davenport
Des Moines
Ottumwa
Sioux City
Arlington Heights
Bloomingdale
Bloomington
Bolingbrook
Chicago
East Moline
Glendale Heights
Lombard
McHenry
Naperville
Peoria
Wheaton
Woodridge
Bedford
Indianapolis
Dodge City
Kansas City
Leawood
Olathe
Overland Park
Prairie Village
Jeffersontown
Owensboro
Alexandria
Baton Rouge
Eunice
Lake Charles
Arlington
Cambridge
Medford
Greenbelt
Beverly Hills
Cadillac
Farmington
Farmington Hills
Ferndale
Kalamazoo
Oak Park
Pontiac
Rochester Hills
Westland
Austin
Bemidji
Bloomington
GA
GA
GA
HI
IA
IA
IA
IA
IA
IL
IL
IL
IL
IL
IL
IL
IL
IL
IL
IL
IL
IL
IN
IN
KS
KS
KS
KS
KS
KS
KY
KY
LA
LA
LA
LA
MA
MA
MA
MD
MI
MI
MI
MI
MI
MI
MI
MI
MI
MI
MN
MN
MN
25
Research
Report
Minneapolis
Moorhead
Belton
Independence
Moberly
Springfield
St. Joseph
St. Louis
Great Falls
Asheville
Cary
Champer Hill
Fayetteville
Greensboro
Lexington
Matthews
Monroe
Raleigh
Reidville
Winston-Salem
Lincoln
Berlin
Manchester
Nashua
Albuquerque
Farmington
Carson City
Las Vegas
Reno
Lackawanna
Massapequa Park
White Plains
Akron
Bedford
Brook Park
Brooklyn
Brunswick
Cleveland Heights
Columbus
Dayton
Fairfield
Fairview Park
Fremont
26
MN
MN
MO
MO
MO
MO
MO
MO
MT
NC
NC
NC
NC
NC
NC
NC
NC
NC
NC
NC
NE
NH
NH
NH
NM
NM
NV
NV
NV
NY
NY
NY
OH
OH
OH
OH
OH
OH
OH
OH
OH
OH
OH
Lakewood
Mansfield
Rocky River
Sidney
Tiffin
Edmond
El Reno
Lawton
Midwest city
Moore
Norman
Oklahoma City
Beaverton
Gresham
Oregon City
Portland
Bethlehem
Lancaster
Moon Township
Philadelphia
Pittsburgh
Barrington
Pawtucket
Greenville
Greenwood
Rock Hill
Brookings
Huron
Hendersonville
Springfield
Amarillo
Arlington
Austin
Baytown
Beaumont
Benbrook
Brownsville
Coppell
Denton
Eagle Pass
El Paso
Fort Worth
Galveston
OH
OH
OH
OH
OH
OK
OK
OK
OK
OK
OK
OK
OR
OR
OR
OR
PA
PA
PA
PA
PA
RI
RI
SC
SC
SC
SD
SD
TN
TN
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
Garland
Grand Prairie
Killeen
La Porte
La Mesa
Laredo
Lewisville
Longview
McAllen
McKinney
Midland
Pasadena
Port Arthur
Richardson
Robstown
San Angelo
Terrell
Victoria
Waco
American Fork
Provo
Salt Lake City
Sandy
West Valley City
Chesapeake
Norfolk
Radford
Richmond
Roanoke
Suffolk
Vienna
Virginia Beach
Bellingham
Everett, WA
Shoreline
Tacoma
Allouez
Brookfield
Green Bay
Greenfield
Manitowoc
Milwaukee
Waukesha
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
UT
UT
UT
UT
UT
VA
VA
VA
VA
VA
VA
VA
VA
WA
WA
WA
WA
WI
WI
WI
WI
WI
WI
WI
About the National League of Cities
The National League of Cities (NLC) is the oldest and largest national
organization representing municipal governments throughout the United
States. NLC serves as a national resource and advocate on behalf of
over 1700 member cities and for 49 municipal leagues whose membership
totals more than 18,000 cities and towns across the country.
The mission of the National League of Cities is to strengthen and promote cities as centers of opportunity, leadership, and governance.
About the Author
Michael A. Pagano is professor of public administration and director of
the Graduate Program in Public Administration at the University of
Illinois at Chicago. He has written the annual City Fiscal Conditions
report for NLC since 1991. He is co-editor of Urban Affairs Review, a
member of the Committee for the Study of the Long-term Viability of
Fuel Taxes for Transportation Finance of the Transportation Research
Board, a unit of the National Academy of Sciences, and Principal
Investigator for a Pew Charitable Trust project (Government Performance
Project) to grade the states on Infrastructure Management. He coauthored a 2004 Georgetown University Press book with Ann OM.
Bowman entitled, Terra Incognita: Vacant Land and Urban Strategies as
well as a 1995 book, Cityscapes and Capital published by Johns Hopkins
University Press. He earned a B.A. from the Pennsylvania State University
and a Ph.D. from the University of Texas at Austin in 1980.
About the Great Cities Institute
The Great Cities Institute (GCI) serves as the University of Illinois at
Chicago's focal point for new initiatives in interdisciplinary, applied urban
research. GCI attempts to build a unique, responsive and strongly supported center of urban research based on UIC's commitment to first class
research in and for the "great cities" of the world -- with a particular
emphasis on Chicago. The more precise mission of GCI is one of "civic
engagement" through creation, dissemination, and application of interdisciplinary knowledge about urban affairs, with the goal of improving the
quality of life in metropolitan and urban areas.
National League of Cities
1301 Pennsylvania Avenue, NW
Washington, DC 20004
www.nlc.org