More than half, 57 percent, of municipal officials said finances were worse in fiscal 2011 than in 2010, the National League of Cities said today, citing a survey of municipal officials. Inflation-adjusted revenue is headed for a fifth- straight annual drop, while worker health-care and pension costs rose for more than 80 percent. Half said state aid has declined.

The good news was that the number of city officials saying their communities are worse off was lower compared with the 87 percent who said that last year. The number who indicated things had improved rose to 43 percent from 13 percent.

“We’re in a situation where they don’t see it getting worse, but it’s not getting any better,” Christopher W. Hoene, research director for the advocacy organization in Washington, said by telephone yesterday.

The plight of cities has exerted a drag on the economy as local officials move to cut spending to cope with diminished tax collections and reduced assistance from states dealing with their own budget deficits, government data show. More than a half-million jobs have been cut from municipal payrolls in the past three years, according to U.S. Labor Department figures. States have slashed 130,000 positions since August 2008.

Property Markets Slump

The real-estate rout that’s pushed down home prices in major metropolitan markets by almost a third from a July 2006 peak has cut into property levies, while ebbing consumer confidence has curbed retail sales-tax collections by municipalities.

State and local property-tax receipts dropped 1.2 percent in the second quarter from a year earlier, the U.S. Census Bureau said today. That marked the third-straight decline.

Municipal governments are also shouldering rising medical- care expenses for workers and face widening unfunded pension liabilities after tumbling markets led to losses in 2009.

Local governments have only recently begun to feel the full brunt of the housing market’s drop because values used for taxes typically lag behind markets by 18 months or more, according to the League. Receipts likely will decline in fiscal 2012 and 2013 for the same reason, the group said.

Default Speculation

The financial strains on cities have fostered investor speculation that municipal-bond defaults would rise after banking analyst Meredith Whitney’s firm in September 2010 forecast that more issuers would renege on their debts.

While communities such as Pennsylvania’s capital of Harrisburg have staved off default, Central Falls, Rhode Island, began bankruptcy proceedings last month because of costs tied to pensions and employee health care.

“Those choices are very, very rare,” Hoene said.

Through Sept. 22, about $1.18 billion of municipal debt entered default this year, compared with almost $3.61 billion for 2010, according to the Distressed Debt Securities Newsletter in Miami Lakes, Florida. On the whole, cities are paying their bills and balancing their budgets by eliminating jobs, canceling projects and charging more for services, Hoene said.

Local governments have slashed 550,000 jobs from their payrolls since September 2008, the month that the Lehman Brothers Holdings Inc. sought bankruptcy court protection, accelerating the financial crisis. Half of cities cut or froze employee pay, 31 percent fired workers and 30 percent cut health-care benefits, the League said.

Delayed Projects

Three out of five municipalities delayed or canceled “capital infrastructure projects,” according to the survey. Mayors and city councils also took steps to increase revenue. Fees charged to residents were raised in 41 percent of cities, while 23 percent imposed new charges and 20 percent raised property-tax rates, the League said.

The survey of 1,055 municipal finance officers, including those in all U.S. communities with more than 50,000 residents, was conducted by mail and e-mail from April to June. The results are based on 272 responding cities.

Since the end of June, there has been growing investor concern that the U.S. economy may stall and slip into recession. National nonfarm payroll growth halted a 10-month climb in August, Labor Department figures show. Manufacturing output slowed last month while consumer confidence plunged.

Given the direction of the economy, it may be two to five years before local revenue grows enough to let cities fully emerge from the slump spurred by the recession that ended in June 2009, Hoene said. A housing market recovery will be key to any rebound, given the dependence on real-estate taxes.

“There’s a big question mark about where we are headed economically,” he said.