Monday, May 15, 2000

City's budget outlook healthy

Based on rosy forecast for economy

By Cliff Peale
The Cincinnati Enquirer

        Even if a recession hits in 2002 and lasts for a year, the city of Cincinnati's economy looks good for the long term, a new study shows.

        Driven by growth in services — such as banking, advertising and computer software — a larger economy should produce increased tax revenue through 2006, providing a rosy long-term budget picture.

        From now until 2005, per-capita personal income will grow 4.2 percent, and another 4.7 percent from 2005 to 2010, said the report from Standard & Poor's DRI, an economic consultant hired by the city to produce the study every two years.

        Those predictions are substantially more than the 1998 S&P report.

        “I was surprised at the level of the growth,” City Manager John Shirey said. “They're just larger numbers than I expected.”

        In mid-April, Mr. Shirey used the report to predict a $15 million city surplus after 2006, reversing an earlier warning of a $17 million budget deficit.

        Increased economic activity will mean more tax money in city coffers, but that will not necessarily mean more money for basic services — such as trash collection — that might touch citizens' ev eryday interaction with City Hall, Mr. Shirey said.

        Instead, he will try to persuade City Council to hold the line on the operating budget and use the extra money for capital costs such as road repairs and economic development projects such as convention center expansion.

        “I think that's what you do when times are good,” he said.

        The city's service economy, the main growth driver, will even start to catch up with Cincinnati's suburbs, the report predicted. From now until 2006, without a downturn, service employment will increase 2.3 percent in the city and 2.9 percent in the suburbs.

        While a recession would be painful, with lost jobs and a decline in real personal income after adjusting for inflation, it would have little impact on the city budget for the next two years, and the report predicts a robust recovery after the downturn hits bottom in 2003.

        The rosy estimate used by the city administration was the more conservative of the two estimates provided by Standard & Poor's. It assumes the 45 percent probability of a recession will become reality.

        That means avoiding funding commitments that might require spending money in two or three years, with the payoff down the road, Finance Director Tim Riordan said.

        “We want to be careful about doing too many things,” he said. “What they're saying is it looks like there's a lead-in to some stronger times.”

        Under the scenario, presented by Standard & Poor's to city officials last month, an overheated economy in 2001 will cause a crackdown on interest rates and a severe stock-market correction, leading to a downturn.

        Adjusted for inflation, real personal incomes would decline in 2002 and 2003, according to that scenario. The city's total employment would decline 3.5 percent over six quarters ending in mid-2003.

        There would be fewer jobs in construction and manufacturing, and people would make fewer major purchases such as houses or cars, the consultant said.

        But even if that recession comes, personal incomes would rebound to grow 5 percent annually in 2004 and 2005.

        That means taxable income — the base for the city's earnings tax — would increase 4.4 percent annually between 2000 and 2006, compared with 5.1 percent in the scenario that does not include the recession.

        George Vredeveld, director of the Center for Economic Education at the University of Cincinnati, said there is little sign of an immediate downturn.

        “I don't think we're looking at any type of recession,” he said. “If we do get a downturn, it's much more likely to be toward the end of the next two-year period.”

        Even the negative parts of the prediction for city officials are better than in past years. For example, it predicts the city will continue to lose manufacturing jobs, but at a slower rate than previously thought, Mr. Shirey said.

        The “recession forecast” calls for manufacturing employment to fall 1.6 percent until 2005, and then 1 percent during the next five-year period.


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