As 2011 wound to a close, reports of a slowly growing GDP and signs of life in the housing sector pointed toward a strengthening economy.
But don't break out your champagne bottles yet, as “strength” is a relative term. We're talking about an economic climate in which nearly all of our nation's financial muscle had been stripped away. It will take many years to build it back up to prerecession size.
Additionally, continued recovery is still very much dependent upon real estate and construction activity, cautions Anirban Basu, chief economist for the national organization Associated Builders and Contractors Inc. What little growth we've experienced in recent years is due to the American Recovery and Reinvestment Act of 2009. As stimulus-funded projects decline, growth in nonresidential construction will increasingly depend on private investment.
But with office vacancy rates still high, job creation slow, and lending disciplined, that's not likely to increase much in 2012, warns Basu. As a result, public construction spending continues to decline in many communities across the United States.
We've got some good news …
Last month (“State tax revenues up, local down,” December 2011, page 16), we reported that state tax revenues grew by 8.4% in 2011, marking the strongest annual gains since 2005. Although lower than four years ago, the increase indicates states are beginning to recover from one of the worst economic periods since the Great Depression.
According to the National Governors Association and the National Association of State Budget Officers (NASBO)'s Fall 2011 Fiscal Survey of States, rising tax collections have driven 2.9% growth in planned expenditures. Forty-three states enacted 2012 budgets with higher general fund spending than in 2011 — calling for $667 billion as compared to last year's $648 billion.
Though $20 billion less than pre-recession spending, that's the second annual increase since the declines of 2009 and 2010.
Midyear budget adjustments are another indication of fiscal health (or, more accurately, illness). Last year, only 19 states cut expenditures — significantly fewer than in 2010 (39 states) and 2009 (43).
Transportation spending drew the smallest number of cuts.
And some bad news …
At the local level, however, the picture's heading in the opposite direction as lower property values and declining sales take their toll. Last year marked the fifth consecutive year of revenue declines.
Released in September 2011, the National League of Cities' City Fiscal Conditions projected a 2.3% revenue decrease by the end of the year that will continue to decline in 2012. Income tax receipts are decreasing by 1.6%, and property tax collections are expected to decline through at least 2013.
The biggest hit state and local budgets will take this year is the wind down of stimulus funding (see chart on page 46). In 2010, funding to states and localities totaled $112 billion, dropped to $66 billion in 2011, and will decline to $23 billion in 2012.
Not surprisingly, at least 26 states are still reducing aid to localities to balance budgets. Since 2009, municipal financial officers report, states have made cuts in general aid, shared revenues, reimbursements and other transfers, and funding of state-mandated services.
State spending on Medicaid is expected to take a bigger bite out of budgets and outpace revenue growth as provisions of the Affordable Care Act go into effect. So if you're expecting funds to trickle down to your agency from your state's increased tax revenues, you'll most likely be kept waiting.OH, HOW TIMES HAVE CHANGED
Five years ago, you were more worried about keeping up with the needs of a growing population (39%) than with fallout from a weak local economy and declining tax base (12%). Some things haven't changed, though: Your biggest challenge was skyrocketing material and supply costs.
A year later, respondents to our annual survey of operations and capital spending expectations began citing rising costs and lower revenues as challenges: 31% received budget cuts, 29% didn't have enough money for maintenance, and 42% were short-staffed. But only 2% were concerned about a bad housing market or tight credit hindering their ability to access the bond market for new projects and major upgrades.
Instead, the most common concerns revolved around implementing new technologies and recruiting young talent while retaining organizational intelligence as long-time employees retire.
We didn't even ask if respondents expected to suspend or postpone construction or maintenance programs until 2009.
Do you expect your operations and maintenance (O&M) budget to increase, decrease, or stay the same this year?
Over the next year, do you expect to postpone or reduce planned maintenance programs?
Do you expect your capital improvement plan (CIP) budget to increase, decrease, or stay the same this year?
Over the next year, do you expect to postpone or suspend construction on capital improvements?
Over the next year, do you expect to postpone or suspend construction of new infrastructure?Your peers tell all
City Fiscal Conditions reported that most communities were responding to falling tax receipts by delaying infrastructure projects as well as cutting personnel and services. To further gauge how public works budgets are faring, we e-mailed readers our annual outlook survey in November. Nearly 600 responded.
Half expect their operations & maintenance (O&M) spending to remain the same this year as compared to 2011, nearly one-third expect to spend more, and one-fifth expect to spend less. What's more, two-thirds don't expect to postpone maintenance activities to meet budgetary goals. This is an improvement over the last few years of survey responses, although certainly not as optimistic as responses from prerecession years (see “Oh, how times have changed” sidebar on page 46).
Spending expectations for capital improvements are also the best we've seen in four years. One-third of respondents expect their budget to stay the same, close to one-third expect it to increase, and one-third expect it to decrease. Little more than half don't think they'll have to postpone or suspend either major improvements or new construction for another year.
“There are things that have been waiting to be fixed and now we can afford it!” concurs a wastewater treatment plant manager.
Even so, many respondents commented that the numbers don't tell the full story.
A public works director who has more to spend on maintenance and major improvements this year says it's only because of a 1% sales tax increase and that, even with it, most line items remain flat. “The increase in operating budget is due to the additional revenue going to projects that have been deferred for several years.”
Another public works director says that although maintenance spending for his department remains level, increasing fuel, materials, and labor costs mean “this is basically a slight reduction for us. The only positive is the excellent bid climate for services and projects, which is realizing savings in our contract programs.”
And still another, who will see a decrease in operations funding, brings forth a hot-topic complaint: “Continued drop in local sales tax combined with an unwillingness to trim nonessential services (festivals, parades, etc.), combined with increased costs for resources (asphalt, fuel, concrete, etc.), result in continued decline in the ability to maintain infrastructure. This leads to increasing utility/roadway failures, which enhances the public outcry against fair wages and pension benefits of public employees.”
Speaking of crumbling infrastructure, many of this year's respondents are saying enough is finally enough: If we don't want to shut down roads and bridges or turn off streetlights, budgets need to be increased — somehow, someway.
“We're paying the price for not completing regular preventative maintenance on an ongoing basis. It's to the point where we're playing catch-up and physically cannot postpone these activities any longer.”
For some, accomplishing this has required moving line items around to funnel resources to address the most critical needs.
“Our capital improvement plan has been slashed to offset increased operational costs,” explains one West Coast survey-taker.
At least one respondent is waiting for federal legislators to get their collective act together and finally address long-term infrastructure funding: “What's happening with the transportation bill is a travesty that's impacting our ability to move projects forward.” (For the latest on efforts to renew the national surface transportation program, see page 15 of our news section.)
Even when budgets remain level, respondents reminded us that planned expenditures aren't always approved when it's time to award a project. “Sometimes pulling teeth is easier than getting a preventative maintenance tool,” says a utilities supervisor. If and when spending is allowed, reduced staffing levels make it difficult to maintain service levels and/or complete projects without eliminating nonessential elements.
“The city came into existence with the predominant purpose of maintaining the streets in the community. If property owners want/expect more, they'll have to approve a tax rate increase.”
Another respondent says there was no choice but to increase capital expenditures: “The city's done without for so many years that it should start to increase.”
Sounds like our economy. Or so we hope.