Cities, counties and school districts are facing a one-two punch: simultaneous drops in property tax revenue and state aid. The blows come even as demand for services is growing. This fiscal squeeze — not seen since 1980 — has resulted in painful choices for local governments large and small.
For instance, high schools in Portland, Ore., have replaced class time with study halls supervised by teaching assistants or other adults. Foley, Minn., near Minneapolis, stopped paying county sheriff’s deputies to patrol streets and hired private security guards who do not have the authority to investigate crimes. Los Angeles’ 2012 budget eliminated ambulances and fire trucks at one in four fire stations throughout the city.
These consequences of the country’s economic crisis are no secret. Far less obvious, however, has been the impact on the fiscal relationship between cities and states.
States cut aid
As detailed in a new report, “The Local Squeeze,” from Pew’s American Cities Project, the economic fates of state and local governments — and their ability to maintain quality services — often are intertwined. Strong cities are essential to creating jobs and industries that produce a healthy, stable tax base for state services. And the reverse is also true: cities in severe fiscal distress can put a drag on state budgets and economic growth.
While municipal bankruptcies are rare — less than 0.5 percent of localities issuing debt have gone through bankruptcy since 1980 — localities with particularly troubled budgets may require costly state intervention to bring them back to health. In addition, the agencies that assign credit ratings to state bonds take local government finances into consideration, and a worse rating means higher borrowing costs for taxpayers.
States traditionally fund nearly one-third of local budgets. But state aid fell by $12.6 billion in 2010 and 26 states reported reduced funding for local services for fiscal year 2011. School districts, which historically have been spared, are now frequent targets. Thirty-seven states cut school funding for 2011-2012.
In addition, all but four states cap the ability to raise local property taxes, limiting the options for cities responding to falling home values. Property tax revenue, which accounts for nearly 30 percent of local budgets nationally, decreased by 2.5 percent in 2010 and 3.1 percent in 2011. Similar declines are expected in 2012 and 2013.
Cities sue, innovate
Cities’ reactions to these fiscal pressures have varied. Some have filed lawsuits. In Texas, for example, more than half of the school districts sued the state for cutting $4.3 billion from school funding in fiscal year 2012. Other cities have attempted to cope with the loss of revenue through innovation or privatization.
Washoe County, Nev., and its cities of Sparks and Reno have started issuing streamlined, multijurisdictional business licenses from a single location to improve efficiency. Santa Clara County, Calif., implemented an online tool for visitation requests for inmates in its large jail system, lowering staff costs and reducing complaints. Anaheim, Calif., and Luzerne County, Pa., contracted out park maintenance, graffiti removal and the collection of delinquent taxes to private operators.
Meanwhile, many states have the power to directly oversee or intervene in local budget affairs, and a number are exercising it. In 2010, Massachusetts appointed a fiscal overseer for the city of Lawrence and authorized the use of $35 million in bonds to stabilize its finances. Michigan has dispatched to troubled cities emergency managers who have the authority to change union contracts and lay off workers. Other states, such as Kentucky, can require localities to raise taxes and cut spending to plug budget gaps.
As new state-local arrangements are developed and tested, stakeholders at both levels must understand that success will be measured not just in fiscal terms, but also by how well they deliver reliable, cost-effective services at the core of Americans’ daily lives.