City Economic and Fiscal Resilience: How can we measure it? How can we improve it?

#LiveAtUrban

City Economic and Fiscal Resilience: How can we measure it? How can we improve it?

#LiveAtUrban

Michael A. Pagano Dean, College of Urban Planning and Public Affairs Professor, Public Administration University of Illinois at Chicago

The Fiscal Policy Space of Cities

The generous support of the John D. and Catherine T. MacArthur Foundation is greatly appreciated.

Fiscal Policy Space: Sets of attributes that define the range of fiscal policy options available to officials.

Change frame from averages to variation

Change frame from fiscal condition to fiscal behavior.

-10.00%

-5.00%

0.00%

5.00%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Change in Constant Dollar Revenue (General Fund) Change in Constant Dollar Expenditures (General Fund)

0.0

10.0

20.0

30.0 Actual Ending Balance as % of Expenditures

Fiscal Policy Space Attributes • The intergovernmental context, including both state-imposed and locally-

imposed limitations on taxes and expenditures.

• The fiscal base, the linkage between a city’s economic base and its fiscal architecture or authority to tap into a city’s underlying economy.

• The demands and preferences of citizens for a quantity and quality of

services and the local political culture that creates a set of expectations, norms of conduct and behavior, and informal rules.

Boise

Seattle

Portland

Reno Salt Lake City

Los Angeles Phoenix

Omaha

Denver

Albuquerque

Austin

Oklahoma City

Wichita

Little Rock

Baton Rouge

Kansas City

Des Moines

Minneapolis

Milwaukee Chicago

Indianapolis

Louisville

Nashville

Jackson Montgomery Augusta

Jacksonville

Virginia Beach

Dayton Columbus

Grand Rapids Buffalo

Pittsburgh

Baltimore Philadelphia

New York

Bridgeport Providence

Boston

Anchorage

Honolulu

Houston

Dallas

San Francisco

San Diego

San Antonio

Detroit

San Jose

Cape Coral

Las Vegas

Sacramento

Memphis

Cleveland

Tampa

Riverside

St. Louis

El Paso

Tucson

Fresno

Stockton

Bakersfield

Cincinnati

Charlotte

Durham

New Orleans

Tulsa

Orlando

Colorado Springs

Greensboro

Raleigh

Birmingham

Toledo

Rochester

Richmond

Lexington

Madison

Corpus Christi

Oxnard

Akron

Winston-Salem

Worcester

Ft. Wayne

Knoxville Chattanooga

Modesto

Atlanta

Spokane

Lincoln

Springfield

Miami

Shreveport

Santa Rosa

Mobile

Fayetteville

Lubbock

Syracuse Hartford

Huntsville

New Haven

McAllen

Property + Sales + Income

Property + Sales or Income

Property or Sales Only

Map 1: City Fiscal Authority

Source notes: State-by-state information on local tax authority is drawn from several sources: 1. Critical Issues in State-Local Tax Policy: A Guide to Local Option Taxes (National Conference of State Legislatures, 1997); 2. Home Rule in America, by Dale Krane, et. al. (1999); and 3. Updated information from state and local government websites conducted in 2014-15.

Boise

Seattle

Portland

Reno Salt Lake City

Los Angeles Phoenix

Omaha

Denver

Albuquerque

Austin

Oklahoma City

Wichita

Little Rock

Baton Rouge

Kansas City

Des Moines

Minneapolis

Milwaukee Chicago

Indianapolis

Louisville

Nashville

Jackson Montgomery Augusta

Jacksonville

Virginia Beach

Dayton Columbus

Grand Rapids Buffalo

Pittsburgh

Baltimore Philadelphia

New York

Bridgeport Providence

Boston

Anchorage

Honolulu

Houston

Dallas

San Francisco

San Diego

San Antonio

Detroit

San Jose

Cape Coral

Las Vegas

Sacramento

Memphis

Cleveland

Tampa

Riverside

St. Louis

El Paso

Tucson

Fresno

Stockton

Bakersfield

Cincinnati

Charlotte

Durham

New Orleans

Tulsa

Orlando

Colorado Springs

Greensboro

Raleigh

Birmingham

Toledo

Rochester

Richmond

Lexington

Madison

Corpus Christi

Oxnard

Akron

Winston-Salem

Worcester

Ft. Wayne

Knoxville Chattanooga

Modesto

Atlanta

Spokane

Lincoln

Springfield

Miami

Shreveport

Santa Rosa

Mobile

Fayetteville

Lubbock

Syracuse Hartford

Huntsville

New Haven

McAllen

> 78.4%

63.6% - 78.4%

48.7% - 63.5%

33.8% - 48.6%

< 33.8%

Map 2: Own Source Revenues as a % of General Revenues

Source Note: U.S. Census of Governments, 2012

Mean: 63.6% Standard Deviation: 14.9%

Boise

Seattle

Portland

Reno Salt Lake City

Los Angeles Phoenix

Omaha

Denver

Albuquerque

Austin

Oklahoma City

Wichita

Little Rock

Baton Rouge

Kansas City

Des Moines

Minneapolis

Milwaukee Chicago

Indianapolis

Louisville

Jackson Montgomery Augusta

Jacksonville

Dayton Columbus

Grand Rapids

Pittsburgh Philadelphia

Honolulu

Houston

Dallas

San Francisco

San Diego

San Antonio

Detroit

San Jose

Cape Coral

Las Vegas

Sacramento

Cleveland

Tampa

Riverside

St. Louis

El Paso

Tucson

Fresno

Stockton

Bakersfield

Cincinnati

Charlotte

Durham

New Orleans

Tulsa

Orlando

Colorado Springs

Greensboro

Raleigh

Birmingham

Toledo

Lexington

Madison

Corpus Christi

Oxnard

Akron

Winston-Salem

Ft. Wayne

Modesto

Atlanta

Spokane

Lincoln

Miami

Shreveport

Santa Rosa

Mobile

Fayetteville

Lubbock

Huntsville

McAllen

> 24.8%

17.7% - 24.8%

3.2% - 17.6%

< 3.2%

Map 3: State Aid as a % of General Revenues

Source Note: U.S. Census of Governments, 2012

Mean: 10.4% Standard Deviation: 7.2%

Boise

Seattle

Portland

Reno Salt Lake City

Los Angeles Phoenix

Omaha

Denver

Albuquerque

Austin

Oklahoma City

Wichita

Little Rock

Baton Rouge

Kansas City

Des Moines

Minneapolis

Milwaukee Chicago

Indianapolis

Louisville

Nashville

Jackson Montgomery Augusta

Jacksonville

Virginia Beach

Dayton Columbus

Grand Rapids Buffalo

Pittsburgh

Baltimore Philadelphia

New York

Bridgeport Providence

Boston

Anchorage

Honolulu

Houston

Dallas

San Francisco

San Diego

San Antonio

Detroit

San Jose

Cape Coral

Las Vegas

Sacramento

Memphis

Cleveland

Tampa

Riverside

St. Louis

El Paso

Tucson

Fresno

Stockton

Bakersfield

Cincinnati

Charlotte

Durham

New Orleans

Tulsa

Orlando

Colorado Springs

Greensboro

Raleigh

Birmingham

Toledo

Rochester

Richmond

Lexington

Madison

Corpus Christi

Oxnard

Akron

Winston-Salem

Worcester

Ft. Wayne

Knoxville Chattanooga

Modesto

Atlanta

Spokane

Lincoln

Springfield

Miami

Shreveport

Santa Rosa

Mobile

Fayetteville

Lubbock

Syracuse Hartford

Huntsville

New Haven

McAllen

No TELs

Nonbinding Property Tax Limit

Potentially Binding Property Tax Limit

Potentially Binding Property Tax Limit + General Revenue/Expenditure Limit

Map 4: State Tax and Expenditure Limits (TELs)

Source notes: State-by-state information on TELs is drawn from the following sources: 1. National Conference of State Legislatures (various years); 2. Home Rule in America, by Dale Krane, et. al. (1999); 3. The Lincoln Institute of Land Policy’s tracking of local property tax limits, and 4. Updated information from a search of state and local government websites conducted in 2014-15.

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Non-binding TEL cities Binding-TEL cities

TEL gap by binding/non-binding TELs

The fiscal base is the weighted average of per capita values of properties, retail sales, and income compared to the reliance of a city on property, sales, and income tax receipts.

0.00

0.50

1.00

1.50

2.001

23

Economic base for 1) property tax, 2) sales tax, and 3) income tax

Tax ratio of 1) property tax, 2) sales tax, and 3) income tax

0.00

0.20

0.40

0.60

0.80

1.001

23

Economic base for 1) property tax, 2) sales tax, and 3) income tax

Tax ratio of 1) property tax, 2) sales tax, and 3) income tax

Orlando Buffalo

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.401

23

Economic base for 1) property tax, 2) sales tax, and 3) income tax

Tax ratio of 1) property tax, 2) sales tax, and 3) income tax

Denver

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.401

23

Economic base for 1) property tax, 2) sales tax, and 3) income tax

Tax ratio of 1) property tax, 2) sales tax, and 3) income tax

Boston

A measure of local demand that combines political ideology, housing affordability, and public sector unionization.

Low Demand 2002 2012 High Demand 2002 2012

Ft. Wayne IN -0.42 -1.11 Hartford CT 1.91 1.8

Lubbock TX -1 -1.39 New Haven CT 1.89 1.84

Virginia Beach VA -1.04 -1.08 Providence RI 1.71 1.44

Wichita KS -1.08 -0.97 Boston MA 1.67 1.42

Winston-Salem NC -1.09 -0.85 Bridgeport CT 1.63 1.39

Lincoln NE -1.13 -1.25 Detroit MI 1.22 1.78

Huntsville AL -1.4 -1.07 Miami FL 1.2 1.44

Colorado Springs CO -1.42 -1.29

Boise

Seattle

Portland

Reno Salt Lake City

Los Angeles Phoenix

Omaha

Denver

Albuquerque

Austin

Oklahoma City

Wichita

Little Rock

Baton Rouge

Kansas City

Des Moines

Minneapolis

Milwaukee Chicago

Indianapolis

Louisville

Nashville

Jackson

Jacksonville

Virginia Beach

Dayton Columbus

Grand Rapids Buffalo

Baltimore Philadelphia

New York

Bridgeport Providence

Boston

Anchorage

Honolulu

Houston

Dallas

San Francisco

San Diego

San Antonio

Detroit

Cape Coral

Las Vegas

Sacramento

Memphis

Cleveland

Tampa

Riverside

St. Louis

El Paso

Fresno

Stockton

Bakersfield

Cincinnati

Charlotte

Durham

New Orleans

Tulsa

Orlando

Colorado Springs

Greensboro

Raleigh

Birmingham

Toledo

Rochester

Richmond

Lexington

Madison

Corpus Christi

Oxnard

Akron

Winston-Salem

Worcester

Ft. Wayne

Knoxville Chattanooga

Atlanta

Spokane

Lincoln

Springfield

Shreveport

Santa Rosa

Mobile

Fayetteville

Lubbock

Hartford

Huntsville

McAllen

4 FPS Attributes (N=11)

3 FPS Attributes (N=30)

2 FPS Attributes (N=32)

1 or No Attribute(s) (N=18)

Map 5: Fiscal Policy Space – City Clusters (2010)

-200

-150

-100

-50

0

50

Total Tax License/Permit Fines, Forfeitures,Penalties

Charges Federal and StateAid

Other Total Non-Tax TOTAL REVENUE

Per Capita Revenue Change, 2007-2012 (Governmental Funds, 2012 dollars)

Cluster 1 Cluster 2 Cluster 3 Cluster 4

-350

-300

-250

-200

-150

-100

-50

0

50

100

General Gov Public Safety Public Works Health Culture & Rec Capital Outlays Debt service Other TOTALEXPENDITURES

Ending Balance

Per Capita Spending Change from 2007-2012 (Governmental Funds, 2012 dollars)

Cluster 1 Cluster 2 Cluster 3 Cluster 4

The FPS is a behavioral frame and needs to be better understood in order to:

• Analyze the efficacy of fiscal decisions, • Design federal and state programs, and • Identify appropriate changes to constraints that can enhance city

leaders’ abilities to efficiently, effectively, and fairly pursue pathways to improving conditions in cities.

Thank you Contact information: Michael Pagano: MAPagano@UIC.edu Chris Hoene: Choene@calbudgetcenter.org

Public access to the data base of 100 cities with 600+ variables covering the time period 1992-2012 can be found at: http://www.srl.uic.edu/fiscalpolicyspace/index.php

City Economic and Fiscal Resilience: How can we measure it? How can we improve it?

#LiveAtUrban

Putting Municipal Fiscal Health in Context

Tracy Gordon

City Economic and Fiscal Resilience: How can we measure it? How can we improve it?

September 8th 2016

For most of US history, localities were the de facto public sector

Today, although federal level dominates, states and localities still provide most direct services

System of federal grants evolved to address things the local public sector cannot do well

Phases of American Federalism

Dual Federalism 1787–1933

Cooperative Federalism 1933–1962

Creative Federalism 1962–1968

New Federalism 1968–1980

Fend for Yourself Federalism 1980–1992

New Flexibility 1992–2000

New Accountability/Executive

Federalism/etc.

2000+

How to allocate grant dollars? Suggestive evidence they are not going where they should

• Revenue capacity US average tax rate multiplied by state base

• Expenditure need US average per capita spending multiplied by state population and adjusted for costs and demographics

• Fiscal gap at capacity Difference between the two measures, with federal grants added in

Gap at Capacity After Transfers

< -$1,000 -$1,000 -- $0 $0 -- $1,000 > $1,000

AK ME

WI VT NH

WA ID MT ND MN IL MI NY MA

OR NV WY SD IA IN OH PA NJ CT RI

CA UT CO NE MO KY WV VA MD DE

AZ NM KS AR TN NC SC DC

OK LA MS AL GA

HI TX FL

U R B AN I NS TI TU TE

Source: Urban Institute calculationsNote: Gap at capacity after transfers equals a state's revenue capcity plus federal transfers minus expenditure need.

This is also an issue for state grants to local governments

Fisher & Prasad (2012):

• Mostly per capita formulas with minimums

• Need, but not cost factors included

• Suspended in times of state fiscal crisis

Many alternative methods for directing aid dollars Category Concept Source Method Indicators

Economic

Index of Center City

Hardship

Nathan and Adams (1976) Urban to suburban ratios, weighted

Unemployment, dependency

of population, education,

income, crowded housing,

poverty

Indices of Social,

Economic and Fiscal

Need

CBO (1978) Composite scores from point-in-

time indicators and outside indices

Social Need: Nathan and

Adams index, plus

unemployment and per capita

income

Economic: 6 indicators

Fiscal effort: tax effort,

property tax base, and two

comprehensive measures

developed by HUD

Fiscal Capacity ACIR (1971) Representative Revenue System

Revenues collected divided by

revenue capacity

ACIR (1977) Fiscal Pressure

Tax effort divided by change

in tax effort

Need-capacity Gap

Ladd and Yinger (1989),

Ratcliffe, Riddle & Yinger

(1990), Reschovsky (1993)

Revenue-raising capacity minus

standardized expenditure need,

expressed as a % of capacity

Standardized expenditure

need from costing functions,

regressions, and

environmental cost factors

Revenue capacity is revenue

that can be raised by applying

a uniform tax burden, as a %

of resident income

Alternatives, cont’d Fiscal & Financial

Urban Fiscal Strain

Treasury (1978)

Average change in weighted

variables; combined with other

indices

Population, per capita income,

own-source revenue burden,

long-term debt per capita,

property value (full market)

Fiscal stress warning

signs

ACIR (1973) Based on qualitative evaluation of

cities’ financial status

One-year operations,

continuous operations,

working capital, short-term

operating loan balance,

property tax delinquency,

property valuation

Fiscal strain

Clarke and Ferguson (1983)

Measure based on fiscal outputs

divided by population indicators.

Produces twenty separate

indicators.

Fiscal outputs include general

expenditures, own revenues,

common functions, and debt.

Population factors include

median family income,

population change, and city

wealth index

Financial Condition

Ratios

Aronson & King (1978) Focus on debt-serve combined a

rising ratio of debt service to

income

Seven ratios, focused on debt,

debt service and income

Brown (1993) 10-Point Scale Total revenues/population,

own-source General Fund

(GF) Revenues /GF revenue,

GF sources from other

funds/Total GF sources,

OpEx/Total expenditures

Total revenue/total

expenditures, Unreserved GF

Balance/GF revenues

GF cash and investments/GF

liabilities, GF liabilities/GF

Yet more alternatives

Comprehensive

Fiscal Trend

Monitoring System

(FTMS)

International City/County

Managers (ICAMA, 1980)

Groves and Valente (1994)

Nolleberger (2003)

36 individual indicators across 7

categories, measure them each

individually over time.

7 categories:

Revenue, expenditure,

operating position, debt,

unfunded liability,

capital plant, and community

needs and resources

Groves, Godsey, and

Shulman (1981)

ICMA FTMS Ask city representatives in 50

cities to use and give feedback

on ICMA FTMS.

Hendrick (2004) Three-dimensional fiscal health

measurement.

Spending needs and revenue wealth,

balance with the environment,

and fiscal slack

Revenue wealth and spending

need indicators obtained

through regression analysis,

similar to Ladd and Yinger.

Fiscal balance is

revenue/wealth and

spending/need

Fiscal slack is % unreserved

fund balance, % capital

expenditures, % enterprise

income, and % debt service

Focus on financial indicators Financial Condition Ratio Formula

Liquidity Current ratio Current assets/current liabilities Working capital Current assets – current liabilities Quick ratio (Cash + marketable securities + accounts receivable)/current liabilities Net position ratio Total net position/expenses Current liabilities Current liabilities/total revenues Solvency Debt-to-asset ratio Total liabilities/total assets Operating position Total revenues/total expenditures Profit margin ratio Surplus (or deficit)/revenue Return-on-assets ratio Surplus (or deficit)/total assets Continuing services ratio Unrestricted net assets/total expenses Fund balance ratio Unrestricted general fund balance/general fund expenditures Operating deficit ratio General fund surplus or deficit/net operating expenditures Operating expenses Operating expenditures/total expenditures Sustainability Net worth ratio Restricted and unrestricted net assets/total expenses Sustainability ratios Total revenues, tax revenues, or expenditures/population Debt service ratios Debt service expenditure/total revenues or expenditures Long-term debt per capita Long-term debt outstanding/population Pension underfunding Unfunded pension liability/population Diversification Common size ratio Line item amount/total amount (e.g., cash to total assets) Capacity Debt-to-assessment ratio Debt/assessment Effective tax rate Taxes (or own-source revenues)/taxable assessment Risk Tax leverage factor Total operating expenditures/property tax revenue Risk exposure factor (Investment revenue + intergovernmental revenue + transfers in)/property tax revenue

Transfer dependency Transfers/total revenues Charge-to-expense ratio Charges for services/total expenses

What if … an Early Warning System?

GovRank recently collected nearly 100,000 government financial reports and manually extracted “top line” figures

A preliminary finding: lots of “stickiness” in city fiscal conditions

Bottom 25 % Top 25% Bottom 25 % Top 25%

Bottom 25 % 11.3% 3.1% Bottom 25 % 18.1% 0.4%

Top 25% 3.7% 11.3% Top 25% 0.4% 18.9%

Bottom 25 % Top 25% Bottom 25 % Top 25%

Bottom 25 % 17.3% 0.9% Bottom 25 % 16.9% 0.4%

Top 25% 0.4% 17.2% Top 25% 0.9% 17.7%

Continuing

services 2009

Net worth

2009

Continuing services ratio 2009 vs 2014: Net worth ratio 2009 vs 2014:

Continuing services 2014 Net worth 2014

% of Cities with 2012 CoG pop >=25,000

N=1,217

*Observations include cities with financial health indicators (profit margin ratio, debt-to-assets ratio, continuing services ratio, and net worth) for 2009 and 2014.

Debt-to-asset ratio 2009 vs 2014:

Debt-to-asset 2014

Debt-to-asset

2009

Profit margin ratio 2009 vs 2014:

Profit margin 2014

Profit margin

2009

And initial economic conditions matter

What to do?

• Recognize variation is hallmark of local government

• Recognize data availability and comparability issues

• Refine goals and decide

What is it we want to measure and why?

City Economic and Fiscal Resilience: How can we measure it? How can we improve it?

#LiveAtUrban

UNDERSTANDING CITY FISCAL CRISES

FUNDAMENTAL CAUSES

PRECONDITIONS FOR CITIES AT RISK

By this I mean high rates of poverty and high rates of elderly living in your city. Both groups will consume more in services than they contribute in tax revenues. This is typically not a serious problem as long as the share of city population in these two groups is modest, but if their combined share gets much over 35 % then the city has real fiscal problems.

“BAD” DEMOGRAPHICS:

“BAD” ECONOMICS

City’s economy is dominated by low skilled occupations – and thus low real wages and thus home values and low capital intensity – and/or the industries of the city are cyclically sensitive.

Also city economies dominated by a single industry will be more at risk than a economically diversified city economy.

“BAD” POLICIES: These will typically be policies that redistribute the economic surplus earned by efficient agglomeration to those who do not produce the surplus. Such policies arise from fiscal redistributions, and when those redistributions get “large enough” – that is, greater than private sector benefits of being in the city – then the taxed firms and households will leave. Examples include income redistribution policies, paying for prior debt and unfunded pensions, neglected infrastructure, non-competitive public employee labor contracts.

USUALLY IT TAKES A “PERFECT STORM” ➔ FISCAL CRISIS

DEMOGRAPHICS ECONOMY POLICIES CITIES

GOOD GOOD GOOD Indianapolis; Minneapolis

GOOD GOOD WEAK ?

WEAK GOOD GOOD NYC in 1990s

WEAK GOOD WEAK D.C., Phila up to 1989

WEAK WEAK GOOD Pittsburgh in 60's/70's

WEAK WEAK WEAK Camden, Phila (90), Newark, Bridgeport

PHILADELPHIA AS A CASE STUDY In June, 1990 Mayor Wilson Goode proposed and City Council approved a balanced budget. The state accepted that budget as valid. By the Fall of 1990 it was revealed to be a bogus budget – full of holes. What had been a balanced budget (under Mayor Green) had become a $250 million deficit on a $2 billion budget by 1990. Just as the city was creating this “structural deficit,” the national economy fell into recession lowering city tax bases and thus also city revenues. By the winter of 1990 /1991 the deficit going forward looked to be perhaps as large as $400 million. Four years of fiscal austerity (under Mayor Rendell) were required to restore taxes and spending into balance.

CAUSES?

10 YEARS OF EXPENSIVE LABOR CONTRACTS STATE IMPOSED POVERTY OBLIGATIONS NEIGHBORHOOD SPENDING DECLINING TAX BASE WITH INEFFICIENT TAX STRUCTURE NOW “STIR IN” THE 1990 RECESSION

ONE STRUCTURAL PROPOSAL

REGIONAL FUNDING OF CITY POVERTY OBLIGATIONS

OR

“TREAT PHILADELPHIA LIKE PITTSBURGH”

City Economic and Fiscal Resilience: How can we measure it? How can we improve it?

#LiveAtUrban