City budgets are shrinking in the shadow of the nation's economic downturn, and a report released in September by the Washington-based National League of Cities (NLC) indicates many will have to struggle to make ends meet for the next two years. In a tale of two cities, Cambridge, Mass., officials are hoping to escape the brunt of the hard times, while Riverside, Calif., officials are hoping to avoid taking drastic steps to fend off a crisis.

NLC's City Fiscal Conditions in 2008 report predicted that, even if overall economic conditions improved now, cities could be reeling until 2010. The report found that property tax revenues dropped 3.6 percent from the prior year, in inflation-adjusted terms, sales tax went down 4.2 percent and income tax declined 3.3 percent in inflation-adjusted dollars. As a result, 64 percent of the city finance officers interviewed for the report said their cities would find it hard to meet their fiscal needs in 2008, and 79 percent said the struggle would be even more difficult for them in 2009.

Although Riverside, where 2,516 homes were foreclosed on in 2007, has suffered a loss of property tax revenue, Mayor Ronald Loveridge says a 15 percent statewide decline in sales tax has been more damaging. Some of Riverside's neighboring cities have been forced to lay off employees, but Riverside has not yet been forced to that extreme. "But, we're essentially not filling positions," Loveridge says. "And we're asking departments to take 5 percent cuts."

Loveridge hopes that continuing the hiring freeze, along with other cost-cutting measures, will be enough to see the city through until the economy improves. "We have a rainy day fund that's approximately $45 million, so we can draw down to some extent from the money we have in reserve," he says. "The kind of loss of revenue we're experiencing is [happening in] most other cities, and we're engaged in trying to figure out how to survive."

In Cambridge, a series of factors, including being fiscally prudent, have kept the financial crisis at bay, says Vice Mayor Brian Murphy. "We are as strongly positioned a city as you can hope for," he says. "AAA bond ratings from all three rating agencies, the largest amount of free cash of any community in the Commonwealth of Massachusetts, [being home to] Harvard [and] MIT [universities and] Life Sciences [pharmaceutical company], we are a very strong community. Having said that, we are still making some adjustments." For example, the city is holding off authorization of accruing additional debt for a high school renovation and some infrastructure improvements because of market instability.

Cambridge, like most local governments in Massachusetts, heavily relies on property tax. "We depend on property taxes for about 60 percent of our operating revenue," Murphy says. The property tax assessments for 2009 are based on property values from Jan. 1, 2008, which are based on the slow market activity of 2007. "I guess the good news is we can get a sense of what's coming. The bad news is, we know what's coming," Murphy says.

In addition to the revenue decline, the NLC report found that cities saw a 3 percent rise in spending in 2007 because of inflation in the cost of products and services, such as energy. As a result, 49 percent of respondents have increased fees, while others have increased the number or type of fees. "I think virtually every city and town is facing the real challenge of increased costs, increased expectations on the part of residents, and a declining ability to find the cash to meet those needs," Murphy says.

Cities will have to be prudent to survive in the coming years, Murphy says. "A lot of [surviving] is just moving slowly, and recognizing, particularly in property tax-dependent areas, that there is a lag and we are by no means out of the woods," he says. "If anything, we're just starting our walk into the woods."