For Growing Numbers of Struggling U.S. Cities, the Downturn Has Arrived

FOR GROWING NUMBERS DF STRUGGING U. S. CITIES, THE DOWNTURN HAS ARRIVED 

(A boom in some big metropolitan areas has masked fiscal weakness in cities tied to shrinking industries)

HARVEY, Ill.—Christopher Clark was elected mayor last year, pledging to seek business tax reductions and lower water bills. They were popular goals that seemed in reach given that city revenues had been rising almost every year since the recession.

On taking office, Mr. Clark quickly figured out the city’s progress had stalled. Property tax collections were down, and businesses were cutting jobs. A fall in city revenue, coupled with growing debt payments, meant there would be no relief from business taxes or water bills.

“We just have to figure out ways to do more with less,” Mr. Clark said, echoing a familiar mantra surfacing in dozens of U.S. cities.

A decade of growth in the U.S. economy allowed cities to patch fiscal holes left by the financial crisis and recession. A surprising number now see new signs of trouble.

The proportion of American cities expecting general-fund revenue to drop more than 3% when the books close on the 2019 fiscal year increased to 27% from 17% in fiscal 2018, when adjusted for inflation. That is one of the findings from a Wall Street Journal analysis of data collected from 478 U.S. municipalities by the National League of Cities, an advocacy group.

The total general-fund revenue reported by these cities—locales that span the U.S.—is expected to be lower in fiscal 2019 than in fiscal 2018, adjusted for inflation, the first such dip in seven years. Cities in the survey range in population from the low tens of thousands to the millions.

General-fund revenue typically represents dollars not earmarked for a specific purpose, a flexible pot of money to spend on public goods and services.

“It’s a big deal when you have this many cities concerned about the near-term future,” said Matt Fabian, a partner with municipal bond research firm Municipal Market Analytics. “Maybe they don’t hire new police as quickly as they did before…Maybe they put off plans to address the big challenges that cities are facing like pensions and climate change.”

American cities are generally doing better than rural communities, buoyed by the U.S. expansion. Yet the boom in such metropolitan areas as Denver, Salt Lake City and Nashville, Tenn., masked fiscal weakness in cities tied to manufacturing and other shrinking industries.

Fallout from the coronavirus disease on the U.S. economy and city budgets is another potential setback. In the past week, New York City has held daily meetings of pension advisers, and California put out a warning to prospective municipal bond investors.

All regions of the U.S. contains cities that are losing fiscal ground, the Journal found. In the West, 29% of cities expected declines of more than 3% in general-fund revenue in fiscal 2019, up from 18% in fiscal 2018. In the South, the proportion of cities reporting a revenue drop went to 20% from 16%, using the same measure; in the Northeast, it went to 31% from 14%.

On the flip side, nearly 60% of U.S. cities reported general-fund revenue increases that outpaced inflation in fiscal 2018. Yet even in this group, expectations are fading: Cities expecting similar growth in fiscal 2019 fell to 53%.

Stagnating or declining revenues are easier to manage for growing cities in the West and South. In New England and the Midwest, many places are struggling with losses of population as well as industry.

Job losses hit hardest in cities that have been barely keeping pace with expenses during the recovery. Tighter household budgets translate into smaller sales-tax allocations. City populations shrink when residents follow jobs out of town, hurting home prices, commerce and property tax collections.

The general-revenue declines struck earliest in the Midwest, where combined inflation-adjusted city revenues fell by 4.3% in the 2018 fiscal year from 2017, the Journal found.

Over the 12 months ending in November, 28 metropolitan areas in the Midwest lost manufacturing jobs, according to the Bureau of Labor Statistics, including Detroit, Youngstown, Ohio, and Louisville, Ky.

Some losses stem from the shifting global economy and disruptions from the U.S.-China trade war. In Blue Springs, Mo., population 55,000, an auto-parts manufacturer last fall announced it was closing its plant to save costs, a loss of more than 150 local jobs. Operations are moving to Monterrey, Mexico, a company executive said. The city expects general-fund revenue to fall slightly for the current fiscal year, which ends on Sept. 30.

Other disasters have come out of the blue. In Wichita, Kan., aerospace company Spirit AeroSystems Inc. said in January it was laying off 2,800 workers after Boeing Co.’s decision to suspend production of its 737 MAX aircraft.

PENSION IOU

Many cities operating with little fiscal breathing room have been sweating to cover day-to-day city operations under the burden of growing retirement costs and past borrowing.

Bond and pension liabilities owed by roughly 1,000 U.S. cities ballooned nearly 25% to about $500 billion in 2018 compared with 2013, according to an analysis of data from Merritt Research Services. Roughly 50 million Americans live in cities that are devoting at least a fifth of annual spending to debt.

As many as 20 of the largest U.S. cities could face either service cuts or tax increases to cover the costs of pensions, retiree health care and interest on bond debt, according to a J.P. Morgan Asset Management study. New Haven, Conn., and Jersey City, N.J., for instance, raised taxes last year to cover such expenses.

Few municipalities are in a deeper hole for their size than Harvey, a city of 24,641 that was founded in 1891 by a lumber tycoon.

Harvey, located about 17 miles south of downtown Chicago, grew into an industrial center, producing car mufflers, farm and mining equipment and military airplane parts. When Mr. Clark, the new mayor, was born a half-century ago, the population was nearly 35,000. Roughly 46% of employed men over 16 worked in manufacturing, according to the 1970 census.

“Everybody had a nice fenced-off yard,” Mr. Clark recalled of his boyhood neighborhood. “There was either a Cadillac or a Lincoln in front.” The local Dixie Square Mall had more than 50 stores, including Woolworth and Montgomery Ward.

Mr. Clark drove a forklift before getting a scholarship to law school. He opened his law practice 10 years ago in a former jewelry store downtown.

Factories closed in the 1980s, taking jobs with them. By 1990, nearly 15% of men ages 25 to 54 were unemployed, according to the census. Dixie Square Mall was demolished in 2012 after closing years earlier.

Longtime residents dispersed to other states. For years, they held annual gatherings, called “Harvey Days,” in Florida, California and Arizona. The reunions drew thousands of people who had lived, worked or attended high school in Harvey, said Carl Durnavich, who helped organize many of them.

After the financial crisis, city services hit bottom. Broken streetlights went unrepaired, and the fire department was down to one working fire engine. Firefighters who couldn’t fit aboard, crammed into a pickup truck, said Ron DeYoung, president of International Association of Fire Fighters Local 471.

The economic recovery finally hit town. One of the city’s remaining manufacturers, Sterling Site Access Solutions, which straddles Harvey and the adjacent town of Phoenix, Ill., added roughly 100 jobs between 2013 and 2018. About half were skilled manufacturing positions. The local plant of an international lubricant-maker also expanded its workforce.

In 2018, the city’s total private-sector jobs ticked up for the first time in six years, according to a state report. Then, the following year, job numbers fell, eroding most of the gains.

Voters selected Mr. Clark, an outspoken alderman, as mayor. Local employers hailed him as an ally. In the weeks after Mr. Clark’s inauguration, residents reported that some alleys had been cleared for the first time in years.

BALANCING ACT

Harvey seemed poised for a turnaround. Signs of distress emerged instead. Property taxes, the city’s largest revenue source, fell in the 2018 fiscal year, which ended April 30, 2018. The decline wasn’t reported until an audit was completed in October.

Raising rates to make up the losses risked driving away residents and business. Sterling opened a new plant last year, but it was in Texas. Carter Sterling, the company’s chief executive, said he decided to expand out of state, in part, because property taxes in Harvey and neighboring Phoenix were too high. Property owners in Harvey pay some of the highest rates in the Chicago metropolitan area, according to an analysis from the Civic Federation, a business-backed watchdog group.

David Abshire, vice president at LB Steel, a local manufacturer, said the city’s property tax rates discourage new business, especially with city services falling short. Mr. Clark isn’t considering lowering property taxes, he said, because the city needs the money.

Mr. Abshire praised the mayor’s work so far, but he said he was still waiting for the city to raze the collapsing building across the street from LB Steel. It makes a poor impression on manufacturing executives he invites to see his nearly 500,000 square-foot facility.

“We have world-class customers coming here,” Mr. Abshire said. “They go, ‘Whoa, I don’t even know if I should drive in here.’ ”

City officials said they were working on securing funds to tear down many vacant structures in town.

Decisions by Mr. Clark’s predecessor, Eric Kellogg, drove up the city’s total bond debt to $35 million. Its liability to police and firefighter pension funds grew to $82 million. Use of some of the bond proceeds drew scrutiny from the Securities and Exchange Commission, which charged the former mayor with fraud after finding the city spent investor money for a hotel project on payroll instead. In a civil settlement with the SEC, Mr. Kellogg agreed to stay out of future bond deals. He didn’t respond to requests for comment.

The state in 2018 began garnishing millions of dollars in city revenues to refill pension coffers. Like many cities, Harvey had long made smaller-than-needed payments to swelling pension obligations. During Mr. Kellogg’s tenure, the city paid nothing into police and fire pension funds for several years, according to city financial reports.

The city has less than 33 cents on hand for every dollar of benefits it has promised retired and working police officers and about 17 cents for every dollar owed retired and working firefighters, according to city records. As a measure of its contraction, Harvey sends paychecks to more retired firefighters than working ones.

Before taking office, Mr. Clark hoped officials representing police and fire pension funds would agree to accept smaller payments over a longer period, giving the city more leeway for urgent expenses. Fund officials haven’t agreed.

Bringing an economic recovery to Harvey will be a huge challenge, said City Councilwoman Shirley Drewenski, a college administrator. Her 3-bedroom house, built by her parents, was valued at $46,580 by the county assessor’s office, less than what she paid for her new car.

Mr. Clark is focused on making the most of the revenue he has. The city public works department bought two new snowplows and new mowers. Some streetlights are set to be repaired with a grant for energy-saving LED lighting.

“You know that some things aren’t going to happen,“ he said of the city’s prospects ”You know that you’re going to live a life of hand-me-downs.”

FOOTNOTES: Cezary Podkul contributed to this article.  Write to Heather Gillers at heather.gillers@wsj.com