Of the three major tax sources for local entities, the sales tax is the smallest. Counties and transit authorities can levy a local sales tax, and it is one of the major shares of their revenue base. Schools, townships and municipalities cannot. Collections in current dollars are shown in Table 5.

Figure 6 shows sales tax collections adjusted for inflation, which rose by an annual average of 1.3 percent between 2007 and 2013. Sales tax collections were at $2.058 billion in 2013 and are projected to be at $2.295 billion by 2015 in current dollars.

OBM projects 7.2 percent growth in the local sales tax in 2014, based on first-half 2014 revenues, tax rate increases and forecasted retail sales growth, with a return to more standard growth of 4.2 percent the following year.

With the sales tax, too, the actions of a few jurisdictions can mask underlying economic conditions. For example, Franklin County alone accounts for $90 million in sales-tax growth in 2014, OBM estimates. Marion County and Erie County, the two others with rate increases, contribute another $8 million. The three counties with rate increases accounted for $98 million – about two-thirds - of the $148 million in sales-tax growth forecast in 2014 compared to a year earlier.[18]

 

Growth or decline of local government tax revenue can be gauged by its share of the total Ohio economy. Figure 7 illustrates Ohio’s local government tax revenue (not including schools) as a share of Gross State Product between 2007 and 2013. During this time, this share of the economy has remained virtually flat.  Total revenues from property, income, sales, casino revenues, estate taxes and lodging taxes made up 2.34 percent of Gross State Product (GSP) in CY 2007[19] and 2.35 percent in 2013.

 

Uneven recovery means many communities still struggle

Aggregate property values are recovering, but many places continue to have declines.  Table 6 shows trends in median home sales price in the state’s largest 10 cities between 2007 and 2013. Just three out of ten show a positive trend while four of the ten show double-digit plunges in values.

Trends among smaller communities vary even more widely (Table 7). Lincoln Heights, near Cincinnati, has seen home values fall by 76.4 percent while nearby Indian Hill has seen values increase by 27.7 percent.

Though the pace of foreclosures has slowed substantially from the height of the foreclosure crisis, the number is still nearly double the rate it was before the run-up in predatory lending early in the century. Ohio faces an enormous challenge in recovering. In Cuyahoga County alone, foreclosures have caused 24,000 vacant homes, of which 10,000 or more need to be demolished. The projected cost: more than $100 million for residential properties alone.[20] A conservative estimate by the Thriving Communities Institute found that Ohio had 50,000 vacant homes that required demolition. Even with local initiatives, resources from the federal government, and money from a national mortgage settlement, the cost of dealing with this blight will run hundreds of millions of dollars, which presents a challenge to the budgets of many jurisdictions.

State cuts

In communities where the property tax base lags and the damage from foreclosure prevents recovery, state budget cuts have compounded fiscal problems. However, state funding cuts have not just affected those communities: the cuts have affected all jurisdictions in the state.[21]

Fact sheets from the Ohio Office of Budget and Management highlight the state’s reduction in funding to local government since 2010 (Table 8). In 2014 dollars, state funding for Ohio’s local governments, including funding for mandated services delivered locally, has fallen by $813.23 million dollars. (Table 8 does not include state funding for schools).

Table 8 highlights that state funding to local governments (not including schools) for all purposes – revenue sharing, mandated services and other – is $418.2 million less in 2015 than in 2010 in nominal dollars; adjusted for inflation, the gap is $813.2 million. Yet, even this tally of loss is not complete. For example, it does not include elimination of the estate tax. Between 2003 and 2012, $231.9 million a year was distributed to Ohio communities from this source. It was hoped casino tax revenues would make up for lost local government revenue. The funding from casino revenues that went to counties and municipalities in the last four quarterly distributions totaled $153.1 million. In total, this source does not replace loss of state budget cuts and other funding cuts to Ohio’s local governments.[22]

The state has changed its historic commitment to Ohio communities. The General Assembly continues to cut local resources – most recently through House Bill 5, which changed municipal income tax provisions and may cost localities millions or even tens of millions annually. [23] The $10 million provided in one time state funds to aid townships is helpful to those communities, but does not address larger cuts and stubbornly weak property tax values in many communities which undercut their ability to fully recover from damage of the recession.

 Local government employment loss

Local government, like any service sector, is labor intensive. The number of people providing those services – security, garbage collection, traffic control, emergency services, and more – has dropped sharply. The Ohio Labor Market Information Current Employment Survey data tool shows that Ohio had 41,100 fewer local government employees in November 2014 than in November 2007.[24]

The annual reports of the public retirement systems provide detailed information on public employment. The Ohio Public Employment Retirement System (OPERS), one of several state and local retirement systems in Ohio, lost 33,911 active members between the end of 2005 and the end of 2013.[25] There was loss at all levels of government, although here was also gain at some institutions, notably related to health care, a fast-growing employment category (Table 9).

Reserve funds

Reserve funds are an important indicator of the financial health of jurisdictions. In 2012, almost a third of Ohio’s jurisdictions either had lower-than-recommended levels of reserves or had expenditures that exceeded revenues. Many communities are not prepared for another downswing in the economy, a natural disaster, or further state budget cuts – the kind of situations adequate reserve funds can help a community weather.

In government accounting, “unassigned reserve funds” or “fund balances” provide a fiscal safety net for government. The state of Ohio maintains a rainy day fund and some local governments have their own policies for such funds. A primary objective of a fund balance policy is to maintain resources to cope with contingencies.

The size of Ohio’s local government reserve balances has received recent attention. Governor Kasich has said more than 90 percent of local governments in Ohio are running a surplus greater than the state’s 5 percent rainy day fund, stating “If you’re running a significant surplus, it’s kind of hard to argue that we should make your surplus bigger.”[26] However, that comparison is not apples to apples, because it compares a very large governmental unit (the state) with much smaller units (cities, villages and townships), and reserves needed for smaller jurisdictions differ from those required for larger ones.

The trade association of government finance officers, the Government Finance Officers Association (GFOA), recommends local governments retain at least 60 days of operating funds in reserve. They suggest that while reserve funds for very large units of government – like state government - might be as low as 5 percent of revenues or expenditures,[27] the recommended minimum for smaller units of government – like cities or counties - is 16.2 percent.[28]

However, there can be variation. The GFOA conducted a study to determine the right level of reserves for Colorado Springs and recommended 25 percent because of risks and uncertainty, including uncertainty around sales tax collections, legal liability, infrastructure concerns and the need for expanded emergency reserves as climate change increases weather damage.  Reserves of similar cities reviewed as part of the study showed wide variation: Fort Collins had 23.1 percent; Oklahoma City, 12.7 percent; Denver, 18.3; Indianapolis, 56.9 and Charlotte, 17.3. The average unrestricted funds for comparable cities considered in the study ranged between 20 and 25 percent. The wide range of “best practice” cities included as comparables illustrates how different jurisdictions may need different reserves.[29]

The Cincinnati Enquirer and Gannett Ohio prepared a database of local government finances, based on the Auditor’s Summarized Financial Statements.[30] One indicator covered was rainy day funds as a share of expenditures for the cities, villages, townships and counties in the Auditor’s database.  The database included complete financial data for 2,276 Ohio local governments in 2012. Of this group, nearly a third - 31.9 percent - had less than the recommended minimum reserves of 16 percent of expenditures. An even larger share of townships, which are not required to report reserve funds, had expenditures that exceeded revenues. Of the 637 villages with general fund revenues and expenses in the database, 110 or 17.3 percent had smaller reserves than recommended.  Of the 253 cities, more than a quarter (69 cities or 27.3 percent) failed to reach the recommended level of reserves – including eight of Ohio’s 10 largest cities (Table 10).

Many counties remain in precarious financial situations. Of those that use accrual accounting and report expenditures and unassigned fund balances, more than a quarter have less than recommended reserves.  The 10 with the lowest reserves are in rural places across the state (Table 11).

An aggregate view masks individual reality of different jurisdictions. Small places like Hunting Valley, with a sizable estate tax payment in 2012 that caused it to have a huge surplus, can skew overall impressions.[31] The receipt of estate tax payments provided many places with funds for capital expenditures and the purchase of big-ticket items like fire trucks and police fleets.  Hamilton Finance Director Tom Vanderhorst testified to the Senate Ways and Means committee: “The City of Hamilton currently has about $8M in reserves or roughly 20% of GF expenditures. Oddly enough, the reserve was created by an estate tax windfall received in 2011, otherwise, we would have been cutting even more services before now.”[32]

Conclusion

The economic recovery in Ohio has been slow and unevenly spread across communities. Revenues from the three major local tax sources grew very slowly between 2007 and 2013, due in significant measure to change in tax rates, which rose as the recession hammered property values and the income tax base. Funds needed to repair the damage of the recession were not available to many communities. The General Assembly continues to cut local resources – most recently through House Bill 5, which changed municipal income tax provisions and could cost municipalities millions of dollars. The $10 million provided in one-time state funds to aid townships in the waning hours of the 130^th General Assembly is helpful, but does not address larger cuts and stubbornly weak property tax values in many communities, which undercut their ability to fully recover from the recession.

The Kasich administration forecasts increase in local revenues in 2014 and 2015, but OBM factsheets reveal hundreds of millions of dollars local governments have lost in reduced state aid and program subsidies. The administration has also pointed to reserve funds of local governments to demonstrate fiscal health, but the level they identify as a healthy reserve (5 percent) is a third of the level recommended by the Government Finance Officers Association. In terms of industry best practice, almost a third of the municipalities and counties listed in the Cincinnati Enquirer database lack adequate reserve balances to weather emergencies, natural disaster, or unexpected expenses.

Local finances are worse in some places than in others. Property values are still below pre-recession levels on a statewide basis, with recovery not forecast until 2017. Some communities, like Lincoln Heights outside of Cincinnati, where median home values fell by 76 percent, or Maple Heights outside Cleveland, where median home values fell by 54 percent, have much longer to wait.

Many places raised local tax rates, accounting for a significant share of the gain in local tax revenues. However, state budget cuts undermined increased local efforts. Communities are hundreds of millions short of what they need to repair the physical damage of the foreclosure crisis. Local governments employ 41,100 fewer people than before the recession.

Local public services support our quality of life, protect family wealth and underpin opportunity. We all deserve sound, dependable services and stable public finance. Ohio’s communities need more support from the state and a period of stability - without cuts or threats - to recover, rehire and rebuild.