I. Introduction

Fiscal Crisis in Cities

Figure 1
Figure 1

According to a report from the National League of Cities, over half of the country's cities and towns were facing budget deficits as of July 1992. Of the 620 cities and towns that responded to the League of Cities survey, 54 percent reported budget deficits for 1992, slightly more than in 199 1. Moreover, small cities and towns are just as likely to be facing red ink as large urban cities.

A number of interrelated trends are causing the fiscal problems. These include: 1) surging city-government spending; 2) rapid escalation in government employee salaries and fringe benefits; 3) unfunded state and federal mandates; 4) the recession; and 5) a declining tax base in many cities.

TREND #1: The Tremendous Growth in City-Government Spending and Taxes.

Per capita city-government spending doubled in real terms from 1960 to 1990, according to Census Bureau data.[1] In the ten fastest-shrinking of the 40 largest cities, real per capita government spending increased even faster, rising an average of $855 between 1960 and 1990.[2]

Increases in city revenues have been driving the growth in government spending (see Figure 1 above). City revenues increased 22 percent after adjusting for inflation and population from 1980 to 1990.[3] State and local governments collected $531 billion in taxes in 1991, a 5 percent increase from the previous year.[4]

Much of this money has been spent on expanding government by greatly increasing the number of city-government employees. The number of public employees in the country's largest cities rose 38 percent faster than did their populations from 1960 to 1990.[5] State and local governments employed 15.1 million people as of 1991, an increase of 149 percent since 1960, according to the Census data.[6]

Even during the latest recession, state and local government employment has continued to grow rapidly. Local government payrolls grew by 173,000 workers between January 1992 and December 1992, according to the Department of Labor.[7]

TREND #2: The Rapid Escalation in Government Employees' Salaries and Fringe Benefits.

Not only has the number of city employees mushroomed over the last decades, but so has their pay. From 1980-1990, state and local public employees received an average annual compensation increase of $4,258. This amounts to increases of $6.32 for every $1.00 of private-employee increase during the same time period, according to a report from the American Legislative Exchange Council (ALEC).[8] These findings were reinforced by the December 1991 U.S. Department of Labor report on Employment Cost Indexes and Levels 1975-91 (see Figure 2 above).

Moreover, on average, public employees have: 4.4 days more in paid holidays;[9] 3.1 more days in paid vacation time after one year of work;[10] and 28 percent higher pension and insurance benefits than workers in private industry.[11]

TREND #3: Unfunded State and Federal Mandates.

State and federal mandates are also adding greatly to cities' financial obligations. A federal EPA storm water mandate for cities of under 100,000, for instance, is projected to cost as much as $20,000 per family in every community.[12] Another EPA regulation, this mandating new regulations on radon levels in drinking water, may force many cities and towns to pass on $14.5 billion in new capital and operating costs to local ratepayers and taxpayers.

Columbus, Ohio, a city with a population of 633,OW, did a thorough analysis of the costs of complying with federal mandates from the Clean Water and Safe Drinking Acts. Total costs to the city were estimated to approach $1 billion-$7'70 million for Clean Water and $105 million for Safe Drinking Water.[13]

TREND #4: The Movement of People from the Cities to the Suburbs and Exurbs.

Jobs and residents have been leaving the nation's major central cities for the suburbs at high rates over the last 40 years. Since 1950, the population in St. Louis has fallen by over 50 percent, while in Detroit and Cleveland it has declined by more than 40 percent.[14] On average, central cities contain only one-fourth of the population in metropolitan areas of more than one million. Furthermore, two-thirds of the job growth in America between 1960 and 1980 was in the suburbs.[15] The population loss has meant a smaller tax base in cities. thus further exacerbating the fiscal problems.

TREND #5: The Recession.

The recession has also taken a toll on cities. Slow economic growth has caused income and sales taxes to fall short of revenue projections. Nearly four out of five respondents to the National League of Cities survey reported that they were less able to meet their financial needs in 1992 than in 1991.[16]

Trends Are Interrelated. These five trends are highly interrelated. For example: since employee salaries and benefits amount to 60 percent of the average city's budget, the rapid growth in public employee compensation was a driving force behind the increase in spending. Moreover, there appears to be a correlation between the high taxes required to fund the large increases in government and the movement of people away from these cities. In the cities whose governments grew most quickly between 1960 and 1990, for example, population declined by 37 percent. Population loss, in turn, reduces a city's tax base, meaning in order to raise the same amount of revenues as previously, the city must increase taxes.

THE FAILURE OF TRADITIONAL METHODS

METHOD #1: Tax Increases. The most common methods for cities and towns to deal with budget deficits is to increase taxes and fees, reduce services, and/or issue short-ten-n debt. Of the cities responding to the National League of Cities survey, 72 percent raised taxes or fees or imposed new ones in 1992. This reliance on tax increases has numerous adverse effects, including slowing economic growth, driving businesses away from the cities. and causing citizens to rebel with tax revolts.

METHOD #2: Service Cuts. While city taxes and spending have been skyrocketing, services have been reduced in many cities. According to a survey of 50 cities by the U.S. Conference of Mayors covering the period from 1980-1990, the majority of cities raised taxes; of these cities, 60 percent had also reduced services.[17]

Cuts in essential services, such as police and courts, are unnecessary at a time when city taxes and spending are rising greatly. The problem is not insufficient government funds, but rather the often inefficient public-sector delivery of services. This inefficiency drives up operating costs. City operating costs increased 22 percent from 1980 to 1990.[18] The operating cost increases in turn are largely the result of increases in unit costs, meaning the costs of providing services outstrip the overall cost increases in the general economy. According to ALEC, unit-cost escalation averaged 28 percent (inflation and population adjusted) between 1980 and 1990 among 41 large cities surveyed.[19] Insulated from competition, government units have little incentive to cut costs or implement innovative techniques to increase productivity.

METHOD #3: Short-term Debt. Another method of balancing budgets increasingly used by city governments is to issue short-term debt.

In 1990, state and local government debt totaled $648.6 billion.[20] This is more than double the $303.7 billion of total debt in 1981 and 900 percent greater than in 1960.

The increasing reliance on short-term fixes such as tax increases and debt to finance budget shortfalls has resulted in lowered credit ratings for many cities, thereby reducing their ability to incur additional debt. (see Figure 3 - click More Images to view)