Newly Released Data Show Long-Lasting Impact of the Great Recession on Cities

May 14, 2014, 15:55 ET from Lincoln Institute of Land Policy

CAMBRIDGE, Mass., May 14, 2014 /PRNewswire-USNewswire/ -- The Great Recession continues to wreak havoc on city budgets long after it officially ended, depriving many of the nation's largest central cites of tax revenue even as the economy recovers, according to a new data analysis by researchers at the Lincoln Institute of Land Policy.

America's cities saw tax revenue decline significantly beginning at the start of this decade, according to an analysis of 2011 data that has been added to the Fiscally Standardized Cities database on the Lincoln Institute's website. The FiSC database provides detailed annual fiscal information on 112 of the nation's largest central cities, from 1977 to 2011.

Although the Great Recession officially ended in June 2009, the fiscal impacts of the recession and the collapse of the housing market have lingered.

For the two years of the Great Recession, 2007 through 2009, the average real per capita revenue of the cities in the database remained largely unchanged, in part because increases in property taxes and user fees offset declines in revenue from state aid and other local taxes. In 2010 however, average real per capita general revenues fell by three percent from their 2007 level. This decline continued in 2011, with per capita real revenues nearly five percent below where they were in 2007.

The FiSC database provides a full picture of revenues raised from city residents and businesses and spending on their behalf, whether done by the city government or by a separate overlying school district, county, or special district. The database was constructed using data collected by the Governments Division of the U.S. Census Bureau.

The decline in real per capita revenues between 2009 and 2011, and especially between 2010 and 2011, is attributable to a decline during those years of the two most important sources of revenue for cities — the property tax and state aid. On average, the property tax accounts for one-quarter of general revenues for the 112 cities in the database. Other taxes, such as general and selective sales taxes, account for 13 percent, and charges and fees levied on residents, tourists, commuters, and businesses, represent on average 17 percent. Intergovernmental revenues from states and the federal government average nearly 40 percent of total revenue.

Reflecting the decline in property values in most parts of the country, real per capita property tax revenues declined on average by 1.6 percent between 2009 and 2010, and by 4.8 percent between 2010 and 2011.While large, these revenue reductions were much smaller than the decline in housing prices in most cities.

Following the passage of the federal stimulus legislation, the American Recovery and Reinvestment Act, federal aid increased by 6.1 percent between 2009 and 2011. But during this same period, state aid, a much more important source of intergovernmental revenue for most cities, declined by nearly four percent.

Revenues from local sales and income taxes also declined steadily during the course of the recession. By 2010, these revenues were 12 percent below 2007 levels. In 2011, they increased slightly reflecting the slowly improving economy.       

Overall, there was wide variation in revenue declines across the country compared to pre-recession 2007 levels. The largest revenue reductions occurred in Florida and in the West, with particularly large reductions between 2007 and 2011 in Las Vegas (20.2 percent), Sacramento (17.8 percent), Miami (13.9 percent), Fort Lauderdale (13.2 percent), and Phoenix (13.0 percent). Revenue increases between 2007 and 2011 occurred in a handful of cities including Baltimore, Buffalo, Ft. Worth, Minneapolis, and San Francisco.

In terms of expenditures, in 2011 the average city in the database had per capita current expenditures of $4,473. One third of current expenditures were for education. Spending for public safety accounted for 14.1 percent of expenditures. Spending patterns vary widely; for example, education makes up over half of spending in Jackson (MS) and Springfield (MA), but less than 20 percent of spending in Ft. Lauderdale and San Francisco.

Real per capita current expenditures grew from 2007 to 2009, as local governments were able to draw down fund balances and reserves, then declined from 2009 through 2011. Overall, however, the cuts in spending were smaller than the spending increases from 2007 to 2009, and thus on average real per capita expenditures in 2011 were 2.6 percent higher than they had been in 2007.

In 45 central cities, spending fell between 2007 and 2011. In six cities, including Reno, Richmond, Sacramento, and San Diego, real per capita spending fell by more than 10 percent. During the same four-year period, spending rose by more than ten percent in 20 cities, including Baltimore, Buffalo, Pittsburgh, and San Antonio.

The impact of the Great Recession on central cities' finances is an unfolding story. Fuller assessment of that impact must await the availability of comprehensive data for 2012 and 2013. The 2012 Census of Government Finances is currently scheduled to be released in December 2014, and once available, these data will be added to the FiSC database.

But given the slow rate of economic recovery combined with recent fiscal trends, and the likelihood that many cities got through the recession by deferring expenditures for capital maintenance and wage increases, most cities appear to be in for leaner times for an extended period.   

There is evidence that revenues continued to decline into 2012, with some stabilization in 2013. For the nation as a whole, real per capita local government property taxes fell nearly 3 percent in 2012 and stayed near that level in 2013.

Prospects for state and federal aid to cities may be gloomy as well. Although comprehensive data on state aid to local governments are not available, a survey conducted by the Center on Budget and Policy Priorities found that in 33 states real per student state aid to primary and secondary education was lower in fiscal year 2014 than it had been in fiscal year 2008. The winding down of the federal government stimulus program resulted in a sharp drop of federal aid to state and local governments in 2012. Looking forward, in light of the most recent Congressional budget agreement, it is likely that over the next decade federal grants to local governments will decline.

The analysis of the 2011 data for the Fiscally Standardized Cities database was done by Howard Chernick, a professor in the Department of Economics at Hunter College and the Graduate Center, City University of New York; Adam Langley, a research analyst in the Department of Valuation and Taxation at the Lincoln Institute of Land Policy; and Andrew Reschovsky, a fellow in the Department of Valuation and Taxation at the Lincoln Institute, and a Professor Emeritus at the University of Wisconsin-Madison.

The Lincoln Institute of Land Policy is a leading resource for key issues concerning the use, regulation, and taxation of land. Providing high-quality education and research, the Institute strives to improve public dialogue and decisions about land policy. 

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SOURCE Lincoln Institute of Land Policy