Urban Wire Many of our 90,000 local governments are in fiscal trouble
Kim S. Rueben
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While the budget difficulties facing states and the federal government are getting a lot of attention, we hear much less about the fiscal woes of cities and other local governments.  This is partly because following 50 states is easier than tracking almost 90 thousand local governments (including over 19 thousand cities, 17 thousand townships, 3 thousand counties and over 14 thousand school districts).  But these local governments provide critical public services and even though the economy is improving, cities and other local governments are probably facing their toughest year yet.

When the National League of Cities surveyed members in 2009, it estimated that the municipal sector would face a budget shortfall of $56-$83 billion in the 2010-2012 period.  Nearly 90 percent of city finance officers reported difficulties meeting their fiscal needs in 2009, and three-quarters of city officials reported that overall economic and fiscal conditions had worsened in 2010. Conditions are especially bad in the West, where 91 percent are reporting worsening conditions, compared to 76 percent of Northeast cities.

Part of the problem facing cities has to do with their revenue sources. Property taxes are “backward looking,” so it took some time for the declines in house prices to translate into declining property tax revenues.  But it also has to do with shrinking payments from other levels of government.  When states face budget shortfalls one of the things they cut is money to local governments.  According to the National Council of State Legislators, about 14 states cut local funds in 2010 and 2011.  Connecticut, Maine, New Jersey, Rhode Island and New York cut municipal aid. Virginia cut local aid to cities and counties and North Carolina’s governor has told counties to spend the money in their “surplus’ accounts.  The only problem is that the funds in these accounts aren’t really surpluses –just money needed for later in the fiscal year.

This has forced cities to cut programs, lay off workers and shut libraries, fire stations and schools.  Washington DC’s mayor, facing a $322 million budget shortfall earlier this month proposed a budget that included city layoffs and cuts to social services and a tax increase.  And cities and other local governments are in an especially tight spot because the extent of state actions is not yet known.  So they’re trying to come up with their budgets (which for about half of them are on the same schedule as their state) without knowing how big the cuts from the states will be.  

Research Areas Economic mobility and inequality State and local finance