Property taxes and state aid are both down, creating major problems for local governments.
For the first time since 1980, both property tax revenue and state aid to local governments are declining at the same time. While cities and counties used to be able to count on at least one of those remaining positive, this current state of double decline is creating the most significant strain on the finances of local governments in a generation. And things probably aren't going to get much better any time soon.
This dismal situation is explained in a new report from the Pew Charitable Trusts' American Cities Project, which looks at how both state aid and local property tax revenue have sharply declined in recent years. It's a problem that's making things even harder for the roughly 90,000 counties, cities and school districts in the U.S. as they struggle to provide services and aid that's now in much higher demand than before the economic downturn. These two funding sources typically amount to more than half of city revenues, and to have them both declining at the same time is like taking a city's wallet and then punching it in the stomach.
"During the past few years, the growth of both sources slowed relative to local spending and then dropped," says Robert Zahradnik, research director at the American Cities Project. "By 2009 state aid and property taxes together covered a smaller share of local expenditures than at any time since the Census began tracking these funds in 1972."
"It puts a lot of pressure on local governments who have to make some tough choices about how to make up for this lost revenue."
State aid, for example, makes up about a third of local government budgets on average. The report notes that state aid dropped by about $12.6 billion nationwide in 2010, a 2.6 percent cut. Though complete data isn't yet available for fiscal year 2011, 26 states reported making similar cuts, and at least 18 have made cuts in the 2012 fiscal year, according to the report.
Property taxes make up about 29 percent of local government revenues on average. But property tax revenues dropped 2.5 percent from 2009 to 2010 and another 3.1 percent from 2010 to 2011 – a pattern expected to continue in 2012 and 2013.
In the 2010 fiscal year, the reductions in state aid and property tax revenues for local governments added up to more than a $25 billion decrease from the year before.
Local governments, for the most part, are combating these funding shortfalls by cutting spending. As a result, local services like public safety, trash collection, welfare and social services are being greatly reduced or even eliminated in some places.
Since 2008, about a half million public sector jobs have been eliminated, according to the report. Half of those were either teachers or other school officials. The report notes that 17 states since 2008 have reduced their per-student funding by more than 10 percent. And though some federal stimulus funding has prevented further cuts, that funding will expire later this year, leaving local governments with few options for avoiding even deeper cuts.
Between December 2008 and December 2011, states saw an average decrease in their local public workforce of 5.6 percent, relative to population growth*. Nevada, Georgia, South Carolina, Arizona and Michigan were the worst hit, each with workforce cuts of at least 7 percent. Nevada saw its public sector workforce cut by more than 15 percent over that time. Public sector employment increased in only five states during that time: Tennessee, Arkansas, Delaware, Wyoming and New Hampshire. The increases were 3.5 percent or less.
Local governments, though, have few options to counteract these reductions in revenue. For example, 46 states have laws that greatly restrict how much local governments can raise taxes.
And the fiscal problems facing local governments will likely be here for at least a few years, according to the report. Because some cities don't assess their property taxes annually, the negative impacts of the housing market crash haven't been fully felt.
"A lot of the downturn of the housing market is still working its way through the system and will be reflected in property taxes this year and next year," Zahradnik says.
Moody’s Analytics predicts that average property tax revenues will decrease by another 4.4 percent during 2012.
However, the report notes that some local governments have been able withstand the cuts in state aid and property tax revenue by investing in new technologies or forming partnerships that allow them to maintain levels of services at lower costs.
"That’s one of the opportunities that can come out of this crisis, is to find ways to either use technology or to partner with counties or other local governments in the region to deliver services more efficiently," Zahradnik says.
And while there are some examples of local governments making creative efforts to maintain services, most local governments are likely to keep dealing with this double downturn in revenues the old fashioned way – making cuts.
Images courtesy Pew Charitable Trusts' American Cities Project
Photo credit: Sergey Ksen /Shutterstock
*A previous version of this story did not note that reductions in local public sector workforces in states are relative to population growth.