Just as San Jose, Calif., was planning to open four new library branches, a community center and a regional police substation, the city was hit full force by the worst economic storm since the Great Depression. Without funds to operate the facilities, the city had to forego ribbon-cutting ceremonies and a grand opening and instead installed lengths of chain-link fencing to help protect buildings that have remained unoccupied, at least for now. In the past decade, the city has reduced its workforce by almost 30 percent, falling from about 7,450 to about 5,400 employees today. Slightly more than 75 percent of those position reductions occurred in the last three years.

Despite the financial hit, the tide may be turning in San Jose, with the first budget surplus — albeit less than 1 percent — in nine years and even the prospect of hiring back a few positions in areas that suffered disproportionately, says Kim Walesh, the city’s director of economic development and chief strategist. The city’s 2012–2013 proposed budget includes recommended funding for opening the four branch libraries and the community center. The opening of the police substation, however, is recommended to be deferred for another year to direct funding toward gang prevention.

“The last several months, it seems fundamentally different,” Walesh says. “Like there’s light at the end of the tunnel. We don’t see any more painful layoffs and service reductions.”

Though the scene is uneven nationally, recent data indicate that the drastic shrinking of employment in the public sector may be over, with hopeful signs of a rebound in some pockets benefitting from an improved economy. If the current trends continue, government officials across the nation would breathe a collective sigh of relief. “It’s a challenge predicting with any crystal ball,” says Elizabeth Kellar, president and chief executive officer of the Center for State and Local Government (SLGE), a Washington-based think tank on local government workforce issues. “But I would not expect any major layoffs in the near future.”

Recent numbers foster optimism that the scene may brightening, even if only in comparison to the recent trauma. In March 2011, the U.S. Department of Labor reported 15,000 state and local employees lost their jobs. A year later, the number of layoffs had dwindled to 1,000 for the month, though it blipped up by 3,100 in April. Most notably, local government layoffs from January through March 2012 totaled only 3,700 employees, or 0.1 percent.

A recent report from SLGE confirms that state and local governments are slowing the pace of layoffs in 2012. The survey of government human resources officials from February 27 to March 13 found that 28 percent of employers are seeing layoffs this year, down from 40 percent in last year’s survey.

“The worst of the decline seems to have leveled off,” says Elizabeth McNichol, a senior fellow at the Center on Budget and Policy Priorities, a Washington budget think tank. “But there will be a long climb back out of the hole.”

The effect on revenue

State and local governments took a double hit from the recession. Not only was employment savaged, but so was the property tax base, the economic underpinning of state and local finances, which in the past had continued to grow even during recessions.

For 2011, overall city government revenues were projected to fall by 2.3 percent, the fifth straight year of declines, according to the National League of Cities (NLC), the Washington-based advocate for the nation’s cities. Its annual report on city fiscal conditions, which was released in September 2011, projected a 3.7 percent fall in property tax revenue in 2011, with further declines expected in 2012 and 2013. The previous year’s (2010 vs. 2009) 2 percent drop was the first year-to-year decline in city property tax revenues in 15 years, according to the report.

But data released in March 2012 by the Census Bureau brought more encouraging news, showing that total tax revenue for state and local government rose 4.5 percent last year, the biggest gain since 2006, and property taxes have increased for two consecutive quarters. “The worst might be over in the aggregate,” says Chris Hoene, NLC’s director of the Center for Research and Innovation, “but it masks dramatic variations.”

Many cities in pockets of the country remain mired in deep slumps because of falling property values. In recent months, a number of cities — including Hartford, Conn.; Providence, R.I.; and Detroit — have been in battles with their states, as their fiscal conditions deteriorate and they contemplate the trauma of bankruptcy.

Even local governments that face much less severe consequences have been forced to cut deeper than during past slowdowns, because of the extended length of the recession — now entering its fifth year, Hoene says. “I don’t think local government has been able to manage the retrenchment in a way that residents don’t feel it,” he says. “It’s not the case this time. The trench is too deep.”