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U.S. Cities' Economies Still Falling&#59; 2010-2011 Government Job Losses May Soar

The latest data points suggest that the economy is picking up for U.S. businesses (a few of which I cited last week), but this week's issue of The Economist points out the lag built into many cities' tax systems, highlighting a forecast that in this and the next fiscal year, cities may have to lay off as many as 500,000 more workers.

Of the 154 million in the U.S. labor force, about 14 million work in state and local government jobs, more than half of which are in education. The number peaked at about 14.6 million when the financial crisis hit, and is now about 14.2 million.

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And it's headed lower, by as many as 500,000 jobs, forecasts the National League of Cities.

For many cities property taxes are the main source of revenue. Because of the time lag inherent in the assessment system, cities actually saw increases in real estate tax revenues in 2009. The decreases from the real estate crisis are just starting to work their way through.

Collections for 2009 continued to reveal strong revenue growth as assessments caught up with the previous growth in the real estate market[, rising 4% from 2008]. Projected property tax collections for 2010, however, point to some of the impact of the downturn in real estate values. Property tax revenues for 2010 reveal the first constant dollar decline (-1.8%). The full weight of the decline in housing values has yet to hit the budgets of many cities and property tax revenues will likely decline further in 2011 and 2012 as declining property values continue to be reflected in city property tax assessments and collections.
Many cities also rely on a sales tax. Those were hit right away with the drop in consumer spending, falling seven percent in 2009, and are expected to fall another five percent in 2010.

And for reasons we know all too well, cities' income tax receipts are off too.

In response, cities made broad cuts to the services they provide, capital spending programs, and their personnel costs:

[For 2010,] The most common cut was a hiring freeze (74%). Over half (54%) of cities reported salary or wage reductions or freezes and one in three (35%) cities reported employee layoffs. Cuts were also made in employee development-related activities, including reducing or eliminating travel budgets (59%) and reducing or eliminating professional development budgets for training, education, and skill building (46%).
And things aren't getting any better: 80 percent of city finance officers forecast that their cities will be less able to meet needs in 2011 than they were in 2010.
City budget shortfalls will become more severe over the next two years as tax collections catch up with economic conditions. These will inevitably result in new rounds of layoffs, service cuts, and cancelled projects and contracts. With local and state sectors comprising about one-eighth of GDP, and cities making up a significant portion of this sector, the services and employment offered by local governments are critical to the health of local and regional economies that drive national economic performance.
At the start of November, the markets celebrated that 150,000 jobs had been created during October, the strongest gain in a long time. I don't know what the timing will be on the local government job cuts, but they will offer a strong headwind to the slow gains in the private sector.