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U.S. cities face threats from federal cuts to revenues, economies

A general view of the U.S. Capitol building in Washington February 28, 2013. REUTERS/Jason Reed
A general view of the U.S. Capitol building in Washington February 28, 2013. REUTERS/Jason Reed

By Lisa Lambert

WASHINGTON (Reuters) - When the mayor of Baltimore, Maryland, talks about the federal spending cuts set to begin on Friday, she does not mention appropriations committees, line items or revenue rates.

Mayor Stephanie Rawlings-Blake first talks about crime.

"Number one is the public safety impact," she said. "We have made Baltimore a safer city, but we're not where we need to be and this isn't the time to pull the rug out from under us."

In the public imagination, Baltimore is closely linked to the HBO crime drama, "The Wire," which portrayed it as a post-industrial, drug-infested wasteland. The city's police department seized 1,830 illegal guns in 2012 and there were 217 homicides in the city.

Still, that is nearly half Detroit's 411 homicides last year, and Baltimore's violent crime has been dropping since 2000. Rawlings-Blake attributes part of the decline to federal funds for justice and safety, which are now subject to sequestration.

Mayors across the country say the $85 billion across-the-board spending cuts, known as sequestration, for the fiscal year ending September 30 pose a threat large and vague that will reach into various areas of their cities' daily operations.

They know they will receive fewer grants, and funding for joint programs they operate with the U.S. government will drop, but they do not have details on all the cuts. Mayors, along with governors, have been visiting Capitol Hill this week to push for an alternative to sequestration to bring down the federal debt.

Local governments will likely receive $28.3 billion in grants from the federal government under sequestration this federal fiscal year, compared with $29.8 billion last fiscal year, according to the Federal Funds Information for States.

Then there are the indirect economic effects cities cannot quantify from federal furloughs, less spending, slow growth and fewer dollars to help those with low incomes. Those could all boost demand for aid, causing cities to spend more, while also driving down tax revenues. Many places have only recently begun recovering from the 2007-09 recession and they are wary of jeopardizing their improvements.

Most cities receive only 5 percent of their revenues from the U.S. government. Federal money also filters through state governments, but many states slashed local funding during the recession. Meanwhile, property taxes, most cities' chief revenue source, are still low from the housing downturn.

"We're already flipping over the sofa cushions trying to find money," said Rawlings-Blake, noting Baltimore had to close $300 million in budget gaps over the last three years.

PROBLEMS SIMMERING

Mayors and civic officials say sequestration will not force cities to shut down immediately next week. Instead, said Columbus, Ohio, Mayor Michael Coleman, problems will arise over time, like water coming to a boil.

Some do not consider those problems major. Oklahoma City Mayor Mick Cornett says his city may have less spending flexibility due to reductions in community development grants and could face some private sector layoffs, but "we'll survive."

Sequestration will at most only slow the city's "boom-time economy," but not stop it, Cornett said.

Standard & Poor's Ratings Service said on Thursday municipalities "have exhibited their willingness to impose cutbacks in response to a weaker revenue environment since the beginning of the recession, and we expect them to be prepared for the possibility of sequestration." Sequestration would have minor credit consequences for local governments, it added.

Nuveen Asset Management looked at how reducing all federal money sent to local governments, including that trickling through states, by 10 percent would affect the 20 largest cities. It found the impact on revenues would likely be small.

"Given the resiliency of communities and their ability to adjust their budgets... we fully expect they'll be able to manage a cut like that, really, without showing much strain," Shawn O'Leary, research analyst at Nuveen, told Reuters Insider.

Philadelphia would take the biggest hit, losing about 4.1 percent of revenues, followed by Phoenix, at 3.8 percent. On the other end, San Diego and Jacksonville, Florida, would see only 0.4 percent less.

Still, for some, a 4 percent drop would be tough.

"Our revenues are already tight. I mean, we are coming out of the recession. All of us, not just Philadelphia, all American cities are in a precarious financial situation," said Philadelphia Mayor Michael Nutter. "I can't replace the revenues."

Houston, Texas, has not put dollar amounts to its losses, but it expects fewer grants for public safety, transportation and parks, said Controller Ronald Green, adding that the cuts will put the onus on the city to pay for services.

"The federal government can pass it to the state, the state can pass it to the city. But with us, it stops with us," he said. "Trash has to get picked up. Police have to answer calls."

(Reporting by Lisa Lambert; Editing by Tiziana Barghini and Dan Grebler)

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