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1st Quarter 4:55

US cities turn fiscal corner but not yet on solid ground

Rising pension and health care costs are threats

Fiscal conditions are slowly improving for US cities, aided by increases in sales tax and income tax revenue, but rapidly rising pension and health costs for city workers continue to pose a potentially crippling threat, an annual study by the National League of Cities concluded.

Local officials also expressed concern that the gridlock in Washington over the debt ceiling and other budget issues could send their cities back into a tailspin. In particular, there would be “catastrophic implications” to a failure to raise the debt ceiling, said Clarence Anthony, executive director of the league.

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“Cities’ fiscal conditions remain vulnerable to external policy shifts in the face of a gradual and tenuous economic recovery,” the report concluded, “including cuts in federal spending and threats to global, national, and regional-local economic conditions from political stasis on issues including the federal budget and US debt ceiling.”

Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois, Chicago, who presented the report at a news conference in Washington, said that it was especially unfortunate that the stalled federal budget debate was happening just as cities appear to be turning a fiscal corner.

“God knows what will happen with the shutdown now,” he said.

The latest City Fiscal Conditions Survey, which the league has undertaken yearly since 1986, was sent by mail and e-mail to financial officers from 1,140 US cities. This year, 31 percent responded to the survey, which the league said was sufficient to make reliable generalizations about cities’ fiscal health.

The survey of city finance officers, released Thursday, showed that 72 percent believed their cities were better able to pay their bills and keep services operating this year than they were in 2012. In last year’s survey, 57 percent made a similar claim, while only 43 percent did so in 2010.

‘God knows what will happen with the shutdown now.’

Michael Pagano, University of Illinois, Chicago 
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Still, the officials reported that their cities were still feeling the effects of the 2008 recession. The recent economic improvements, while notable, are still happening too slowly, they said, and skyrocketing pension and health costs remain a constant worry.

“Pension and health care costs will persist as a challenge to city budgets for years to come,” the survey said.

City sales tax revenue increased 6.2 percent in 2012, a rate that the league characterized as “robust” and that indicated the rising strength of local economies. Financial officers said they expected such revenue to continue to rise this year, though at a slower rate.

For those cities that have income taxes, revenue rose 4.4 percent between 2011 and last year. Property tax revenue, however, fell a small amount, 0.4 percent, despite higher housing prices, largely because it can take years for cities to reassess properties to reflect changing prices.

Concerned about shrinking state and federal aid, city officials are also keeping more cash on hand at the end of the year as a kind of rainy day fund, following several years in which cities were forced to eat into such reserves to blunt the impact of the economic downturn.

When the financial officers were asked which budget factors had the most negative impact on their cities, 80 percent said health benefit costs, 75 percent said pension costs, and 73 percent said infrastructure demands. When asked what had the most positive impact, 65 percent pointed to the “health of the local economy.”

To help offset these rising costs, 39 percent said their city had raised existing fees for municipal services, while about a quarter of the cities had established new fees for previously free services. Only 1 in 5 had taken the politically unpopular route of raising property taxes.

About a third reported cutting work forces or instituting hiring freezes. Labor Department statistics released in August showed that municipal government employment across the United States was about half a million jobs lower than the level of August 2008, just before the financial collapse.

“Looking to 2014 and beyond, all indications point to improving conditions for city budgets, with national economic indicators pointing to continued slow growth,” the report concluded. “External factors, however, could easily undermine cautiously optimistic projections, including, most notably, the possibility of federal budget cuts.”

The outcome of those external factors will have a major impact on whether cities can sustain this fiscal momentum.

“Everybody is watching Congress now,” said Ron Green, controller of the city of Houston. “We’re looking at the debt ceiling.”

The partisan gridlock in Washington has at least forced cities to come up with fresh ideas to address their own budget problems, said Dan Gilmartin, executive director of the Michigan Municipal League.

“I think cities are just getting used to being victims of some of these ideological foodfights we’re seeing in the federal government and in state capitals,” Gilmartin said.

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