The fiscal conditions of America's cities are beginning to deteriorate following several years of growth, according to a new survey of municipal financial officers conducted by the National League of Cities. This could potentially impact the market for municipal bonds, which are popular investments for high-net-worth advisor clients, and it is already affecting local tax policies. Moreover, the declining health of municipal economies couldl eventually impact the national economy, according to the report.
"This year's results point to the potential start of a contraction in the municipal sector after optimism about growth hit a peak in 2015," the report said.
Municipal revenue growth is expected to slow sharply in 2017, to 0.9% from 2.6% last year, while expenditures are anticipated to be steady — up 2.1% vs. 2.18% last year, according to the NLC report, which bases its analysts on the latest figures in municipal budgets.
Sales and income tax revenues are expected to decline by 0.2% and 2.7%, respectively, this year compared with increases of 3.7% and 2.4%, respectively, last year. Property tax revenues are anticipated to rise, but at a much slower rate, up 1.6% vs. 4.3% in 2016. Sales tax collections are hampered by the limited ability of local governments to tax online purchases, according to the report.
"General Fund revenues still have not fully recovered from the recession," the report states, adding that municipal revenues now equal less than 98% of what they were in 2006. "It is possible that revenues may not return to prerecession levels during this economic cycle."
The decline in municipal revenues has led many cites to raise local taxes and fees, which has, however, been a common development over the past two decades, according to the report. For 2017, two in five financial officers report raising municipal fees and 27% report increasing local property tax rates.
