WASHINGTON, Jan 17 (Reuters) - The fiscal gloom hanging over U.S. cities and local governments will lift slightly in 2013 as the pace of spending cuts slows, according to an economic assessment presented on Thursday to a mayors' conference in the U.S. capital.
Real state and local government spending will decline by 0.5 percent this year, compared to a 1.3 percent drop in 2012, said James Diffley, director of regional economics for IHS Global Insight.
"In the state and local government sector the pace of budget tightening has eased slightly and revenues have begun to improve, but as you all know all too well, municipalities remain under severe pressure," he said.
In December, local governments shed 14,000 jobs, compared to state governments that gained 4,000 jobs, according to the Labor Department, showing that cities and counties continue to struggle with spending.
"Many of the problems we have stem from an economy that still has not kicked in and got back to where we were," said Scott Smith, the mayor of Mesa, Arizona, at the meeting of the U.S. Conference of Mayors.
"We still have too many of our citizens who are out of work - who are unemployed or underemployed."
Cities rely primarily on property taxes for revenues, and when the housing bubble burst, their income slowly collapsed. Property tax assessments have not picked up yet, while states and the federal government have pared the aid they send to local governments, forcing many cities to continue to slash spending.
It could soon get worse, IHS's Diffley warned. The federal government is expected to hit its debt ceiling in about a month absent congressional action. Once the federal government can no longer borrow it will dramatically reduce its funding for almost everything, he said.
While the across-the-board federal budget cuts set to begin in March, known as sequestration, will also affect cities' budgets, those cuts will be more gradual and less severe than any action the federal government takes to stay under the debt ceiling, Diffley added.
Fitch Ratings said on Thursday that a multi-year federal deficit reduction plan could hurt cities financially, because "local governments could bear the brunt of federal cuts to states if the state reduces aid to locals."
While mayors are concerned about federal actions to cut the government's debt and deficit, they have gotten used to budget challenges, said Philadelphia Mayor Michael Nutter.
"All of us have been to the fiscal cliff and back. We dealt with this two to three years ago. The federal government, quite honestly, is just kind of getting around to it. Welcome to the Great Recession," he said. "What we also should be talking about is investments. How do you jumpstart an economy?"
The mayors group intends to discuss job creation and development programs with the White House and members of Congress over the next few days. Secretaries and agency heads told the mayors on Thursday they are looking into spurring economic activity in metropolitan areas, where the majority of Americans live, through grants, loans and financing initiatives.
"More now than ever, I honestly believe that local governments are disproportionately affected by this economic downturn," said Rosie Rios, Treasurer at the U.S. Treasury, during a session with the mayors. "Local governments usually pay the price for state governments and in some cases the federal government's bad decisions. And so this is a time for innovation."