Fourth in a series on the 2011 budget.

What happens to New Rochelle when the U.S. suffers through a recession? You can see the rug being pulled out from under us, undoing sound financial planning that took a decade to accomplish.

Recession’s Downward Pressure on Revenue

Look at the chart above, showing revenue directly linked to the pace of the overall economy; watch the economy collapse after 2007. That’s a loss of almost $9 million tied directly to the national recession and state financial crisis, a loss the City is powerless to stop.

What does that mean for property owners in New Rochelle? Think of it this way: replacing that $9 million in the City budget, holding everything else equal, would require a tax hike of about 21%.

But that’s not the extent of revenue loss for the City. The revenue source on which the bad economy had the most direct effect is the sales tax.

Sales Tax Plummets

Yes, sales tax revenue rebounded slightly in 2010, and we expect a similar, tiny recovery in 2011 — but the damage done was immense. We’re still down over $3 million from 2007, which would require an additional 7.25% property tax hike to make up the difference.

What else could go wrong? Well, as I mentioned in an earlier post, the National League of Cities released a report warning that while revenues for many cities have been declining for the past four years, reduced property values are only just beginning to make an impact on property tax collections, putting further pressure on local budgets.

In fact, New Rochelle has seen declining tax rolls for most of the decade, even during the housing boom. Municipalities get it coming and going. When property values are falling, taxpayers understandably file for tax reductions through the Board of Assessment Review, small claims court or the certiorari process. When property values are rising, as they were in the first half of the decade, disparities between the residential and commercial sectors legally entitle commercial properties to tax reductions, even when their market values have remained constant or increased at a rate slower than the market overall. (That last point is very confusing, even to municipal finance experts — call me if you want more detail.) Whatever the cause, the drop has been dramatic:

Tax Roll Continues to Diminish

Here’s what this means: if property tax rates were to remain constant year to year, New Rochelle would have lost $4.5 million since 2007, requiring another 10.75% tax hike over three years just to keep the revenue from our property tax levy constant.

So let’s put all these pieces together and examine the total picture. It is not pretty: New Rochelle would have needed a tax hike of almost 40% over three years just to catch up to the failing economy. That’s without so much as a penny of additional discretionary spending.

Wait until you see what kind of pressure rising expenses have put on the City budget. That will be the subject of the next post.