fter waning optimism in recent years, nearly two in three finance officers in large cities now predict a recession as soon as 2020. This forecast comes on the heels of weakening major economic indicators, including in manufacturing, agriculture and service sectors, home sales and business sentiment. While the slowing economy is largely a global phenomenon, the U.S.’s trade disputes with China, Canada, Mexico and the European Union have added more uncertainty to the future.
These factors are starting to affect city finances. For the first time in seven years, cities anticipate a decline in revenue as they close the books on fiscal year 2019, the National League of Cities’ 2019 City Fiscal Conditions
survey reveals. While this drop was expected after revenue growth plateaued in fiscal year 2018, these findings signal that economic pressures on city budgets are mounting.
In fiscal year 2018, total constant-dollar general fund revenue growth slowed to 0.6 percent. Income tax and property tax revenues slowed, while sales tax revenue growth was unchanged from the prior year.
- Property tax revenues grew by 1.8 percent, compared to 2.6 percent in FY 2017
- Sales tax revenues grew by 1.9 percent, compared to 1.8 percent in FY 2017
- Income tax revenues grew by 0.6 percent, compared to 1.3 percent in FY 2017.
Meanwhile, expenditures are climbing, increasing by 1.8 percent in fiscal year 2018. While that growth rate is slightly lower than the prior three years, officials also expect it to climb again to 2.3 percent for fiscal year 2019. Infrastructure needs, public safety spending and pension costs are among the most significant expenditures.
The declining fiscal conditions are sharpest in the Midwest as overall general fund revenues in cities there declined by 4.4 percent. Much of that appears to be driven by large revenue drops in big cities. Elsewhere across the South, West and Northeast, cities in all population categories experienced slower growth in general fund revenues and property tax receipts over the last year, but growth nonetheless.
Still, three out of four finance officers across the country remain confident in the ability of their local government to address expenditures and meet the financial needs of their communities. City budgets continue to be buoyed by generally healthy local economies and robust tax bases. Finance officers in the Midwest, however, are most likely to report that their cities’ budgets were less able to support the community over the past year.
Looking beyond 2019, the resilience of city fiscal conditions will be tested by looming economic headwinds, largely driven by trade. Meanwhile, the cost of healthcare and pensions are rising faster than inflation and placing pressure on spending. Combined with state policies that impede local fiscal autonomy, these factors all have the potential to further constrain city budgets.