Oct 23, 2019

Exclusive: Cities see signs of recession on the horizon

Data: National League of Cities City Fiscal Conditions Report; Chart: Axios Visuals

Almost two in three finance officers in large cities are predicting a recession as soon as 2020, according to a new report from the National League of Cities, as weakening major economic indicators and shrinking revenue sources put pressure on municipal budgets.

Why it matters: One of the first signs of changing economic conditions can be seen in city revenue collections. For the first time in 7 years — generally seen as the recovery phase since the Great Recession — cities expect revenues to decline as they close the books on the 2019 fiscal year.

Threat level: The impact of changing economic conditions tends to be felt by cities sooner than at the national level.

  • Since fiscal reporting happens on a yearly basis, there's often a lag of about 18-24 months for economic changes (particularly property taxes) to show up on city ledgers.
  • That means that the downward trends cities are now seeing likely reflect a broader economic slowdown that's already started.

What's happening: The annual City Fiscal Conditions report, which will be released Monday, analyzed the responses from financial officers in 554 cities of varying sizes, but all with populations greater than 10,000. (Note: The chart above reflects data from 451 cities, since not all cities collect property, sales and income tax.)

  • Cities' revenue growth stalled in the 2018 fiscal year, but this year's continued drop indicates mounting pressures on city budgets.
  • At the same time, expenditures grew by 1.8% in 2018. City officials predict they'll grow again to 2.3% in 2019, thanks to climbing costs associated with infrastructure, public safety spending and pension costs.

Finance officers from large cities and larger mid-sized cities are more likely than those from smaller mid-sized cities to expect a recession in the next two years. A few factors may be driving this, per Christiana McFarland, research director for the National League of Cities.

  • Big cities are seeing a wider gap between revenue growth and spending growth than smaller cities.
  • Business investment in 2019 is also declining, which tends to affect bigger cities first.
  • And housing market growth is leveling off in most places — and even starting to slump in previously hot markets like San Francisco and Seattle.
  • While larger cities may be nearing the end of this cycle of economic expansion, smaller cities may still have a bit more room to grow.

The Midwest is bearing the brunt of declining conditions, the report found. Overall general fund revenues in midwestern cities dipped by 4.4% in fiscal year 2018, mostly driven by steep revenue drops in the region's big cities. Chicago, for example, recorded an 11.7% revenue decline.

  • Finance officers in midwestern cities are also most likely to say they are concerned that their budgets can't support the communities' needs over the past year.

The other side: Across the South, West and Northeast, municipalities of all sizes showed some growth in general fund revenues, albeit slower growth than previous years.

The bottom line: Peaks and valleys in property, sales and income tax collections tend to balance each other out over time. The fact that all three revenue sources are trending downward simultaneously — combined with the growing gap between city revenues and expenditures — suggests an economic downturn may be on the horizon.

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