Download PDF

Much has been written about the impact of the Great Recession on state governments and larger cities, but we have yet to see deep analysis on how smaller municipalities weathered the recession. To get the ball rolling my students and I have analyzed the impact of the recession on smaller cities in Georgia and Florida and are currently adding an additional eleven states to the analysis. To begin we selected two states that have somewhat different revenue structures:

  • Florida has limitations on increases in property taxes in each year, but values property at 100 percent of fair market value. Georgia sets the maximum assessed value of property at 40 percent of fair market value. Additional local exemptions in both states further reduce property taxes. In Georgia, reduction or elimination of property taxes appears to be much more of a priority than in Florida.
  • Georgia has more small municipalities that run their own electric utilities and rely on those enterprise revenues to support government functions.

 

Even given these differences Florida and Georgia share similarities as well:

  • Property taxes are 15 to 20 percent of general revenue, and
  • Both states have low local sales tax rates.

 

We based our analysis on a set of indices calculated to measure the impact of the recession as follows:

  • The Reserve Index measures the number of months of expenditures available for unrestricted use by the municipality.
  • The Operations Index measures the actual operating margin versus a baseline operating margin calculated as if the recession had not occurred. Values for this index are 0 to 10+ with 10 meaning operating margins meet the baseline. Each point below 10 represents the loss of margin equal to one month of expenditures.
  • The Environment Index measures the deviation from an economic environment where unemployment is five percent, property values and personal income grow at two percent per year, and the pre-recession poverty rate is maintained. Values for this index are 0 to 10+. Each point below 10 means that the economic environment is performing at a lower level than described in the preceding sentence.
  • The Strength of Response Index measures how strongly the municipality addressed financial stress caused by the recession. Values for this index are 0 to 10 with 10 representing the strongest response available.

 

The indices were calculated for 62 cities in Georgia and for 30 cities in Florida. The cities in the two states were matched by population to enhance comparison. Some large cities were included from each state to determine how the impact of the recession varied between large and small cities. Table 1 presents the index comparisons between the two states and between large and small cities:

 

TABLE 1   Georgia Florida
Index Period Large Small Large Small
Reserve Pre-recession 6.57 5.50 3.60 6.08
During recession 5.63 5.02 3.01 6.08
1-3 years after recession 4.48 4.79 2.43 5.17
4-6 years after recession 2.67 4.60 -.34 4.42
Operations Pre-recession 9.84 10.05 9.07 9.69
During recession 8.66 7.63 7.88 8.38
1-3 years after recession 8.46 7.04 7.33 8.09
4-6 years after recession 6.77 7.07 5.40 6.55
Environment Pre-recession 10.30 10.69 12.13 12.32
During recession 8.68 9.55 8.97 8.30
1-3 years after recession 7.50 7.27 6.59 6.42
4-6 years after recession 8.49 8.21 9.29 9.23
Response During recession 3.63 3.61 3.52 2.84
1-3 years after recession 3.85 4.06 5.15 4.89
4-6 years after recession 4.37 5.24 7.24 6.33

 

There are several interesting observations from the analysis:

  • Small cities in both states maintained higher reserve balances than larger cities throughout the recession and during the six years following the technical end of the recession. Large cities in Florida began the recession with only 3.6 months of operating expenditures in reserve.
  • Small cities in Florida fared better than larger cities even though the economic environment was slightly worse.
  • Small cities in Georgia were substantially worse off than larger cities in Georgia even though their response to the recession was as strong or stronger.
  • The economic environment was worse in Florida than in Georgia during and one to three years after the recession, but seems to have substantially improved during the period four to six years after the recession. It is also notable that the economic environment in Florida was substantially stronger than in Georgia before the recession.
  • During and after the technical end of the recession both large and small cities in Florida were able to mount substantially stronger responses to the recession than Georgia cities.

 

We also looked at differences in the type of response to the recession between cities in Georgia and Florida. Table 2 reflects our findings:

 

TABLE 2   Georgia Florida
Period Strategy No. % No. %
During recession Cut expenditures/employees 16 25.4 17 56.7
Used reserves 29 46.0 10 33.3
Increased property tax 25 39.7 3 10.0
Increased other taxes 48 76.2 20 66.7
Increased non-tax revenue 28 44.4 16 53.3
Increased electric rates 13 (max 13) 100.0 2 (max 2) 100.0
Increased water/sewer rates 42 (max 51) 82.4 17 (max 23) 73.9
1-3 years after recession Cut expenditures/employees 39 61.9 28 93.3
Used reserves 32 50.8 16 53.3
Increased property tax 30 47.6 27 90.0
Increased other taxes 27 42.8 10 33.3
Increased non-tax revenue 14 22.2 7 23.3
Increased electric rates 10 (max 13) 76.9 2 (max 2) 100.0
Increased water/sewer rates 50 (max 51) 98.0 20 (max 23) 86.9
4-6 years after recession Cut expenditures/employees 35 55.6 24 80.0
Used reserves 30 47.6 24 80.0
Increased property tax 35 55.6 29 96.7
Increased other taxes 42 66.7 7 23.3
Increased non-tax revenue 19 30.2 19 63.3
Increased electric rates (max 2) 13 (max 13) 100.0 1 (max 2) 50.0
Increased water/sewer rates (max 23) 50 (max 51) 98.0 18 (max 23) 78.3

 

Cities in both states relied heavily on increasing utility rates indicating the importance of enterprise activities to local governments. Utility rates were increased in each period during and after the technical end of the recession. Florida cities relied much more heavily on cutting expenditures and increasing property taxes than Georgia cities. Georgia cities preferred increasing other taxes more than property taxes although most Georgia cities that did increase property taxes did so early and during every period during and after the recession. This indicates that even given Georgia’s unfavorable view of property taxes, these taxes were vitally important to maintaining operations during the recession. Other strategies varied as to preference during different periods.

 

Perhaps most importantly, our study confirms the opinion held by most that the recession lasted much longer than the technical end of the recession in June 2009 and, for many cities and might come to represent a new normal for many municipal governments.

 

Additional information and details are available from the author. The entire study will be available for review later this fall and the expanded study (eleven additional states) will be available in Spring 2018.