Atlantic Cities

Don't Forget, Local Governments Are Facing a Fiscal Crisis of Their Own

Don't Forget, Local Governments Are Facing a Fiscal Crisis of Their Own
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President Barack Obama has won an impressive, if terribly divisive, campaign to become only the second post-World War II Democrat to win the presidential election twice (Republicans did it four times). And yet, an unsatisfying omission—the 'what wasn’t said' factor—in the campaign is gnawing at me. Here’s why: The presidential and vice-presidential debates, speeches, and interviews were revealing if for no other reason than to underscore the fact that jobs and the economy attract everyone’s attention, as does the looming "fiscal cliff." The two top priorities—creating jobs and preventing a fiscal collapse—ought to concern us all, but missing have been two crucial related realities: honest discussion of the real geography of job creation in this country (hint: it's in our cities), and the "other" looming fiscal crisis, namely, the one facing state and local governments.

Both candidates omitted discussion of these issues. We can surmise that neither Obama nor Romney, perhaps wisely, wanted rural and possibly suburban voters to be confronted with the stark truth: job creation favors metropolitan regions and local governments are in at least a precariously comparable position to that of the federal government.

With some 80 percent of Americans living in urban areas, which are responsible for some 85 percent of GDP, it’s not a stretch to say that the ability of U.S. cities to address challenges from transportation and economic development to healthcare in the years ahead will determine the kind of country we become. We need to create a new fiscal architecture for cities that allows them to meet their financial and service obligations without going broke in the process, and without imposing an unfair and unequal burden on local residents and businesses. The federal government must play a role in ensuring that cities have the flexibility and the resources they need.

Toward a Federal-City Partnership

The Great Recession has had a powerful effect on metropolitan regions. Job loss in 2008 and 2009 wracked cities and urbanized regions as nearly all of the loss was in the private sector; since then, over 4.3 million private sector jobs have been created, benefiting the nation’s metropolitan regions, but at the same time, job loss in the state-local government sector has worsened. Local governments in particular will be hard pressed to recoup the losses of the last five years as the real estate market is only now showing signs of recovery. Fortunately, the real estate sector may be stabilizing—and mortgage rates remain at historically low rates, benefiting the housing market—but property tax collections lag the “real-time” market by 2 to 3 years and sometimes longer. Consequently, cities’ capacities to provide a level of service that citizens enjoyed in, say 2006, may not be reached for several more years… if ever.

To complicate matters, estimates of infrastructure needs total in the trillions of dollars and pension obligations for local governments, as well as health benefits for retired municipal employees, reach unfathomable heights. In other words, cities labor under a weak tax collection regimen today and for the foreseeable future just at the same time as pension obligations, health costs for city retirees, and the "life" of infrastructure assets are reaching critical needs. Metropolitan regions and cities, the engines of the national and global economies, are straining under the confluence of these critical factors. Private sector employment, the growth of private firm formation, the training of an appropriately-skilled work force, and the linking of the component parts of a sustainability economy require an adequate delivery of municipal services.

Do cities now find themselves at an inflection point, a point that will symbolize a break from previous eras, a new starting line against which future fiscal action will be measured, a new normal? Is the federal government in a position to provide a supporting environment for cities as they pivot from the inflection point and journey toward a new destiny? Although the response to both questions should be a resounding 'yes,' the response should not be interpreted as one that requires cities to go hat-in-hand to Uncle Sam for money; after all, Uncle Sam is facing a fiscal cliff of his own. Rather, the federal-city partnership ought to be premised on the following principles:

  • Maintain levels of federal spending, but limit financial support for new or expanded infrastructure projects. Instead, redirect federal financial investment to maintenance, repair, rehabilitation and replacement projects when consumer/citizen demand warrants it. New infrastructure should be supported by new residents, not subsidized by current residents or the federal coffers. More compact development would result, energy usage would decline, neighborhoods would be vibrant. The nation’s cities’ deteriorating infrastructure could be better addressed by targeting existing federal aid.
  • Reduce some of the costly mandates, such as municipal compliance with ADA regulations, environmental standards, and historic preservation, that continue to divert city resources from local needs to national needs, unless the federal government pays cities to accomplish national ends. Federal regulations that require cities to pursue national goals should come with funding from the national taxpayer. The city treasury is already under siege; federal mandates only deflect local fiscal priorities.
  • Cap the mortgage interest deduction for only one residence to 80% of the median value of housing to encourage smaller household footprints and denser urban areas. What national purpose is served by subsidizing the ownership of two homes or very expensive homes? More important, what urban or regional purpose is served?  
  • Invest in transportation systems that provide all residents of metropolitan regions, where the nation’s economic engines reside, access to safe, efficient and modern transit and highway systems that reduce carbon footprints, encourage compact settlements, and reduce production and household costs. A fiscally sustainable transportation system can only help cities’ fiscal positions.
  • Accelerate and strengthen the administration’s emphasis on coordinating transportation, housing, and environmental policies and programs. Regional solutions to regional problems must be addressed systemically by all relevant federal (and state) agencies, not by a single-department approach. Keep up the regionalism initiative! Coordination across political boundaries creates economies of scale and improves the fiscal health of cities.

Some of course will argue that federal intrusion only worsens the economic base, heightens social tensions, and prolongs the inevitable. My perspective is different. The quality and type of investment in social and physical capital by the public and private sectors needs to be sustainable, not transitory, and should recognize the human and capital linkages in work and leisure. These investments, then, redound to the benefit of cities’ private and public spheres, enhancing their capacity to provide government services efficiently and effectively. And the fiscal cliff confronting cities can be avoided.

So, please President Obama, please acknowledge that the health of metropolitan regions and cities matters to the sustainable economic growth goals and global competitiveness of the United States of America. The fiscal health of cities and metropolitan regions today is vital to reaching those goals and must be addressed by city leaders with the collaborative support of the federal government.

Top image: Torian/Shutterstock.com

Michael A. Pagano is dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago and co-editor of Urban Affairs Review. All posts »

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