States Cut City Funding By $2.3 Billion

State revenues to cities were cut by approximately $2.3 billion, for fiscal year 2004, a 9.2 percent decrease from 2003, according to a study by the National League of Cities (NLC).

The percentage decrease is the largest in at least a decade.

To gauge the impact on cities, the National League of Cities conducted an analysis of state budget cuts in 2003 and 2004, as well as a historical analysis of state and federal aid to cities.

Among the findings:

— Cuts in state revenues for cities were reported in 24 states in 2003 and 2004.

— In 13 of the 16 states where revenues for cities were not cut, revenues grew marginally, at rates of less than 3.0 percent.

— These changes amount to a 9.2 percent actual decline in state revenues for cities between 2003 and 2004, totaling $2.3 billion.

— Since 1977, federal revenues as a share of total city revenues have declined from 15 to 5 percent.

The decline in revenues in 2004 points to the depth of the state-local fiscal crisis and expands upon the findings of an NLC report released in May 2003 showing that state revenues would fall by 2.1 percent in 2003, after growing only marginally (.3 percent) in 2002.

A number of states are driving the total dollar decline in state revenues — more than $1.1 billion in cuts in California, $400 million in Massachusetts, $136 million in Florida, and $110 million in Minnesota.

Given the differences among states in terms of population and the size of state economies, the percentage change between 2003 and 2004 is a better source for comparison. Cities in some states saw programs eliminated or nearly eliminated, resulting in large drops in state revenues — Kansas (100 percent drop), California (59 percent), Texas (47 percent), and West Virginia (39 percent).

Cities in other states are experiencing state revenues cut by more than one-fifth from their previous year’s totals — Alaska (26 percent), Oklahoma (24 percent), and Pennsylvania (22 percent). Cities in Georgia (17 percent), Minnesota (13 percent), and Florida (12 percent) are also coping with dramatic cuts in state revenues.

In many states, the rounds of cuts began prior to 2004. North Carolina cities saw state revenues drop by 68 percent from 1999 and 2003, driven largely by the elimination of a state revenue program going into 2003. Similar drops occurred in Alaska (38 percent), Washington (33 percent) and West Virginia (49 percent) over the same time period.

Cuts in state revenues can take many forms, given the realities and complexities of 50 different systems in 50 states. These cuts came in a variety of packages: in revenue-sharing programs where the state provides general purpose aid to cities or shares a percentage of a state-collected revenue source with cities; in tax reimbursement programs where the state backfills city revenues repealed, decreased or transferred by other state actions; in funds for designated purposes such as highway maintenance and construction; and, in funds to offset the costs of state-mandated programs.

Not every state provides each of the types of local aid or revenue support, and cuts were not always made in every program. Cities in Massachusetts experienced across-the-board cuts in state revenue programs. Alaska, Kansas, Minnesota, and Washington are among the states that experienced cuts in revenue-sharing programs. California cities lost more than a billion dollars in state revenues provided as a backfill to previous take-aways.

Cities are also coping with dramatic cuts to designated funds (for highways, parks, libraries, etc.) in Florida, Georgia, Oklahoma, Pennsylvania, and West Virginia.

Depending upon the structure of the revenue program, decreased revenues may be the result of the downturn in the economic cycle. For example, cities in Arizona receive a portion of state-collected sales and income tax revenue collections – revenue sources that respond quickly to economic changes.

In some instances, states have cut revenues for cities, but are also passing along the authority for local governments to raise taxes. In North Carolina, the elimination of local tax reimbursements was coupled with the authority for counties to levy a sales tax, with an additional provision that the distribution of the sales tax revenue should cover lost state revenues.