City budget officers say their budget outlook is improving, as sales and income taxes recover to pre-recession levels and rainy-day funds grow, according to an annual survey.

For the first time since 2006, city general fund revenues are projected to increase in 2013, though only by the barest of margins. Cities will spend more than they did last year, the projections show, reversing a three-year trend of spending cuts, according to the National League of Cities’s annual City Fiscal Conditions Survey.

The data show an improving economy, but at a pace so gradual that cities haven’t been able to repair the damage caused by the recession. City budget officials are worried that stagnant revenue growth will continue to pressure their budgets, especially with rising health-care and pension costs.

“It appears that the decline that has continued for almost five or six years now has just about bottomed out,” said Michael Pagano, Dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago and a co-author of the annual survey. “I wouldn’t call it a soft landing, but our feet can touch bottom.”

Nearly three-quarters of budget and finance officers say their cities are better able to meet financial needs this year. At the depths of the recession, in 2009 and 2010, nearly nine in 10 city budget officials said they were less able to meet those needs.

As the economy recovers from the great recession, cities are generating more money from sales and income taxes. Sales tax revenue jumped by 6.2 percent from 2011 to 2012, and another 1 percent between 2012 and 2013. Income tax collections rose by 4.4 percent and 2.3 percent over the same periods.

City tax collections by source:

(Source: National League of Cities)

Sales tax collections were the first to fall during the recession, while a drop-off in property taxes lagged behind. And even as sales tax revenue grows, the real estate market has remained stagnant. Property tax revenue, which began declining in 2010, is still projected to fall — albeit by less than a percentage point — in 2013.

“What the chief financial officers are telling us is, they’re expecting their budgets for [Fiscal Year 2014] to be better than FY ’13, but we don’t have a good sense of which revenue sources are going to propel that optimism,” Pagano said. “Real estate taxes, I suspect, are going to increase a bit next year.”

City budget officials are most nervous about health-care and pension costs. Those costs have increased in four out of five cities, the survey found. Infrastructure and public safety costs are rising in most cities, too.

At the same time, half of cities reported receiving less aid from the federal government and cities. About 40 percent of cities have responded by increasing fees, while about 20 percent increased local property taxes in the last year.

The impacts of the recession are still being felt in many cities. Almost 40 percent of cities maintained a hiring freeze this year, while 17 percent laid off employees and 24 percent reduced health-care benefits for their remaining employees. At the height of the recession, in 2010, almost three-quarters of cities were refusing to hire new workers, while 35 percent laid off employees.

“Cities are rethinking the way in which they employ labor and hire people back,” Pagano said. Developments in technology means the layoffs could be permanent, as advanced systems take over jobs that an employee used to perform.

It’s unclear whether the government shutdown would slow federal dollars earmarked for city budgets. The study was conducted before the government shut its doors last week.