Shortfalls for U.S. cities could reach $56 billion

A man takes a photograph of New York City skyline from the ''Top of the Rock'' observation deck in New York September 2, 2009.

WASHINGTON (Reuters) - U.S. cities will face a collective budget shortfall of at least $56 billion over the next two years, with the current recession not seen hitting bottom until 2011, according to a report on Wednesday.

The National League of Cities said that because economic recoveries in cities lag national ones by about two years, the pain from the recession that began in 2007 could continue for years to come.

The collective shortfall could reach $83 billion through 2012, the league said. Cities will seek to cure revenue declines and spending pressures with higher service fees, layoffs, unpaid furloughs, and drawing on reserves or canceling infrastructure projects, the report said.

Many cities have already used these options as the recession has worn down their finances.

States are also threatening to cut another lifeline for cities -- direct aid transfers. As they attempt to reconcile their own battered budgets, states are saying they can send less money to cities. California, for one, has already taken back aid it had granted.

States cut aid to cities by 9 percent in 2003 and 2004 in response to the 2001 recession, according to the report.

"In comparison, the current recession is by nearly all measures more severe than the 2001 recession, suggesting that state cuts in transfers will, if anything, be more severe as well," the group said.

If states simply cut 10 percent of aid per year from 2010 to 2012, cities will lose $21 billion in total, the league estimated.

Like the states, cities are pressing for more federal aid, through a job creation bill like the one recently passed by the House of Representatives; a transportation bill; or additional funding for programs begun through the economic stimulus bill passed last February, such as the energy efficiency grant program.

"We urge federal action that would create jobs. Inaction at the federal level could worsen the already difficult situation facing cities and the country," said the group's president, Ronald Loveridge, who is mayor of Riverside, California, one of the areas hardest hit by the housing downturn.

(Reporting by Lisa Lambert; editing by Jeffrey Benkoe)