The Fiscal Health of the American CityFiscal Leadership and the Modern City

Initiative on Cities, Boston University, April 27, 2013

Andrew ReschovskyFellow, Lincoln Institute of Land Policy and

Professor Emeritus, University of Wisconsin-Madison

reschovsky@lafollette.wisc.edu

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What Do We Mean by Fiscal Health?

Much of the recent discussion of fiscal health has focused on the risk of insolvency and bankruptcy

Bankruptcy is and will remain a rare phenomena

Most cities are at little risk of insolvency, but many may be in very weak fiscal health

Structural Fiscal Health

The quality of life of city residents flows from the goods and services provided by local governments

Cities are in good fiscal health if government revenues are sufficient to allow them to meet their public service responsibilities at reasonable rates of taxation

Assessing fiscal conditions of cities requires that we focus on spending on behalf of city residents and businesses and the public services they receive

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Factors Contributing to Weak Fiscal Health

Weak economic base Loss of jobs and population

Declining housing prices

Deteriorating physical infrastructure

Limited financial assistance from the state and federal government

High expenditure needs A broad list of public services responsibilities Concentration of poor residents and/or “dependent”

residents In Detroit, 59% of population is either under 18, over 65, or disabled

Historical or physical factors that drive up the costs of delivering core public services

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Fiscal Health in Large Central Cities

Comparing central cities is complicated because of the wide variation across the country in government structure

Municipal governments have different public service responsibilities

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Fiscally Standardized Cities (FiSCs)

We construct FiSCs by combining Census data on revenue and expenditures of city (municipal) governments with an appropriate share from overlying county governments, school districts, and special districts

Allocations to FiSCs based on share of population and students within central city boundaries

FiSC dataset includes 112 large central cities with data from 1977 through 2012

Public access to data at:http://www.lincolninst.edu/subcenters/fiscally-standardized-cities/

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The “Great Recession” and the Fiscal Condition of Cities

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91 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36$3,000

$3,500

$4,000

$4,500

$5,000

$5,500

$6,000

Average Per Capita General Revenues and Expenditures(Adjusted for inflation)

112 Fiscally Standardized Cities, 1977 to 2012

General Revenue

General Expenditures

Shaded areas indicaterecession years

101 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36$3,000

$3,500

$4,000

$4,500

$5,000

$5,500

$6,000

Average Per Capita General Revenues and Expenditures(Adjusted for inflation)

112 Fiscally Standardized Cities, 1977 to 2012

General Revenue

General Expenditures

Shaded areas indicaterecession years

111 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36$3,000

$3,500

$4,000

$4,500

$5,000

$5,500

$6,000

Average Per Capita General Revenues and Expenditures(Adjusted for inflation)

112 Fiscally Standardized Cities, 1977 to 2012

General Revenue

General Expenditures

Shaded areas indicaterecession years

122007

$250

$500

$750

$1,000

$1,250

$1,500

$1,750

$2,000

$2,250

Figure 6The Effect of the Recession on Revenue Performance

Average Real Per Capita Revenue by Source, 112 FiSCs, 2006-2012

Federal Aid

User Charges

Property Taxes

State Aid

Taxes

*Peak

*Peak

*Peak7.1% decrease from peak

9.9% decrease from peak

8.5% decrease from peak

7.1% increase 2007 to 2012

3.4% decrease from peak*

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Fiscal Prospects for Cities

Will Revenues be Sufficient to Meet Cities’

Public Service Responsibilities?

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Locally-Raised RevenuesTaxes, User Charges and Fees

Growth in locally-raised revenues depends on the strength of the local economy the mix of taxes used a well-functioning property tax system the creative use of fees and charges the presence of state-imposed property tax levy

limits or other tax limitations e.g. new levy limits with super-majority override provisions in

NY e.g. continuation of levy freezes in Wisconsin

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The Influence of State and Federal Policies

on the Fiscal Prospects of Cities

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Intergovernmental AssistanceThe Future of State Aid to Cities

% cuts in state aid to FiSCs during and after recession were proportional to % cuts in state tax revenues, but

Some states chose larger cuts, e.g. Rhode Island, Nevada

Prospects for growth in state aid to cities At end of FY 2015, real state tax revenues will still be

below pre-recession peak (NASBO)

State tax policies are slowing state revenue growth in a number of states

Income tax cuts enacted or proposed in Kansas, Wisconsin, Ohio, Louisiana, Maine, Arkansas

With growing use of internet and more spending on services, sales tax growth is sluggish

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181976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

20062008

20102012

20142016

20182020

20222024

0%

1%

2%

3%

4%

5%

6%

The Future of Federal Aid to CitiesNon-Defense Discretionary Spending as a % of GDP FY 2016 Congressional Budget

Plans

Actual House Plan Senate Plan 1975-2014 avg CBPP baseline

What Policies Can City Leaders Pursue?

Increase locally-raised revenues Adopt cost-cutting and service-enhancing

policies Even small policy changes make a difference

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What Policies Can City Leaders Pursue?

Push for metropolitan area/regional cooperation Try to convince suburbanites that a strong

central city will spur regional growth Exploit scale economies and sell services to

smaller communities

Exploit low interest rates to invest now in maintaining and improving cities’ capital infrastructure Failure to invest will sacrifice the future well-

being of city residents and reduce prospects for economic growth

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