U.S. cities reel from store closings

NEW YORK (CNNMoney.com) -- U.S. cities from Duluth, Ga., to Los Angeles are being hit with a double whammy: Not only are they rapidly losing their retail businesses, but many are also struggling to replace these vacant storefront with new businesses.

"City officials tell us that the economic impact [of this pattern] on regional and local communities could be very severe," said Christiana McFarland, research manager with the National League of Cities (NLC), a non-profit group that represents municipal governments.

Specifically at risk are community services such as libraries, schools and senior centers. That's because cities in 35 states rely on sales taxes either as a primary or additional source of revenue to pay for these facilities, said McFarland.

According to the NLC's new survey of 400 city officials, 57% said the pace of store closings is "either worse or much worse than it was last year."

This trend has also accelerated in larger metropolitan areas that are more sales tax-reliant versus cities that generate a majority of their revenue from sources such as property and income taxes, the report showed.

While many large chain stores such as Circuit City, Linens 'N Things and Fortunoff have buckled under the recession, 63% of city officials polled said it's the locally-owned Main Street sellers - mom-and-pop type stores - who are being hit the hardest in their area by the economic downturn.

McFarland called this a "silent problem" with wide-reaching repercussions.

"The media tends to focus on the bigger retailers that are going out of business, but the small sellers are just as vital to cities," she said.

The International Council of Shopping Centers (ICSC) estimates that about 73,000 stores - both public and private - will close in the first half of the year, doubling that number for the full year.

McFarland said local merchants tend to spend more of their revenue on inventory, supplies and services provided by other local businesses. "They create a network among other retailers and suppliers, and keep the revenue in the local economy," she said.

At the same time, these economic dependencies have a dire domino effect when one business in the link fails, thereby putting the other business at risk.

To that end, 81% of city officials surveyed said the retail slowdown was having a negative impact on other local businesses and on the regional economy.

What's worse is that 78% of respondents reported a decline in new business start-ups.

"The current economic crisis is not only resulting in increased store closings but the business churning process, whereby newer more productive businesses enter the market, is also being disrupted," the report said.

As a consequence, McFarland said cities are looking for ways to become less dependent on retail as a revenue source.

"They're trying to get services like nail salons and laundromats to fill the empty storefronts," she said. "These services tend to ride out the economic crisis better."

Also, some cities are looking at redeveloping retail space for "mixed use," such as office space and community centers. Others are looking at revenue sharing agreements with other cities or reaching out to the private sector for help.

But the most likely short-term fix to make up for the sales tax shortfalls will hit city residents' in their pocketbooks.

McFarland said she wouldn't be surprised to see more cities raising charges, fees and fines for using and misusing public services.

"At some point cities will reach the tipping point and their tax structure will change to make them less reliant on retailers," she said.