Understanding Fiscal Health in American Cities

The Fiscal Health of the American City Fiscal Leadership and the Modern City Initiative on Cities, Boston University, April 27, 2013 Andrew Reschovsky Fellow, Lincoln Institute of Land Policy and Professor Emeritus, University of Wisconsin-Madison reschovsky@lafollette.wisc.edu

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 2

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 3

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 4

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 5 5

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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/ 7

The Great Recession and the Fiscal Condition of Cities 8

Average Per Capita General Revenues and Expenditures (Adjusted for inflation) 112 Fiscally Standardized Cities, 1977 to 2012 $6,000 General Revenue $5,500 $5,000 General Expenditures $4,500 $4,000 $3,500 Shaded areas indicate recession years $3,000 9

Average Per Capita General Revenues and Expenditures (Adjusted for inflation) 112 Fiscally Standardized Cities, 1977 to 2012 $6,000 General Revenue $5,500 $5,000 General Expenditures $4,500 $4,000 $3,500 Shaded areas indicate recession years $3,000 10

Average Per Capita General Revenues and Expenditures (Adjusted for inflation) 112 Fiscally Standardized Cities, 1977 to 2012 $6,000 General Revenue $5,500 $5,000 General Expenditures $4,500 $4,000 $3,500 Shaded areas indicate recession years $3,000 11

Figure 6 The Effect of the Recession on Revenue Performance Average Real Per Capita Revenue by Source, 112 FiSCs, 2006-2012 $2,250 *Peak Taxes $2,000 7.1% decrease from peak *Peak State Aid $1,750 9.9% decrease from peak $1,500 *Peak Property Taxes 8.5% decrease from peak $1,250 7.1% increase 2007 to 2012 $1,000 User Charges $750 $500 3.4% decrease from peak * Federal Aid $250 2006 2007 2008 2009 2010 2011 2012 12

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Fiscal Prospects for Cities Will Revenues be Sufficient to Meet Cities Public Service Responsibilities? 14

Locally-Raised Revenues Taxes, 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 15

The Influence of State and Federal Policies on the Fiscal Prospects of Cities 16

Intergovernmental Assistance The 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 17

The Future of Federal Aid to Cities Non-Defense Discretionary Spending as a % of GDP FY 2016 Congressional Budget Plans 6% 5% 4% 3% 2% 1% 0% 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 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 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 18 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 19

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 20