Since 2001, city fiscal conditions are showing some improvements. However, half of the nation's cities have raised new revenues to address gaps created by rising employee health care and pension costs, and increases in public safety and infrastructure needs.

According to a survey conducted by the Washington-based National League of Cities (NLC), 48 percent of the surveyed cities increased fees and charges for municipal services to balance budgets in 2005. The annual survey also found that 26 percent relied on increases in property taxes, while even smaller numbers increased sales tax rates, income tax rates and other tax rates.

Constant-dollar (adjusted for inflation) revenues grew by 1 percent in 2005, the first time city finance officers have reported substantive growth since before the 2001 recession. But ongoing revenue constraints and concerns over potential declines in property tax revenues from slowing real estate markets leave many city officials cautious as they draw up their 2006 budgets.

According to the survey, 63 percent of city officials say their cities were better able to meet financial needs in 2005 than in 2004. In addition, finance officers in cities that rely on sales taxes or income taxes were more likely to report improved conditions for 2005 than those cities that rely exclusively on property taxes.

Health benefits and employee wages were among the most critical issues affecting city budgets in 2005. Furthermore, increases in employee health care and wages, public safety needs, pension costs and infrastructure needs were cited as having the most negative effect on the ability of cities to meet their fiscal demands in 2005. While 77 percent of officials reported that their city increased public safety spending in 2005, 53 percent increased spending on infrastructure needs. Forty percent of officials increased spending on human services.

When asked to assess their cities' ability to meet financial needs in fiscal year 2006, 59 percent of city finance officers predicted that their cities would be able to meet financial needs. The fiscal recession between 2001 and 2004 appeared to subside in 2005, but concerns about the slowing real estate markets' effect on property tax revenues will temper city fiscal actions. After three years of difficult conditions, tough budget choices remain for city officials in the coming year about how to plan for the future and how to fill gaps in service levels from previous years.

The City Fiscal Conditions Survey is a national mail survey of finance officers in U.S. cities. Surveys were mailed to a sample of 1,059 cities, including all those with populations greater than 50,000 and to a random sample of cities with populations between 10,000 and 50,000. Data are drawn from 276 responding cities, with a representative sampling across city size.

Copies of “City Fiscal Conditions 2005” are available at www.nlc.org. The report also may be obtained by contacting the NLC's Center for Research and Municipal Programs at (202) 626-3030.

Pagano is a senior fellow at the University of Illinois at Chicago, and Hoene is research manager at the National League of Cities.