For the first time since 1980, property tax revenue and state aid to cities across the United States are shrinking simultaneously, the Pew Charitable Trusts said in a report on Thursday.
The downward double spiral is likely to continue for at least two to three years at a time when local governments have already been squeezed by increasing costs and falling revenue, Pew researchers said.
"More tough choices lie ahead as leaders look to balance the day-to-day needs of their communities with their long-term prospects," said Robert Zahradnik, research director for the Pew American Cities Project.
The project is examining the biggest city in each of the country's largest 30 metropolitan areas. The report, which uses U.S. Census Bureau data, is its first. www.pewstates.org/localsqueeze
Since the Great Recession began in late 2007, local governments have laid off public workers, cut services, raised taxes and fees, privatized or consolidated services, and taken other measures to trim their budgets to the bone.
Though the recession is officially over and many state economies are beginning to show signs of recovery, some cities and towns are still reeling.
In fiscal 2010, the most recent year for which Census data was available, local governments lost 2.6 percent of their state aid and 2.5 percent of their property tax revenue - or nearly $25 billion altogether - from the prior year, Pew found, bringing the combined revenue that year from both sources to $942.7 billion.
The property tax revenue drop was the largest in three decades, Pew said.
By 2009, state aid and property taxes combined covered a smaller share of local expenditures than at any other time since the Census began tracking the data in 1972, Zahradnik said.
The two revenue sources together make up more than half of local revenue. They also normally counterbalance each other, with one falling when the other rises.
Cities and towns across the country have had to adjust. Cleveland, Ohio, laid off more than 300 employees - at least half of them police officers and firefighters - after state lawmakers cut $36 million in funding the city would have used for its fiscal 2012 budget. The city also closed five fire companies and cut six trash collection crews, Pew noted.
In 2011, Sarasota, Florida, increased property rates for the first time since 2007 after the city lost $3.5 billion - or a third of its tax base - in property tax receipts over three years, Pew said.
Residents of Belvidere, New Jersey now must haul their own garbage to the landfill or pay for private services after the small town cut trash collection entirely in early 2012.
Altogether, cities and towns have shed about 500,000 employees altogether since 2008, or more than 3.4 percent of the local government workforce, through layoffs, furloughs, hiring freezes and attrition. Half of the affected workers were teachers and other school employees, Pew found.
Pew researchers say that recovery will be slowed in some places by lags in the time it takes to assess home values, along with continuing foreclosures and the "sheer magnitude" of the slide in property values.
They also note that efforts to reduce the federal deficit are expected to shrink grants to states for low-income housing, workforce development, education and community development, among other federal aid that has already begun to ebb.
Despite a budget gap bigger than a quarter of its general fund, Connecticut in 2010 boosted local aid by more than 10 percent, according to the Pew report.
Alaska, flush with oil severance tax revenue, helped its municipalities pay down unfunded pension obligations between fiscal 2010 and 2013 by more than $1.7 billion, the report said.
Many localities have also found more efficient ways to operate, including sharing service needs with neighboring areas, Zahradnik said.
"Going forward (cities and towns) are just going to have to pay that much more attention to maintain their fiscal solvency as some of their key revenue sources are slowing," Zahradnik said.
The United States has about 90,000 local governmental entities, including nearly 19,500 small and large cities, more than 16,500 towns, about 13,000 school systems, 3,033 counties and nearly 37,400 special districts like fire protection and hospitals.
(Reporting by Hilary Russ; Editing by James Dalgleish)