Thousands of towns face budget squeeze in downturns wake – Economy Watch

Sean Mulvey, the newly appointed finance director for the town of East Greenbush, N.Y., is trying to solve a riddle facing cities and towns across the country.

Though property tax revenues in the Albany suburb have yet to recover from the worst housing collapse since the Great Depression, fixed expenses like long-term contracts, debt interest and pension costs are squeezing the town’s budget.

To make matters tougher, New York state recently enacted a law limiting tax increases by local governments and school districts to no more than 2 percent or the rate of inflation, whichever is less.

“Our reserve funds have been helping to take of care of some of the problem, but they’re starting to come to the point where we are looking to refresh them if possible,” said Mulvey. “If there’s a pot of gold around here, I’d love to have someone show it to me.”

So would many of the roughly 20,000 cities and towns still struggling to balance their budgets more than five years after the housing collapse began eroding property tax revenues, the main source of funding for most local governments.

Despite recent signs of a bottom in the housing market, the outlook for local government finances “remains negative for the fourth straight year in 2012,” according to Moody’s Investors Service, which rates the creditworthiness of cities and towns hoping to borrow money in the bond market.

The perplexing move towards limiting local tax increases just as federal stimulus money disappears and states pass their own shortfalls onto municipal governments does not augur well for city finances this year. Looks like the perfect storm will hit just as property taxes catch up with falling real estate prices.

Read: Thousands of towns face budget squeeze in downturns wake – Economy Watch.