A sure sign of trouble is when the current Congress and president can quickly agree on something. So it doesn't bode well for the U.S. economy when these factions hammered out an economic stimulus package in a matter of days.

Mark McMullen is a senior economist with Moody's Economy.com who specializes in state and local government fiscal conditions. He shared his insights on what the current economic trouble means for fire chiefs.

How will the economy affect cities and towns?

The outlook is really dark for state fiscal conditions. It is about an even bet that we are heading into a recession. We saw economic activity contract in December and it sure looks like it is contracting in January. With less economic growth and less income growth, you are going to get less sales and income tax. This will put pressure on states and localities.

What about property tax issue and the housing market?

There isn't a universal story when it comes to property tax. In so many parts of the country … you see strict caps on how fast either the property taxes can rise or the tax assessments of your property value. In a lot of places, we haven't seen the huge boom in property tax revenue that we did see in house prices. As a result, we're not going to see the same sort of bust that we're seeing now in house prices.

Less building activity over time is going to weigh on property taxes. But that said, there was a tremendous amount of housing stock that went into place over the last five years. In many places, property taxes are shielded from taking big declines, but they aren't everywhere. Many places are considering property tax reform right now just for that reason. The outlook for property tax is pretty dark, even in places where strict controls will keep them from collapsing. Nowhere is the outlook good. Property taxes are expected to grow at a below average rate for the next three to four years and that weighs directly on state and local financing.

How dark will it be?

It could be particularly bad for municipalities. The current recession, if indeed we are in one, looks about no more severe than what we suffered through during the beginning of the decade. The environment for local government is quite a bit worse than at that time. Primarily it is because of the weakness in property tax revenue that is the difference. Over the last 30 to 40 years, property tax revenues have grown faster during recessions than they have during expansions. This has been a real source of support for municipalities. The first thing that state lawmakers cut when budgets get tight are the transfers down to municipal governments. In past recessions that has been tolerable because localities have continued to receive healthy property tax growth to offset a loss in state funds. This time around, localities will be in a worse position should states cut off their funding. It may result in actual program cuts.

Is there a lag time between economic downturn and when the effects are felt at the municipal level?

There certainly is. Over the past five recessions we've seen the local spending growth doesn't bottom out until one to two years after the underlying economic growth does. Part of that is because budgets are set in advance. And, part of it is that policy makers try to spend more when the economy is weak to stimulate growth. The delay was very pronounced early this decade, when spending didn't bottom over two years after the economy did.

Is there also a lag time for recovery?

Government cycles aren't as severe as the private sector. You don't see governments shutdown schools or firehouses as often as you see manufacturers close down plants. There isn't as much volatility, but the pattern is the same. Once there's weakness in revenue, then it takes sometime before it is reflected in local spending.

What type of municipalities are at the greatest and least risk?

There are two groups that are in particular danger. One is the areas that are highly exposed to housing market downturns. Municipalities in California, Nevada and Florida, places that are undergoing sharp housing market contractions are at the biggest risk of revenue decline. And that goes beyond the property tax issue. Sales tax are in a lot of trouble because consumers are spending a lot less. Households are spending a lot less of their housing wealth than they were during the boom. This is putting a lot of pressure on these big-ticket household furniture purchases and automobile purchases that really drive sales tax revenues. In states that are exposed to the housing downturn, we're seeing a revenue drought already. And this is going to directly affect the municipalities insofar as about a third of their spending on fire protection comes as a result of inter-governmental transfers. These transfers are at great risk in states that are facing revenue drought. In addition, you are also looking at states exposed to declining manufacturing. The industrial Midwest and the domestic auto manufacturing areas are in particular trouble.

It is difficult to find anyone who will be completely unscathed. That said, the areas less dependant on housing market, the broad south excluding Florida, Texas and the Pacific Northwest where the housing market downturn looks to be relatively mild, will also have relatively mild revenue downturns. The second group would be states and municipalities that are enjoying revenues from their natural resources, in areas that are energy producers in particular. With oil prices so high, local governments in energy-producing areas are doing quite well and should continue for some time.

What warning signs should chiefs watch for?

Should a recession ensue, it is going to be characterized by weak consumer spending. This wasn't the case in the last recession, when despite a lot of job losses, consumers continued to buy cars and buy houses. So, if you start seeing measures of retail sales or sales taxes or retailers going out of business in your area, that's a sign that the revenues are likely to be weakened in the near term followed by less spending by local government.

What can fire chiefs do?

Try to undergo hiring and capital projects in the near term. The general fund side of state budgets should hold up fairly well through the end of the year. This summer we probably won't see a whole lot of year-end budget cuts and tax increases. Those are probably going to come in the following fiscal years. Another thing is that borrowing costs and bond rates are low right now, in terms of borrowing to build firehouses and to buy trucks. The outlook is for higher borrowing costs in the future, given the lack of credit that is out there right now. Strike while the iron is hot. Future years are going to be much less rosy in terms of own revenue and inter-governmental revenue.

What's the long-term outlook?

Fire protection has been surprisingly stable over the past 30 years in terms of its share of local government spending. Fire protection has made up a little over 1% of total capital expenditure and almost 3% of overall local government expenditures. Building roads, schools and prisons costs more than building firehouses. We're seeing the children of the baby-boom generation coming of age. As the school-age population becomes a smaller share of the overall population, the relative demand for schooling is declining. There is a chance here with the weaker demand for school, that fire stations can grab a bigger piece of the local pie in the decade ahead. Of course, that's aside from the cyclical concerns right now, which looks like economic growth is slowing, which will bring local revenues and expenditures down with it.