As the economy continues to decline, states may begin to make budget cuts that could affect local government funding. However, a new report from the Washington-based National League of Cities suggests a new approach may be in order.

During the brief recession in 2001, cities suffered from cuts in state revenues and state takeaways from local revenues. In his NLC report, "Cities and State Fiscal Structure," Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago, says that states should instead try different ways to structure local revenue authority and capacity. "Not enough attention is paid to the variation in state-local fiscal structures that exist," he says in the report. "There are essentially 50 different state-local systems."

States should consider authorizing more local taxing authority, maintaining state aid levels and avoid imposing tax and spending limits in response to short-term condition changes. "Unfortunately, we usually see the opposite occur, resulting in further weakening of the state-local sector's ability to respond to and recover from the downturn," Pagano says.

The report is available at www.nlc.org.