The Two Approaches to Cutting City Costs

City governments have had a tough go in recent years. When the housing market crashed, many saw deep cuts to one their main sources of revenue – property taxes. Unemployment, foreclosure and the general decline of the economy has been kicking cities and keeping them down. To counteract these losses, cities across the country have had to make cuts.

Spending has been reduced in a wide variety ways – from cutting infrastructure investments to slashing education budgets to sharply reducing human services programs. One of the main methods by which cities have tried to match their budgets with their means is to cut their own workforces.

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This is the short-term approach. Cities have been furloughing workers, freezing any new hires and laying off employees to try to stop the bleeding. According to a new report from the National League of Cities, in 2010, 74 percent of U.S. cities instituted a hiring freeze, 54 percent cut or froze wages and salaries, and 35 percent laid workers off.

They also took a long-term approach. Cities started to look at reducing health care benefits for employees, revising union contracts and reducing pension benefits to cut overall costs. If the bankruptcy of Stockton is any lesson, they're wise to be doing so.

As you can see in the chart below, short-term layoffs and freezes and early retirements have since fallen to significantly lower rates than in 2010. The long-term approaches of dealing with pensions, health care and union contracts have actually been more prevalent in 2012 than in 2010, and only slightly less so than in 2011. But with only three years of data, it's hard to know whether this trend will continue.

Source: National League of Cities

City governments are recognizing that addressing budget issues over the long term requires more attention to these fundamental financial concerns far more than the day-to-day dealings of salaries and wages. These longer-term approaches to cutting city costs may be more complicated to change, but they'll likely have much more of an impact on improving a city's financial solvency than quick bandage solutions like layoffs and furloughs.