Pew: Localities Squeezed by Reduction in State Aid and Property Taxes, Growing Demand for Services

While states slowly rebound from the Great Recession, many local governments are struggling with unprecedented fiscal challenges. For the first time since 1980, state aid and property taxes, two primary sources of funding, are dropping simultaneously, according to a new report, The Local Squeeze, released today by The Pew Charitable Trusts. The decrease in revenue, alongside increased demand, is forcing many cities, counties and school districts to eliminate jobs; increase class sizes and shorten school days; reduce services such as public safety, library hours and trash collection; and privatize functions such as park maintenance and 911 dispatching, among other measures.

“In many places, the impact of revenue shortfalls and increased need for services has been wide and deep,” said Robert Zahradnik, director of research for Pew's new American Cities Project. “Going forward, local policy makers will have more tough choices to make. It is unclear whether these changes will be temporary or permanent, but the impacts of the squeeze will be felt for years to come. ”

This is the first research report by the American Cities Project, which focuses on the biggest city in each of the nation's 30 largest metropolitan areas and aims to help policy makers understand key challenges and promising approaches. The project will analyze three major topics: How city governments have dealt with the fiscal pressures compounded by the economic downturn; how cities vary in service delivery, and what this means for their residents; and key factors that will affect their resiliency in the years to come, such as changing demographics.

According to the report, property tax revenue, which accounts for nearly 30 percent of local budgets, is shrinking, reflecting the drop in real estate prices during the recession. Home prices fell by nearly 20 percent since 2007, with some states, like Arizona, seeing much sharper declines. In 2010, property tax collections were 2.5 percent ($11.9 billion) lower than in 2009. The drop was even greater in 2011—3.1 percent—and declines are expected to continue in 2012 and 2013. To cover this shortfall, some localities have raised rates, but many are limited from doing so by state law.

At the same time, state aid, which on average amounts to almost one-third of local budgets, has also declined. In fiscal year 2010, it dropped by $12.6 billion, or 2.6 percent. Twenty-six states reported reduced funding for fiscal year 2011. Nebraska, for example, cancelled all state aid to cities and counties that year. School districts, which historically have been spared, are now frequent targets—in the 2011-2012 school year, 37 states cut their funding. A number of districts, cities, and counties are fighting back with lawsuits, but policy makers in some states, such as New Jersey and Ohio, argue that reduced aid will encourage local governments to become more efficient and make more strategic budget choices.

The revenue shortfalls are occurring as demand for government services grows, fueled by stubborn unemployment rates and population growth, among other factors. To meet these needs with fewer resources, many localities are reducing the level of services they provide and the size of their workforce. Local governments have shed half a million jobs from 2008 to 2011, including close to 100,000 workers in California. They also are rethinking the way they do business. Some policy makers have promoted privatization, regional partnerships or technological innovations to try to reduce costs and increase efficiency.

Localities are also closely monitoring their credit rating—and while bankruptcies and defaults remain rare, the drops in state aid and property tax revenues and the slow recovery have hampered some governments' ability to borrow.

“Many localities face a rough road ahead,” said Zahradnik. “In communities across the country, residents are feeling the impact of budget challenges on their everyday lives.” 

To read the full report, please visit pewstates.org/cities. The website currently features an interactive tool designed to help users compare and contrast key data points for the 30 cities.

The Pew Charitable Trusts is driven by the power of knowledge to solve today's most challenging problems. Pew applies a rigorous, analytical approach to improve public policy, inform the public and stimulate civic life. www.pewtrusts.org