How are city governments faring in this economic downturn? In two words- not well. Much the like the rest of the economy where bad news trickles down and adversely affects connecting people or organizations so goes our governmental systems. The lack of money being spent, sales tax revenue being collected as well as assistance from states and the federal government are all bearing down on towns, cities and villages across the US. Germany’s news publication SPIEGEL reported, “The bailout packages aimed at shoring up financial markets in Europe are getting increasingly expensive. A creeping depreciation of currency is inevitable and state (local) bankruptcies can no longer be ruled out.”Chancellor Angela Merkel stated, “There is a rumor going around that nations cannot go bankrupt. This rumor is not true.’’

Cities are feeling the burden in several ways. First, with the significant reduction in home values, property taxes are going down. Lower taxes may be the only bright spot in the eyes of most homeowners today. But for local governments, it’s disastrous. In California, since Prop 13 passed years ago, property taxes are capped at 1 ¼% of a home’s value. In some parts of California where prices are 25 to 50 percent of what they were only 18 months ago, that adds up to millions of dollars not going to the state. Then, of course state funding to counties, cities, education, health care and other critical needs get cut significantly.

There is tax loss from other areas hit by the recession as well. Retail stores which sit empty provide no tax base whatsoever. So, when stores close, whether they be small or large, it impacts the pocketbooks of city governments. Further, states and local governments lose income tax revenue each time an employee is laid off. To further erode the revenue base with unemployment at a high more people are collecting unemployment insurance compensation.

The third major impact for local cities and governments is the large reduction in state funding. State funding to provides money to counties, cities, education, health care and other critical needs. Everything from community colleges to food banks, to medical care for those without insurance all takes a financial hit. The state of California is in debt over $42 billion dollars. Since California is the worlds 7th largest economy in and of itself, that means bad news trickles down in a big way. It’s so bad in the state that the governor is furloughing state employees every other Friday, without pay. Florida eliminated $2.6 billion from their budget by slashing education and health care. Arizona cut $1.6 billion in education spending and will still have a $3 billion deficit. So even when state or local governments suffer, so does just about everyone else. The $787 billion dollar government bailout isn’t going to be enough to help states balance their budgets. We have seem to forgot that the state can never borrow enough money to create prosperity.

Some local governments are canceling plans to release new bond offerings. Without being able to issue bonds, some local authorities will have to seek higher interest costing loans to finish projects already in the works. Or pay much higher interest rates to bond holders. Analysts say that the dysfunction of the municipal bond market may be the end of the road for relatively cheap money for local governments.

Local governments have options other than making cuts. Many cities and towns are having to lay off employees which impacts city services, cutting pay , cutting pensions, cutting hours. Are the hundreds of thousands state and local workers eligible for unemployment during cuts? This is a issue that will have attornies for the state and un-employment lawyers running in a tizzy. Do state, federal, and local workers on furlough qualify for checks (dole)? Another difficult area that may face cuts is in the local school districts. In many communities police and education are the two biggest budgets and therefore the biggest targets for cuts. But there aren’t too many citizens that welcome cutting the amount of police and fire protection they receive or in potentially limiting educational services. We have been for years promising school more money that we no longer have.

Some cities and states will try to raise taxes as a way to counterbalance the cuts they have to make. California lawmakers just approved a 1.5% sales tax increase which is wildly unpopular given that the taxes in California are already has some of the highest taxes in the nation.

While many cities have dealt with layoffs, service cut-backs and other challenges before, most have not dealt with reduced property tax, income tax, foreclosed homes and businesses going under in droves- all at the same time. The early 1990’s is the last time that there were years over year reductions in sales tax revenues alone in California. Many mayors and city councils are unsure of how to deal with the financial crisis that sits before them. But there is help.

A local California Company Terra Asset Management.com is available to consult with cities and local governments on how to best navigate their current circumstance. Terra specializes in risk reduction; cutting down turnaround times on foreclosures and helping city governments keep as much revenue coming in as possible. City and local governments can easily spend a good deal of money on consultants to help them cope with the problem. But, Terra, being locally based, handles all matters with the principals of the company and have all of the necessary resources at hand and can bring in additional highly trained resources to help deal with a local municipalities challenges. With Builders, Realtors, CPA’s on call, , Terra Asset Management.com is your best source of intellectual capital and thought leadership in reducing risk, eliminating expense and increasing local revenue without cutting important local services.

Principal Charles Stewart would welcome an opportunity to discuss your situation with them and how they can be of service. (760) 408-8998 or reolord@aol.com