Research
Report
on
America’s Cities
City Fiscal Conditions
in 2002
National League of Cities
Copyright © 2002
National League of Cities
Washington, D.C. 20004
Research
Report
Table of Contents
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page iii
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page v
City Fiscal Conditions in 2001 . . . . . . . . . . . . . . . . . . . . . . . . . .page 1
Appendices
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page 23
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page 26
City Fiscal Conditions in 2002
Research
Report
City Fiscal Conditions in 2002
Ackowledgements
The author would like to acknowledge the 308 respondents to this year’s fiscal survey.
The commitment of these cities’ fiscal officers to this project is greatly appreciated.
Data entry was provided by the Survey Research Laboratory of the College of Urban
Planning and Public Affairs under the supervision of Jennifer Parsons, Assistant
Director for Research Programs.
Chris Hoene, Research Manager 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.
Bill Barnes, Director of the Center for Research and Municipal Programs at NLC, provided helpful comments about the survey instrument and the final report.
Christiana Brennan, Research Assistant at NLC, provided additional support in monitoring survey responses, conducting follow-up mailings and phone calls, and editing
the final report.
Michael A. Pagano
August 2002
iii
Research
Report
City Fiscal Conditions in 2002
Executive Summary
Amid the current economic downturn, the fall of the stock market, and federal and state
budget crises, fiscal conditions in America’s cities are also declining. 1 For the first time
in a decade, the majority of city officials report that they are worse off financially than
in the previous fiscal year. Since the recession that ended in 1993, more than half of city
officials have annually reported being better able to meet financial needs in the current
fiscal year than in the previous fiscal year. In 2002, the majority of officials report that
their cities are worse off financially than in 2001. 2
On the revenue side, the decline in city fiscal conditions is being fueled largely by slower than expected growth in revenues from sales taxes, income taxes, and tourist-related
taxes such as restaurant and hotel taxes. While city officials had predicted a slowing of
the growth rate in these revenues, actual receipts between October 2001 and March
2002 (the post-September 11, 2001 period) were substantially below projections.
On the expenditure side, public safety spending, rising health care costs, and infrastructure
investment are fueling a steady rate of growth. Heightened demands for public safety
expenditures after September 11, 2001 began to be apparent in early- to mid-2002 and are
expected to continue to increase in the future. Aside from concerns about the health of the
local economy, rising costs of health care and increased spending on infrastructure continue to be among the factors city officials cite as having the most negative impact on their
local budgets.
Concerns about slow revenue growth and increasing obligations can be seen in city officials’ expectations for their General Fund budgets.3 From 2001 to 2002, growth in
General Fund expenditures was expected to increase slightly from its 2000-2001 level,
while growth in General Fund revenues was expected to decline significantly.
Expectations that these trends will continue into the future have local officials predicting a
further worsening of conditions in 2003. Two-thirds of city officials believe that their city
1 “Cities” refers to municipal corporations.
will be less able to address financial needs in fiscal year 2003.
2 All references to specific years are for fiscal
Final figures for 2001 reveal that conditions in that year were probably the peak of the
previous positive
trend.4
In 2001, year-end balances, often called reserve funds or
rainy-day funds, reached the highest point since the fiscal survey was first administered
in 1985. Yet, city reserves are now threatened by significant erosion in the face of a
worsening economy. As a result, there is cause for real concern that conditions will likely worsen in the near future.
years.
3 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.
4 Many cities’ fiscal years ended prior to, or
just after, September 11, 2001.
v
City Fiscal Conditions in 2002
City Fiscal Conditions
in 2002
1 The data for this report were derived from 308
Michael A. Pagano
University of Illinois at Chicago
The purposes of this study are to detail cities’ fiscal situations in 2002 and over the past
decade and a half, 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. 1
Overview of the Fiscal Environment
Not since February 1998 has the Dow Jones Industrial Average fallen below the 8,000
mark as it did in July 2002, and the price of high-tech stocks on the NASDAQ retreated
to 1997 levels. Not since Fiscal Year 1997 has the federal government incurred a budget
deficit. The unemployment rate in June 2002 was 5.9 percent (down from 6.0 percent in
April 2002), a level not seen since September 1994. 2 Per capita personal income
increased in 2001 over 2000 levels by over $500 to $23,687 (constant 1996 dollars), a
healthy increase compared to earlier years. 3 And while the prognosis for the long-term
is for the national economy to regain its strength, short-term problems continue to beset
nearly all sectors.
2001. 4
The cities’ fiscal
The nation’s cities started feeling the economic slowdown in
officers became less enthusiastic about their cities’ fiscal fortunes, projecting little or
no real growth in revenues and ending balances for 2001 or 2002. Even the cautious
pessimism of finance officers could not anticipate the bottom dropping out of the
1
respondents to a survey administered in March and
April 2002 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 29.1 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.
2 U.S. Department of Labor.
Bureau of Labor Statistics website,
http://data.bls.gov/servlet/SurveyOutput
Servlet?data_tool=latest_numbers&series_id=
LFS21000000
3 U.S. Department of Commerce,
Bureau of Economic Analysis, National Income
and Product Accounts website:
http://www.bea.doc.gov/bea/dn/
nipaweb/TableViewFixed.asp#Mid
4 City Fiscal Conditions in 2001 (Washington,
DC: National League of Cities, July 2001).
Research
Report
economy, albeit briefly, in response to the shock of September 11, 2001. 5 Not only was
Wall Street closed for the first time due to a terrorist attack on U.S. soil, but the impact
on retail sales sent many states’, counties’, and cities’ sales tax collections into a
freefall. Quarterly state tax revenue figures declined in the July-September 2001 quarter (3rd Quarter 2001) by 3.1 percent, or 5.0 percent in real (inflation-adjusted) terms,
and in the 4th Quarter by 2.7 percent, or 4.1 percent in real terms. 6 The economy failed
to pick up the momentum in the new year and state sales-tax receipts declined in the
1st Quarter 2002 (January-March 2002) by 7.9 percent, or 9.5 percent in real terms,
marking “the worse quarter of state tax revenue decline.”
Revenue growth for governments depends in part on their authority to tax individual and
corporate wealth and various parts of the economy. Most local governments are authorized to tax real estate, while others’ authority extends to taxing retail-sales transactions,
personal property, or wages and salaries. Municipal corporations’ taxing authority is constrained by state constitutions and statutes. Revenue structures are more or less “responsive” to changes in the underlying economic base. Income tax revenue, because it is collected regularly and increases or decreases according to changes in wages and salaries,
responds rather immediately to changes in economic circumstances. Sales tax receipts
also respond to changes in consumer behavior, which in turn depends on income, needs,
and confidence in the future income stream. Property tax revenues tend to be less immediately responsive to changes in the underlying economic base of a city because properties are not exchanged regularly and the value of property, as a consequence, tends to
be estimated only occasionally.
5 Surveys of city officials taken shortly after the
terrorist attack are reported in: Chris Hoene,
“Cities Increase Security, Coordination; Worry
About the Economy” Posted: October 22, 2001
on NLC’s website:
http://www.nlc.org/nlc_org/site/newsroom/nations_ci
ties_weekly/display.cfm?id=A70B94DA-4DD942FE-A23B8B890090333F ; Chris Hoene and
Kyan Bishop, “Cities May Face $11 Billion
Revenue Hit” Posted: November 12, 2001 on
NLC’s website:
http://www.nlc.org/nlc_org/site/newsroom/nations_
cities_weekly/display.cfm?id=976CA377-55D9447E-B2857AA7C88503F1
6 Nicholas W. Jenny, “Worst Quarter of State
Tax Revenue Decline,” State Revenue Report,
No. 48 (June 2002).
The federal government and the states rely on one or both of the more elastic general tax
sources, namely, the income tax and the sales tax. During the 1990s, an era of rapid economic
growth in which both incomes and consumption increased, federal and state revenue collections increased at a very strong rate of growth. Without increasing tax rates, tax revenues
surged for those governments that levy a sales or an income tax. Because economic growth
is not capitalized entirely in real estate investment and land ownership, governments that
rely more heavily on a property tax did not experience revenue growth as rapidly or immediately as the sales or income-tax governments during the 1990s. On the other hand, these
property-tax levying governments are not expected to experience the sharp declines in revenue generation as the economy sputters and stalls. Unlike the quick responsiveness of
sales and income tax revenue collections to surges in the underlying economy, the growth
in property tax collections will change more slowly.
Figure 1 presents the index in General Fund revenue growth for the federal government,
state governments and municipal governments from 1988 to 2001 (1988=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 236, meaning revenues grew
2
City Fiscal Conditions in 2002
240
220
200
180
160
140
120
100
1988
Per Capita Income 100
100
GDP
100
Federal
100
State
100
Municipal
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
106
107
110
109
106
112
114
113
116
112
114
117
114
121
115
119
124
117
127
120
123
130
126
131
124
127
138
138
138
129
132
145
149
146
134
137
153
163
153
141
144
163
180
161
146
152
172
198
170
152
157
181
207
183
159
165
193
236
196
169
170
200
224
212
179
Figure 1:
Federal, State, and Municipal General Fund Revenue Index (1988=100)
136 percent over their 1988 levels, but then actually dropped in 2001 to 224 due to reductions in the income tax rate and in personal income. States also experienced robust growth
until 2001. 7 The index in 2001 for states was 212 or more than double the 1988 level. And
although municipalities have experienced a slower overall growth rate in revenue generation than states and the federal government, the index in 2001 for municipalities’ General
Fund increased to 179, an increase of nearly 6 percent over 2000 levels.
Although access to the property tax by municipalities is ubiquitous, their revenue structures
are anything but homogeneous. The revenue trendline for municipalities in Figure 1 masks
the influence of diverse 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 the property tax only, 8 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. 8 Besides nearly universal access to the income tax
by municipalities in Ohio, Pennsylvania, and Kentucky (and 20 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, San Francisco) and are granted that authority by a
special action of the state legislature. 9
3
7 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.
8 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.
9 “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.
Research
Report
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.
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,
Shreveport, Dallas), and for others the income tax (e.g., Columbus, Philadelphia, New
York, Baltimore, Cleveland, Louisville, Cincinnati).
The composition of municipalities’ General Funds is presented in Figure 2. Although the
property tax does represent the largest piece of the General Fund pie (26%), the sales
tax and the income tax components taken together amounted to only slightly less (21%)
than the property tax element. Other tax revenue accounted for 14 percent of General
Fund receipts in 2001.
Financial Officers’ Assessments
9 “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.
Cities’ Chief Financial Officers were asked whether their cities were better able to address their
financial needs in the current fiscal year (2002) than in the preceding year (2001). They were
also asked for the predictions of the budgetary climate in the next fiscal year (2003). For the
first time in ten years, 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 year (Figure 3). This majority “negative” assessment is not significantly related to:
Federal funds 2%
State funds
13%
All other revenues
13%
Fees/Charges
11%
Other taxes
14%
Income tax 8%
Property tax
26%
Sales tax 13%
Figure 2: Composition of municipalities’ General Funds.
4
City Fiscal Conditions in 2002
a) taxing authority: finance officers in cities with access to only the
property tax
only reported that their cities’ financial condition is in worse shape in 2002 than in
2001 in the same proportion to cities that have access to either the income tax or the
sales tax [Figure 4]);
b) population size:
50 percent of the nation’s small cities (populations
between 10,000 and 50,000) and a slightly larger percentages (58%) of larger cities
(Figure 5) reported being worse off; or
c) regional location: although, 61 percent of the nation’s Midwestern city officials
noted the deteriorating financial condition of their cities compared with a smaller 49
percent of the nation’s Western city officials (Figure 6).
When asked their assessment of their cities’ ability to meet financial needs the next fiscal
year (2003) compared to the current fiscal year, there was a noticeable decline in the proportion of fiscal officers who registered a “better able” response compared to earlier years
(Figure 7). Two of three (67%) financial officers predicted that their cities will be less able
to address their financial needs in fiscal year 2003 than in 2002, compared to 54 percent
who reached this same negative assessment last year and only 37 percent in 2000. This perception did not vary according to the general taxing authority of the city or the size of the
city. However, 44 percent of the Southern cities felt that their cities’ financial condition in
2003 would be better than it was in 2002, while only 21 percent of the nation’s Northeastern
cities and 24 percent of the Midwestern cities predicted a better fiscal situation.
Figure 3:
Percent of Cities that Are
“Better Able/Less Able” to Meet
Financial Needs This Year Than
Last Year
80%
1997
1998
1999
2000
56%
45%
-55%
1996
-44%
73%
-27%
75%
-25%
69%
68%
65%
-32%
1995
-32%
1994
-35%
-43%
54%
-46%
1992
34%
22%
21%
1991
-66%
-40%
-78%
-20%
-79%
0%
33%
20%
-63%
Percent of Cities
40%
58%
60%
-60%
-80%
1990
1993
Less able
Better able
5
2001
2002
Research
Report
Property
Tax Cities
N=82
-55%
44%
Income
Tax Cities
N=29
-52%
45%
Sales
Tax Cities
N=192
-60 %
-54%
-50%
-40%
44%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Percent of Cities
Better able
Less able
Small Cities
N=117
10,000-50,000
-50%
Medium Cities
N=88
50,000-100,000
Figure 5:
Percent of Cities
That Are
“Better Able/
Less Able” to
Meet Financial
Needs This
Year Than in
Last Year By
City Size
47%
-55%
42%
Large Cities
N=76
100,000-300,000
-58%
41%
Largest Cities
N=26
300,000
-58%
42%
-60 %
-40%
-20%
0%
Percent of Cities
Better able
Western
Cities
N=85
-54%
44%
Midwest
Cities
N=76
-61%
38%
Northeast
Cities
N=26
-50%
43%
-80 %
-60 %
-40%
-20%
0%
Percent of Cities
Better able
6
20%
40%
60%
Less able
48%
-49%
Southern
Cities
N=113
Figure 4:
Percent of Cities
That Are “Better
Able/Less Able” to
Meet Financial Needs
This Year Than Last
Year By Taxing
Authority
Less able
20%
40%
60%
Figure 6:
Percent of Cities
That Are “Better Able/
Less Able” to Meet
Financial Needs This
Year Than in Last Year
By Region
City Fiscal Conditions in 2002
80%
61%
64%
63%
-39%
-36%
-37%
1996
1997
1998
1999
33%
55%
-45%
1995
-67%
53%
-48%
1994
-54%
50%
-50%
-40%
49%
-20%
-51%
0%
29%
20%
-72%
Percent of Cities
40%
46%
60%
-60%
-80%
1993
Less able
2000
2001
Better able
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 FY2001 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 9 of 10 (94%) responding city officials, and more than 7 in 10 city officials identified
increases in infrastructure needs (72%) and public safety needs (75%). While 44 percent of
the respondents indicated that the health of the local economy increased, only 22 percent
indicated it had decreased. In addition, 76 percent noted that the city tax base has increased
during the past year – only eight percent noted a decrease. On a personnel issue, 58 percent of responding city officials indicated that costs associated with employee pensions
increased over the previous year.
One in four indicated that education needs (26%), and federal aid (25%) and state aid
(25%) had increased over the previous year. At the same time, 33 percent indicated that
state aid had decreased and 24 percent noted a drop in federal aid. Roughly one-third
(31%) noted that federal environmental mandates had increased, while 27 percent noted
an increase in state environmental mandates.
Survey respondents were then asked their assessment 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 88 percent of responding city officials citing it as a negative factor; close
behind was “employee wages” at 82 percent. Other “negative” impact factors included public safety needs (69%), infrastructure needs (67%), prices and inflation (67%), and employ7
2002
Figure 7:
Percent of Cities
That Are “Better
Able/Less Able”
to Meet Financial
Needs Next Year
(2003) Than in
Current Year
Research
Report
ee pensions (57%). The “health of the local economy” was cited by 49 percent of city officials as having had a “negative” impact on the budget, and it was also cited by 22 percent of
city officials as having had a “positive” impact. Seven in ten city officials (70%) noted that
the “city’s tax base” had a positive impact on their ability to meet cities’ overall needs, while
only eleven percent noted that it had a negative impact.
An interesting paradox arises from a reading of Figure 8 and Figure 9. There appears
to be a disconnect between the fiscal officers’ assessment of the change in their city’s
tax base (76% registered an “increase” in the tax base and 70% noted that the impact
was “positive”), while a much smaller 22 percent stated that the “economic health” of
the underlying economy had increased. Yet, more than 4 in 10 city officials (44%), on
the other hand, concluded that their cities’ “economic health” had decreased and 49
percent noted that the impact was negative. In other words, while the tax base appears
to have expanded since the last fiscal year, the city’s economic health apparently did not
improve. One reason for this seemingly ambiguous response is that the economic
downturn that was noticeable early in the fiscal year accelerated toward the end of the
fiscal year and nearly collapsed for several weeks after the terrorist attack of September
11th, an issue discussed later this report.
Figure 8:
Change in Selected Factors
from FY 2001
When finance officers were asked to identify the three items that have had “the most
negative impact” on the cities’ ability to meet city needs, important shifts from the previous few years became apparent (Figure 10). First, the rise in the importance and
impact of “health benefits” placed it at the top of the “most negative factors” list. More
city officials (64%) than at any time since this question has been asked (since 1992)
100%
90%
Percentage of Cities
80%
70%
60%
50%
40%
30%
20%
Health of local
economy
City tax
base
Fed non-enviro
mandates
Amount
state aid
Education
needs
St non-enviro
mandates
Amount
federal aid
State tax &
expenditiures
Human Serv
needs
Population
State enviro
mandates
Fed enviro
mandates
Employee
pensions
Prices
inflation
Employee
health benefits
Public Safety
needs
Infrastructure
needs
0%
Employee
wages
10%
Increased 93.8% 72.1% 75.0% 91.9% 76.3% 58.1% 31.2% 26.9% 53.9% 48.1% 14.3% 25.3% 19.5% 25.6% 25.3% 11.0% 76.0% 21.8%
Decreased 0.3% 1.3% 0.3% 1.0% 2.3% 1.8% 2.9% 2.3% 10.4% 1.3% 1.9% 24.0% 2.3% 1.3% 33.4% 1.6% 7.8% 43.8%
8
City Fiscal Conditions in 2002
100%
90%
Percentage of Cities
80%
70%
60%
50%
40%
30%
20%
Health of local
economy
City tax
base
Fed non-enviro
mandates
Amount
state aid
Education
needs
St non-enviro
mandates
Amount
federal aid
State tax &
expenditiures
Human Serv
needs
Population
State enviro
mandates
Fed enviro
mandates
Employee
pensions
Prices
inflation
Employee
health benefits
Public Safety
needs
Infrastructure
needs
0%
Employee
wages
10%
Increased 3.9% 3.2% 3.6% 1.9% 3.9% 7.5% 0.6% 1.0% 17.5% 2.9% 1.0% 23.7% 0.6% 1.9% 20.8% 1.0% 70.1% 22.4%
Decreased 81.8% 66.9% 69.2% 88.0% 67.2 56.8% 63.0% 29.9% 34.1% 43.2% 24.4% 25.6% 22.4% 20.8% 39.9% 14.3% 11.1% 49.0%
Figure 9:
Impact of Selected Factors on FY 2002 Budgets and Their Ability to Meet Cities’ Overall Needs
placed the problem of health benefit costs as the most important negative factor. A distant second was infrastructure needs cited by 36 percent of the respondents as among
the “most negative”, but a clear fall from its nearly perennial number-one position.
During the past decade, the larger-than-expected increases in city revenues, especially
from sales tax receipts, have found their way into city capital spending plans. As cities
have been able to address more infrastructure needs, the category has diminished in
relative importance. Finally, the performance of the local economy was identified as
among the “most negative” factors by one in four city officials, putting it at near the
same level as the 1992-96 period.
Revenue Actions 2001
The most common revenue action taken by cities in 2002 and in the previous 15 years was to
increase fees and charges for services (Figure 11). Two of five cities (39%) increased levels of
fees and charges (Figure 12). The most significant variation in this revenue action was by city
size. While nearly half of the nation’s large and medium-sized cities (46% and 44%, respectively) raised user fees, a smaller percentage of the nation’s largest cities raised user fees (27%)
(Table 1). One-fifth of all cities (21%) increased property taxes. Less than ten percent of the
nation’s large cities raised the property tax, while more than one-fourth (27%) of the small cities
9
Research
Report
70
63.6
Percentage of Cities
60
51.4
44.3
20
52.6
47.4
35.7
38.6
21.7
18.9
10
4
8.6
1993
1994
1995
1996
Infrastructure
Figure 10:
Percent of Cities
Reporting Item Has
Had Among the
Most Negative
Impacts on Budget
16.9
7.8
0
1992
25.2
27.3
24.4
23.2
36.1
31.6
26.4
27.7
55.1
49.2
44.3
32.9
29.3
55.5
51
41.1
42.1
40
30
55.3
52.9
50
1997
1998
5
2000
1999
Health Benefits
2001
2002
Local Economy
80
Percentage of Cities
70
60
50
40
30
20
10
0
1987
Increased Fees/Charges
New Fees/Charges
Incr'd Property Tax Rate
Development Fees
Other Tax Rates
New Tax
58
23
38
13
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
62
34
42
22
9
10
60
30
43
18
8
12
73
43
39
28
13
8
78
47
38
26
21
20
52
28
31
15
8
8
49
23
30
16
12
7
48
23
30
16
12
7
47
20
28
10
6
5
39
15
23
13
7
3
32
17
21
18
6
2
29
16
19
12
6
3
31
18
22
22
6
1
32
20
21
17
8
4
35.4
16.2
21.6
17.4
5.9
2.6
39.3
18.2
20.8
18.8
4.3
1.9
Figure 11:
Revenue Actions,
1987-2002
45%
Percentage of Cities
40%
35%
30%
25%
20%
15%
10%
5%
0%
Employee Property
wages
Tax Rate
Increased
Decreased
1.9%
39.3%
14.3%
20.8%
Number
of Fees
Level of
Impact
Fees
1.9%
18.8%
1.9%
18.2%
10
Other
Tax Rate
Tax
Base
Sales
Tax Rate
3.9%
4.3%
2.6%
3.6%
2.3%
3.9%
Number
of Other
Taxes
2.6%
1.9%
Income
Tax Rate
0.3%
1.6%
Figure 12:
Revenue Actions
in 2001
City Fiscal Conditions in 2002
adopted this revenue action. Moreover, 14 percent of all city officials also reported decreases in
property tax rates in 2002. Slightly less than one-fifth of all responding city officials increased the
number or level of impact fees (19%) and increased the number of other fees or charges (18%) with
little variation attributable to city size.
Municipal Tax Rate Increases
Since 1995, state governments have been reducing tax rates and fees, thus generating fewer
revenues than they would have collected in the absence of such actions. State governments
reduced revenues through tax and fee reductions by $300 million in the current fiscal year
2002, the smallest decrease in eight years. Nevertheless, since 1995, state governments have
EXPENDITURE ACTIONS
TOTAL
Increased infrastructure spending
Increased growth rate of operating spending
Increased size of city workforce
Increased city service levels
Increased contracting out services
Improved productivity leveles
Increased interlocal agreements
Reduced size of city workforce
Reduced infrastructure spending
Reduced growth rate of operating spending
Reduced interlocal agreements
Reduced city service levels
Reduced productivity levels
Reduced contracting out services
Increased human service spending
Decreased human service spending
Increased public safety spending
Decreased public safety spending
Increased education spending
Decreased education spending
47.4
47.7
38.3
23.1
17.9
34.7
21.8
12.3
9.4
14.6
2.3
2.9
0.6
2.9
43.5
2.6
72.7
1.3
13.6
1.6
REVENUE ACTIONS
TOTAL
Increased level of fees/charges
Increased property tax rates
Increased number/level of impact or development fees
Increased number of other fees or charges
Reduced property tax rates
Increased tax base
Increased rates of other taxes
Increased sales tax rates
Reduced tax base
Increased number of other taxes
Reduced rates of other taxes
Reduced number/level of impact or development fees
Increased income tax rates
Reduced income tax rates
Reduced sales tax rates
Reduced level of fees/charges
Reduced number of other fees or charges
Reduced number of other taxes
39.3
20.8
18.8
18.2
14.3
3.6
3.9
3.9
2.6
2.6
4.2
1.9
0.3
1.6
2.3
1.9
1.9
1.9
Table 1:
Actions That Cities
Have Taken During the
Past 12 Months
LARGEST CITIES LARGE CITIES MEDIUM CITIES SMALL CITIES
300,000
100,000-300,000 50,000-100,000
10,000-50,000
46.2
38.5
38.5
19.2
11.5
50
23.1
26.9
15.4
30.8
0
3.8
0
3.8
26.9
3.8
76.9
0
15.4
0
50
47.4
46.1
27.6
14.5
40.8
21.1
14.5
11.8
18.4
0
3.9
0
3.9
55.3
2.6
80.3
2.6
17.1
3.9
50
51.1
44.3
21.6
18.2
34.1
22.7
11.4
6.8
12.5
2.3
2.3
1.1
0
46.6
2.3
76.1
1.1
12.5
1.1
44.4
47.9
29.1
22.2
21.4
28.2
21.4
8.5
8.5
10.3
4.3
2.6
0.9
4.3
37.6
2.6
65
0.9
12
0.9
LARGEST CITIES LARGE CITIES MEDIUM CITIES SMALL CITIES
300,000
100,000-300,000 50,000-100,000
10,000-50,000
26.9
23.1
15.4
19.2
15.4
3.8
7.7
7.7
0
3.8
3.8
3.8
0
7.7
0
3.8
0
0
46.1
9.2
25
22.4
17.1
5.3
3.9
1.3
1.3
1.3
1.3
2.6
0
1.3
1.3
0
0
1.3
11
44.3
22.7
19.3
21.6
9.1
2.3
5.7
4.5
3.4
5.7
5.7
1.1
0
1.1
5.7
2.3
4.5
1.1
34.2
26.5
15.4
12.8
16.2
3.4
2.6
4.3
3.4
0.9
4.3
1.7
0.9
0.9
0.9
2.6
1.7
3.4
Research
Report
reduced tax and fee rates generating $33 billion in tax and fee relief, even as recent
reports indicate that states’ budgets could be in a $40 billion deficit. 10 Estimates from
previous NLC surveys indicate that, in contrast, the “municipal sector” has raised net tax
and fee rates each year since 1992 in response to their fiscal situations and in so doing
positioned city budgets for years of declining or slow economic growth.
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 rates, net tax
revenues in the responding cities were expected to increase by $392 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.
10 National Association of State Budget
This tax increase divided by the total number of inhabitants of all the responding city officials (42,887,879 people in 307 responding cities) yields an average increase in taxes of
$9.15 per city resident. The Bureau of the Census estimates that approximately 140 million
people live in cities with 10,000 or more inhabitants. Multiplying this number by the average amount of per capita tax increase ($9.15) yields approximately $1.28 billion of increased
municipal sector tax revenues as a result of net changes in tax rates in 2002.
Officers, Fiscal Survey of States,
May 2002 http://www.nasbo.org
Likewise, as a result of raising or lowering fees and charges or imposing new ones, the
Millions of Current Dollars
$20,000
$15,000
$10,000
$5,000
$0
($5,000)
($10,000)
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Net Effect of State Revenue Changes
Net Effect of Municipal Revenue Changes
Figure 13:
Net Revenue Effects of Changes to State and Municipal Tax Rates and Fees
12
City Fiscal Conditions in 2002
net increase in fee revenue is expected to amount to $153 million for the responding
cities. This is not the amount of user fee revenues that were generated through higher
use. Rather, this is the estimated increase in user fee revenues that are due to deliberate policy decisions to raise and lower city user fees and charges or to adopt new fees
and charges. If this net increase in user fees and charges is divided by the total number
of inhabitants of all the responding cities, the average net increase in fees amounts to
$3.57 per city resident. Again, assuming the responding cities are representative of all
U.S. cities, the total amount of fees generated by these policy actions equals approximately $500 million in 2002.
The net effect of changes in both tax rates and fees for 2002, then, has been to increase
revenues by a total of $545 million for the responding cities. This amounts to an average of $12.72 per city resident for all the cities in the survey, or, if extrapolated to all
U.S. cities over 10,000 population, the equivalent of approximately $1.78 billion for
2002 (Figure 13).
Figure 14:
Expenditure Actions in 2001
80%
Percentage of Cities
70%
60%
50%
40%
30%
20%
10%
0%
Decreased
Increased
Public
Safety
Spending
Capital
Spending
Operating
Spending
Growth
Rate
Municipal
Workforce
1.3%
72.7%
9.4%
47.4%
14.6%
47.7%
12.3%
38.3%
Human Productivity Contracted
Services
Levels
Out
Spending
Services
2.6%
43.5%
0.6%
34.7%
2.9%
17.9%
Expenditure Actions 2001
Nearly three in four cities (73%) increased public safety spending in 2001 (Figure 14).
Roughly half of all responding cities increased infrastructure spending (47%) and the
growth rate in their operating budgets (48%) with little city-size variation (Table 1).
Almost two in five (38%) of the city officials that responded increased the size of the city
workforce, also with little variation by city size. Nearly one in four cities (23%) increased
city service levels, 18 percent increased contracting out services, 35 percent improved
productivity levels, and 22 percent increased inter-local agreements (all with little variation in these actions based on city size or location). Figure 15 presents city responses to
13
City
Services
Levels
2.9%
23.1%
Number Education
of
Spending
Interlocal
Agreements
2.3%
21.8%
1.6%
13.6%
Research
Report
80
Percentage of Cities
70
60
50
40
30
20
10
0
1987
Reduce Operating Budget 57
Reduce Capital Spending 56
Contract Out
27
Reduce Employment
27
Reduce Service Levels
8
Interlocal Agreements
Increased Productivity
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
47
39
31
21
8
38
34
30
19
4
50
38
39
23
9
72
47
39
38
18
72
61
30
36
12
69
55
38
38
15
24
36
61
44
39
22
12
24
32
49
30
35
18
9
24
30
33
23
22
17
8
28
31
9
12
28
16
4
18
24
5
4
26
10
1
24
39
6
7
28
9
1
27
46
5
7
28
8
3
23
47
4.5
8.1
28.5
9.9
2.4
24.3
42.9
14.6
9.4
17.9
12.3
2.9
21.8
34.7
Figure 15:
Expenditure Actions,
1987-2002
31
questions on expenditure actions since 1987. Fewer city officials identified “increasing
productivity” during the past twelve months than in the previous two years. And the percentage of city officials that identified “reducing the growth rate in operating spending”
tripled (to 15%) from 2000 levels (5%).
The action “reduced growth rate of operating spending” showed notable variation based
upon city size in 2002, as it did in 2001. Only one in ten (10%) city officials from the
nation’s small cities reported a reduction in the growth rate in operating spending, while
a much larger 31 percent of city officials from the nation’s largest cities reported this same
action. Variation by city size in the “increased human service spending” action was also
significant. Although slightly more than two-fifths (44%) of total city officials reported
this action, 27 percent of city officials in the largest cities, and 55 percent of city officials
in the nation’s large cities reported increasing their human service spending.
Growth in Revenues/Expenditures & Ending Balances
Year-to-year growth in General-Fund revenue has been quite robust, especially since 1996.
Figure 16 plots the year-to-year changes of both general-fund revenues and general-fund expenditures in current dollars. Between 1991 and 2001, the average annual increase in general-fund
revenues was 4.4 percent and the average annual increase in general-fund expenditures was 4.3
percent. Since 1997, however, the growth rate in revenues has been a very robust 5.2 percent
while spending averaged 5.0 percent. Controlling for the effects of inflation still presents a fairly strong financial portrait of cities’ revenue and spending in the recent past (Figure 17). Since
14
City Fiscal Conditions in 2002
1991, constant-dollar general-fund revenues grew 1.8 percent per year and constant-dollar general-fund expenditures grew 1.7 percent per year. And the growth rate since 1997 was 2.4 percent for general-fund revenues and 2.2 percent for general-fund spending.
The political pressure to meet increased public safety concerns, higher health insurance
costs, increasing human service needs, and many other city needs led city fiscal officers’
to prepare general-fund budgets for FY2002 that increased spending by 5.6 percent, or
4.45 percent in constant dollars. The budgeted growth rate in current dollar spending is
somewhat greater than the previous five-year average of five percent. Budgeted revenue
growth for FY2002, on the other hand, is 1.2 percent, or virtually flat in constant dollars.
Much of the reason for the no-growth revenue projections for FY2002 can be explained
by the poor showing of sales-tax and income-tax collections in FY2001. Figure 18 presents the annual growth rate in general-fund tax receipts by revenue source. The annual
growth in sales tax collections between 1995 and 2000 averaged a very strong 6.5 percent
but then plunged to –2.3 percent in 2001 and is expected to increase only slightly in 2002
(0.8%). Income-tax revenues also grew at a fairly strong rate, though not nearly as strong
as the sales-tax growth rate. (One reason that the growth rate in “income” taxes was not
as strong as the federal income tax growth rate during this period is that practically none
of the responding cities with the authority to levy an income tax can tax capital gains.) The
4.0 percent average annual increase in income-tax receipts between 1995 and 2000 fell to
2.8 percent in 2001 and is budgeted at only 1.2 percent in 2002.
The important point for understanding the projected revenue growth rate for FY2002,
then, is that sales-tax collections and income-tax collections are expected to change very
little from the previous year, a year that for sales-tax collections actually witnessed a
Figure 16:
Change in GF Revenues and
Expenditures (current dollars)
1.19%
1.0%
0.0%
1986
1993 1994
Change in Current Dollar Revenue (General Fund)
5.56%
6.20%
5.99%
5.82%
5.12%
1998
4.52%
5.50%
4.31%
3.48%
1997
1.90%
3.78%
3.72%
5.31%
6.32%
1992
3.87%
4.14%
1991
3.64%
3.24%
1990
2.0%
3.22%
1989
4.19%
3.64%
1988
3.44%
1987
3.0%
4.75%
7.55%
7.0%
5.30%
4.0%
5.98%
4.96%
5.0%
5.46%
6.0%
5.32%
4.86%
7.0%
7.06%
6.66%
8.0%
1995
1996
1999
2000
2001
2002
(budget)
Change in Current Dollar Expenditures (General Fund)
15
Research
Report
4.45%
3.58%
2.88%
0.09%
1.80%
1.59%
2.55%
1.58%
2.59%
1.14%
1.20%
1.76%
4.04%
3.02%
1.27%
0.60%
1.00%
0.66%
2.34%
1.79%
2.44%
0.56%
1.87%
1.00%
0.0%
0.75%
1.0%
1.43%
1.04%
0.59%
2.0%
3.00%
4.0%
3.0%
2.43%
4.0%
4.25%
3.84%
5.0%
-0.66%
-1.0%
1986
1987
1988
1989
1990
1991
1992
1993 1994
Change in Constant Dollar Revenue (General Fund)
1995
1996
1997
1998
1999
2000
2001
2002
(budget)
Change in Constant Dollar Expenditures(General Fund)
Figure 17:
Change in GF Revenues and Expenditures (constant dollars)
10%
6.1%
0.8%
1.2%
2.8%
-2%
Figure 18:
Year-to-Year Change
in General Fund Tax
Receipts
5.0%
5.8%
4.8%
4.6%
3.3%
5.5%
4.0%
5.9%
4.0%
5.4%
-2.3%
0%
3.2%
2.2%
2%
3.6%
4%
5.9%
6%
7.7%
7.8%
8%
-4%
1995-96
(est)
1996-97
Sales Tax Collections
1997-98
1998-99
Income Tax Collections
1999-2000
2000-01
2001-02
(budget)
Property Tax Collections (all cities)
decline in receipts. The good news is that property-tax collections, which averaged 4.2
percent growth between 1995 and 2000, continued to increase in 2001 at a very robust
rate (5.0%) and are expected to increase in 2002 by an even stronger 6.1 percent rate.
Ending Balances
Cities operate under balance-budget requirements, meaning that cities almost always
plan on ending the fiscal year with a surplus. This surplus, which is referred to as a “carryover balance” or a “reserve,” becomes available revenue for the next fiscal year.
Reserves are planned for a variety of purposes, including the need to store funds in antic16
City Fiscal Conditions in 2002
ipation of an economic downturn and declining revenues. Between 1993 and 2000, cities’
ending balances continued to build as the underlying economic bases of cities expanded rapidly. Indeed, the actual growth rate in revenues for most cities exceeded the budgeted or predicted growth rate, allowing cities to not only build up their savings but also
to meet other needs. Among the list of expanding needs that cities have long identified
is infrastructure or capital assets. The growth rate in spending on infrastructure between
1994 and 2000 far surpassed the growth rate in city operating spending. And the principal fuel for the explosive growth in capital spending was the unexpected accumulation
of tax revenues resulting from economic expansion.
A plurality of cities, according to survey respondents, has created “reserve” or “endingbalance” goals for their general funds (Figure 19). A substantial majority of cities either
have an “official” ending balance or reserve goal (45%) or a “generally recognized” goal
(25%) that they try to reach. Twenty percent of the responding cities follow an “informal” reserve goal policy, while fewer than one in ten (7%) do not have a reserve policy
(3% did not answer the question).
The survey asked city officials to indicate the dollar value of their cities’ official or “generally accepted” ending balances. Three-fourths of the 251 city officials responding to
this question exceeded their cities’ ending-balance goals in 2001, while 15 percent fell
below their goal. This latter group of 38 cities missed their target by $171 million, while
the former group of 190 cities exceeded their target by $1.6 billion. In 2002, a smaller
percentage (60%) of cities are expected to exceed their ending-balance goals.
The average ending balance for the nation’s largest cities was $85.6 million in 2001, and
$31.8 million for cities with populations between 100,000 and 300,000 (Figure 20). The
nation’s small cities (10,000-50,000 population) averaged $5.6 million ending balances,
while the medium cities (50,000-100,000 population) averaged $13.5 million. The ending
balance goal for the largest cities was $35.9 million, indicating that the largest cities’ average ending balance exceeded the actual goal by $49.7 million on average. The ending balance goal for the large cities (100,000-300,000 population) was $19.6 million. The average
large city exceeded the goal by $12.2 million. The ending balance goal for medium cities was
Figure 19:
Ending Balance Goal Policies,
2002
No goal 7%
Unofficial,
but generally
recognized
goal 25%
3%
Official ending
balance goal
45%
Informal goal 20%
17
Research
Report
$7.7 million, which places the actual ending balances $5.8 million over the goal. And the
small cities average ending balance of $5.6 million exceeded the goal of $3.5 million by $2.1
million.
The municipal sector’s aggregate ending balance as a percentage of expenditures in 2001
increased to 19.1 percent, its highest point since the fiscal survey was first administered
in 1985 (Figure 21). Only once during the series have cities’ budgeted ending balances
exceeded the actual ending balances, and that was in 1992. Since then, budgeted ending
balances have been generally within 1-3 percentage points of the actual ending balances.
In August 2002, it is difficult to understand how city fiscal conditions in FY2001 could have
been so strong. Yet, several issues are worth noting. First, nearly 40 percent of all cities
end their fiscal years on June 30, which was prior to the September 11th terrorist attacks
and the rapid decline in retail sales and tourism. Many other cities end their fiscal years on
September 30, only a short time after the attacks and before these cities would have been
able to feel the fiscal impacts. The data that is presented herein for a fiscal year does not
discriminate between those cities whose fiscal years end June 30th and those that end
December 31st or September 30th or April 30th. Consequently, the annual revenue and
expenditure cycle for this fiscal report is not the same for all responding cities.
Second, the accounting scandals of early 2002 in the private sector and the enormous
shock of stock price collapses in June and July were most likely not anticipated or incorporated in FY2002 budget forecasts. The resulting declines in consumer confidence and
purchasing power have now placed cities’ fiscal health in a more precarious position.
Even though ending balances are at their highest point since data were first collected
18 years ago, there is cause for real concern about the fiscal health of cities. Because
of the confluence of the declining economy and the terrorist attacks, this year’s report
probes into their revenue impacts.
$85,589
$80,000
$78,141
$73,713
($000)
$60,000
$40,000
$28,934
$20,000
$11.832
$5,343
$31,776
$33,299
$13,448
$12,650
$5,422
$5,637
$0
Figure 20:
Average Ending Balance
by City Size
18
Ending Balance
2000
Ending Balance
2001
Small
Large
Medium
Ending Balance
2002 (budget)
Largest
City Fiscal Conditions in 2002
20.0
18.0
16.2 16.1
15.0
15.0
11.5
12.3
13.4
10.0
9.0
10.3
9.6
17.1
15.7
12.7 12.2
11.1
18.5 18.3 19.1
11.6
13.2
10.5
14.1
12.0
12.3
12.2
8.9
9.8
16.9
16.6
17.2
15.3
12.2
10.5
5.0
0.0
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Actual Ending Balance
Budgeted Ending Balance
Figure 21:
Ending Balances as a Percentage of Expenditures (General Fund)
Recession and 9-11
If city officials were anticipating a decline in certain revenues, one would expect forecasts to capture those declines. Indications that the economy was cooling down were well
known by late 2000 and early 2001. But, no one predicted the terrorist attacks on New
York City and Washington, DC on September 11th, 2001. Yet for many cities the revenue
implications were obvious. Therefore, to separate the twin effects of recession and terrorist attack, we requested quarterly budgeted and actual data for four revenue sources.
The data series for quarterly “budgeted amounts” and “actuals” began in the 4th Quarter
of 2000 (October-December 2000) and continued through the 1st Quarter of 2002
(January-March 2002). The survey requested city officials 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, 2000 and ending March 31, 2002.
Responding to the cooling economy, fiscal officers projected slow property-tax revenue
growth during those six quarters, October 2000 through April 2002. Because property values and property tax collections tend to change marginally from year to year and
do not respond to economic shifts as rapidly as sales, income, or tourist tax receipts,
property-tax collection forecasts tend to be fairly reliable and accurate. For example,
between October 2000 and March 2001, city officials that provided data on their budgeted property tax collections and actual property tax collections expected to collected
$10.4 billion and actually collected $10.3 billion. Actual property tax collections for the
six quarters, then, are 99 percent of budgeted or projected property tax collections
(Figure 22).
19
Research
Report
Sales tax and tourist tax revenues, on the other hand, respond to underlying market factors immediately. A downturn in the economy reduces consumer confidence, which in turn
tends to push consumer spending down. Since sales tax collections do not lag changes in
the underlying economic base of a city, budget officials’ predictions of the state of the
economy four or six quarters into the future tend not to be as accurate as their predictions for property tax collections. The same can be said of “tourist” taxes, which include
lodging, restaurant, and amusement taxes. For the responding cities, the six-quarter accuracy for sales tax collections amounted to 97 percent of the budgeted amount and for
tourist tax collections it was 91 percent. Forecasts of income tax receipts fared the poorest; actual collections were only 90 percent of budgeted amounts.
Figure 23 presents the quarter-by-quarter comparisons between “actual” revenue collections and budgeted amounts. Between the 4th Quarter 2000 and the 3rd Quarter
2001, actual collections were roughly within 10 percent of projected collections. During
the 4th Quarter 2001 (October-December), actual collections for tourist-related taxes
fell to 89 percent of budgeted amounts then to 82 percent during the first quarter of
2002 (January-March). Given the fairly accurate prediction of quarterly “tourist” tax revenues for the first four quarters of the study period, it is not unreasonable to conclude
that the substantial and widening gap between actual and budgeted tourist tax revenues
for the last two quarters (October 2001 through March 2002) are related to the terrorist attacks and the subsequent decline in the tourist industry. What is also apparent
from Figure 23 is that actual sales tax collections were between 98 percent and 102 percent of the predicted levels for the first three quarters of the study period. But for the
next three periods, including the post-September 11th quarter, actual sales-tax collections were below budgeted amounts by about the same amount, 92-93 percent.
100.0%
98.0%
98.9%
96.0%
96.6%
94.0%
92.0%
90.0%
89.7%
89.7%
88.0%
86.0%
84.0%
Property Tax
Sales Tax
Income Tax
Tourist Tax
Figure 22:
Six-Quarter Forecast Accuracy
(Actual Revenue Collections as a % of Budgeted Receipts)
20
City Fiscal Conditions in 2002
Nevertheless, tourist tax revenues do not constitute a large share of municipal revenues,
even as they are very important to several of the nation’s tourist destinations. Sales-tax
revenues, on the other hand, amount to a very large share. The revenue data presented
in Figure 24 are derived from those survey respondents that could provide both budgeted and actual data for all six quarters in the study period. Because more than half of
all cities are authorized to impose a sales tax, the number of usable surveys from these
cities resulted in a significant number (N=149). Based on the responses from the 149
sales-tax cities who could provide quarterly actual and estimated revenue data, the devastating impact of both the post-September 11th attack and the worsening economy
pushed sales tax revenues to $77 million, then $82 million and finally $96 million
below budgeted amounts, for a total of $286 million below projects for the four quarters ending March 31, 2002.
Although the foregone revenues in Figure 24 are large, it should be noted that the budgeted amounts were not based on optimistic economic scenarios. Fiscal officers projected quite conservatively during this period, an important consideration given the very
rapid growth in sales-tax collections in the preceding 4-5 years. For example, as Figure
25 depicts, fiscal officers budgeted for sales tax collections in the 1st Quarter of 2001 to
be on average 3.4 percent more than the 4th Quarter of 2000 and only 0.1 percent more
in the 2nd Quarter of 2001 than in the 1st. The budgeted amounts actually declined during the 3rd Quarter of 2001 and increased by 2.1 percent in the 4th Quarter and another 2.6 percent in the 1st Quarter of 2002. In other words, fiscal officers expected the late
spring and summer months of 2001 to be fairly flat in terms of sales-tax collections but
105.0%
104.1%
104.1%
102.2%
100.7%
100.0%
98.1%
100.9%
97.7%
95.0%
95.1%
97.5%
93.7%
95.7%
92.3%
94.3%
93.4%
90.0%
89.3%
88.6%
85.0%
81.5%
80.0%
4th Q 2000
1st Q 2001
(Oct.-Dec.)
Sales Tax (N=149)
2nd Q 2001
3rd Q 2001
Tourist Tax (N=127)
4th Q 2001
Income Tax (N=29)
Figure 23:
Actual Revenue Collections as a Percentage of Budgeted Receipts
21
1st Q 2002
(Jan.-Mar.)
Research
Report
then pick up again for the Thanksgiving/Christmas season (4th Quarter). In actuality,
however, sales-tax collections increased by 4.7 percent in the first quarter of 2001 but
then dropped to 95 percent for the next two quarters. Actual sales tax receipts in the 4th
Quarter 2001 did increase by 1.7 percent but then actually declined, albeit slightly, in the
1st Quarter 2002.
$5,800
$10,840
$5,080
$20,000
$10,905
$40,000
$3,682
$27,386
The twin impacts of the deteriorating economic base, especially in consumption,
tourism, and income (employment), and the heightened demands for public safety
expenditures after 9-11-01 have become more apparent by early- to mid-2002. Although
cities’ ending-balances reached very high levels by the end of FY2001, they are threatened by significant erosion in the face of a worsening economy. Cities’ access to the
property tax, which does not change significantly in response to rapidly worsening (or
improving) economic conditions, and cities’ substantial ending balances will most likely cushion the landing in the short term. Indeed, the ability to weather at least a shortterm economic decline is the hallmark of city fiscal policies that advocate substantial
ending balances and balanced revenue structures.
$(100,000)
Fourth Quarter
2000
First Quarter
2001
(Jan-Mar 2001)
Sales Tax Revenues
(Actual-Budget) (N=149)
Second Quarter
2001
Third Quarter
2001
Tourist Tax Revenues
(Actual-Budget) (N=127)
$22,040)
$(25,055)
$(24,283)
Fourth Quarter
2001
$(96,679)
$(77,440)
$(80,000)
$(16,184)
$(52,393)
$(30,688)
$(60,000)
$(82,679)
$(77,440)
$(2.856)
$(28,105)
$(20,000)
$(40,000)
$(2,730)
$-
First Quarter
2002
(Jan-Mar 2002)
Income Tax Collections
(Actual-Budget) (N=29)
Figure 24:
Difference Between Actual Revenue Collections and Budgeted Revenues (by Quarter) ($000)
22
City Fiscal Conditions in 2002
APPENDIX A
Methodology
This 2002 report on city fiscal conditions is based on a national mail survey of finance officers in U.S. cities during March and April 2002. Survey data for this report are taken from
the 308 city officials that responded to the mail survey, for a response rate of 29 percent
(see Appendix B for a list of all responding city officials), allowing us to generalize for all
cities with populations over 10,000.
In March and April 2002, NLC sent surveys to all cities with populations greater than
50,000 and, using established sampling techniques, to a randomly generated sample of 520
cities with populations between 10,000 and 50,000. Questionnaires were mailed to 1,060
cities. They were returned to the Survey Research Laboratory, College of Urban Planning and
Public Affairs, University of Illinois at Chicago, 412 South Peoria Street, Chicago, IL 60607,
where they were compiled and coded and the data were put into computer-readable format
(see Appendix C).
The number of usable responses totaled 308, for a response rate of 29 percent. The response
rate was higher for the larger cities than for smaller cities. 23 of the 55 largest cities (>300,000
population), or 42 percent, responded as did 76 of 155 cities, or 49 percent, in the larger city
category (100,000-299,999 population). More than a quarter (26%) of the medium-sized cities
(50,000-99,999 population) responded, or 88 of 338. And 119, or 23 percent, of the remaining cities that were sent surveys returned the form. Cities that responded to the survey are listed in Appendix A. The responses received allow us to generalize about all cities with populations of 10,000 or more. Due to the lower response rates from smaller cities and cities in the
Northeast (16% response rate), any conclusions regarding cities remain tentative.
Population groupings in this report are based on Census data. The “largest” cities are
TABLE A-1
CITY
POPULATION
NUMBER OF CITIES
IN THIS CLASS
NUMBER OF
SURVEYS SENT
NUMBERS
RETURNED
RESPONSE
RATE
>300,000
55
55
23
41.8 percent
100,000-299,999
155
155
76
49.0 percent
50,000-99,999
338
338
88
26.0 percent
10,000-49,999
2,041
512
119
23.2 percent
unknown
1
TOTAL
2.589
1,060
307
29.1 percent
* All cities with populations greater than 50,000 were mailed surveys, and a random sample of cities between 10,000
and 50,000 were selected and mailed surveys.
Table A-1:
Cities Surveyed in 2002 and Response Rate By City Size*
23
Research
Report
defined as those with populations of 300,000 or more; “large” cities have between
100,000 and 299,999; “medium” cities between 50,000 and 99,999; and “small” cities
have populations of 10,000-49,999.
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 earnings 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 2000, 2001,
and 2002: 13 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;
PRINCIPAL AND INTEREST PAYMENTS ON G.O. DEBT; COMBINED FUNDS BUDGET; and CAPITAL SPENDING. The survey also asked for financial data for 2000-01
on the amount of ADDITIONAL CITY REVENUE the city generated during the past year
as a result of raising tax rates and of raising fees and charges.
13 Most cities end their fiscal year on
June 30 or December 31; a few cities end their
fiscal years in April and September. As a
result, most of the data requested
in the survey are the legislatively approved
estimates for the 2002 fiscal year. Data for
previous years are actual or preliminary actual.
City finance officials were also asked to provide data on their city’s GENERAL FUND.
The General Fund is the largest fund of all cities accounting for an average of 49.8 percent of total city revenues in 2001, according to the survey respondents. And this statistic remains remarkably stable despite differences in city size. The General Fund
accounts for approximately 45.9 percent of the total city budgets of the responding
cities nation’s largest cities (defined as cities with populations greater than 300,000),
47.9 percent of the total budget of large cities (cities between 100,000 and 299,999),
47.6 percent of the total budget of medium-sized cities (cities between 50,000 and
99,999), and 53.8 percent of the total budget of small cities (cities between 10,000 and
49,999).
24
City Fiscal Conditions in 2002
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 general-purpose spending.
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 (April 2001 through April 2002), 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 2002 compared with the previous year, and
whether the city will be better able or less able to meet its financial needs in 2003 compared with 2002.
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
25
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Report
APPENDIX B
Responding Cities
Torrence CA
Vista CA
Yorba Linda CA
Concord CA
Davis CA
Fremont CA
Los Angeles CA
Norwalk CA
Oxnard CA
Palmdale CA
PLeasant Hill CA
Rialto Santee CA
Simi Valley CA
Danville CA
Upland CA
Vacaville CA
Walnut Creek CA
Watsonville CA
Whittier CA
Windsor CA
Boulder CO
Brighton CO
Fort Collins CO
Lakewood CO
Longmont CO
Colorado Springs CO
Ansonia CT
New Haven CT
Cheshire CT
West Hartford CT
Boca Raton FL
Cape Coral FL
Coconut Creek FL
Coral Springs FL
Fort Lauderdale FL
Gulfpoint FL
Greenacres FL
Inverness FL
North Miami FL
Pembroke Pines FL
Pompano Beach FL
Tampa FL
Venice FL
Palm Bay FL
Sweetwater FL
Royal Palm Beach FL
Wellington FL
Albany GA
Savannah GA
Juneau AK
Montgomery AL
Dothan AL
Mobile AL
Selma AL
Fayetteville AR
Fort Smith AR
Little Rock AR
Chandler AZ
Peoria AZ
Phoenix AZ
Scottsdale AZ
Lake Havasu City AZ
Carlsbad CA
Anaheim CA
Bakersfield CA
Bellflower CA
Berkeley CA
Burbank CA
Camarillo CA
Chula Vista CA
El Segundo CA
Fairfield CA
Fullerton CA
Hermosa Beach CA
Irvine CA
La Mesa CA
Lakewood CA
Lodi CA
Martinez CA
Milpitas CA
Montebello CA
Monterey Park CA
Moreno Valley CA
Mountain View CA
Orange CA
Pittsburg CA
Porterville CA
Redding CA
Redondo Beach CA
Riverside CA
Salinas CA
San Bruno CA
San Diego CA
San Leandro CA
Santa Barbara CA
Santa Clara CA
Santa Maria CA
Sunnyvale CA
26
Burlington IA
Davenport IA
Mason City IA
Ottumwa IA
Sioux City IA
Dubuque IA
Iowa City IA
Boise ID
Bloomington IL
Evanston IL
Naperville IL
Peoria IL
Wheaton IL
Mount Prospect IL
Rolling Meadows IL
Bloomingdale IL
Bolingrook IL
Franklin Park IL
Oak Lawn IL
Orland Park IL
Woodridge IL
East Chicago IN
Evansville IN
Terre Haute IN
Atchinson KS
Leawood KS
Kansas City KS
Topeka KS
Lexington KY
Alexandria LA
Baton Rouge LA
Eunice LA
Monroe LA
Sidell LA
Lake Charles LA
Shrevport LA
Athol MA
Bedford MA
Boston MA
Newburyport MA
Arlington MA
Annapolis MD
Greenbelt MD
Newcarrollton MD
Lewiston ME
Cadillac MI
Farmington MI
Ferndale MI
Oak Park MI
City Fiscal Conditions in 2002
Sterling Heights MI
Detroit MI
Grand Rapids MI
Kalamazoo MI
Lansing MI
Pontiac MI
Bemidji MN
Bloomington MN
Austin MN
Moorhead MN
Duluth MN
Belton MO
Bellefontaine Neighors MO
Independence MO
Joplin MO
Kansas City MO
Kirksville MO
St Joseph MO
St. Louis MO
Springfield MO
Warrensburg MO
Greenville MS
Gulfport MS
Billings MT
Great Falls MT
Ashville NC
Havelock NC
Lexington NC
Monroe NC
Salisbury NC
Winston-Salem NC
Raleigh NC
Reidsville NC
Cary NC
Matthews NC
Lincoln NE
Omaha NE
Portsmouth NH
New Providence NJ
South Brunswick Twp NJ
Hamilton NJ
Piscataway NJ
Trenton NJ
Albuquerque NM
Santa Fe NM
Clovis NM
Las Vegas NV
Buffalo NY
Lackawanna NY
New Rochelle NY
Oswego NY
Akron OH
Bedford OH
Berea OH
Brook Park OH
Brooklyn OH
Brunkswick OH
Euclid OH
Fairview Park OH
Fremont OH
Mansfield OH
Seven Hills OH
Springfield OH
Toledo OH
Wilmington OH
Cleveland heights OH
Columbus OH
Fairfield OH
Perrysburg OH
Tiffini OH
Warren OH
Bartlesville OK
Chickasha OK
McAlester OK
Midwest City OK
Norman OK
Ponca City OK
Shawnee OK
Moore OK
Salem OR
Eugene OR
Gresham OR
Portland OR
Aston PA
Bethlahem PA
Columbia PA
Pittsburgh PA
Mechanicsburg PA
Philadelphia PA
Barrington RI
Greenville SC
North Charleston SC
Athens TN
Springfield TN
Memphis TN
Millington TN
Arlington TX
Austin TX
Balch Springs TX
Beaumont TX
Brownsville TX
Burleson TX
Carrollton TX
Coppell TX
Corpus Christi TX
Denton TX
League City TX
Lubbock TX
McKinny TX
Mission TX
Richardson TX
Victoria TX
Wichita Falls TX
Dallas TX
Fort Worth TX
Gainesville TX
Garland TX
Houston TX
Irving TX
Laredo TX
Lewisville TX
Longview TX
McAllen TX
Midland TX
Odessa TX
Pasadena TX
Plano TX
Robstown TX
San Antonio TX
Tyler TX
University Park TX
Waco TX
Layton UT
Sandy UT
West Valley City UT
Alexandria VA
Radford VA
Richmond VA
Roanoke VA
Suffolk VA
Danville VA
Newport News VA
Norfolk VA
Virginia Beach VA
South Burlington VT
Salt Lake City VT
Bellingham WA
Bellvue WA
Kelso WA
Spokane WA
Tacoma WA
Brookfield WI
Greenfield WI
West Bend WI
Manitowoc WI
Milwaukee WI
New Berlin WI
Brown Deer WI
27
Research
Report
City Fiscal Conditions in 2002
NOTES
28