The effects of the recession will continue to drag down city budgets beyond 2010, according to a survey by the Washington-based National League of Cities (NLC). The situation reflects the typical 18-month time lag seen in the effects that economic shifts have on city budgets that results from the collection of tax revenues only at certain times of the year, according to NLC.

The report, "City Fiscal Conditions in 2009," found that cities face significant budget gaps this year because of a 1.3 percent decline of income tax and a 3.8 percent decrease in sales tax collections. Those taxes are typically the earliest source of city revenue to decline as job losses increase and consumer purchases decrease, according to NLC. Property taxes, which make up the bulk of city revenue nationwide, are beginning to slow, growing only 1.6 percent as real property assessments are adjusted to reflect declining housing values.

Those tax revenues are collected only at specific times during the year — or over the course of several years in the case of property tax revenue — leading to the 18-month lag behind the rest of the economy. "Cities face the burden of confronting the effects of the downturn for years after any recession ends," said Michael Pagano, a professor at the University of Illinois at Chicago and coauthor of the report. "This means that cities will be navigating the implications of the downturn for awhile longer, even if the business climate turns around immediately."

Nine in 10 city finance officers surveyed for the report expect their cities to have difficulty meeting their financial needs this year, and 89 percent expect the situation will remain the same in 2010. Many cities are raising fees for city services and increasing taxes to raise money to meet the crisis. "Cities will be seeing difficult conditions for some time," said Chris Hoene, co-author and NLC's director of research and innovation. "The impact of the housing market drop is really just beginning to be felt. City leaders and residents will need to work together more than ever to make decisions about the future of their communities in terms of the types and levels of services cities will provide in the next few years."

View the "City Fiscal Conditions in 2009" report.

Related Stories