The nation and indeed the world have been following the ongoing fiscal catastrophe in Detroit, the largest municipal government in history to file for bankruptcy protection. But while Detroit’s financial woes are outsized, they're far from unique. The problem of declining revenues and increasing costs, compounded by the effects of the Great Recession, has been a troubling trend for local governments for years now.
In many, if not most, of America’s major cities, the revenue that the government needs to operate – to pick up trash, police the streets, pay its workers’ pensions – remains far from what it was before the economic crisis.
An important new report from the Pew Charitable Trusts' American Cities Project paints a grim picture of the financial health of the center cities of America's 30 largest metro regions, municipalities that house one in 10 Americans and that account for nearly half of the country’s economic output.
In more than two-thirds of these cities – 21 of 30 – municipal government revenues had not bounced back to their pre-recession levels by 2011, the last year for which data is available. Just nine cities – Portland, Washington, Atlanta, San Francisco, San Antonio, Pittsburgh, St. Louis, Dallas, and Chicago – saw their revenues rebound to 2007 levels by 2011. At the other extreme, revenues were still on the decline in eight cities – Boston, Houston, Miami, Minneapolis, Orland, Phoenix, Sacramento, and Tampa. (The graph below, from the report, shows the fiscal recovery of these 30 cities as of 2011.)
Source: Pew Charitable Trusts' American Cities Project
The Pew report offers a troubling look at just how unsustainable the recovery has been for local finances in many U.S. cities. Federal and state stimulus dollars don't last forever, and cities have taken to two other main methods of plugging their budget gaps: dipping into reserve funds, and cutting spending.
In 29 of the 30 cities studied – each one that was able to do so legally – local governments tapped into reserve funds as a first step before resorting to spending cuts. Average reserve levels fell from 18 percent of the general fund revenue in 2007 to 14 percent in 2011, a decline that means that these rainy-day funds could be in danger of drying up. Kil Huh, the director of state and local fiscal health at Pew, says that reliance on reserve funds is a dangerous bet. “I don’t think anyone really foresaw how bad or deep the economic recession would be,” Huh explains. “Most cities’ reserve funds didn’t really have the appropriate levels to weather all the shortfalls they saw.”
Cities have also cut spending. The initial round of cuts generally hit the areas of parks and recreation, arts and culture, housing and economic development, public works, and transportation. More worryingly, two-thirds of the cities Pew studied had resorted to reducing spending on public safety in real dollar terms by 2011.
The combined effects of spending cuts on quality-of-life improvements and public safety present the biggest challenge for cities as they compete for residents and businesses. As Huh explains, “many of the employees that were let go in order to facilitate cost savings were in the public safety sector, and that’s a concern for residents that are there, but also for people that may come.” When publicity about public safety cuts gets bad enough, the next issue may be whether they come at all.
The report also points to four main factors that have contributed to fluctuations in local revenue since the crisis.
- Property tax declines took a few years to set in. Property tax revenue was in fact able to mute some of the effects of the recession in the early years. But when they hit, they hit hard, especially in the three big Florida cities – Orlando, Miami, and Tampa – all of which have been significantly affected by the housing crisis.
- Cities that relied heavily on sales and income taxes felt the effects of both the recession and the recovery far sooner. These tax sources react with the market, as workers feel the sting of unemployment levels and consumers adjust their spending habits. In New York, a drop in sales tax revenues contributed to almost a quarter of the total decline, but as the economy picked back up so too did these receipts in 2011.
- Smaller, less traditional sources of revenue have taken on outsize importance in city budgets. Revenue sources like fees, business taxes and investment income, which have generally made up a smaller part of overall revenue, now play a disproportionately large role.
- City budgets have grown dependent on federal and state transfers. For the nine cities that have seen remarkable growth in revenue, the recovery has, unfortunately, come in large part from huge increases in what is referred to as “intergovernmental aid” – meaning grants and transfers, including the federal stimulus package – from state or federal government. In fact, in nearly half of the cities studied, changes to these aid levels were the leading factors in both the decline and the rebound of the cities’ revenue streams.
The Pew report points out that the full force of these factors has had a delayed effect on city budgets, hitting home while many are still climbing out of the fiscal hole the recession created. Worryingly, the ways that cities have attempted to patch their budget gaps, ranging from cutting spending to relying on larger influxes of cash from state and federal government, are largely only short-term solutions.
For more details, check out the interactive, city-by-city graphic that Pew put together, below:
Top Image: The word "Bankruptcy" is painted on the side of a building in Detroit, Michigan (REUTERS/Joshua Lott).