The Fiscal Revolution in America’s Cities

January 18, 2010
The following is a preview of one of the topics to be covered during the Leadership Training Institute seminar "Leading Through An Economic Storm: Navigating the New Normal in Local Government" in North Palm Harbor, Fla., held January 28-30, 2010. 

We find ourselves in a peculiar position: While unemployment continues to inch upward and the housing and automobile markets appear to not have rebounded, prognosticators sound perfectly giddy in announcing the end of the "technical" recession. 

The Dow Jones Industrial Average and NASDAQ have roared back, growing dramatically in the last eight months as the bears returned to the markets, and we are readying for possibly the largest corporate bonuses in history. Has the economic recession "technically" ended or are these mixed signals reflective of a multi-pronged recovery in which some sectors continue to sink, while others flourish? 

If it's challenging to understand the performance and direction of the private economy, the crystal ball on municipal government finance isn't much clearer. For the past 24 months, as housing prices have been in freefall in many places (and only "soft" in others) and consumers have retreated from their buying frenzy (latest figures indicate that households are now saving nearly 4 percent of their income up from -1 percent a year ago), cities' receipts have not fallen in like fashion. 

Indeed, NLC's 2009 City Fiscal Conditions survey noted that property tax receipts, which had been expected to demonstrate a downward turn based on the analysis of the prior year's data, had actually increased compared to 2008 receipts. And even as the red flags were being seen in almost every quarter, total General Fund revenues declined a marginal 0.4 percent, which certainly didn't match the rhetoric that we have been hearing that "it hasn't been this bad since the Great Depression." 

How, then, do we square the rhetoric with the reality? Are these crocodile tears that cities are shedding? Or, is this the lull before the storm? 

The answer seems to be closer to the 'lull.' Indications are that property tax receipts will fall in FY10 and continue to fall (or at least not rebound) for another two fiscal years even should the real estate market surge. Sales tax and income tax receipts have yet to rebound as the unemployment rate grows higher and consumers' confidence stays low. 

Economy.com projects that the economies of some of the nation's states will begin to grow in 2010, some in 2011, while others (notably California, Illinois and New York) will not grow until 2013. 

And when states' and regions' and municipalities' underlying economies rebound, will cities' fiscal positions rebound as well? My position is that it won't, at least it won't resemble the rebounds of other recessions. 

The reason is that the national and regional economies' rebound will not look like that of 1983, 1992 or 2002. And the problem is that cities have built their fiscal architecture on the wealth-generation of an economy that hasn't powered cities in at least a generation. Now that we're in the midst of the worst fiscal crisis since the 1930s, it is time to renegotiate. 

It's time to work with our states and straighten out the mess - if states want cities to be responsible for their actions, states should give them adequate tools. It's time to match the economic engines of growth with the fiscal engines - the fiscal mismatch is weakening cities. It's time to re-think the pricing structures of municipal service - pricing drives consumer behavior and often disadvantages cities. It's time to negotiate with neighboring governments - jointly provide services and share service delivery costs. 

It's just time. 

A crisis is a terrible thing to lose. Let the political discourse and reconstruction of cities' fiscal architectures begin. The Fiscal Revolution in America's cities should commence now. 

Details: Pagano will lead the Leadership Training Institute seminar "The New Normal: Fiscal Implications, Structural Changes, and Local Consequences" on Thursday, January 28, 2010 from 1 p.m. to 5 p.m. For more information or to register for Leadership Training Institute seminars, visit www.nlc.org. 

Michael A. Pagano is dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago. With Christopher Hoene, NLC's director of the center for research and innovation, Pagano writes NLC's City Fiscal Conditions, a report he has authored since 1991.