Pew Report: Recession Brings Another Round of Higher Taxes and New Fees to Big Cities

The latest review of municipal budgets in 13 major cities by The Pew Charitable Trusts' Philadelphia Research Initiative finds that almost all of the cities are dealing with another year of budget shortfalls, albeit slightly smaller than last year, and four of them intend to raise major taxes or impose broad new fees for fiscal 2011.

The update, Not Out of the Woods: The Recession's Continuing Impact on Big City Taxes, Services and Pensions, also finds that most of the cities are trying to reduce the size of their workforces or win further concessions from municipal unions on benefits, or both, as they cope with the recession's ongoing impact on municipal finances and pensions.

As of late May, Philadelphia was alone among the 13 cities in increasing broad-based taxes for a second year in a row, adding a two-year property tax hike beginning in fiscal year 2011 on top of a five-year sales tax increase that began in fiscal 2010. But all of the cities are scrambling to find new or additional revenue streams. Most of the cities intend to boost a variety of fees and targeted taxes. Several are looking at selling or leasing assets such as parking garages. For four cities, new or expanded casino gambling is being discussed for fiscal 2011 or beyond.

“Cities, like states, are not out of the woods from the recession,” said Thomas Ginsberg, Philadelphia Research Initiative project manager and author of the review. “Unlike the federal government, they have to balance their budgets. That has led most of the cities we reviewed to raise  taxes or impose new fees in their current and upcoming budgets. And their municipal employees who keep their jobs are receiving fewer and costlier benefits.”

The review is the third by Pew's Philadelphia Research Initiative in the past year. Like the two previous reports, this one examines Atlanta, Baltimore, Boston, Chicago, Columbus (Ohio), Detroit, Kansas City (Missouri), Los Angeles, New York, Phoenix, Pittsburgh and Seattle, in addition to Philadelphia. The cities were chosen primarily for reasons of size and geography.

The four cities looking at higher tax rates or fees that will impact a broad swath of residents or businesses in the upcoming fiscal year are Baltimore (a tax on nonprofit hospitals and universities and a variety of other new or higher taxes), Kansas City (property tax), Los Angeles (a rate increase for city-owned utilities) and Philadelphia (property and other taxes). Five other cities and Philadelphia raised broad-based taxes for the current fiscal year. That means nine of the 13 cities have raised or will raise tax rates in the past two years to cope with the impact of the recession.

On the cost side, all nine of the cities that have presented budget plans for fiscal 2011 were proposing specific job cuts, in addition to benefit or pay reductions. In most cases, the proposed job cuts were lesser in number than they had been for the current year. Many cities planned to keep doors closed on some library branches, recreation centers or firehouses that had been shuttered in fiscal 2010. However, two cities that had raised taxes this year, Columbus and Phoenix, are reopening some previously-closed community centers and restoring some previously-discontinued trash pickup. Philadelphia's mayor has said he must eliminate 339 jobs, which would require cutting library hours, deactivating two fire companies and cancelling two classes of police recruits. He has pledged to keep all functioning pools open at least through the coming summer.

Every city for which figures were available reported a marked deterioration in its pension assets. In most cases, that means cities have to shift money away from city services and into pension funds. The cities' proportions of pension assets relative to obligations fell to a median of 64 percent in 2009 from a median 79 percent in 2008. (Actuaries generally consider 80 percent a safe minimum.) Seattle had the biggest decline, down 22 points to 64 percent. Pittsburgh's pension was in the worst shape with a 34 percent funded ratio. Los Angeles' was in the best shape at 90 percent. Philadelphia's ratio fell from 55 percent to 45 percent.

The fiscal crisis has led one hard-hit city, Detroit, to embark on a three-year government restructuring effort intended to “right size” city government starting with the consolidation of agencies. A few other cities planned modest restructuring or department mergers. “Eventually the cities are going to come out of this recession with a different set of burdens on taxpayers and job benefits for city workers,” Ginsberg said. “Whether that leads to other fundamental changes in local government is yet to be seen.”

About the Report
To prepare this report, Thomas Ginsberg reviewed budget documents in the 13 cities, interviewed city officials and independent budget experts, and reviewed local media coverage from March to May 2010.