The Last Time That Happened Was During the Great Depression
Until a few years ago, running a U.S. city was pretty easy. You added services when voters asked, you hired more workers (who were likely to vote for you come election time) to provide the services, and you promised lavish retirement benefits to cops and teachers who weren't going to retire until long after you left office. If tax revenues didn't cover day-to-day operations, no problem; Washington was sending plenty of aid to make up the difference.
No longer. The gap between what a typical city gets from sales and property taxes and what it owes its employees is a now a chasm that even trillions in federal stimulus money can't fill. So for the first time in most Americans' memory, cities actually have to live within their means. The result, according to today's Wall Street Journal, isn't pretty.
As Slump Hits Home, Cities Downsize Their Ambitions
MESA, Ariz. - The police department in this city of 470,000 has lost about 50 officers, and is hiring lower-paid civilians to do investigative work. The Little League has to pay the city $15 an hour to turn on ball-field lights. The library now closes its main location on Sundays, and city offices are open only four days a week. This holiday season, the city didn't put up festive lights along the downtown streets.
Mesa's tax receipts, depressed by the recession, will likely come back one of these days. But Mayor Scott Smith doesn't believe city services will return to prerecession levels for a long time, if ever. "We are redefining what cities are going to be," says Mr. Smith, a Republican who ran a homebuilding company before his election last year.
Months after many economists declared the recession over, cities are only now beginning to feel the full brunt of it. Recessions often take longer to trickle down to local government, in part because it takes time for the sales and property-tax revenues on which municipalities depend to catch up with a depressed economy.
But the sting this time around is expected to be far more acute and long-lasting than in previous recessions. Projected deficits are especially deep in some places and tax revenues could be pinched for years as consumers turn thrifty and real-estate prices remain diminished. That means the relatively painless measures such as borrowing, deferred payments to pension plans and scattered layoffs that have been used during past episodes of fiscal strain are unlikely to be effective in some cities.
In the decade through 2008, municipal tax revenues grew at a rate of 6.5% a year, faster than the overall economy's 5.1%, unadjusted for inflation. Those revenues have started to slip. A national tally isn't yet available, but state tax collections fell 11% across 44 states in the third quarter of 2009, from the same period a year ago, according to a report by the Nelson A. Rockefeller Institute of Government at the State University of New York. In a recent survey by the National League of Cities, 88% of city budget officers said they were less able to meet their financial needs than they were a year ago.
The specter of lean budgets for years ahead has some of the nation's 89,000 local governments rethinking what services to provide and how to pay for them. From Mesa to Philadelphia, this means some combination of higher taxes and fewer services. In some places, it means more and higher fees for permits and recreation programs. Museums, pools and the like are relying more on income from fees charged to users and from nonprofit organizations, and less on taxpayers.
These cuts matter greatly to the economy at large. Local government spending accounts for 8.8% of the nation's total output, including everything from employee salaries to snowplows. The sector employs one in nine workers - 14.5 million in all, or about 8 million in education and 6.5 million elsewhere. More Americans work for cities, counties and school boards than in all of manufacturing.
More likely to be union members, government workers tend to be better paid and have greater job security than many of the taxpayers who pay their salaries. Benefits are often better, too. Virtually all full-time state and local workers have access to retirement benefits; in the private sector, about 76% of full-time employees had retirement benefits. Employment in local government peaked in August 2008 and has fallen by 117,000 since then, or less than 1%, compared with a 6.3% fall in private employment from its December 2007 peak.
In Philadelphia, where sales and corporate taxes have taken a hit, budget cuts are limited by the large fixed costs of city workers' pension and benefits plans. About one fifth of the city's $3.7 billion budget goes for health-care and pension costs for current and retired workers. The city's overall tax revenue has fallen 6% over the past two years, while pension costs have risen 6% and health-care costs 11%. Philadelphia Mayor Michael Nutter, a Democrat, is pushing union employees to pay more of their health costs and is looking to move new employees to a less generous pension plan.
The city has cut about 800 positions in the past year, mostly through attrition, and suspended some services citizens used to take for granted. It has stopped providing snow removal on some smaller, one-way streets, except in emergencies, and it suspended mechanical leaf pick-up in some spots. This fall and early winter, older, tree-lined neighborhoods like Mt. Airy and Chestnut Hill were littered with rotting leaves.
Anyone who wants to have a parade in Philadelphia now has to pick up the tab. The city's Mummers Parade, where 10,000 or so string bands and other performers don bright costumes and march up Broad Street on New Year's Day, won't receive the $336,000 in prize money that used to go to the best string band and other parade participants. The last time that happened was during the Great Depression.
- Local governments have been able to hang on this long mainly because the federal government has borrowed trillions of dollars and handed some of it to mayors and city councils. Since federal borrowing is functionally the same as city borrowing - in the sense that U.S. citizens living in towns or cities eventually have to pay it back - this can go on only as long as someone out there is willing to lend us the money. Which is to say as long as the dollar holds up.
- Right now the dollar is holding up pretty well, so the Feds will almost certainly step in with more aid for local governments in 2010. This will prevent wholesale cuts in public employment and pension plans, but once again at the cost of bigger problems down the road.
- In the end we'll run out of money because our obligations exceed our income. And that means massive cuts in state and local services that First World citizens have come to see as a birthright. Pools and ball fields that used to be free will now charge users. Streets that used to be plowed after a snowstorm will be left untouched. Permits and licenses that used to cost a few dollars will now cost many. After-hours school programs will end, putting low-income kids on the street. Libraries will be closed most of the time. Fewer police will be there when needed. And let's not even think about what the DMV will be like.
- These service cuts won't come smoothly. Public sector wages and benefits now vastly exceed those of comparable private sector workers and the public sector unions won't give up their advantages without a fight. So on the way to fewer services there will be strikes and slowdowns and tax increases. Things will get messy.
- But the cuts will come. TINA, as Margaret Thatcher used to say: There Is No Alternative. The price of having it too easy for the past three decades will be having it a lot harder for the next three.