Local squeeze: the budget pain felt by state lawmakers for the past two years has made its way to cities and counties.

• Author: Greenblatt, Alan

[ILLUSTRATION OMITTED]

Cities and counties were largely spared the kind of shortfalls that decimated state budgets back in 2002 and 2003. During the current downturn, however, they are experiencing nearly as much pain as states.

In part, that's because of choices made by states. It's almost a given during tough times that legislatures will cut aid to local governments.

But while their woes are exacerbated by cutbacks from the state, local budget problems have their roots elsewhere. The reason localities were not hit as hard as states during the post-9/11 recession is that they depend largely on property taxes. Back then, those collections were still buoyant.

No more. The collapse of the housing market bubble and widespread foreclosures are eating into the local property tax base, with housing values down 10 percent since 2007. Commercial property values are continuing to decline, and localities face a long climb back. Tax collections lag market conditions because property appraisals, often done on a rolling basis, generally take two to three years to reflect diminished values.

The other major sources of local revenue--sales taxes and income taxes for those cities that collect them--are down as well. The result is that local governments expect to face at least two and possibly several more years of declining revenues.

City budget officers projected average budget shortfalls of 3 percent in 2009, with deeper holes in 2010 and 2011. The National League of Cities estimates that the municipal sector will face shortfalls of up to $83 billion between 2010 and 2012.

"Austerities are not going to feel like one-year budget adjustments," says Mark Muro, policy director for the Brooking Institution's Metropolitan Policy Program.

OFF LIMITS NO MORE

It doesn't help that the fiscal pain felt by states has trickled down to the local and county levels. While few states still maintain direct aid or general revenue sharing programs with their localities, most have complex fiscal relationships that, during downturns, come to involve changes in formulas that hurt localities.

"For anyone in local government, all you have to do is look to the state to see the threat," says David Smith, county manager in Maricopa County, Ariz.

His county sent $66 million to the state of Arizona over the past two fiscal years and Smith expects the state to ask for an additional $50 million this year.

This latest proposal is a shift that would move budget obligations away from the state and onto the books of counties. Counties would be expected to fund the entire Arizona

Department of Juvenile Corrections, as well as 100 percent of the costs for incarcerating sexually violent prisoners. The budget proposal would cost Arizona's 15 counties a total of $90 million, forcing them to raise property taxes and slash their own spending priorities.

Arizona is not alone. New Jersey proposes...