Cities felt recession’s challenges well after recovery began

November 13, 2013

The economy began exiting the worst global downturn in generations in the summer of 2009, but for America’s largest cities, the fiscal pain was only beginning — and many cities still haven’t recovered to pre-recession levels.

Lagging tax revenues and slumping property values brought on by the housing bubble forced cities to dip into reserve funds, raise taxes elsewhere, float hundreds of millions of dollars in new debt, and beg states and the federal government to cover their costs.

A new report from the Pew Charitable Trusts shows 17 of the nation’s 30 largest cities now carry millions of dollars in debt than they did before the recession. By 2011, 16 cities had not returned to 2007 revenue levels.

Source: Pew Center on the States
Source: Pew Center on the States

Cities like Tampa and Sacramento were particularly hard-hit. Tampa more than tripled its debt between 2009 and 2011, to $96 million, while its revenue, $540 million in 2007, dipped to $423 million in 2011, a 27 percent decrease. Sacramento”s revenue fell from a peak of $697 million in 2007 to $521 million in 2011, a 34 percent drop; the city’s debt increased more than 50 percent between 2007 and 2009, to $78 million.

Only nine cities have returned to pre-recession revenue peaks. But even in those cities, returning to pre-recession numbers isn’t an indication of recovery; those cities are rebounding because they are increasingly relying on aid from their state and federal governments — in all nine cities, intergovernmental aid is either the first- or second-largest contributor to growth in city revenue, the Pew report found.

“What became apparent [during the recession] was how little discretion cities actually have. They don’t control the business cycle, they don’t have any near or midterm say over the composition of their industrial base,” said Kil Huh, an author of the study and research director at the Pew Center on the States.

Sales and income taxes were the first revenue streams to show signs of the recession; 18 of the 20 major cities that levy a sales tax saw those revenues decline in 2009, while income taxes fell in nine of the 10 cities that tax their residents’ income. That hurt especially in cities like Phoenix and Houston, where the sales tax is the second-highest revenue source, and in Cincinnati and Cleveland, which rely on the income tax for the largest share of their total revenue.


Source: Pew Center on the States. Cities that levy a sales tax include Atlanta, Chicago, Dallas, Denver, Houston, Kansas City, Los Angeles, Minneapolis, New York, Philadelphia, Phoenix, Pittsburgh, Riverside, Sacramento, San Antonio, San Diego, San Francisco, Seattle and Washington, D.C. Cities that levy an income tax include Baltimore, Cincinnati, Cleveland, Detroit, Kansas City, New York, Philadelphia, Pittsburgh, St. Louis and Washington, D.C.

More than a dozen cities were hit hardest by declines in smaller taxes and fees. Kansas City saw a $57 million drop-off in tax revenue gleaned from contributions and investment income between 2008 and 2010. San Antonio got hit by a $33 million decline in receipts paid to its city-owned utility between 2008 and 2009.

Atlanta, Boston and Philadelphia all coped with lower property tax revenues brought on by the housing crisis by raising tax rates. Denver and New York raised sales tax rates. And cities like Baltimore, Los Angeles and St. Louis all raised charges and fees.

But many cities are limited in the types of revenue-raising steps they can take. States frequently put limits on cities’ abilities to increase taxes without state approval.

That meant most cities had to deal with lower revenues by tapping their reserve funds. Some cities had prepared for rainy days long ago; others, like Chicago, found their reserve funds woefully inadequate and had to sell city-owned assets to compensate. The average reserve level across all 30 cities declined from 18 percent of general revenues in 2007 to 14 percent in 2011, the study found; Sacramento relied particularly heavily on its rainy day fund, drawing it down from 31 percent of its annual general revenue in 2007 to 6 percent in 2011.

Most cities are starting to rebuild those reserve funds, in hopes of preparing better for the next downturn.

“In order for [cities] to have some flexibility, building reserves is a key component in helping them manage the ups and downs,” Huh said.

To cut budget shortfalls, the top 30 cities in the country eliminated almost 40,000 jobs, through a combination of layoffs, hiring freezes and attrition. Phoenix was particularly brutal, axing 2,500 jobs. But by 2011, two-thirds of major cities were cutting public safety, housing, economic development and transportation staffers.

Reid Wilson covers state politics and policy for the Washington Post's GovBeat blog. He's a former editor in chief of The Hotline, the premier tip sheet on campaigns and elections, and he's a complete political junkie.
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