Cities Brace for a Prolonged Bout of Declining Tax Revenues

A new study released today by the American League of Cities shows that local tax revenues are decreasing for the first time in 7 years. As if it was not bad enough, the same study also predicts that revenue will continue to decrease for up to two more years. Check out the following story below on the recent findings courtesy of the Wall Street Journal:

Weak growth in property taxes, reflecting soft housing prices, did not counterbalance sharp declines in other sources of income, including sales taxes, income taxes and state aid, according to a survey of 379 league member cities.

Overall city revenues declined by 0.4%, even as expenses rose 2.5%, and city officials expect steep drops in tax collections in the next two years, making for the worst outlook in the 24 years the group has been surveying its members. Western cities were particularly downbeat.

The gloomy mood "is indicative of the depths of the downturn, that they have the worst ahead of them, and the fact that the recession is universally hitting their revenue sources," said Chris Hoene, research director for the league.

Because employee wages, health care and pensions are a major component of municipal budgets, two-thirds of the cities reported hiring freezes or layoffs. Almost as many cities said they were postponing big construction projects.

Cities Turn Off Streetlights to Save Money

USA Today posted a great article on the recession’s latest victim: the streetlight. Although turning off a few lights might seem like no bid deal, as the article explains, it can actually save local government agencies thousands of dollars per month. Some cities are even considering a new “streetlight fee” that could be added to resident’s local tax bills.

The cost-cutting moves coincide with changing attitudes about streetlights. Once viewed as helpful safety measures, the lights are increasingly seen by some public officials and researchers as an environmental issue, creating light pollution and burning excess energy.

In July, Santa Rosa, Calif., started a two-year effort to remove 6,000 of the city's 15,000 streetlights. An additional 3,000 will be placed on a timer that shuts lights off from midnight to 5:30 a.m. Savings: $400,000 a year.

The city boasts that it will cut its carbon footprint. What really matters, though, is money.

Public works director Rick Moshier says he'd already cut his department's budget by 25% when he turned to streetlights. "I can either fix potholes and storm drains or keep paying $800,000 a year for electricity," Moshier says.

Turning out the lights has met some local resistance. Santa Rosa has a hotline for complaints.

"What about the human factor?" says Kenneth Ozoonian of North Andover, Mass. His town is turning off 626 streetlights — about one-third of the town's total — to save $47,000 annually.

States Feel The Pain On Auto Dealer Row

From CNNMoney.com:

Loss of dealerships, coupled with declining car sales, is hammering state and local budgets already thinned by the recession.

The downfall of the American auto industry is wreaking havoc on state and local budgets from coast to coast.

The decline in auto dealerships, coupled with the drop in car sales, is costing states and municipalities millions of dollars in lost sales taxes, not to mention lost income and property taxes and other fees.

Though exact numbers aren't available, car purchases account for about 12% to 15% of sales tax revenues in many states, estimates the Center on Budget and Policy Priorities. And sales taxes usually account for about one-third of a state's revenue.

As the recession deepens, state tax revenues have fallen off a cliff. This has opened up yawning gaps, forcing officials to scramble anew to balance their budgets.

The drop in sales taxes are the worst since World War II, and the plunge in car sales are a major reason for it, said Donald Boyd, senior fellow at the Nelson A. Rockefeller Institute of Government, a public policy group.

"The declines have been devastating," he said. "It comes at a time when the states can't afford it."

Take California, which has seen new car sales plunge 43% in the first quarter and 186 dealerships disappear since the start of 2008. The Golden State, which is struggling to close a $21.3 billion budget gap, is slated to lose 32 Chrysler dealerships and possibly 100 GM dealerships as part of the automakers' restructuring.

New car sales are the single largest component of the sales tax base, accounting for 10.6% in 2006, the latest year available, according to the state's Department of Finance. Municipalities also depend on the sales taxes, as well as other revenues such as property tax, to fund their operations.

"Many communities are having to let go firefighters and police because the sales tax revenues are down," said Peter Welch, president of the California New Car Dealers Association.

Fewer sales, deeper budget cuts

Indiana, which is wrestling with a $1 billion budget gap, saw auto sales taxes fall by 23% in the second quarter, said Chris Ruhl, the state's budget director. Car purchases are the third largest source of sales tax revenue, until recently accounting for about $550 million a year.

The state is now tightening its belt, Ruhl said, to deal with the lower revenues. On Monday evening, Gov. Mitch Daniels recommended cutting spending by 2.5% across-the-board and tapping into the state's $1 billion-plus rainy day fund to balance its budget.

New Jersey, meanwhile, is also feeling the effects of the auto industry meltdown. The Garden State has lost 170 dealerships since the start of 2007 and could lose 90 more in the cutbacks by Chrysler and General Motors (GMGMQ), which filed for bankruptcy on Monday. New car sales are down 33% for the first four months of the year.

This plunge has a drastic effect on state revenues, said James Appleton, president of the New Jersey Coalition of Automotive Retailers. He estimates that the state loses $10 million in revenue for every 1% drop in car sales. Incomes taxes also suffer when dealers close since each employs about 65 people.

State officials are now scrambling to close a $4.4 billion budget gap, exacerbated by an unprecedented decline in sales taxes.

"Until these markets come back, the state will continue to suffer," Appleton said.

Detroit's Hotel Doldrums

Detroit’s recently renovated hotel scene is struggling to keep up with tax payments as the town’s economy continues to deteriorate. Bizjournals.com published an article on the topic, and you can find an excerpt of their post below. Alternatively, the full story can be found here.

Just before a glittering new terminal opened at Detroit Metro Airport seven years ago, I flew out for an airport-arranged private tour. Then I drove downtown for my own self-guided view of the seamier side of Detroit's travel infrastructure.

Four of the city's once-famous deluxe hotels were ornate tombs, abandoned for decades and facing the wrecker's ball. Two starkly modern properties built in the 1960s were shabby and sorely in need of new ownership. Even the 73-story hotel in the Renaissance Center, opened in the late 1970s as part of a massive urban-renewal project, was dreary and depressing.

"TERRIBLE!" I scribbled in my notebook in 2002. "Someone should fix."

And fix they did. The Madison-Lenox and the Detroit Statler were demolished, but the Book Cadillac and the Fort Shelby received hundreds of millions of dollars worth of renovations and restorations. The Book, as locals call it, reopened to raves in October and the Fort Shelby came back to life two months later. One of the 1960s icons, the St. Regis, became a spiffy boutique property. The other, the Hotel Pontchartrain, was recently renovated and is now called the Riverside. The cylindrical skyscraper hotel at the Ren Center? It's a Marriott now, and it sparkles. And the city's three casinos have each opened upscale hotels with Vegas-style perks and amenities.

But this is Detroit, where hotel happy endings are always the start of the next lodging nightmare. If anything, the Motor City's hotel scene is in worse shape today than seven years ago.

More than half of Detroit's estimated 40,000 guestrooms are empty, and PKF Hospitality Research says lodging demand will fall further this year. The St. Regis is in receivership. The Riverside has been picketed by employees who say they haven't been paid, and the Detroit News says the hotel owes almost $700,000 in back taxes. One of the casinos is in bankruptcy and another is for sale. Only a handful of buyers have closed on the dozens of pricey condos atop the Book Cadillac. The Fort Shelby's new rental apartments are mostly empty too. And Detroit's REVPAR (revenue per available room), the key measure of financial health in the lodging industry, is one-third lower than the national average.

"The statistics are scary," admits Shannon Dunavent, general manager of the Doubletree Guest Suites hotel that was lovingly carved out of the carcass of the Fort Shelby. "I've been working in Michigan for 20 years and I won't lie to you. There's no new business in the market. We're all trying to steal from the other guy to survive."

It doesn't take a genius to figure out what's ailing Motown's hotels: The automotive business has been careening downhill for decades. Detroit has never been able to replace cars, and the thousands of related businesses that depend on the carmakers, as the city's economic engine. Hell, even Motown Records moved to Hollywood almost 40 years ago.

Retail Tax Drops Affecting Sales Tax Revenue to Cities

From The Mercury News:

What does a $19.95 flowered spring top at the Gap have to do with streetlights and police?

For cities, the answer is a lot. The purchases rung up at the cash register are a major revenue source that pays for critical city services.

As the economy continues to tank, and as consumers tighten their grip on spending, there are fewer and fewer pennies flowing from shopping malls to cities, resulting in dramatic shortfalls in sales tax revenue — "the bread and butter" of general city funds. If a consumer spends a dollar and is charged 8 cents sales tax, cities generally get a penny of that.

For many cities facing budget deficits, that decline is expected to result in cuts residents are likely to notice. In San Jose, in part because of a $4.6 million sales tax revenue shortfall, the city is already bracing for layoffs, its first since the early 1990s. Gilroy has eliminated dozens of full-time positions. Santa Clara has frozen hiring for 30 positions funded out of the city's general revenue fund.

Santa Clara budgeted $43.4 million from sales tax revenue in the 2007-2008 fiscal year. What it actually received was $41.6 million, or $1.8 million less. For the current fiscal year, it is budgeting significantly less from sales tax revenue: $40.2 million.

"We are concerned obviously," said Santa Clara Deputy City Manager Carol McCarthy. "Like anyone else, we're out there, we're brainstorming and getting information."