July 10, 2012 at 3:32 PM ET
Sean Mulvey, the newly appointed finance director for the town of East Greenbush, N.Y., is trying to solve a riddle facing cities and towns across the country.
Though property tax revenues in the Albany suburb have yet to recover from the worst housing collapse since the Great Depression, fixed expenses like long-term contracts, debt interest and pension costs are squeezing the town’s budget.
To make matters tougher, New York state recently enacted a law limiting tax increases by local governments and school districts to no more than 2 percent or the rate of inflation, whichever is less.
“Our reserve funds have been helping to take of care of some of the problem, but they’re starting to come to the point where we are looking to refresh them if possible,” said Mulvey. “If there’s a pot of gold around here, I’d love to have someone show it to me.”
So would many of the roughly 20,000 cities and towns still struggling to balance their budgets more than five years after the housing collapse began eroding property tax revenues, the main source of funding for most local governments.
Despite recent signs of a bottom in the housing market, the outlook for local government finances “remains negative for the fourth straight year in 2012,” according to Moody’s Investors Service, which rates the creditworthiness of cities and towns hoping to borrow money in the bond market.
Earlier this month, Stockton, Calif., became the largest city in U.S. history to file for bankruptcy protection from creditors. In Scranton, Pa., Mayor Chris Doherty is facing lawsuits over his unilateral move to cut the salaries of police, firefighters and other public workers to the minimum wage of $7.25 an hour.
As local government finance directors like Mulvey closed out their books in 2011, they projected continued declines in revenues, forcing additional spending cuts this year, according to a survey by the National League of Cities. Though towns and cities continue to rely on reserves set aside in better times, those funds fell for the third year in a row.
Budget cuts are getting harder to make after four years of shrinking payrolls, service cutbacks, and deferred maintenance and investment in new infrastructure, according to the League of Cities. But amid a weak job market and lingering impact of the recession, demand for safety net services like local food banks have “increased significantly,” according to about a third of the cities that responded to the League of Cities survey.
One solution to the budget squeeze has been a contraction in local government payrolls, typically the biggest single line item in a town or city’s budget. Some 40 percent have cut workers, according the League of Cities. Nationwide, local government payrolls have shrunk by nearly 4 percent, or more than half a million workers, since peaking in the summer of 2008.
In many cities, those payroll savings have been wiped out by rising pension and health care costs for retirees, along with continued benefit contributions for current workers. Pension obligations have risen faster than inflation mainly for two reasons: Retirees are living longer, and low interest rates have sharply cut the returns on pension funds used to pay benefits.
Even as towns and cities struggle to balance this year’s books, pension and benefit costs are expected to continue to put pressure on future budgets. So will the declines in property tax revenues, which accelerated in 2011, according to the League of Cities. Because of a lag of several years in changes in property tax assessments, the post-2006 plunge in house prices will continue to hammer local budgets for at least the next few years.
So will the recent sharp cuts in federal and state aid. Following the expiration of tens of billions in federal stimulus spending in 2009 and 2010, state finance officials have balanced their budgets in part with cuts in aid to local governments, according to a recent report from Fitch Ratings.
That helped states absorb the loss of federal stimulus dollars. But it left local governments struggling to fund ways to pay for services, including education, that are still mandated by the state.
"If you look at a typical city, they may get very little or no state funding,” said Amy Laskey, a Fitch researcher who co-authored the report.
Other local budget shortfalls are strictly the result of the local government’s own making.
Since the recession of 2007, a handful of cities and towns have landed on the fiscal rocks after borrowing to fund business development projects that went bust. Though some of those failures can be chalked up to simple mismanagement, others have become victims of a national recovery that has been one of the weakest on record.
“The economy has been so weak we’ve seen more failures than we would have in a better economy,” said Laskey.
In such tough times, a few cities have resorted to unconventional sources of new revenue.
Cash-strapped Scranton, Pa. came up with a creative new way to cover police overtime and other costs associated with recent campaign stop by Vice President Joe Biden, who visited his boyhood home last week. As the city struggles to avert financial collapse, Mayor Doherty proposed a novel plan to cover the cost of Biden's visit.
"We're going to bill the (Obama/Biden) campaign," Doherty told the Scranton Times-Tribune.