Cities, counties, school districts and other local governments have suffered a long-lasting period of fiscal challenges since the beginning of the Great Recession. Metropolitan governments continue to adjust to the "new normal" of sharply lower property values, consumer sales, and personal income. Contributors to this volume include elected officials, academics, key people in city administrations, and other nationally recognized experts who discuss solutions to the urban problems created by the Great Recession.
Metropolitan Resilience in a Time of Economic Turmoil looks at the capacity of local governments to mobilize resources efficiently and effectively, as well as the overall effects of the long-term economic downturn on quality of life. Introducing the reader to the fiscal effects of the Great Recession on cities, the book examines the initial fraying and subsequent mending of the social safety net, the opportunities for pursuing economic development strategies, the challenges of inter-jurisdictional cooperation, and the legacy costs of pension liabilities and infrastructure decay.
Contributors are Phil Ashton, Raphael Bostic, Richard Feiock, Rachel A. Gordon, Rebecca Hendrick, Geoffrey J.D. Hewings, David Merriman, Richard Nathan, Michael A. Pagano, Breeze Richardson, Annette Steinacker, Nik Theodore, Rachel Weber, and Margaret Weir.
About the Author
Michael Pagano is dean of the College of Urban Planning and Public Affairs and professor of public administration at the University of Illinois at Chicago (UIC). He is a fellow of the National Academy of Public Administration, faculty fellow of UIC's Great Cities Institute, and coeditor of The Dynamics of Federalism in National and Supranational Political Systems and other books.
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Metropolitan Resilience in a Time of Economic Turmoil
By MICHAEL A. PAGANO
UNIVERSITY OF ILLINOIS PRESSCopyright © 2014 Board of Trustees of the University of Illinois
All rights reserved.
Cities and the Great Recession
Lessons in Dynamic Change and Adaptation
MICHAEL A. PAGANO UNIVERSITY OF ILLINOIS AT CHICAGO
The Great Recession has had a powerful effect on metropolitan regions and on local governments. The real-estate bubble burst in 2007, putting many owners under water (the mortgage exceeded the market value of the home) and the stock markets plummeted in 2008, wiping out hundreds of billions of dollars in investments. Consequently, the unemployment rate in the nation soared quickly to over 9 percent and has declined ever-so-slightly over the last several years and appears stuck at around 7–8 percent, well above the pre–Great Recession levels of 4–5 percent. Job loss in 2008 and 2009 wracked cities and urbanized regions as nearly all of the loss was in the private sector, down by some 8 million jobs; since then, nearly 5 million private-sector jobs have been created, benefiting the nation's metropolitan regions. At the same time, however, job loss in the local government sector has worsened. The U.S. Bureau of Labor Statistics indicated that local government employment at the end of 2012 shrank by 577,000 employees from the peak of 14,610,000 reached in 2008. Local governments, including school districts, cities, and counties—which generated 75 percent of their total tax revenue from a tax on real-estate values—in particular are hard-pressed to recoup the losses of the last five years as the real-estate market is only recently 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 by cities, counties, school districts, and townships lag the "real-time" market by two to three 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 the growth challenges of metropolitan regions, estimates of basic 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. A recent study on the unfunded liability of the municipal pension systems and the unfunded portion of "other post-employment benefits" (typically including health care costs) estimated that the unfunded liability for 61 cities reached a staggering $217 billion. In other words, cities labor under a creaky tax regimen today and for the foreseeable future just at the same time that pension obligations, health costs for city retirees, and the "life" of infrastructure assets are reaching critical needs.
The quality of life in urban regions depends on the capacity of cities and metropolitan regions to respond to the environmental, infrastructural, organizational, and human challenges of the global era. Cities and urban regions that are resilient enough to cope with the challenges posed both by unexpected shocks and longer-term trends will be positioned to provide adequately for the health, safety, and well-being of their citizens. These challenges require the application of human and financial capital, innovation and entrepreneurship, a vibrant private sector, and the involvement of government and nonprofit institutions in governance and service delivery. When natural disasters strike (e.g., Hurricane Katrina, Super Storm Sandy, and the Blizzard of 2011, all in a series of "storms of the century") or when the economic swings of the business cycle hit cities' foundations (e.g., the Great Recession, the dot-com bust), the preponderance of cities are resilient enough to survive and even thrive. Cities "come back," they "rebound" and "adapt." They age and they also reinvent themselves, and a very few do indeed become ghost towns and die.
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. The health and welfare of the nation depends on the strength and resilience of its cities.
IT HASN'T BEEN THIS BAD SINCE ...
"Not since the Great Depression" is the opening line to many contemporary analyses of unemployment, the fiscal position of cities and counties, the fraying of social safety nets, increased poverty levels, declining housing markets, and crushing personal and commercial bankruptcies. In truth, the Great Recession that raised its ugly head with the bursting of the real-estate bubble in 2007, and its acceleration with the stock market crash of September 2008, does not truly equate to the disastrous economic collapse of the 1930s. The great lessons of the Great Depression were found in the broad regulatory and social institutions created during that era for the purpose of averting, or at least softening, the catastrophic human and commercial effects of failed systems. Regulation at a national scale was created through New Deal legislation, including a national system of Social Security, recognition of collective bargaining rights, establishment of minimum wages and work regulations, banking and stock market regulations, among a host of other regulations over the national economy. These regulations have been effectively coupled with the fiscal powers of the federal government and, with the monetary powers of the Federal Reserve system over the supply of currency, they constitute a powerful and profound influence over the economy, the distribution of wealth, and the quality of life. These regulatory institutions were certainly called on after the onset of the Great Recession to perform what they were designed to do, namely, to ease the human suffering caused by drastic shifts in the national and global economies.
In its time, the Great Depression spawned numerous regulatory agencies and interventions designed to ensure efficient and safe markets as well as to provide a social safety net for those suffering both short- and long-term employment dislocations. The comparison, therefore, between the effects and impacts of the Great Depression on the economy, social fabric, and livelihood of the nation differ markedly from those of the Great Recession. A few illustrations highlight the stark differences.
Unemployment. At the peak of the Great Recession, unemployment reached nearly 10 percent by 2009, while at the peak of the Great Depression, unemployment approached 25 percent.
Stock market. The Dow Jones Industrial Average plummeted by 89 percent between 1929 and 1933, while it dropped some 20–30 percent between 2008 and 2010.
Prices. The prices of goods and services declined nearly 25 percent between 1929 and 1933—hence the term "depression"—while prices remained stable during the Great Recession.
Bank foreclosures. Bank foreclosures reached nearly 50 percent of all banks by 1933, but only 10 percent by 2012.
Municipal bankruptcies. During the Great Depression, 4,770 local governments defaulted on their debts; during the Great Recession, only a handful defaulted.
Social disruptions. Urban and rural riots during the 1930s were abundant, while the most notable disturbances related to the Great Recession in the United States were the Occupy Wall Street movement and the Wisconsin teachers' actions in reaction to Governor Scott Walker's proposal to disallow collective bargaining for state employees (the federal Wagner Act protects the collective bargaining rights of private-sector employees, except in agriculture, but not those of state and local government employees).
Since the Great Depression of the 1930s, the nation has continued its move from an agrarian economy to an industrial and service economy to a metropolitan-centered economy. By the end of World War I, the nation's urban population and rural population were nearly identical. By 1930 and the start of the Great Depression, 56.1 percent of the nation's population resided in urbanized areas; by 2010, the census numbers indicated that 80.7 percent resided in urban areas.
The economic drivers of the twenty-first century are the nation's metropolitan regions. Fully 85 percent of the nation's GDP can be tied directly to the economic activity of the nation's cities and metropolitan regions. As the nation's cities attract an ever-growing share of the U.S. population, the capacity of local governments to honor service commitments, build and maintain necessary infrastructure, and meet their financial obligations will have a profound effect on local and regional economies, public safety, education, and overall quality of life for hundreds of millions of Americans.
It is not a stretch to say that the ability of U.S. cities and metropolitan regions to address challenges from transportation and economic development to health care in the years ahead will determine the kind of country we become. Unfunded pension liabilities, the gaping infrastructure deficit, the promises of "other post-employment benefits" to retired municipal employees, and the continued strain of delivering basic city services as the tax base of cities stagnates, all combine to threaten the fiscal foundation of cities and their citizens in a way that we have experienced "not since the Great Depression."
Metropolitan regions—and the individuals, households, and firms that link together to form networks of social, political, and economic life within the metropolitan region—are challenged by changes and shifts in systemic linkages to other metropolitan regions, international markets, migratory patterns, social disturbances, and other shocks to their welfare. Metropolitan regions and cities, just like other social organizations, adapt and change to these shifting systems and either survive and grow in new and different ways or stagnate and decline. Municipal governments, like other social organizations, engage in problem-solving activities in order to maintain an equilibrium between the city government and its internal and external environments. A city's external environment consists primarily of citizens who receive local governmental services and of taxpayers who provide revenues for such services. The city searches for an equilibrium or steady state in its relationship with this external environment. This equilibrium can be explained in Tieboutian terms as the "bundle of services" that residents receive for a given tax price. Taxpayers can and do "vote with their feet" in search of municipalities with good public services for which they are willing to pay the taxes and fees. Local governments, then, are in a continuous game of competition with neighbors to be efficient and effective service providers.
While the challenges that cities and metropolitan regions face today are not new, investment in the economic development potential of metro regions is tied directly to the nation's capacity to survive the Great Recession and rebound. The underlying premise of this volume is that cities and metropolitan regions are and can be resilient, they can successfully adapt to changing circumstances, and they can survive in a brave new world that they might not have anticipated only a few years earlier.
The Fiscal Effects of the Great Recession on Cities
The early years of the Great Recession were certainly painful to the economy and civil society, but its impacts cannot be compared with the devastating impacts of the Great Depression on society. The Great Recession has taken a toll on the fiscal health of cities as well as on the nation's employment and income. Although municipal defaults during the Great Depression amounted to 4,770, such defaults were few and far between in the late 2000s, except for those considered "newsworthy" (none of which was related to the Great Recession, e.g., the inability of Harrisburg, Pa., to pay borrowing costs for an incinerator; the inability of Jefferson County, Ala., to retire its debt for its massive sewer system; Vallejo, Calif.). Since the start of the Great Recession, only a few city governments (e.g., Stockton, Calif.), have petitioned the federal courts through Chapter 9, the federal bankruptcy legislation for local government protection. Indeed, because the part of the federal bankruptcy code that applies to cities requires that state law specifically authorize the municipality to be a debtor, the number of states that permit their municipalities to file for Chapter 9 bankruptcy protection is small. Twelve states allow cities to file in federal bankruptcy courts, another twelve authorize a "contingent filing," three grant limited authorization, and "two states prohibit filing.... The remaining 21 [states] are either unclear or do not have specific authorization." Few cities contemplate filing for Chapter 9, even if their states permit it, because cities have the authority to adjust their spending and taxing responsibilities.
For the most part, city officials have approached their elected offices responsibly and have managed to balance their resources with their service delivery responsibilities, as challenging as that has been during the Great Recession. In fact, an annual survey of the nation's cities' chief financial officers on city fiscal conditions indicates that cities are quite active in ensuring that their revenue-raising and spending responsibilities stay in alignment. Since 1987, nearly half of all responding cities in National League of Cities surveys have increased fees and charges each year, and another one-quarter have identified new activities for which to charge fees. In contrast, just one in four cities has raised the property tax rate annually since at least 1992. Due to the cities' powers to adjust spending levels and levy taxes and fees, and due to their balanced budget requirement, few municipal governments, then, actually declare bankruptcy.
The case of Columbus, Ohio, is instructive. During the depths of the Great Recession, the city, under Mayor Michael Coleman, proposed raising the municipal income tax by half a percent. At the time, a 2 percent municipal income tax rate was levied on wages and salaries of residents and of nonresidents who worked within the city limits, as well as on the net profits of businesses. The proposed 0.5 percent increase would raise income tax receipts to the city by $90–$100 million. The city had already eliminated over a hundred positions and closed one-third of the city parks because of the recession, which resulted in a nearly $80 million decline in city revenue. Yet, on August 4, 2009, the city voters approved raising taxes rather than continue to reduce service levels and city government employment.
Is a Federal Bailout Possible?
Cities' financial capacity to remain solvent does not rely on bailouts from the federal government. Historically, the federal government's intervention in the affairs of municipalities was quite modest until the 1960s. The public works projects funded and administered by the Works Progress Administration, the Public Works Administration, and the Civilian Conservation Corps during the Great Depression were cooperative projects with state and local governments. Yet, as the Great Depression wound down with the escalation of the global military conflicts culminating in World War II, the federal government retreated from its broad entanglements with municipalities of the 1930s and settled into cooperative agreements in areas of public housing and social welfare, policy arenas that were principally linkages with the states. With the rise of a political coalition that pushed for broader federal-city collaboration, starting in the Great Society years of the 1960s, the federal government stepped up its aid to cities as a means of fighting poverty, creating jobs, and promoting urban economic development. When President Lyndon B. Johnson signed the law creating the U.S. Department of Housing and Urban Development in 1965, he opened the curtain on a decade that would see a vast increase in U.S. attention to (and spending on) cities. Among the subsequent laws that made significant new federal funds available to municipalities were the State and Local Fiscal Assistance Act (also known as General Revenue Sharing) in 1972 and the Housing and Community Development Act of 1974, which initiated the Community Development Block Grant (CDBG) program.
As figure 1 shows, federal aid to municipalities reached $25 billion (in constant dollars) in fiscal year 1978, amounting to nearly 15 percent of general municipal revenue. This high-water mark coincided with the release under the Carter administration of the National Urban Policy Report of 1978, which outlined a series of measures aimed at stimulating jobs and investments in the nation's inner cities. Within a year of the release of the report, however, rampant inflation wracked the economy with increasing joblessness ("stagflation"), and the electorate wanted the government to reduce taxes and deficits. In response, the Carter administration furiously backpedaled away from a "national urban policy" and from further financial entanglements with cities.
Excerpted from Metropolitan Resilience in a Time of Economic Turmoil by MICHAEL A. PAGANO. Copyright © 2014 Board of Trustees of the University of Illinois. Excerpted by permission of UNIVERSITY OF ILLINOIS PRESS.
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Table of Contents
Preface and Acknowledgments Michael A. Pagano.................... vii
PART ONE: OVERVIEW....................
"Cities and the Great Recession: Lessons in Dynamic Change and Adaptation"
Michael A. Pagano.................... 3
PART TWO: WHITE PAPERS....................
"Building the Local Social Safety Net in an Era of Fiscal Constraint"
Margaret Weir.................... 21
"Low-Wage Work and the Fraying of the Social Safety Net" Nik Theodore..... 50
"Social Safety Nets: Subsidies and Place" Rachel A. Gordon................ 54
"Resilient Economic Development: Challenges and Opportunities" Raphael W.
"Economic and Policy Cycles and the Great Recession" Rachel Weber......... 80
"An Interrelated International Urban Economy" Geoffrey J. D. Hewings...... 86
"How Cities Collaborate While Competing in the New Economy" Richard C.
"Collaboration and Competition within the Chicago Metropolitan Region"
Rebecca Hendrick.................... 112
"A Nuanced Perspective of Local Governance" Annette Steinacker............ 117
"The Legacy Costs of Earlier Decisions" Richard P. Nathan................. 122
"Legacy Infrastructure Costs: Is the Cure Worse than the Disease?" Philip
"Pension Costs and Durable Public Infrastructure" David Merriman.......... 145
PART THREE: SUMMARY....................
"Conversations with Local Policy Officials: A Synthesis" Breeze
PART FOUR: POLICY EXPERIMENTS....................
"What Now?".................... 175
List of Contributors.................... 179