By Andrew Nusca
Posting in Cities
When did cities become so reliant upon state and federal governments for money to operate essential services? SmartPlanet editor Andrew Nusca digs in.
As I was leafing through the New York Times this weekend I came across an article that, in essence, detailed how cities were losing state and federal aid just when they need it the most.
From New York to Minneapolis, Philadelphia to Los Angeles, cities are suddenly coming up short when they need to perform essential maintenance services such as filling potholes, supporting police officers and keeping libraries open.
The answer? The United States Conference of Mayors is calling for a speedy end to wars in Iraq and Afghanistan. The basis for this request: if the U.S. is burning through Benjamins building bridges in the Middle East, perhaps it would be more sensible to put that money to work here, in this sprawling nation.
They have a point, at least on principle. But I can't help but feel that these budgets are not one and the same.
The budgetary picture that cities rely on to run operations is a complicated tangle of various income streams. I don't want to ignore that fact, but looking at the issue from 30,000 ft., it seems to me that a city should be policing its streets and keeping its libraries open on its own dime.
Here's a quote from the Times article, by Lansing, Mich. mayor Virg Bernero:
Our cities — and it ain’t just Lansing — our cities are stumbling, many of them, on the edge of receivership. We rely on property taxes. The silent scream that is happening out there is this continued foreclosure crisis. The unemployment rate is unacceptably high. But the foreclosure rate is outlandish. We rely on those property taxes, and they are in steep decline.
No one denies that an economic downturn spells trouble for anyone trying to balance a budget. But when did cities fail so spectacularly at diversifying their revenue streams?
What's even more concern is a lack of flexibility (and transparency, for that matter) among these cities with regard to prioritization of services. Bernero added in the Times report: "I’m providing 2011 services with a 2001 budget."
An unnerving statement, because the underlying assumption in it is that modern services require a bigger budget. In 2010, Lansing had just over 114,000 residents; 10 years prior, the city had 4 percent more residents. (The city has been on a decline since the 1970s, from a high of 131,000 residents; in fact, its greatest population drop happened in 2000.)
I'm no mathematician, but it seems to me that the city is spending much more per capita than it used to. And while I have little doubt that Lansing is a safer, better place to live in 2011 than in 1970, you've got to wonder where the wiggle room in the budget has been all these years -- and moreover, why cities are increasingly reliant upon the state or federal government to survive, when they generally count most of their state's taxpayers as residents anyway.
Simply: why are we trying to provide 2011 services? Why not provide efficient 2012 services? Many of the topics we write about on SmartPlanet apply technology to solve problems. Sounds expensive, but whether for solar panels or transit fare systems, many of the business models for these infrastructure remedies are being structured in revenue sharing agreements, in which the city pays little to no upfront cost.
I'm a firm believer in spending money to make money, but it's clear to me that cities need to stop building their budgets around federal and state handouts -- or a single revenue stream, for that matter -- and treat that money as a temporary windfall, not a right.
When it comes to building bridges or other essential infrastructure, state and federal governments should certainly offer financial support. That's part of what they exist for. But the city government that waits expectedly for a gift is one that risks burning their constituents when one isn't delivered.
Illustration: Joe Lertola for TIME
Jun 20, 2011
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Financial independence requires fiscal responsibility. Most cities are run by Liberal Democrats, hence your problem.
For nearly two thirds of a century, the outmigration from cities has undermined their fiscal viability as people and investment has been drained from them as a matter of public policy. Policies based upon racial prejudice have had a large but by no means complete role in driving the out migration. Urban renewal, as first instituted in Pittsburgh with the world's first Urban Redevelopment Authority, has often been referred to as "black removal." More than that it was an effort to eliminate the traditional, European-style, pedestrian, working class urban form and replace it with something more befitting the suburban aesthetic of the estates of the rich who were behind establishing the public policy in Pittsburgh. Subsidies facilitating the conversion of farm and rural land to inefficient suburban settlement patterns have driven up costs both in the cities whose service burden increases at the same time as its revenue base is undermined. On the other end of the migration, the suburbs are inundated and overwhelmed with new service demands -- typically $1.25 to $1.50 in service load for each $1 in new revenue created by new suburban residents. Top that off with public policy that discourages and in many cases disallows the construction of new urban form within cities (e.g., suburban building standards based building codes enacted after WWII), and cities themselves have been increasingly suburbanized from within. As cities began to pride themselves on the amount of demolition they could accomplish, it has been a prescription for municipal suicide. Left alone, cities (and towns) with their traditional urban form offer significant advantages over the suburban and rural forms, hence they once attracted people and investment inward to them. But when cities try to become suburbs, they tend to be third rate suburbs at best and thus people continue to head outward for the real suburbs when given the choice over the centrally located third rate wannabee inner city suburbs. Given their historic former densities within real, traditional urban form (as opposed to the faux urban forms of the so-called new urbanist movement) and no subsidies for suburban real estate speculation, cities could easily compete and would not need to be subsidized. A net inward movement could easily be driven by their natural economic and social advantages. But hobbled by decades of public policy abuse, much or most of it still in place, they cannot be expected to hold their own unattended. The solution, of course, is to first stop doing the wrong things -- stop the subsidies and change the policies favoring sprawl as well as those discouraging the traditional urban form -- then there will be much less need to pursue economic adjustments in the form of urban subsidies. The latter may still be needed until balance is returned and quality urban form is recreated, but it will be much less than the subsidies being unsuccessfully poured into our cities now.
City, county, state and federal budgets unfortunately are built on expectations. (with a dash of wishful thinking) They are looking at expected revenue based on previous history. They spend based on what they had previously brought in rather than counting on not having the same revenue rate as they should. (in other words preparing for a rainy day.) Let's take a personal example. I paid off my car. The money previously spent on car payments now goes directly to savings. Good thing too since the company I've been working for is apparently in terrible financial straits and I may no longer have this job in the near future. So fortunately I've been putting this money away and will help until I find other employment. Government on the other hand is in the business of spending before they receive. Operating budgets are calculated a prior to the fiscal year. They don't plan on downturns in fact from what I've seen they've been budgeting based on expected growth?!?!? Apparently it must be quite common for MBAs to have slept through that semester I guess. Just imagine what kind of fiscal strength this country would have if the powers that be were to base their budgeting and project planning based on 75% of their prior fiscal year revenue and bank the rest toward major projects. (infrastructure, changes to revitalization areas, etc.) Of course those folks of the Tea Party persuasion would demand a tax refund instead. (can't see the forest for the trees)
No world class city has ever existed without a hinterland for which it provides a commercial and cultural hub. Such cities must generate many expensive services to both business and tourist travelers who either cannot or will not pay directly for the entire expense of hosting their visit and any commercial activity they conduct. Tourism, specifically, is a historically weak and inconsistent source of income for cities; while logistics requires large, long term investments in infrastructure; and services are difficult to fully tax. By far the largest federal contributions to cities are in welfare and subsidized housing, education, and transportation. The welfare, housing and education dollars go to the cities because that's where the needy people are or gather, first hoping to find work. If you check the history you'll find that federal investments in transportation are largely justified as support for civil defense (the interstate system), then as support for job creation. You wish to see cities pay their own way without the least grasp that cities wouldn't exist at all if it weren't for the external demands placed on them as respiratory organs for national needs and goals.
Cites are straddled with Federal mandates on one side (and state mandates to a certain extent), along with the prevailing 'be all things to all people' attitude that places the governement in charge of our well-being. The city I live in: - Funds abortions for the poor (thereby helping to keep the population of the poor lower - Eugenics lives on!), - Gives property and sales tax breaks to certain large businesses and to certain locations, leaving local businesses out in the cold, - Funds health care for illegal aliens and the poor, taxing the people who actually work for a living, - Funds bicycle roads and lanes with public funds, even though cyclists return no funds in the form of license fees or gasoline taxes, - Taxes the general population to give part-time college students free tuition, - Collects sales taxes to pay for trains that run a limited schedule and to few locations, that loses dozens of millions of dollars a year, - I could go on and on and on..
Diversified revenue streams are nice, but you have to have the authority to use them. Cities are creatures of the state. That is a nice way of saying the state legislatures control what forms a taxation cities may use. Most rely primarily on property taxes, which are the most inefficient manner of collecting taxes. States have more diversified revenue streams and rely a great deal on income and sales taxes, which are much more efficient (the cost of a dollar of revenue is lower) than the property tax. Property taxes can also be very complex. Property tax rates differ among different classes of property. For example, you pay one rate for a home and a different rate for a business. Add to that the fact that all cities are not the same. Some cities are primarily homes and some are well endowed with commercial property (commercial property is usually taxed at a higher rate). Then there are the complexity factors for businesses operating in cities. States like to keep things simple for businesses. If cities are allowed to use multiple forms of taxation, in differing mixes and differing rates you can imagine that businesses might find the accounting a bit daunting and perhaps consider this in their location decisions. Revenue sharing and transfers of funds between federal, state and local communities arose in part because it is more efficient and simpler to raise money centrally than locally. Minnesota has 87 county and hundreds of cities. It is a great deal cheaper to hire one central tax collector than 87 for the counties and hundreds more for the cities. Then there are the societal effects. If you cut all the transfer payments (federal or state money flowing to cities) then you may find that people can no longer afford to stay in their homes because of the cost of property taxes. Many of these people are retirees living on fixed incomes. Do you really want to do what your suggesting without first considering the implications?
Cities and states roll all over each other providing tax breaks to businesses in exchange for providing minimal numbers of jobs.No one is offering me a tax break to live in an area. Perhaps this is simplistic, but if you are using infrastructure and consuming services, you should be paying for this infrastructure and services via taxes.
...that they've lost all objectivity. I'm sure they actually believe that it's the Federal government's responsibility to bail them out of their unsustainable situation. But I'm impressed Andrew that you're beginning to see the light: "...it seems to me that the city is spending much more per capita than it used to." There you go. Most of our large cities do spend much more; often several times per-capita than our smaller jurisdictions do. And yes, they do tend to provide greater services and opportunities to their citizens. But at the rates we're talking about, instead of sewers & bridges collapsing, the streets ought to be paved in gold. Also consider that almost by definition, most of our country's wealth is and is in our cities. That our cities need to go to the Federal government just to sustain themselves is fundamentally absurd. What these mayors are really doing is reaching out and basically stealing from themselves, and if they're lucky, other cities. But it can't work. Ultimately the fact is that wealth mostly comes from their own back yard, and by the time it comes back from the Washington loop, it's lost about 70% of it's value to heat loss and the strings the Federal government usually attaches to fulfill their wasteful agendas. What cities do get back is mostly squandered, since OPM (other people's money) is never spent as wisely as your own, even though the reality is that most of that 30% was once their own. Money spent by local government should not be "a right" or even "a windfall". It should be a public trust to be spent frugally. You will never see an efficient city when its leaders treat every dollar as someone else's.
There is an third alternative to cities or suburbs, and that's small town America. As someone who's resided in all three types of living arrangements, I have to say that small towns have it over both cities and suburbs. Our town (pop. ~ 3600) is economically viable, unlike all the big cities and suburban areas. There's much less crime because everyone knows everyone else's business. It's a cleaner environment with better schools and friendlier people. A small town has all the benefits of urban/suburban living without any of the detriments. I think that all the factors that originally led to big urban environments developing have been mitigated by modern technology. The mega city has seen its day. Now, if we could only get a handle on our population growth, we could set about to make the planet a much better place.
Diversity of revenue income does not insulate any jurisdiction from problems of a recession. If fewer people have jobs, fewer people are paying income taxes. Those same people are also spending less, so sales tax revenue goes down. Just as sure as these unemployed people are up against a wall, they will also stop paying their property taxes, particularly if they are in the process of foreclosure and no longer paying their mortgage. For example: Hawaii has a sales tax, an income tax and property tax, yet their two-year budget was in the red to the tune of a few billion dollars. That trickles down to the city level where fewer dollars make their way.
For communities with stupidly high taxes if spending was limited to 70% of revenue the first year they could drop tax rates equal to 5% the first year and then start your plan of 75% on year 2. It would be a very modest drop in taxes and you would still get the improved long-term savings. The first year with a deeper cut would also help get the local government in the right frame of mind on what the goal is. One example of long-term savings gone bad was the Massachusetts rainy day fund. They had saved billions of dollars in case of a down turn in the economy. The problem is half the money was gone when the recession started. The Patrick administration failed to implement the cost controls portion of Romney Care and the states budget for health care spending went out of control. Rather than fix the problem with health care the Patrick administration and the Democrat controlled Legislature raided the rainy day fund to balance the state budget every year since he was elected in 2006. In 2011 the state still has no budget in place, faces a $2 billion dollar shortfall and the rainy day fund is empty. And health care is almost 30% of the states budget.
...and you disagree with what the government spends its money on. You have no problem funding more roads and widening freeways to the point that they're 10 lanes in each direction, the air is once again acrid and acid rain falls upon your head.
It is a spending problem. Case in point. The city of Boston went to arbitration of a new contract with one of its major unions recently. The city said it could not afford pay raises and proved a break even budget. In the ruling the court arbiter forced them to put raises in the contract saying the city could always raise more money through higher taxes. That act forced the city to raise taxes and beg for more state and federal aid to cover pay raises the city budget did not have the money to afford. Why should the average citizen be forced to pay more taxes for city employee raises when unemployment in Boston is above 9% and most of the people with jobs have not seen a raise in 3 years. While you do not have to be like Wisconsin and take away collective bargaining, there should also be a law that says if the city revenue is not there than the pay raises are not either.
The larger the city, the more powerful the politician. The more powerful the politician, the more susceptible the system is to corruption. So politicians are quick to hand out favors to keep their their rich and powerful benefactors happy, usually at the expense of less rich and powerful citizens. Just look at the bad joke on the citizens of Illinois right now; they raise taxes that collect about $300-million in revenue, but then spend about that much bribing well-connected businesses to not flee the state. The net result? The state nets the same amount of money, but the not-well connected get to pay the new, higher taxes while others still leave, or disregard Illinois as a place to do business.
I'm all for trains if they built ones that made sense and ran them in places where it makes sense. They build trains to keep a 1-lane road from becoming a 2-lane highway, but the 6-lane highway is expanded to 10 lanes. How does that make sense? HSR over 150 mph has been proven to be an eco failure for reducing power consumption per mile and far too expensive to sustain. Every HSR system ever built is running huge deficits. Fares will never cover the cost of operation. Europe and Japan built their rail reputations on trains that ran between 100 and 150 mph and were affordable to maintain. That speed is plenty fast enough to beat car travel. To think trains will be able to honestly compete with planes going 550 mph is a pipe dream. It is far better to make those proven express trains more efficient to operate, more ecologically friendly and keep them financially sustainable. That would take hundreds of thousands of cars off the roads in the US. The other option is to waste money trying to build trains that do 300 mph and will never be able to compete with planes. Efficient local rail systems designed to feed well laid out express trains would make cities easier to travel to and within making them draw the businesses, residents and tourists they need to survive.
Among other things Andrew was talking about revenue flexibility. My point is that more flexibility has implications. More flexibility can be less efficient, more bureaucratic and may result in a bad business climate. If you are efficient with the money you have it stands to reason that it will go further. For example, this evening I spent an hour with a prominent Republican (a name pretty much everyone in America would recognize) who believes that school buildings should be financed with local property taxes and teachers salaries financed via the statewide income tax. That says nothing about the level of taxation but it says loads about efficiency. I recommend you think about what it costs to raise a dollar of revenue. You might find a win-win in this approach.
The discussion about how to improve revenue must stop. Now. The spending has to be cut back. Now. You can't get blood from a stone and right now the economy is nearly stone dead.