By Lisa Lambert

WASHINGTON (Reuters) - Fiscal pain for cities grew more acute this year and will likely become a chronic problem in many places, according to a survey of civic officials released on Tuesday.

The National League of Cities, which represents city leaders across the country, said finance officers are growing accustomed to a "new normal," defined by lower property values and declining home sales.

Yet, a great unknown hangs over their budgets -- namely the federal government's response to a weak economy mired in the effects of a recession that officially ended two years ago.

"The biggest challenge for cities right now lies in the uncertainty about the national economy and where it's headed in the coming months," said Christopher Hoene, director of the group's Center for Research and Innovation, on a call with reporters. "Most cities have questions about whether we're in a state of recovery or whether the economy is slumping again."

The housing bust, financial crisis and recession created a trifecta of pain for state, county and city governments and the effects of the housing downturn linger for many U.S. cities.

Their revenues have dropped for five straight years, forcing spending cuts across the board and difficulties over infrastructure and borrowing. The League found cities are pulling back on capital-intensive projects to put money toward basic services and are reluctant to issue bonds, which would force them to spend on interest payments and debt-servicing costs.

"For cities, the collective impact of property values continuing at levels far below their 2007 peaks, consumer spending slowing, consumer confidence eroding and markets possibly entering a double-dip recession is the worst since the Great Depression," the report said.

City finance officers expect to close 2011 with 2.3 percent less revenues than in 2010 and spending down 1.9 percent. The previous year, revenues dropped 3.8 percent from 2009 and expenditures were down 4.4 percent, the National League of Cities said.

Most cities rely on property taxes as their chief source of funding. But due to a lag in property valuations used to determine tax bills, the bursting of the real estate bubble hit city coffers hard in 2010, when property tax revenues dropped for the first time in 15 years.

As real estate values have remained depressed, cities expect revenue to decline again this year by 3.7 percent, and to drop further in 2012 and 2013.

Finance officers still have negative perceptions of their fiscal situations, but those situations "are not necessarily worsening and may reflect a new normal in terms of their assessment and expectations of meeting nearer-term financial needs," the report said.

The mayor of Chicago, Rahm Emanuel, has said the Midwestern city's financial mess is a structural problem and Chicago can no longer take one-time measures to resolve shortfalls. Emanuel will unveil his fiscal 2012 budget next month, with suggestions for wiping out a projected $635.7 million gap.

Sales tax revenues were likely flat this year after dropping last year, as were income tax receipts, according to the League of Cities report.

"The lack of growth in these revenues suggests that the economic recovery following the 2001 recession was, as many economists have noted, a recovery characterized by a lack of growth in jobs, salaries and wages," the report said.

SERVICE CUTS, TAX HIKES

To cover spending demands, two in five cities increased fees for services and one in four increased the number of fees. One in five also hiked property taxes in 2011.

Nearly three-fourths of cities have cut personnel and more than one-third changed health benefits for employees. Most commonly, they froze hiring and half of cities cut pay.

Detroit, one of the worst hit by the recession, recently cut teachers' wages by 10 percent.

Meanwhile, 60 percent of cities have delayed or canceled infrastructure projects.

They are also relying on reserves -- drawing down their savings each year -- and the League expects cities' ending balances to be nearly 40 percent lower this year than at the end of 2008.

FENDING OFF ECONOMIC UNCERTAINTY

As the U.S. Congress identifies spending cuts to reduce the federal deficit, cities are growing nervous about how changes could affect them, Hoene said. Their budgets are so squeezed that even a small cut could have a big impact, he added.

About 30 years ago, federal funds made up 15 percent of municipal spending. Now that portion is closer to 5 percent, according to Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago.

But the 2009 economic stimulus plan indirectly increased the support, transferring money to states that trickled down to cities, Pagano said on the call. Now states are compensating for the end of the plan by cutting aid to local governments.

Since 2009 states have slashed general aid for half the cities and nearly half of all cities were pushed out of revenue sharing as well, the League found.

The group is asking the federal government to put more money into infrastructure and jobs, and supports President Barack Obama's recent $447 billion tax and spending proposal.

Pagano noted the proposal would limit the exemptions taxpayers can take for interest from municipal bonds. That, in turn, could lower the infrastructure investments cities make, since most bonds are sold for capital works projects.