US cities under increasing
financial strain, says study
By Mayraj Fahim, Local government adviser

4 January 2006: A study by the US Brookings institution found that increased the costs of providing homeland security, education as well as health care and pension provisions for employees are putting US cities under an increasing financial strain. The study also reveals that in order to make up for lost federal aid, cities are relying more on state aid. They also enhance revenues by dipping into reserves as well as increasing user charges and fees.

A number of other articles on this website already deal with the challenging environment local governments in the US have faced over the past few decades. This topical subject matter is currently also discussed by a several organizations including the Brookings Institution.

In 2005, the Brookings Institution released a discussion paper by Bruce A Watlin, an associate professor of political science at Northeastern University and a former senior research analyst with the U.S. Advisory Commission on Intergovernmental relations. The paper was entitled: ‘Budgeting for Basics: The Changing Landscape of City Finances’.

This is a study of the evolution in city finances of 162 cities since 1977, the year preceding California’s paradigm-changing Proposition 13 tax cut citizen’s initiative that had nationwide ramifications, to 2000. The paper further looks at survey data from 54 cities collected in 2004 on the subject of their handling of the 2001 recession.

Highlighted points in the revenue and expenditure trends in the study include the following:
• Declining federal aid with state funding moving to fill the gap to varying degrees.
• Most growth in state aid has been for education (from kindergarten to the pre-college Twelfth Grade).
• Reliance of cities on property tax has declined (with citizen pressures against it fuelled by the 1978 California Proposition) from 27.1% in 1977 to 21.4% in 2000. Income taxes (where permitted), and sales taxes (where permitted) picked up the slack along with the fastest growing source of city revenues: user charges and fees (rising from 11.2% in 1977 to 17.9% in 2000).
• Spending grew relatively slower in cities as compared with state and local governments in general
• Interest payment on debt has grown the most, although it declined during the 1990s through refinancing at lower interest rates and loss in federal aid programs that subsidized capital spending.

Diversity in city expenditure burdens and choices has led to trends that vary by city type. The study divided 162 cities into categories to refine its analysis of fiscal trends. The defining categories were: education cities; non-education cities; property tax-only cities; income tax cities; sales tax cities; utility tax cities and California cities (which constituted a significant proportion of the cities studied, also subject to voter initiated taxing and spending requirements in the state that used popular democracy mechanisms the most of any state in the United States).

In the recent trend survey from the portion of the 54 cities in the study, the following was illustrated:
• Fiscal conditions worsened in 2004, particularly in the case of education and income tax cities with continued strain from public safety costs including that of homeland security, employee benefit (particularly health care and pension), and education costs.
• City budget challenges are structural more than cyclical on both the spending and revenue side.
• In a climate of receding federal aid, decline in state aid due to recession placed additional pressures on the cities.
• To enhance revenues, cities dipped into reserves and raised user charges and fees

In general, cities were hesitant to reduce expenditures and raise revenues through substantive means, and instead chose the incremental route to buy time. Moreover, looking for the least political solution led cities towards choices such as hiring freezes and targeted cuts in spending such as postponing capital expenditures, along with across the board cuts in general spending categories for their less perceptible citizen impact. Employee firing also took place, but to a lesser degree than the more popular choices made during the recession.

The study also cites the innovative paths taken by Austin (Texas), Jacksonville (Florida), Boston (Massachusetts), Oakland (California), Long beach (California), and Syracuse (New York).

The study further noted that public-private partnerships were not used every extensively - but cited some notable examples from the Twin Cities of Minnesota (Minneapolis and St Paul), and Las Vegas (Nevada).

Structural constraints in an era of rising costs and receding federal aid and unreliable state aid has placed US cities, as illustrated by the Brookings discussion paper, in a challenging environment that shows no sign of flexibility and without any changing of the paradigm.

Interested readers can examine the full report by visiting the Brookings Institution’s link to the article: http://www.brookings.edu/metro/pubs/20050823_BudgetingBasics.pdf