Muniland: Be Happy—City Managers Report Optimism

The National League of Cities (NLC) is the nation’s leading advocacy group devoted to strengthening and promoting cities. In the NLC’s annual publication, “City Fiscal Conditions 2016,” 81% of city finance officers report they are better able to meet the financial needs of their communities in 2016 versus 2015. The level is similar to last year and indicates continuing fiscal recovery in U.S. cities. The City Fiscal Condition Survey is a national survey of city financial officers. The most recent report finds that the average city saw general fund revenues grow 3.73% in 2015, and are projecting growth of 0.54% in 2016. Expenditure grew 3.57% in 2015, and budget officers are planning on 3.71% expenditure growth in 2016. Property tax revenue growth is returning to pre-recession levels, with a sizable increase of 3.77% in 2015 and projected growth of 2.6% in 2016. Sales taxes continue to post strong growth, up 5.49% in 2015 and a projected 1.99% in 2016. Furthermore, despite volatility, income tax revenue grew 5.82% in 2015 and is projected to grow 3.47% in 2016. Good financial managers typically use conservative revenue projections, and some of the slowdown versus last year’s revenue growth could be due to conservative budget estimates. Lastly, ending balances (or the amount of general fund reserves to expenditures) is returning to historic highs. This is all very good news for cities. 

City finance managers report that the most positive factors in their outlooks are an increasing city property tax base, followed by improved local economies and positive impacts from lower oil prices. The most negative factors are infrastructure needs, employee and retiree health benefits and employee wages and salaries. Interestingly, employee/retiree pension costs rank near the bottom of the negative survey results. SNWAM continues to weight pension liabilities relatively heavily in our credit models, and the municipal market as a whole is paying closer attention and penalizing cities and states with large pension liabilities through more costly debt issuance. We have a neutral credit outlook on the local government sector, but underweight the sector in our portfolio because of the more attractive risk/reward outlook in other municipal sectors. In all, the prolonged economic growth cycle is benefiting cities, but aging infrastructure and retiree healthcare costs continue to outpace revenue growth, leading to long-term structural imbalances.

Source: The National League of Cities, City Fiscal Conditions 2016 and SNWAM Research