Robert M. La Follette School of Public Affairs
Wednesday, August 15, 2012

Cities face revenue declines

While state governments are recovering from the severe budget crises caused by the Great Recession, city governments continue to face reduced revenues from the property tax and from state and federal grants.

Available online

"Central City Revenues after the Great Recession," Land Lines, July 2012

After accounting for changes in population and inflation, the revenues available to most of the nation's largest central cities, including Madison and Milwaukee, will be lower in 2013 than in 2009, economist Andrew Reschovsky predicts.

"Though there is substantial variation in revenue forecasts across the nation, revenues will decline in nearly three-quarters of central cities," Reschovsky says. He and two co-authors developed a model to forecast the revenues of 109 of the largest central cities in the United States. Their results were published in the summer 2012 issue of the academic journal Publius and in the July 2012 issue of Land Lines, a publication of the Lincoln Institute of Land Policy, where Reschovsky is a visiting fellow.

Reschovsky and his co-authors, Howard Chernick, a professor of economics at Hunter College and the Graduate Center of the City University of New York, and Adam H. Langley, a research analyst with the Lincoln Institute of Land Policy, developed the concept of "constructed cities"to account for the revenues collected by a central city municipal government and revenues from the portion of independent school districts and county governments within central city boundaries. These calculations allowed them to compare the financing of central cites even though some city governments, such as Boston and Philadelphia, provide a full range of public services, while in other cities, such as Milwaukee and Phoenix, many services are provided by independent school districts and county governments.

The authors provide evidence that it takes about three years for declines in housing prices to translate into reductions in property tax revenues. This pattern helps explain why "the largest projected revenue declines are in California and Arizona, states where housing prices have fallen to less than half their pre-recession levels," Reschovsky says. He adds that cities in the West can expect larger declines in revenue than other parts of the country because their declines in locally raised revenues are being reinforced by above-average cuts in state aid.

The predicted revenue declines are much larger than what cities experienced after the last three recessions, the authors note. They conclude that "facing both rising costs and reduced revenues, many central cities have no choice but to implement substantial cuts in public services."