How Major Cities Dragged Down the Economic Recovery
Policy + Politics

How Major Cities Dragged Down the Economic Recovery

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In yet another reminder of how uneven the U.S. economic recovery has been in recent years, a new study shows that many large cities continue to reel from a fiscal crisis that has forced serious cuts in services that affect everyday Americans – including police and fire.

While the nation was bouncing back from years of plummeting housing prices, high unemployment and stagnant investments, many major cities and metropolitan areas were suffering the double whammy of declining property tax revenues and diminished federal aid and grants, according to the Pew Charitable Trusts.

Related: A Double Hit for the States: Recession + Federal Cuts   

Between 2011 and 2012 – the latest period for which there is accurate data – municipal revenues fell substantially in 18 of the 30 cities included in Pew’s long-term study of the effects of the Great Recession. Moreover, in 2012, eight cities recorded their lowest levels of tax and governmental revenues since the start of the recession in 2007 – including Dallas, Detroit, Kansas City, Missouri, Las Vegas, Miami, Orlando, Phoenix and Riverside, Calif.

Major cities have struggled to recoup lost property tax revenues in a slumping housing market, at the same time as federal aid to state and local government has been sharply curtailed. The lost revenue forced most cities to gradually cut back on vital city services, including police and fire, and dip into reserves. If another recession hits—even a mild one—some of these cities will be forced to either raise taxes, reduce services even more, or face bankruptcy.

Detroit, which is just now emerging from an historic municipal bankruptcy; Las Vegas, which suffered one of the highest unemployment rates in the country; and economically depressed Riverside were particularly hard hit, with all reporting total revenues of less than 80 percent of their pre-Great Recession peak, according to the report..

Miami – the hardest hit by declining home prices of any city in Florida – stood out as the only one of the 30 cities in the study to have lost revenue in each of the past five years. Miami’s annual receipts fell to 87 percent of its 2007 high point.

“Cities rode out the Great Recession and its aftermath with a mix of financial management strategies and policy interventions,” Mary Murphy, a researcher on state and local fiscal health at the Pew Charitable Trusts, told reporters on Tuesday. “City policy makers also tapped cash reserves, but spending cuts were necessary to balance local budgets.”

Related: Scores of City Pension Funds Battered by Recession

“Nearly every city cut operational spending to deal with revenue shortfalls at some point between 2007 and 2012,” she added. “During the recession, cities primarily cut spending on housing and economic development and public works and transportation. But as revenue shortfalls persisted, cities turned to public safety, which is the largest share of spending in nearly every city budget.”

These and other fiscal tales of municipal woe may help to better understand what has been at best a halting economic recovery – one that only recently has begun picking up steam. The 30 cities and their surrounding metropolitan areas included in the report account for nearly half of the country’s total gross domestic product and collectively include more than one in every 10 Americans.

The fiscal data reviewed in this report reflect conditions as of 2012, but analysts note that, even with improving property tax collections, the effects of the Great Recession are still being felt in some cities as of 2014.

A sustained slump in property tax revenue is a significant contributing factor in fiscal pressure on some cities, and it’s not that unusual for city property assessments and tax collections to lag behind the real estate market by 18 to 24 months, the study reports.

“This time, however, the national housing crisis so dramatically undercut this important revenue source that Pew’s analysis found collections in many cities remained anemic a full three years after the national economy began to improve,” stated the report, titled “Recovering from Volatile Times: The Ongoing Financial Struggles of America’s Big Cities.”

Related: Many Long-Term Unemployed Still Reeling from Recession   

Other major factors that contributed to this problematic municipal recovery were the cuts in federal aid to the cities and states and the winding down of the federal economic stimulus, under the American Recovery and Reinvestment Act.

The $862 billion of stimulus spending authorized by Congress and President Obama in 2009 to combat the economic crisis began to run out by 2012. Cities and states were also getting the first taste of cuts in federal aid as Congress began addressing the long-term deficit through the Budget Control Act of 2011.

The federal government provides more than $600 billion a year in grants to the states through more than 200 programs, according to the latest figures. Those programs include Head Start and state and local health programs, secondary and higher education programs and transportation.

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Seven of 10 major cities in the study that separate out federal aid from other revenue sources in their financial statements reported year-over-year reductions in federal dollars in 2012. Only two of those cities – Atlanta and Washington – had a similar problem in 2011.

In New York, federal intergovernmental aid fell by more than $2 billion between 2010 and 2012, the equivalent of about three percent of Gotham’s $70 billion annual budget. The decline in Phoenix was relatively even more dramatic: The $201 million loss in intergovernmental aid amounted to 10 percent of the city’s total revenue in 2012. Federal aid to Washington dropped $264 million during the same two-year period.

Not all of the cities studied, certainly were in worse shape in 2012 than the year before. Boston, Cincinnati, Minneapolis, New York, and Seattle exceeded their pre-recession revenue peaks in 2012, due mostly “to gains in sales and income taxes and increased charges and fees,” according to the report. 

Seventeen cities actually managed to increase spending on some programs and services and replenish their reserves in 2012. Yet overall spending in most cities remained below pre-recession levels. “This cautious approach suggests that many city officials have adjusted to the reality of an unusually slow recovery,” the study said.

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