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December 21, 2007

 

DiNapoli: Economic Slowdown Increases
Financial Risks for Local Governments

Signs Point to Slower Revenue Growth, Increasing Fiscal Pressures

Recent economic developments on the national, state and regional levels – the softening real estate market, the subprime mortgage crisis, rising energy costs and slowing consumer demand – could reduce future growth in economically sensitive taxes and increase financial pressures on local governments, according to a report released today by State Comptroller Thomas P. DiNapoli.

Counties and towns that heavily rely on sales taxes and mortgage recording taxes will be the hardest hit by the economic downturn. Significant funding increases provided in the 2007-08 state budget for revenue sharing and school aid have helped to stabilize local finances for cities and school districts, but the fiscal impact of a potential economic downturn on state finances could make it difficult for the State to continue to provide funding increases.

“Local governments are becoming more dependent on sales taxes and other revenues that are sensitive to the economy,” DiNapoli said. “At the same time an economic slowdown is threatening those revenues, local governments are also facing increasing fiscal stress from rising costs and an aging public sector workforce. It’s becoming increasingly difficult to balance providing services and controlling property tax increases.”

Among the report’s highlights:

  • New York’s State and local taxes per capita were again the highest in the nation in 2005. One major reason for this is New York’s high local property tax, which ranked fourth in the nation in 2005 behind only New Hampshire, New Jersey and Connecticut. Local property taxes in New York were $1,768 per capita in 2005, or 56 percent above the national average of $1,132. New York’s total per capita tax burden was $5,752, 56 percent higher than the national average of $3,698.
  • To minimize property tax increases, local governments from 1995 to 2005 increased their reliance on other revenue sources including state aid, sales taxes and mortgage recording taxes. Sales taxes and state aid increased from 30 percent of their budget to 35 percent, with sales taxes representing the fastest growing revenue source for counties. From 2000 to 2004, mortgage recording tax revenues in cities, towns and villages increased 157 percent. In 2005 revenues from mortgage recording taxes increased by only one percent over 2004.
  • Local governments are increasingly relying on debt to finance capital projects and in some cases operating deficits. Long-term outstanding debt between 1995 and 2005 increased by 94 percent. Most of this was driven by school district borrowing, which increased by 266 percent largely due to state building aid policy which encouraged long-term debt for capital programs. The state also authorized 36 bond issuances to finance operating deficits totaling $296 million.
  • Government costs continue to rise despite the economic slowdown. Such fixed expenses include Medicaid, post-employment benefits, employee salaries and benefits, and debt service. Total spending by all classes of local government grew by 57 percent between 1995 and 2005, or 4.6 percent annually. This growth was nearly double the inflation rate of 2.5 percent for this period.
  • The Aid and Incentives for Municipalities (AIM) included $50 million in new aid for 2007-08, and each of the three following years, for a four-year commitment totaling $200 million. These increases are tied to enhanced accountability requirements that encourage local fiscal improvement. The 2007-08 state budget also continues to provide incentive grants to local governments that consolidate or share services under a $25 million Shared Municipal Services Incentive (SMSI) grant program.

The 2007 annual report covers the major fiscal trends in New York’s local governments, as well as recent policy developments and initiatives that affect their operations and fiscal health. The information presented is based on financial data that local governments submit to OSC on a yearly basis, and supplemented by other sources. There are more than 4,200 local governments in New York State, including 57 counties (excluding NYC boroughs), 62 cities, 932 towns, 556 villages, 700 school districts, 867 fire districts, and 1,114 local public authorities and special purpose districts.

Click here for a copy of the report.

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