Rising costs, slow revenue growth
and more reliance on debt shown in local governments

Although many local governments are in stable financial condition, overall costs continue to increase at nearly twice the rate of inflation, while local revenue growth has been slow and reliance on new debt has grown substantially, according to a report issued by State Comptroller Alan G. Hevesi. The Annual Report on Local Government analyzes data collected from local governments through the fiscal year ending in 2003 as well as other more recent fiscal and demographic data.

Major report findings:

•Continued rising costs. Local government expenditures totaled $118.4 billion in 2003, a 3.7 percent increase over 2002 and a 30 percent increase from 1998 to 2003 - twice the rate of inflation for this five year period. The upward pressure on spending was primarily caused by Medicaid and health care costs, wages and salaries, and employee benefits. It should be noted that after the recent rise in pension costs, pension contributions declined and have now stabilized.

•Property taxes fastest growing revenue source. In 2003, revenue for all local governments totaled $108 billion reflecting a 26 percent increase from 1998 to 2003. Real property tax revenue accounted for 30 percent of all revenue, and was the fastest growing source of revenue in 2003, increasing by 9.7 percent to $32.2 billion. Downstate areas saw a substantial growth in property values, permitting lower tax rates even while tax levies grew, while stagnant property values in some upstate communities have led to increased tax rates to support levy increases, pushing them toward their tax limits. Average property tax levy increases ranged from 6 to 9 percent in 2004 and 2005 - much higher than the growth rates generally seen in the years from 1995 to 2003.

•Increased reliance on debt. New debt grew in 2003 compared to 2002 increasing by 12.6 percent. Debt increased from $20.3 billion in 1998 to $29.7 million in 2003, an increase of 46 percent. The bulk of this debt can be attributed to school districts.

"New York's local governments continue to face difficult fiscal challenges. While the underlying fiscal conditions facing local governments vary drastically based on geography and by type of government, the majority of local governments are struggling to contain costs and grow their revenue base. Alarmingly, many are increasing their reliance on debt," Hevesi said.

Other trends described in the report:

•Increasing dependency on sales tax revenues: Forty-nine of 57 counties now have sales tax rates that exceed 3 percent, with eight counties exceeding 4 percent.

•Medicaid burden. Medicaid continued to consume greater portions of county budgets. County property taxes would have to increase by an average of almost one-third by 2010 to keep pace if Medicaid costs continued to rise at the current rate. In response to these pressures, the state approved legislation that will cap Medicaid costs in 2006 at 3.5 percent above 2005 expenditures and a full state takeover of the Medicaid program will begin in January 2008.

•Divergent property value trends. Downstate cities increased tax levy by 28 percent from 1999 to 2004, yet even with this increase, a 23 percent reduction in the tax rate occurred because property value increased by 63 percent. Upstate cities increased their tax levy by approximately 16 percent, but because property values increased by only 4 percent, the levy resulted in a 12 percent tax rate increase.

•Substantial increases in spending and borrowing for schools. School district spending totaled $41.4 billion in 2003, reflecting an increase of 38.7 percent since 1998 - a rate of growth far exceeding both inflation and that in any other class of government. Total outstanding debt for districts increased by 125 percent (18 percent annually) from 1998 to 2003 - the result of more favorable building aid formulas and growing enrollment needs.

•Close proximity to tax limits. As of fiscal years ending in 2005, eight cities, 13 villages and five counties have exceeded more than 80 percent of their available tax limits - a sign of declining fiscal situation.

•Declining population in cities. The population of cities, excluding New York City, has declined by 20 percent since 1970, while the overall population of New York state grew during this period. Residents are moving away from cities into outer-ring suburban towns, weakening the economy and tax base of cities and their dependent school districts.

Visit www.osc.state.ny.us for a copy of the report.