City Economic and Fiscal Resilience: How can we measure it? How can we improve it? #LiveAtUrban

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1 City Economic and Fiscal Resilience: How can we measure it? How can we improve it? #LiveAtUrban

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3 City Economic and Fiscal Resilience: How can we measure it? How can we improve it? #LiveAtUrban

4 The Fiscal Policy Space of Cities Michael A. Pagano Dean, College of Urban Planning and Public Affairs Professor, Public Administration University of Illinois at Chicago The generous support of the John D. and Catherine T. MacArthur Foundation is greatly appreciated.

5 Fiscal Policy Space: Sets of attributes that define the range of fiscal policy options available to officials. Change frame from averages to variation Change frame from fiscal condition to fiscal behavior Actual Ending Balance as % of Expenditures % 0.00% -5.00% % Change in Constant Dollar Revenue (General Fund) Change in Constant Dollar Expenditures (General Fund)

6 Fiscal Policy Space Attributes The intergovernmental context, including both state-imposed and locallyimposed limitations on taxes and expenditures. The fiscal base, the linkage between a city s economic base and its fiscal architecture or authority to tap into a city s underlying economy. The demands and preferences of citizens for a quantity and quality of services and the local political culture that creates a set of expectations, norms of conduct and behavior, and informal rules.

7 Map 1: City Fiscal Authority Seattle Spokane Portland Source notes: State-by-state information on local tax authority is drawn from several sources: 1. Critical Issues in State-Local Tax Policy: A Guide to Local Option Taxes (National Conference of State Legislatures, 1997); 2. Home Rule in America, by Dale Krane, et. al. (1999); and 3. Updated information from state and local government websites conducted in Boise Santa Rosa Reno Sacramento Salt Lake City San Francisco Stockton San Jose Modesto Denver Fresno Colorado Springs Bakersfield Las Vegas Oxnard Los Angeles Riverside Phoenix San Diego Albuquerque Anchorage Tucson El Paso Honolulu Lubbock Austin Minneapolis Rochester Springfield Boston Buffalo Syracuse Worcester Madison Grand Rapids Hartford Providence Milwaukee Bridgeport Detroit Cleveland New Haven Chicago Omaha Des Moines Toledo Pittsburgh New York Ft. Wayne Akron Philadelphia Lincoln Indianapolis Columbus Dayton Baltimore Cincinnati Kansas City Richmond Virginia Beach St. Louis Louisville Wichita Lexington Greensboro Winston-Salem Durham Nashville Knoxville Tulsa Fayetteville Raleigh Oklahoma City Little Rock Memphis Chattanooga Charlotte Huntsville Atlanta Birmingham Augusta Dallas San Antonio McAllen Shreveport Jackson Montgomery Houston Mobile Baton Rouge New Orleans Corpus Christi Jacksonville Orlando Tampa Property + Sales + Income Property + Sales or Income Property or Sales Only Cape Coral Miami

8 Map 2: Own Source Revenues as a % of General Revenues Seattle Spokane Portland > 78.4% 63.6% % 48.7% % 33.8% % < 33.8% Mean: 63.6% Standard Deviation: 14.9% Boise Santa Rosa Reno Sacramento Salt Lake City San Francisco Stockton San Jose Modesto Denver Fresno Colorado Springs Bakersfield Las Vegas Oxnard Los Angeles Riverside Phoenix San Diego Albuquerque Anchorage Tucson El Paso Honolulu Lubbock Austin Minneapolis Rochester Springfield Boston Buffalo Syracuse Worcester Madison Grand Rapids Hartford Providence Milwaukee Bridgeport Detroit Cleveland New Haven Chicago Omaha Des Moines Toledo Pittsburgh New York Ft. Wayne Akron Philadelphia Lincoln Indianapolis Columbus Dayton Baltimore Cincinnati Kansas City Richmond Virginia Beach St. Louis Louisville Wichita Lexington Greensboro Winston-Salem Durham Nashville Knoxville Tulsa Fayetteville Raleigh Oklahoma City Little Rock Memphis Chattanooga Charlotte Huntsville Atlanta Birmingham Augusta Dallas San Antonio McAllen Shreveport Jackson Montgomery Houston Mobile Baton Rouge New Orleans Corpus Christi Jacksonville Orlando Tampa Cape Coral Miami Source Note: U.S. Census of Governments, 2012

9 Map 3: State Aid as a % of General Revenues Seattle Spokane Portland > 24.8% 17.7% % 3.2% % < 3.2% Boise Santa Rosa Reno Sacramento Salt Lake City San Francisco Stockton San Jose Modesto Denver Fresno Colorado Springs Bakersfield Las Vegas Oxnard Los Angeles Riverside Phoenix San Diego Albuquerque Tucson El Paso Lubbock Austin Minneapolis Madison Grand Rapids Milwaukee Detroit Cleveland Chicago Omaha Des Moines Toledo Pittsburgh Ft. Wayne Akron Philadelphia Lincoln Indianapolis Columbus Dayton Cincinnati Kansas City St. Louis Louisville Wichita Lexington Greensboro Winston-Salem Durham Tulsa Fayetteville Raleigh Oklahoma City Little Rock Charlotte Huntsville Atlanta Birmingham Augusta Dallas San Antonio Shreveport Jackson Montgomery Houston Mobile Baton Rouge New Orleans Corpus Christi Jacksonville Orlando Tampa Cape Coral Mean: 10.4% Standard Deviation: 7.2% Honolulu McAllen Miami Source Note: U.S. Census of Governments, 2012

10 Map 4: State Tax and Expenditure Limits (TELs) Seattle Spokane Portland Minneapolis Rochester Springfield Boston Boise Buffalo Syracuse Worcester Madison Grand Rapids Hartford Providence Milwaukee Bridgeport Detroit Cleveland New Haven Chicago Reno Omaha Des Moines Toledo Santa Rosa Pittsburgh New York Ft. Wayne Akron Salt Lake City Philadelphia Sacramento Lincoln Indianapolis Columbus San Francisco Stockton Dayton Baltimore San Jose Modesto Denver Cincinnati Fresno Colorado Springs Kansas City Richmond Virginia Beach Bakersfield St. Louis Louisville Wichita Las Vegas Lexington Greensboro Oxnard Winston-Salem Los Angeles Riverside Nashville Knoxville Durham Phoenix Tulsa Fayetteville Raleigh San Diego Albuquerque Oklahoma City Little Rock Memphis Chattanooga Charlotte Source notes: State-by-state Huntsville Atlanta information on TELs is drawn Tucson Birmingham Augusta from the following sources: 1. Lubbock Jackson Montgomery National Conference of State El Paso Shreveport Dallas Legislatures (various years); 2. Jacksonville Home Rule in America, by Dale Austin Houston Mobile Krane, et. al. (1999); 3. The San Antonio Baton Rouge Orlando Lincoln Institute of Land Policy s New Orleans Tampa tracking of local property tax Corpus Christi limits, and 4. Updated Anchorage Cape Coral information from a search of McAllen Miami state and local government No TELs websites conducted in Nonbinding Property Tax Limit Honolulu Potentially Binding Property Tax Limit Potentially Binding Property Tax Limit + General Revenue/Expenditure Limit

11 TEL gap by binding/non-binding TELs Non-binding TEL cities Binding-TEL cities

12 The fiscal base is the weighted average of per capita values of properties, retail sales, and income compared to the reliance of a city on property, sales, and income tax receipts Orlando Economic base for 1) property tax, 2) sales tax, and 3) income tax Tax ratio of 1) property tax, 2) sales tax, and 3) income tax Buffalo Economic base for 1) property tax, 2) sales tax, and 3) income tax Tax ratio of 1) property tax, 2) sales tax, and 3) income tax

13 Denver Boston Economic base for 1) property tax, 2) sales tax, and 3) income tax Tax ratio of 1) property tax, 2) sales tax, and 3) income tax Economic base for 1) property tax, 2) sales tax, and 3) income tax Tax ratio of 1) property tax, 2) sales tax, and 3) income tax

14 A measure of local demand that combines political ideology, housing affordability, and public sector unionization. Low Demand High Demand Ft. Wayne IN Hartford CT Lubbock TX New Haven CT Virginia Beach VA Providence RI Wichita KS Boston MA Winston-Salem NC Bridgeport CT Lincoln NE Detroit MI Huntsville AL Miami FL Colorado Springs CO

15 Map 5: Fiscal Policy Space City Clusters (2010) Seattle Spokane Portland 4 FPS Attributes (N=11) 3 FPS Attributes (N=30) 2 FPS Attributes (N=32) Santa Rosa Reno Sacramento San Francisco Stockton 1 or No Attribute(s) (N=18) Boise Salt Lake City Fresno Bakersfield Las Vegas Oxnard Los Angeles Riverside Phoenix San Diego Anchorage Denver Colorado Springs Albuquerque El Paso Lubbock Austin Minneapolis Rochester Springfield Boston Buffalo Worcester Madison Grand Rapids Hartford Providence Milwaukee Detroit Bridgeport Cleveland Chicago Omaha Des Moines Toledo New York Ft. Wayne Akron Philadelphia Lincoln Indianapolis Columbus Dayton Baltimore Cincinnati Kansas City Richmond Virginia Beach St. Louis Louisville Wichita Lexington Greensboro Winston-Salem Durham Nashville Knoxville Tulsa Fayetteville Raleigh Oklahoma City Little Rock Memphis Chattanooga Charlotte Huntsville Atlanta Birmingham Dallas San Antonio McAllen Shreveport Jackson Houston Mobile Baton Rouge New Orleans Corpus Christi Jacksonville Orlando Tampa Cape Coral Honolulu

16 50 Per Capita Revenue Change, (Governmental Funds, 2012 dollars) 0 Total Tax License/Permit Fines, Forfeitures, Penalties Charges Federal and State Aid Other Total Non-Tax TOTAL REVENUE Cluster 1 Cluster 2 Cluster 3 Cluster 4

17 100 Per Capita Spending Change from (Governmental Funds, 2012 dollars) General Gov Public Safety Public Works Health Culture & Rec Capital Outlays Debt service Other TOTAL EXPENDITURES Ending Balance Cluster 1 Cluster 2 Cluster 3 Cluster 4

18 The FPS is a behavioral frame and needs to be better understood in order to: Analyze the efficacy of fiscal decisions, Design federal and state programs, and Identify appropriate changes to constraints that can enhance city leaders abilities to efficiently, effectively, and fairly pursue pathways to improving conditions in cities.

19 Thank you Contact information: Michael Pagano: Public access to the data base of 100 cities with 600+ variables covering the time period can be found at: Chris Hoene:

20 City Economic and Fiscal Resilience: How can we measure it? How can we improve it? #LiveAtUrban

21 Putting Municipal Fiscal Health in Context Tracy Gordon City Economic and Fiscal Resilience: How can we measure it? How can we improve it? September 8 th 2016

22 For most of US history, localities were the de facto public sector

23 Today, although federal level dominates, states and localities still provide most direct services

24 System of federal grants evolved to address things the local public sector cannot do well Phases of American Federalism Dual Federalism Cooperative Federalism Creative Federalism New Federalism Fend for Yourself Federalism New Flexibility New Accountability/Executive Federalism/etc

25 How to allocate grant dollars? Suggestive evidence they are not going where they should Revenue capacity US average tax rate multiplied by state base Expenditure need US average per capita spending multiplied by state population and adjusted for costs and demographics Fiscal gap at capacity Difference between the two measures, with federal grants added in Gap at Capacity After Transfers AK < -$1,000 -$1, $0 $0 -- $1,000 > $1,000 ME WI VT NH WA ID MT ND MN IL MI NY MA OR NV WY SD IA IN OH PA NJ CT RI CA UT CO NE MO KY WV VA MD DE AZ NM KS AR TN NC SC DC OK LA MS AL GA HI TX FL Source: Urban Institute calculations Note: Gap at capacity after transfers equals a state's revenue capcity plus federal transfers minus expenditure need. U R B AN I NS TI TU TE

26 This is also an issue for state grants to local governments Fisher & Prasad (2012): Mostly per capita formulas with minimums Need, but not cost factors included Suspended in times of state fiscal crisis

27 Many alternative methods for directing aid dollars Category Concept Source Method Indicators Economic Index of Center City Hardship Nathan and Adams (1976) Urban to suburban ratios, weighted Unemployment, dependency of population, education, income, crowded housing, poverty Indices of Social, Economic and Fiscal Need CBO (1978) Composite scores from point-intime indicators and outside indices Social Need: Nathan and Adams index, plus unemployment and per capita income Economic: 6 indicators Fiscal effort: tax effort, property tax base, and two comprehensive measures developed by HUD Fiscal Capacity ACIR (1971) Representative Revenue System Revenues collected divided by revenue capacity ACIR (1977) Fiscal Pressure Tax effort divided by change in tax effort Need-capacity Gap Ladd and Yinger (1989), Ratcliffe, Riddle & Yinger (1990), Reschovsky (1993) Revenue-raising capacity minus standardized expenditure need, expressed as a % of capacity Standardized expenditure need from costing functions, regressions, and environmental cost factors Revenue capacity is revenue that can be raised by applying a uniform tax burden, as a % of resident income

28 Alternatives, cont d Fiscal & Financial Urban Fiscal Strain Treasury (1978) Average change in weighted variables; combined with other indices Population, per capita income, own-source revenue burden, long-term debt per capita, property value (full market) Fiscal stress warning signs ACIR (1973) Based on qualitative evaluation of cities financial status One-year operations, continuous operations, working capital, short-term operating loan balance, property tax delinquency, property valuation Fiscal strain Clarke and Ferguson (1983) Measure based on fiscal outputs divided by population indicators. Produces twenty separate indicators. Financial Condition Ratios Aronson & King (1978) Focus on debt-serve combined a rising ratio of debt service to income Fiscal outputs include general expenditures, own revenues, common functions, and debt. Population factors include median family income, population change, and city wealth index Seven ratios, focused on debt, debt service and income Brown (1993) 10-Point Scale Total revenues/population, own-source General Fund (GF) Revenues /GF revenue, GF sources from other funds/total GF sources, OpEx/Total expenditures Total revenue/total expenditures, Unreserved GF Balance/GF revenues GF cash and investments/gf liabilities, GF liabilities/gf

29 Yet more alternatives Comprehensive Fiscal Trend Monitoring System (FTMS) International City/County Managers (ICAMA, 1980) Groves and Valente (1994) Nolleberger (2003) 36 individual indicators across 7 categories, measure them each individually over time. 7 categories: Revenue, expenditure, operating position, debt, unfunded liability, capital plant, and community needs and resources Groves, Godsey, and Shulman (1981) ICMA FTMS Ask city representatives in 50 cities to use and give feedback on ICMA FTMS. Hendrick (2004) Three-dimensional fiscal health measurement. Spending needs and revenue wealth, balance with the environment, and fiscal slack Revenue wealth and spending need indicators obtained through regression analysis, similar to Ladd and Yinger. Fiscal balance is revenue/wealth and spending/need Fiscal slack is % unreserved fund balance, % capital expenditures, % enterprise income, and % debt service

30 Focus on financial indicators Financial Condition Ratio Liquidity Current ratio Working capital Quick ratio Net position ratio Current liabilities Solvency Debt-to-asset ratio Operating position Profit margin ratio Return-on-assets ratio Continuing services ratio Fund balance ratio Operating deficit ratio Operating expenses Sustainability Net worth ratio Sustainability ratios Debt service ratios Long-term debt per capita Pension underfunding Diversification Common size ratio Capacity Debt-to-assessment ratio Effective tax rate Risk Tax leverage factor Risk exposure factor Transfer dependency Charge-to-expense ratio Formula Current assets/current liabilities Current assets current liabilities (Cash + marketable securities + accounts receivable)/current liabilities Total net position/expenses Current liabilities/total revenues Total liabilities/total assets Total revenues/total expenditures Surplus (or deficit)/revenue Surplus (or deficit)/total assets Unrestricted net assets/total expenses Unrestricted general fund balance/general fund expenditures General fund surplus or deficit/net operating expenditures Operating expenditures/total expenditures Restricted and unrestricted net assets/total expenses Total revenues, tax revenues, or expenditures/population Debt service expenditure/total revenues or expenditures Long-term debt outstanding/population Unfunded pension liability/population Line item amount/total amount (e.g., cash to total assets) Debt/assessment Taxes (or own-source revenues)/taxable assessment Total operating expenditures/property tax revenue (Investment revenue + intergovernmental revenue + transfers in)/property tax revenue Transfers/total revenues Charges for services/total expenses

31 What if an Early Warning System? GovRank recently collected nearly 100,000 government financial reports and manually extracted top line figures

32 A preliminary finding: lots of stickiness in city fiscal conditions % of Cities with 2012 CoG pop >=25,000 N=1,217 Profit margin 2009 Profit margin ratio 2009 vs 2014: Debt-to-asset ratio 2009 vs 2014: Profit margin 2014 Debt-to-asset 2014 Bottom 25 % Top 25% Bottom 25 % Top 25% Bottom 25 % 11.3% 3.1% Debt-to-asset Bottom 25 % 18.1% 0.4% Top 25% 3.7% 11.3% 2009 Top 25% 0.4% 18.9% Continuing services ratio 2009 vs 2014: Net worth ratio 2009 vs 2014: Continuing services 2014 Net worth 2014 Continuing services 2009 Bottom 25 % Top 25% Bottom 25 % Top 25% Bottom 25 % 17.3% 0.9% Net worth Bottom 25 % 16.9% 0.4% Top 25% 0.4% 17.2% 2009 Top 25% 0.9% 17.7% *Observations include cities with financial health indicators (profit margin ratio, debt-to-assets ratio, continuing services ratio, and net worth) for 2009 and 2014.

33 And initial economic conditions matter

34 What to do? Recognize variation is hallmark of local government Recognize data availability and comparability issues Refine goals and decide What is it we want to measure and why?

35 City Economic and Fiscal Resilience: How can we measure it? How can we improve it? #LiveAtUrban

36 UNDERSTANDING CITY FISCAL CRISES FUNDAMENTAL CAUSES PRECONDITIONS FOR CITIES AT RISK

37 BAD DEMOGRAPHICS: By this I mean high rates of poverty and high rates of elderly living in your city. Both groups will consume more in services than they contribute in tax revenues. This is typically not a serious problem as long as the share of city population in these two groups is modest, but if their combined share gets much over 35 % then the city has real fiscal problems.

38 BAD ECONOMICS City s economy is dominated by low skilled occupations and thus low real wages and thus home values and low capital intensity and/or the industries of the city are cyclically sensitive. Also city economies dominated by a single industry will be more at risk than a economically diversified city economy.

39 BAD POLICIES: These will typically be policies that redistribute the economic surplus earned by efficient agglomeration to those who do not produce the surplus. Such policies arise from fiscal redistributions, and when those redistributions get large enough that is, greater than private sector benefits of being in the city then the taxed firms and households will leave. Examples include income redistribution policies, paying for prior debt and unfunded pensions, neglected infrastructure, non-competitive public employee labor contracts.

40 USUALLY IT TAKES A PERFECT STORM FISCAL CRISIS DEMOGRAPHICS ECONOMY POLICIES CITIES GOOD GOOD GOOD Indianapolis; Minneapolis GOOD GOOD WEAK? WEAK GOOD GOOD NYC in 1990s WEAK GOOD WEAK D.C., Phila up to 1989 WEAK WEAK GOOD Pittsburgh in 60's/70's WEAK WEAK WEAK Camden, Phila (90), Newark, Bridgeport

41 PHILADELPHIA AS A CASE STUDY In June, 1990 Mayor Wilson Goode proposed and City Council approved a balanced budget. The state accepted that budget as valid. By the Fall of 1990 it was revealed to be a bogus budget full of holes. What had been a balanced budget (under Mayor Green) had become a $250 million deficit on a $2 billion budget by Just as the city was creating this structural deficit, the national economy fell into recession lowering city tax bases and thus also city revenues. By the winter of 1990 /1991 the deficit going forward looked to be perhaps as large as $400 million. Four years of fiscal austerity (under Mayor Rendell) were required to restore taxes and spending into balance.

42 CAUSES? 10 YEARS OF EXPENSIVE LABOR CONTRACTS STATE IMPOSED POVERTY OBLIGATIONS NEIGHBORHOOD SPENDING DECLINING TAX BASE WITH INEFFICIENT TAX STRUCTURE NOW STIR IN THE 1990 RECESSION

43 ONE STRUCTURAL PROPOSAL REGIONAL FUNDING OF CITY POVERTY OBLIGATIONS OR TREAT PHILADELPHIA LIKE PITTSBURGH

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46 City Economic and Fiscal Resilience: How can we measure it? How can we improve it? #LiveAtUrban