Dive Brief:
- Overall fiscal health in cities is not declining, but growth appears to be slowing according to the 33rd annual City Fiscal Conditions report released by the National League of Cities (NLC). The survey is based on results from a study of 341 U.S. city finance officers.
- Of those surveyed, 73% are confident in their city's fiscal position. When results are broken down by geographic region, finance officers from cities in the South are most likely to report feeling confident, at 81%. Those from the smallest communities are least likely to report being better able to meet citizens' needs, at 63%.
- General fund expenditures are outpacing revenues; revenues are not in decline but grew at only 1.25% in 2017 and are expected to stagnate in 2018. Revenue from all three tax sources — property, sales and income — grew slower than the previous year and is projected to slow further in the coming year. Cities continue to rely on increasing property taxes and services fees as their main revenue-generating actions.
Dive Insight:
The U.S. economy is showing consistent signs of strength, such as solid GDP growth and low unemployment numbers. But looking more closely at conditions within individual cities paints a slightly different picture, according to the responses from the city finance officers.
Although factors like revenue growth are not declining, they're not growing at a pace to sustain cities' financial needs. If this year's projected stagnation comes to fruition, that could signal that the economic tide is turning. With cities receiving less support from federal and state governments, stagnating or dipping local tax revenue could indicate financial trouble on the horizon.
The survey asked a number of questions about the effects of the recent tax cuts on four specific areas:
- The $10,000 cap on the state and local tax (SALT) deduction
- The elimination of tax-exempt advance refunding bonds
- Taxability of local governments’ contributions to capital made to corporations
- The elimination of tax credit bonds
Respondents indicate it's too soon to tell the real effects, except for the elimination of tax-exempt advance refunding bonds; 35% of respondents note a negative impact in that area. Although the majority of respondents said it will take a couple of years to determine the tax cuts' long-term effects on their cities, about one-third predict a negative long-term impact whereas 10% anticipate a positive impact. That again is different for the elimination of tax-exempt refunding bonds, with 61% of survey respondents anticipating a negative effect.
Compared to last year, fewer cities report increasing funding to contract city services and privatization; 11% report an increase compared with 20% last year. That's interesting when considering the industry push for funding and deploying municipal programs with public-private partnerships. If cities find themselves in a financial pinch over the next few years, that could mean further cuts to contracting services.
If cities are on the brink of a financial turn, another area that could take a hit in the coming years is equity. Communities tend to focus more on equitable distribution of services and resources when times are good, but less during times of financial strain when greater numbers of citizens are struggling and need additional services.
