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—— ‘
2/05 C'JCIRCJDuoDmJIm-pdfi

 

THE URBAN FISCAL CRISIS: AN OVERVIEW
OF SOME PROBLEMS AND PROSPECTS

By

Persephone Waiker

PLAN B RESEARCH PAPER

Submitted to
The School of Urban Pianning
and Landscape Architecture
in partial fuifillment of the requirements
for the degree of

MASTER OF URBAN PLANNING

1981

 

TABLE OF CONTENTS

LIST OF TABLES .
LIST OF FIGURES
INTRODUCTION
Chapter
I. THE PROBLEM AND ITS DEVELOPMENT .
Definition and Sc0pe of the Problem .
Major Causal Factors .

The Decentralization Hypothesis
The Overexpenditure Hypothesis

II. POTENTIAL IMPACTS OF RECENT DEVELOPMENTS .

The Fiscal Limitation Movement
Declining Federal Aid to Cities

111. POLICY ALTERNATIVES .
Local Government Options
State Options
Federal Options

Other Views . .
Implication of Alternatives

IV. SUMMARY AND CONCLUSIONS
BIBLIOGRAPHY

ii

Page

Table

LIST OF TABLES

Selected Features of 1976-1977 Finances in Distressed
and Nondistressed Cities with l975 Populations of at
Least 300,000 (except New York City)

Population Changes in Major U.S. Cities

Net Migration of Whites (in thousands) l950-1975

Increase in Per Capita Government Expenditures and
Revenues in 72 Largest Cities . .

Work Stoppages by Local Government Employees, T958-
l970 . . . . . . . . . . . . . . . .

Inflation Indexes for State and Local Government
Expenditures and Tax Bases, Selected Period, 1967-
l972 . .
States with General Fiscal Limitation Laws

Ingovernmental Aid Per Capita and Percent of Own-
Source Revenue by Size of Municipality l962 and l977

Page

14
I7

18

25

29

33

39

LIST OF FIGURES

Figure Page
l. Average monthly earnings of all U.S. manufacturing

employees and municipal employees in Chicago and
citites over 50,000 1960-l970 . . . . . . . . 26

iv

INTRODUCTION

One of the major economic problems of the last two decades is
the crisis of America's largest cities. The list of possible causes
of this economic distress is long-~a declining private economy,
decentralization, public employee unions, and stagnating public ser-
vices and productivity, among others.

The manifestations of such distress are readily apparent in
the variety of ills including deteriorating neighborhoods eroding
tax bases, decline in the quality and quantity of services, critical
educational problems and, above all, the mounting fiscal pressures
faced by urban areas.

The financial aspect of the urban dilemma, referred to as
the ”urban fiscal crisis," has devastated the quality of life and
development of large cities, spawning increasing incidence of service
cutbacks, reduced maintenance, employee cutbacks and school shut-
downs. Moreover, the crisis is further complicated by growing fiscal
limitation efforts, the current economic downturn and the rise of
“suburban enclaves."

The fiscal troubles, and the underlying causal factors, and
perhaps central to the entire urban problem because without adequate
funds, cities cannot expect to effectively attack the other urban

difficulties. Clearly, the problem is a complicated one--one which

has been the subject of considerable research and discussion in the
economic literature. Current literature indicates numerous causes

of the fiscal problems, although urban economists do not all agree on
specific causal factors. The solutions proposed to remedy this crisis
are just as numerous and diverse.

The purpose of this study is to provide an overview of the
major issues of the urban fiscal crisis, with particular emphasis on
their causal factors, more recent developments affecting the problem
and alternative policy proposals aimed at resolving the crisis. Cover-
age of the problem will be confined to major issues. The primary areas
of concern to be covered include, in Chapter I, a discussion of the
definition of the crisis vis-a-vis various distress, or hardship
indicators and other parameters. This chapter also treats major
hypotheses related to the causes of the fiscal crisis.

Chapter II provides analyses of the possible impact of more
recent developments on these problems.

In Chapter III an analysis of various policy alternatives and
solution perspectives is presented. In addition, the problem-solving
implications of political authority are briefly discussed.

In the final chapter, conclusions reached from the review of
issues are discussed, along with a statement on the prospects for

resolution of the problems.

CHAPTER I

THE PROBLEM AND ITS DEVELOPMENT

Definition and Scope of the Problem

 

The urban fiscal crisis has been generally defined in terms
of "the existing large imbalance between pe0ple's aspirations for
public services and their willingness and ability to pay--an imbalance

1 This

that, to some extent, applies to private goods as well."
imbalance translates into a general inability of large city govern-
ments to meet rising expenditures with available resources. This
painful problem stems from a number of deveIOpments that have occurred
over recent decades, but is being exacerbated by citizen initiatives
limiting government spending, as well as the inflationary effects of
the current economic downturn.

According to the Advisory Commission on Intergovernmental
Relations (ACIR), the problem "occurs quite generally throughout the

"2 Evidence suggest this pervasiveness is on the increase.

nation.
Since there is no single commonly accepted direct measure of fiscal

distress, researchers have used a variety of economic and social

 

1Werner z. Hirsch, "Fiscal Plight: Causes and Remedies," in
Fiscal Pressures on Central Cities: The Impact of Commuters, Non-
Whites and Overlapping Governments, ed: Werner Z. Hirsch,et al.
(New York: Praeger Publishers, l97l), p. 4.

 

 

2Advisary Commission on Intergovernmental Relations, Impro -
139 Urban America: Challenge to Federalism (Washington, D.C.: ACIR,
l976), p. 29.

 

indicators to identify the cities with problems and determine their
levels of distress. Richard P. Nathan has developed (with others) a
metropolitan index of social hardship by combining indices of several
different problems like unemployment, poverty, and welfare inci-
dence.3 The hardship index allows an analysis of the severity of
these problems in central cities by comparing the magnitude of the
index between the central city and the suburbs for each metropolitan
area. When metropolitan areas are ranked by this measure of central
city disadvantage, thirteen of the sixteen most disadvantaged central
cities are old cities. The average index of central city disadvantage
is 58 percent higher for older cities than for new cities.

The League of Women Voters Educational Fund publication,
“Cities in Crises: The Impact of Federal Aid," reports indices of
urban hardship based on population change, housing units built before
l939 and persons living below the poverty level. With lOO as an
average, scores range from 35l for St. Louis, the most seriously
troubled city, to 19 for Phoenix.

The list of distressed cities are as mixed as the criteria
employed in their designation. Hence, every comparative list of
cities is a little different, but most overlap. William G. Coleman

developed a list which distills analyses of urban conditions done by

 

3See Richard P. Nathan and Charles Adams, "Understanding
Central City Hardship," Political Science Quarterly 9l (Spring l976):
47-62.

five experts.4 It groups all cities with 1975 p0pulation over
250,000 into "declining," "stable" and "growing" cities.

Another such list was developed from eight studies that
produced l5 lists of distressed cities. This summary yielded a group
of l6 cities, each of which appeared on at least three lists of dis-

5 The 16 are Atlanta, Baltimore, Boston, Buffalo,

tressed cities.
Chicago, Cincinnati, Cleveland, Detroit, Louisville, Newark, New
Orleans, New York, Philadelphia, Pittsburgh, St. Louis, and San
Francisco. The measures of fiscal distress used include, among
others, short-term borrowings as a percentage of revenue, general
obligations bond ratings, rate of growth, property tax base, percent-
age of population receiving welfare, rate of job losses, and some
composite indices of hardship (see Table l).

The ACIR has developed a much broader classification which
covers a wide range of fiscal conditions affecting metropolitan commu-
nities. Its five level "Metropolitan Continuum" includes the follow-
ing groups:

1. Highly disadvantaged--A community that falls

 

short on the public service side, even though

it makes an extraordinary tax effort.

 

4George G. Coleman, "The Future of Cities: Contrasting
Strategies for Haves and Have Nots," paper presented for the Con-
ference on Reorganization, Woodrow Wilson International Center for
Scholars, Washington, D.C., September 1977.

SDavid T. Stanley, Cities in Trouble (Columbus, Ohio:
Academy of Contemporary Problems, l976).

 

TABLE l.--Selected Features of 1976-77 Finances in Distressed* and Nondistressed
Cities with 1975 Populations of at Least 300,000 (except New York City)

All "°”'

 

Distressed Distressed New York Only
General revenue** 100.0% 100.0% 100.0% lO0.0i
Intergovernmental 40.2 38.7 41.6 47.9
From State 16.1 10.6 21.0 40.7
Education 3.6 1.2 5.7 9.0
Welfare 2.3 .9 3.4 21.9
General Support 4.0 4.7 3.4 5.5
From Federal 22.2 26.7 18.8 6.5
Revenue Sharing 3.9 4.1 3.8 2.0
From Local 2.0 2.1 1.8 .1
Own Sources 59.8 66.3 53.9 52.6
Taxes 43.0 46.2 40.1 42.1
Property 22.3 22.8 21.9 22.8
General sales 5.4 8.9 2.2 6.1
Selective sales 4.8 5.6 4.0 3.1
Income 6.9 4.8 8.9 9.3
Charges and miscellaneous 16.8 20.1 13.8 10.5
Education charges .5 .2 .8 1.1
Interest earnings 2.6 3.5 1.9 1.6

 

(Net Nongeneral Revenue as a Percentage of General Revenue**)‘

 

 

 

Utility operations (1.5) (2 6) ( .5) (4.0)
Employee retirement ( .3) ( .3) ( .3) (1.7)
Nongeneral subtotal (1.8) (2.9) ( .8) (5.6)
(Selected Expenditures as a Percentage of General Expendture**)
Personal services 52.3 53.0 51.7 45.0
Capital outlay 17.4 18.9 15.9 3.3
General debt interest 4.7 4.9 4.5 5.9
Welfare ¢, 4.9 4.5 5.2 29.0
Welfare Net T 2.5 3.6 1.4 4.3
Education ;; 10.5 8.0 15.5 21.6
Education Net 6.4 6.7 6.2 11.0

 

*

"Distressed” cities are those that appeared on at least three of 15 distressed
city lists generated by eight studies summarized in David T. Stanley, Cities in
Trouble (Columbus, Ohio: Academy of Contemporary Problems, 1976).

**
Excludes government utilities, liquor monopolies, and insurance trusts.
iParentheses indicate expendiure in excess of revenue.

*‘State Categorical Aid and any charges attributable to the function have been
subtracted from both the numerator and the denominator terms.

Source: U.S. Bureau of the Census, City Government Finances in 1976-1977
(Washington, D.C.: U.S. Government Printing OFfice, 1979), Table 8.

2. Disadvantaged--A community that must make an extra-

 

ordinary tax effort to provide an average level of
public services.

3. Balanced-~A community that can bridge the gap between
resources and needs by providing an adequate level of
services with an average tax effort.

4. Advantaged--A community that can provide a superior

 

level of services with an average tax effort.

5. Highly advantaged--A community that can provide a

 

superior level of service with a minimal tax effort.6

As indicated by the discussion thus far, central cities tend
to fall in one of the first two categories.

The problem was further characterized in a recent (1977)
study in which the fiscal health of 67 of the 75 largest cities,
according to 1975 population estimates, was analyzed.7 The study con-
cluded that, in the aggregate, the large service and employment reduc-
tions of a few years before had leveled off and tax rate increases
had slowed considerably. Further, combined unencumbered surplus
was being eroded, capital expenditures had been tremendously reduced,
and capital needs were great.

The study also indicated that cities exhibiting the most acute

symptoms of need were those with high unemployment concurrent with

 

6ACIR, Improving Urban America, p. 29.

 

7U.S. Congress Joint Economic Committee, The Current Fiscal
Condition of Cities: A Survey of 67 of the 75 Largest Cities (Wash-
ington, D.C.: U.S. Government Printing Office, 1977).

 

decreasing populations. The survey showed these cities had increased
total service expenditures by 3 percent, which represented a 3 per-
cent decrease in their aggregate service budgets. They, at the same
time, had reduced their aggregate capital budget by 13 percent. Tax
rate increases in these cities accounted for 73 percent of total
revenues generated from taxes. They has also experienced the largest
aggregate reductions in unencumbered surplus--a 32 percent reduction
from fiscal year l976-l977, and the largest total deficit of $682.2
million (including New York).

Only 18 cities surveyed exhibited opposite trends. These were
cities with low unemployment and increasing populations, those con-
cluded by the study to be clearly in the healthiest fiscal condition.

This study alludes to a significant component of the problem,
the mismatch of expenditure and resources in central cities. Their
tax resources are either declining or increasing at a decreasing rate,
reflecting the exodus of industry and middle and high income families
to the suburbs. Per capita taxes were 30 percent higher in central
cities than in their suburbs in 1970.8 Higher central city taxes have
tended to reinforce the other factors pushing upper income families
and businesses out of the central city into the "suburban enclaves."9

0n the expenditure side, the problem is apparent in the intra-
metropolitan jurisdictional disparities. Per capita local government

expenditures in the central city exceeded suburban outlays in the 72

 

8ACIR, Improving Urban America, p. 34.

 

9See ACIR, City Financial Emergencies (Washington, D.C.:
U.S. Government Printing Office, 1973), pp. 132-143.

 

largest metropolitan areas in 1970 by more than $150.10 The ACIR

estimates that in an average central city expenditure were 31 percent
greater than suburban outlays. According to the Commission, in some
cases per capita expenditures increased over 50 percent faster than
those of their suburbs (e.g., New York, St. Louis, Cleveland, and

San Francisco).

The gap between central city and suburban expenditures is
largely a consequence of noneducational demands in central cities.

In general, noneducational expenditures--primarily police, fire, and
sanitation services--were double of those in the suburbs.11 In some
cases central city noneducation and education expenditures both
exceeded expenditures in the suburbs. Although higher educational
expenditures in the suburbs (roughly 50 percent higher) have generally
kept the gap from widening.

Another component of the problem relates to outdated and
inefficient fiscal systems. Except for functions performed as agents
of the statement government, local units exist to provide services
their residents want but either cannot provide for themselves or
prefer to provide publicly. Over the years, as urban areas have
become more crowded and complex, the services required from local
governments have expanded considerably in number and diversity.

There are other issues involved in this complicated problem,

one of which is its causes. An understanding of the underlying causes

 

101bid., p. 34.

HIhid.

10

is of primary importance to resolution efforts and analysis of possi-

ble causes will be provided in the following section.

Major Causal Factors

 

Many different hypothesis have been advanced in search of the
root causes of the problem. Among the most frequently discussed
causal factors are:

l. Decentralization of the urban economy

2. Overexpenditure by central City governments

3. Declining private economy

4. Low public service productivity

5. Structural inadequacies in the market economy

There are others and new explanations continue to emerge as
more research is done in this area. The following section reviews

the major causal hypotheses.

The Decentralization Hypothesis

 

The decentralization hypothesis is one of the first explana-
tions advanced, and is one of the more widely accepted. According to
this explanation, the fiscal difficulties of central cities can be
traced to the interaction of relatively fixed political boundaries
with such factors as population growth, urbanization, and urban
decentralization.

The process began with urbanization when natural population
increases and significant rural migration led to high population

densities in the core cities of urban areas. The upper class began

11

12 As commu-

migrating beyond central city boundaries in the 18005.
nications and transportation technology improved, more and more upper
and middle class persons began to leave the city. The rush to subur-
bia accelerated drastically between 1940 and 1960, financed largely
by the Federal Housing Administration (FHA).13
In earlier years, slow development in the South induced many
unskilled southerners to move to the industrial cities of the North.
Between 1940 and 1960 nearly four million Blacks left the rural areas
and, for the most part, settled in large northern cities. By 1960 one
in five residents of the largest cities was Black, in the biggest
cities the proportions were much greater.14 These large numbers
were mostly lower income persons. Furthermore, between 1960 and 1970,
the Black population became even more concentrated in central

cities.15

The large increases in disadvantaged minority persons and
other dependent populations in central Cities has contributed to the
problems of these cities. Moreover, restrictive zoning by suburban

communities for racial and economic motives has forced central

 

12See Robert L. Lineberry and Ira Sharkansky, Urban Politics
and Public Poligy (New York: Harper and Row, 1971).

 

 

13For a detailed discussion, see Leonard Freedman, Public
Housing: The Politics of Poverty (New York: Holt, Rhinehart and
Winston, 1969).

 

14Frances F. Piven, "The Urban Crises: Who Got What and Why,"
in The Fiscal Crises of American Cities, eds.: Roger E. Alcaly and
David Mermelstein (New York: Vintage Books, 1977), p. 135.

15Seymour Sacks, Trends in Metropolitan America. Advisory
Commission on Intergovernmental Relations (Washington, D.C.: U.S.
Government Printing Office, 1977).

12

cities to house a disproportionate share of the poor in urban
areas.16

The deteriorating quality of life in central cities and
other reasons, has induced outmigration of middle and upper income
groups as well as commerce and industry to the suburbs.17

Some documentation was presented by John Kain in a 1968
study of population and employment for the largest 48 Standard Metro-
politan Statistical areas (SMSAs) between 1948 and 1963.18 He found
that these cities had lost manufacturing jobs absolutely since 1954,
and wholesale and retail businesses since 1958. Over the same period,
the suburban ring's share of manufacturing employment rose from 33
percent in 1948 to 52 percent in 1963 and their share of the popu-
1ation went up from 36 percent to 54 percent over the same period.

Further study by Seymour Sacks with the ACIR (1977) indicated
central cities in the East and Midwest had continued to lose p0pula-
tion and manufacturing since 1963 and had grown very slowly, if at
all.

These trends have continued. According to other estimates,

between 1970 and 1975, 5.9 million persons moved from cities to

 

16See Charles E. Zech, "Fiscal Effects of Urban Zoning,"
Urban Affairs Quarterly 16 (September 1980): 49-56.

 

17See for discussion of other reasons, Peter Mieszkowski,
"Recent Trends in Urban and Regional Development," in Current Issues
in Urban Economics, eds.: Peter Mieszkowski and Mahlon Straszheim
(Baltimore: Johns Hopkins Press, 1979), pp. 3-39.

 

18John F. Kain, "The Distribution and Movement of Jobs and
Industry," in The Metropolitan Enigma, ed.: James 0. Wilson
(Cambridge, Mass.: Harvard University Press, 1968), pp. 1-43.

 

13

suburbs and 1.1 million moved from cities to nonmetropolitan
areas.19

In addition to intrametropolitan decentralization, inter-
regional shifts in employment and population have been significant
in the last decade. Much of the migration has been from the north-
east and north central regions (especially the central cities of
these regions) to the South and West. Some estimates indicate as much
as two-thirds of the out-migration originated in central cities.20

Population estimates for 1980 show the significance of this
trend (see Table 2). It should be noted, however, that while Cities
in the South and West are growing rapidly, this rate of growth is
partially attributable to land annexation, frequently practiced in
the West and South. There has been a substantial out-migration of
Whites from these regions also (see Table 3). At the same time, the
proportion of poor and Black persons in the population has increased
along with racial segregation; the rate of Black suburbanization has
been slight.

Employment figures were not available at the time of this

writing, but other sources show employment trends follow generally the

same pattern.

 

19Mieszkowski, "Recent Trends in Urban and Regional DevelOp-
ment," p. 12.

20George Sternlieb and James W. Hughes, "Metropolitan Decline
and Interregional Job Shifts," in The Fiscal Crisis of American Cities,
eds.: Roger E. Alcaly and David Mermelstein (New York: Vantage, 1977),
p. 148.

14

 

 

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17

TABLE 3.--Net Migration of Whites (in thousands) 1950-1975

 

 

Region 1950-1960 1960-1970 1970-1975
United States 2,685 2,284 0
Northeast - 206 - 519 1,278
North Central - 679 -1,272 1,143
South 52 1,806 1,815
West 3,518 1,169 606

 

Source: Peter Mieszkowski, "Recent Trends in Urban and Regional
Development," in Current Issues in Urban Economics, eds.: Peter
Mieszkowski and Mahlon Straszhein (Baltimore: Johns Hopkins Press,
1979), pp. 3-39.

 

These trends and statistics have distinct fiscal implications
for declining cities. 0n the expenditure side, in the long run out-
migration from older central cities may eventually reduce overall

21 However, in the meantime, it has hiked service

service costs.
expenditures. Once the urban infrastructure is constructed to serve

a given population size, the costs of maintaining it do not decrease
significantly as the population declines, thus raising per capita
expenditures (see Table 4). Furthermore, certain service requirements
are increased. For example, when households abandon the central city,
the need for police and fire services do not decline in pr0portion to

the population. Instead, abandoned properties become sites for van-

dalism and crime, pose fire hazards, and may ultimately be razed at

 

21George E. Peterson, "Finance," in The Urban Predicament,
eds.: Gorham Williams and Nathan Glazer (Washington, D.C.: The
Urban Institute, 1976), p. 44.

18

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19

the city's expense or may require a higher level of police and fire
services.22
In terms of budget expense a city's labor force tends to act
as a fixed overhead item, whose cost must be spread over fewer tax-
payers as result of net out-migration. Pressure to retain public
sector jobs is likely to be great because the cities are suffering
from private sector job loss. Since local government jobs must be
funded primarily out of local government revenues, the shift of
employment out of the private sector is accompanied by an expendi-
ture increase, as well as a revenue decrease; given that, salaries
are 10 to 15 times greater than per employee tax revenues in the
private sector. A recent study by Bahl and Greytak suggest that just
such a shift is now occurring.23
Central city expenditures have also been affected by the demo-
graphic changes which have accrued due to decentralization; the con-
centration of poor and dependent persons has increased the need for
redistributive service, thus increasing spending.24

The process of decentralization thus increases fiscal dis-

parities between suburbs and the core city by making the tax cost

 

22For comparison of declining and growing cities expenditure
levels, see Peterson, "Finance," pp. 47-51.

23Ray W. Bahl and David Greytak, "The Response of City
Revenues to Changes in Employment Structure," Land Economics 52
(November 1976): 416-433.

24Ronald W. Crawley, "An Empirical Investigation of Some
Local Costs of Mi ration to Cities 1955-1960," Journal of Human
Resources 5 (1970): 11-23.

 

 

20

of public services higher in the central city than it is in the
suburbs.

The revenue effects are also significant. Decline in the
central city's ability to raise revenue, especially through property
taxes, isainatural result of out-migration and resulting decrease in
demand for housing when factories fail to expand and industrialized
sites are abandoned. The tax base erosion in central cities has
created another disparity as property values, income, and sales are
growing faster in the suburbs than in the core city.

This erosion of revenue capacity has meant that core cities
have had to rely on increased tax rates and intergovernmental aid.
Peterson found that declining cities in his study sample has raised
their tax rates by nearly 25 percent from 1967 to 1972, while growing
cities managed to cut their effective rates by more than 25 percent
over the same period.25 Recent studies have also documented the
increased dependency of local governments (central cities in particu-

lar) on intergovernmental aid.26

The Overexpenditure Hypothesis

 

This category includes several different explanations of the
high expenditures by declining cities, exclusive of the effects of

decentralization. Excessive compensation and declining productivity

 

25Peterson,"Finance," p. 57.

26For a review of these studies, see Catherine Lovell, "Evolv-
ing Local Government Dependency," Public Administration Review 41
(January 1981): 189-202.

21

of public employees has been advanced as a significant factor affect-
ing city expenditures. Inflation is also believed to have a negative
effect on municipal spending; although inflation is not considered a
basic cause of the fiscal problem, it has contributed to the problem.

The high cost of providing public services, led by increas-
ing levels of employee compensation is regarded as one cause under-
lying the fiscal crisis. The significant cost increase has had
obvious effects on the growth of municipal expenditures, perhaps not
as drastic as inflation, but nonetheless, significant. The price
index for goods and services purchased by local governments rose at
twice the rate of consumer expenditure between 1960 and 1971. This
exceptional increase has been attributed largely to rising labor
costs, which make up more than half the current budgets of local
governments.

While federal civilian employment has been declining as a
proportion of the country's total employment, state and local govern-
ment has been growing comparatively rapidly for many years. State
and local governments have been the fastest growing component of
total employment in recent years, having increased as a proportion of
total employment from 7.6 percent in 1973.27

Recent trends, however, suggest that growth of employment in

this sector has begun to slow.

 

27Roy Bahl et al., "The Impact of Economic Base Erosion,
Inflation, and Employee Compensation Costs on Local Government,"
Occasional Paper No. 23 (New York: Metropolitan Studies Program,
Maxwell School of Citizenship and Public Affairs, Syracuse Uni-
versity, 1975), p. 6.

22

In terms of large cities' employment, those over 500,000 or
more (based on the 1970 census) have grown at rates approximating the
entire state and local sector.28 Evidence from the Bureau of Labor
Statistics show that public employee wages in large central cities
exceed wages in the private sector, as well as those in federal govern-

ment.29 Other evidence indicates that central city employee wages

were above the average for their metropolitan areas in 1975.30

However, iri aggregate large cities have experienced sharp
declines in the rate at which they are increasing employment. Some
large cities are now reducing employment to trim their budgets. While
cities have experienced public sector employment growth in the recent
past, worker productivity has been declining. To date, no adequate
measure for public sector output has been developed, but some econ-
omists and writers argue that low productivity and mismanagement3]
are a large part of the overexpenditure problem.

William Baumol suggests, based on his "two sector model of

unbalanced growthJ'that a lack of technological change and

 

28Ibid.

29Charles V. Field and Richard L. Keller, "How Salaries of
Large Cities Compare with Industry and Federal Pay," Monthly Labor
Review 99 (November 1976): 23-28.

 

30U.S. Department of Commerce, Bureau of the Census, Local
Government Employment in Selected Metropolitan Areas and Large Coun-
ties (Washington, D.C.: U.S. Government Printing Office, August
1976).

31See for example, Gurrey Breckenfield, "Its Up to the Cities
to Save Themselves," Fortune (March 1977): 194-206.

23

productivity gain in the public sector results in rising unit costs.32

One proposition derived from this model is that cost per unit of out-
put in the public sector will rise steadily without limit, even if
activity levels are held constant. This means that consumers of

local government services will have to pay more and more for the same,
or even deteriorating service. Another proposition from this model

is that if the output ratios of the two sectors are held constant,

a greater and greater proportion of the labor force will have to be
allocated to the public sector, and the rate of growth in the total
economy will decline toward zero. This "cost disease" of the public
sector, according to Baumol and Dates, is caused by the high rate of

33 The Baumol hypothesis does not

productivity in the private sector.
accurately describe the performance of these sectors, however, the
expenditure implication for local governments is significant.

In a study which tested the Baumol hypothesis, results seemed
to confirm the idea that rising unit costs, as predicted by Baumol,
were a major source of the fiscal problems of local government.34
It should be noted, however, the accuracy of these results may be
questionable, since the instrument used to measure output was not

entirely adequate.

 

32William J. Baumol, "Macroeconomics of Unbalanced Growth.
The Anatomy of Urban Crisis," American Economic Review 57 (June 1967):
415-426.

33William J. Baumol and Wallance E. Oates, Economics Environ-
mental Policy and Quality of Life (Englewood Cliffs, N.J.: Prentice
Hall, 1979), Chapter 10.

 

34D. F. Bradford, R. A. Malt, and w. E. Oates, "The Rising
Cost of Local Public Service: Some Evidence and Reflections,"
National Tax Journal 22 (June 1969): 185-202.

25

TABLE 5.--Work Steppages by Local Government Employees, 1958-1970

 

 

No. of Workers
No. Of Workers Man-days Involved
Stoppages Involved LOSt as Percent
(thous.) (th (Thous.)
ous.) of Total
1958-63
(Average) 24 11.3 24.4 0.24
1964 37 22.5 67.7 0.40
1965 42 11.9 145.0 0.20
1966 133 102.0 449.0 1.70
1967 169 127.0 1,230.0 1.90
1968 235 190.9 2,492.8 2.70
1969 372 139.0 592.2 2.01
1970 386 168.9 1,330.5 2.36

 

Sources: Harry H. Wellington and Ralph K. Winter, Jr., The
Unions and the Cities (Brookings Institution, 1971), pp. 212-213;
and U.S. Bureau of Labor Statistics, "Government Worker Stoppages,
1960, 1969, and 1970," p. 3.

 

24

On the other hand, Schulze and others note the impact of
changes in the environment may have significantly affected worker
productivity; for example:

Increased street congestion and aging equipment may explain
why sanitation crews collect less trash per hours now than
a decade ago; the growing proportion of children in the
schools who are from disadvantaged homes may present even
more of an educational problem than even expanded numbers
of teachers and teacher aides can deal with; and the added
deterrence of enlarged police departments possibly does not
affect the changes brought on by new social mores, the
changing econgmic pattern of the city and the congested
legal system. 5

Other economists attribute the rise in relative wage rates of
municipal employee unionization. During the 1968-76 period, state
and local government union membership increased by over 112 percent,
while total union membership increased by less than 4 percent.36

The ability of unions to extract higher wages may be substan-
tially greater in the public sector than in the private sector because
many government service demands are inelastic, owing to the "essential"
nature of the service. These unions have become well organized.

Along with this effective organization has come an increased willing-
ness on the part of municipal employees to engage in job actions

(see Table 4 and Figure l). The sudden acceleration of public employee
strikes in 1966 coincided dramatically with a sharp increase in rela-

tive wages of municipal employees that began in the same year. Daniel

 

35Charles L. Schulze, et al., "Fiscal Problems of Cities,"
in The Fiscal Crisis of American Cities, eds.: Roger E. Alcaly and
David Mermelstein (New York: Vintage Books, 1977), p. 199.

36Lawrence M. Spizman, "Unions, Government Services and Public
Employees," Public Finance Quarterly 8 (October 1980): 426.

 

 

26

 

      

 

 

 

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employees and of municipal employeesa in Chicago and in

cities over/under 50,000, 1960-1970.

Source: Charles L. Schulze et al., "Fiscal Problems of Cities,"
in The Fiscal Crisis of American Cities, eds.: Roger E. Alcaly and

David Mermelstein—(New York: Vintage Books, 1977).

27

Hamermesh estimated that public employee unions may have raised
municipal expenditures by approximately 12 percent in 1966.37
There are other possible reasons for the rise in public
employees' wages. During the tight labor market of 1965-1969, most

wages were rising and greater than average increases for public
employees may have been due to public sentiment that these employees
were underpaid.

Political factors have had some effect as well. Racial vio-
lence and a shift of power have created an uncertain political environ-
ment in most large cities. Faced with this situation, politicians
have tried to keep the support of municipal employees, who represent
a potent political constituency in many big cities.

Finally, along with wage increases, liberalized fringe benefit
packages have contributed to the rising cost of labor. Such supple-
ments as pension benefits, health, hospitalization, dental and life
insurance benefits have added substantially to employment costs. A
substantial portion of wage and salary costs is also attributable to
other costly benefits, including paid vacations, holiday pay, sick
leave pay, personal leave pay and Workmen's Compensation. The total
cost of fringe benefits may add more than 30 percent to the amount
paid for time actually worked in both municipalities and private

industry.38

 

37Daniel S. Hamermesh, "The Effect of Government Ownership on
Union Wages," in Labor in the Public and Nonprofit Sectors, ed.:
Daniel S. HamermeSh (Englewood Cliffs, N.J.: Princeton University
Press, 1975), pp. 227-255.

38Bahl, et al., "The Impact of Economic Base Erosion," p. 11.

28

Of all the fringe benefits, the most costly are pensions
and social security coverage. Together,these two account for the
largest proportion of fringe benefits costs by as much as three to
one.39

Retirement obligations appear to constitute more ominous
burdens than other wage costs and benefits because a troubled city
can do very little to reduce pension costs quickly, even though it
reduces employment and puts a total freeze on wages.40

While it is identified as the second major cause of munici-
palities' fiscal distress, inflation's impact is difficult to calcu—
late from generally available price indices. However, special indices
have been developed which measure the impact of inflation on cities'
expenditures and revenues.41

Indexes have been calculated for the period 1967-1972, 1972—

42

1974 and 1974-1976 by David Greytak. See Table 6. In the 1967-1972

 

391bid., p. 13.

4Owiiiiam H. Oakland, "Central Cities: Fiscal Plight and
Prospects for Reform," in Current Issues in Urban Economics, eds.:
Peter Mieskzkowski and Mahlon Straszheim (Baltimore: Johns-Hopkins
Press, 1979), p. 351.

 

4lDavid Greytak and Bernard Jump, "Inflation and Local Govern-
ment Expenditures and Revenues: Method and Case Studies," Public
Finance Quarter 5 (July 1977); and "The Effects of Inflation on State
and Local Government Finances, 1974-1976," Occasional Paper No. 25,
Metropolitan Studies Program, Syracuse University, New York, 1975.

 

42David Greytak, "The Increasing Costs of Local Governments:
Underlying Causes and Policy Considerations," presented to U.S.
Congress, House Committee on Banking, Finance and Urban Affairs, Local

 

Distress, State Surpluses, Prgposition 13: Prelude to Fiscal Crises
or New Opportunities, Hearings before the Subcommittee on the City,
95th Congress, 2nd Session, 1978, pp. 143-173.

 

29

' TABLE 6.--Inflation Indices for State and Local Government
Expenditures and Tax Bases by Type of Government for
Selected Periods 1967-1976

 

 

 

 

Govern- Expenditure Indices Revenue Indices
mental

Unit 1967-72 1972-74 1974-76 1967-72 1972-74 1974-76
States 122.6 125.4 112.2 115.2 116.6 110.0

Counties 122.7 125.4 112.0 127.7 116.7 114.2

Municipali-
ties 122.9 125.4 112.1 123.7 115.4 113.3

Townships 122.1 125.6 112.6 130.0 114.8 113.9

School
Districts 123.7 125.0 110.7 132.2 119.2 116.4

Special
Districts 121.8 125.7 113.4 114.8 113.3 109.6

All State
and Local 123.0 125.2 112.0 121.2 116.9 110.9

 

Source: Inflation indices computed using methods and data
sources noted in David Greytak and Bernard Jump, The Effects of
Inflation on State and Local Government Finances, 67- 74 yra-
cuse, N.Y.: Metropolitan Studies Program, Syracuse University, 1975);
and in Roy Bahl et al., The Outlook for City Fiscal Performance
(Syracuse, N.Y.: Metropolitan Studies Program, Syracuse University,
1978 .

 

30

period,rates of price increase were relatively modest, but did
increase costs of goods and services purchased by state and local
government, slightly more than 5 percent per year, or 22 to 23 per-
cent. During the 1972-1974 period, with inflation in double digits,
increased prices were paid by state and local government. The
decline in the inflation rate between 1974 and 1976 was reflected in
a lower rate of increase in prices paid by governments. According
to Greytak, inflation still raised prices paid by governments by 12
percent.

Over the ten-year period of these indexes, the price of goods
and services for state and local governments increased by 75 percent.
That is, if state and local governments absorbed price and cost of
living increases, while holding service levels constant, the cost of
services provided in 1967 would have been 75 percent greater in 1976,
with a significant part of the increases coming after 1972.

The share of expenditure increases associated with inflation
or employment growth can be attributed to increased purchases of
goods and services from the private market, changes in the real value
of employee and transfer recipient compensation,and an increased
number of transfer recipients. Greytak was unable to determine whether
these items increased for local governments sufficiently to offset
cost of living increases. It appears that inflation and employment
growth account for such a long share of local governments' expendi-
ture growth that little of the increasing costs can be attributed to

increases in real rates of employee compensation. Thus, inflation

31

has been a major factor underlying increasing local government costs,

despite any positive effects it may have had on revenue bases.43

 

43See for discussion of the effects of inflation on revenue
bases, Greytak and Jump, "Inflation and Local Government Expenditures
and Revenues: Method and Case Studies."

CHAPTER II

POTENTIAL IMPACTS OF RECENT DEVELOPMENTS

Central cities face other developments with the potential to

affect their already serious financial problems. Two of these are a

growing fiscal limitation movement and declining federal aid.

The Fiscal Limitation Movement

 

The general taxpayer disenchantment with government spending
and pursuant action has resulted in enactment of state level fiscal
limits by statute or constitutional amendment. Twenty-six of the 50
states now impose limitations on local taxes or state expenditures
and revenues; 23 adopted some form of control during the 1970s; 17
since 1975 (see Table 7).

The limitation movement has not been restricted to high tax
burden states in the last few years, as in the more distant past.
Fiscal limitation looks more like an epidemic whose spread has less
to do with tax levels and p0pulation characteristics than with the

dynamics of the current public mood: disenchantment with government.44

 

44Anthony H. Pascal and Mark David Menchek,Fisca1 Containment:

 

Who Gains? Who Loses? (California: The Rand Corporation, 1979),

 

p. 6; also see Helen F. Ladd, "An Economic Evaluation of State Limi-
tations on Local Taxing and Spending Powers," National Tax Journal
31 (March 1978): 1-18.

 

32

33

 

 

 

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34

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35

Local government property taxes are the primary subjects of
limiation.45 Property taxes are an important source of local govern-
ment own-source revenues. This movement has far-reaching implications
for central cities; many are already experiencing significant tax base
erosion and higher budget requirements. According to Peterson, declin-
ing cities have traditionally spent more on public services than their
suburbs. The squeeze will be more painful for older cities.

The choices available for remedying the squeeze and possible
consequences include: reduction in the quantity and quality of
services, employment cutbacks, increased user charges and tax shifts,
if possibie.46

Evidence suggests that some older cities (e.g., Boston and
Oakland) have already begun to feel the impacts of state fiscal limi-
tation. Boston is perhaps the most extreme case. Although the city's
fiscal health improved considerably between 1976 and 1980, in 1981
Boston is facing a potential deficit of more than 100 million dollars
for the fiscal year that begins in July. The city faces a possible
75 percent loss of property tax revenues, which translates into a
projeCted 97 million dollar reduction in property tax revenue for
fiscal year 81-82. The loss is due to Pr0position 2-1 which limits
property taxes to 2-1 percent of market value. The total loss will be

phased in gradually, reducing property tax revenues 15 percent a year

until the 2-1 rate is reached.

 

451bid., p. 8.

46Harold Wolman and George Peterson, "Policy Consequences of
Local Government Expenditure Constraint," The Urban Interest 2 (Fall
1980): 75-82.

 

36

One of the city's first responses to passage of 2-1 was to
suspend all new commitments for capital projects. The city's ability
to finance capital improvements in the 19805 will be limited by 2-1
and capital improvement debt ceilings.

The full effects of 2-1 will not be felt until July,when it
takes effect. Mayor White in the last few months laid off more than
1,000 of the city's 14,500 employees, including 200 police officers
and a similar number of firemen. The city also plans to furlough
another 400 police personnel by the end of June, arguing that the city
must begin cutting for tax reductions.

The city has other financial problems not attributable to the
effects of 2-1, but the implications for a troubled future are
clear.47

Oakland's case is not as severe.48 The city shares many of
the problems of older cities: employment and population decline and
a loss of regional sales activity. Although it has managed to add to
its job base in the past several years, economic activity remains
laggard. This has eroded the city's tax base and brought its budget
under pressure. The passage of California's Proposition 13 in 1975

reduced Oakland's property tax revenues by two-thirds, worsening the

city's fiscal problems. Oakland has been forced to cut spending

 

47"Boston and Oakland: Fiscal and Physical Decline," Urban
Institute Policy and Research Report 11 (Spring 1981): 7 and 8;
“Prosperous Boston Faces Wrenching Fiscal Crisis," Detroit Free Press
27 April 1981, p. 9A.

48"Boston and Oakland: Fiscal and Physical Decline," Urban
Institute, Policy and Research Report 11, Spring 1981.

 

 

 

37

sharply, even with Proposition 13 bail-out assistance. Activities
that are heavily financed from the city's general fund and histori-
cally dependent on pr0perty tax revenues, have suffered the most.

As the limitation movement spreads,implications for central
cities worsens. There appears to be no end in sight to the problem of
declining cities in the near future as local officials are compelled

to try to offset revenue losses.

Declining Federal Aid to Cities

 

This may also pose some problems. Although property taxes
still supply the greater share of own-source local government revenues,
many cities have become so dependent on federal aid that many experts
doubt their ability to survive without it. Distressed cities are
obviously more dependent in a real financial sense, but others have
become dependent in a political sense.

The massive inflow of direct federal aid to cities is a
major influence on the fiscal performance of the northeast region.
Treasury Department estimates for the 48 largest cities in 1978 show
that withdrawal of Comprehensive Employment and Training Act (CETA),
local public works and countercyclical grants would call for a tax
increase equivalent to 16 percent of own-source revenues or an equiva-
lent expenditure reduction.49 Local governments in the northeast and

midwest receive an above-average per capita share of these grants.

 

49U.S. Department of the Treasury, Office of State and Local
Finance, Report on the Economic Impact of Economic Stimulus Package
in 48 Large Urban Governments, January 23, 1978.

38

Revenue trends clearly indicate the significance of federal
aid to local governments. Heavy reliance on outside aid has become
a distinguishing feature of the nation's largest cities. The ACIR
estimates that in 1967 direct federal aid to the nation's 47 largest
cities was equal to 10 percent of the amount of money that those
cities taken together raised from their own sources of income; by 1978

50 In fiscal l977,outside aid

that figure was roughly 50 percent.
ranged from 75 percent of own-source revenue in the largest cities to
46 percent in some of the smallest, in sharp contrast with the degree
of dependency prevailing in 1962 (see Table 8). In 1978 it is esti-
mated that direct federal aid alone, provided 75 percent of own-
source general revenue in three of the nation's largest cities:
Buffalo, Detroit, and Pittsburgh, and 50 to 75 percent in 22 others.51
The percentages have been doubling every five years for the last two
decades.52 However, recent evidence suggests that federal aid to

state and local governments peaked in 1978 and has since been declin-

ing.53 With the current mood of budget austerity and proposed urban

 

50Advisory Commission on Intergovernmental Relations, Signifi-
cant Features of Fiscal Federalism, 1978 ed. (Washington, D. 0.:
Government Pr1nt1ng Office, 1978).

 

51Advisory Commission on Intergovernmental Relation, Counter-
cyclical Aid and Economic Stabilization, Report A- 69 (Washington, D. C. :
U. S. Government Pr1nting Office, 1978), pp. 22- 23.

 

52George F. Break, Financing Government in a Federal System
(Washington, D. C: Brookington Institution, 1980), p. 225.

53Advisory Commission on Intergovernmental Relations, Sig-
nificant Features of Fiscal Federalism, 1979-1980 ed. (Washington,
D.C.: U.S. Government Printing Office, 1980), p. 161.

 

39

TABLE 8.--Intergovernmental Aid Per Capita and Percent of Own-
Source Revenue, by Size of Municipality, 1962 and 1977

 

 

 

Total Inter- Intergovernmental Aid as
Size of governmental % of Own-Source Revenue
Population Aid Per Capita

1967-77 (S) 1962 1977
Less than 50,000 104 21 64
50,000 - 99,000 105 22 46
100,000 - 199,000 145 24 54
200,000 - 299,000 184 24 67
300,000 - 499,000 196 27 62
500,000 - 999,000 268 32 74
1,000,000 or more 456 29 75
All municipalities 177 26 66

 

Source: Census Bureau, Compendium of City Government Finances
in 1972, Series G-CF62, No. 62 (GPI, 1963), p. 7; and 1976-1977
Series GF 77, No. 4 (GPO, 1979), p. 8.

40

program cutbacks (e.g., CETA) at the federal level,the trend will
continue downward and is likely to have some effect on the fiscal

performance of large central cities.

CHAPTER III

POLICY ALTERNATIVES

The fiscal pressures on the central cities have been in the
making a long time, due to a number of possible causes. There is
obviously a need for policy change, if these cities are to regain
fiscal solvency.

Reform pr0posals have been offered which generally fall into
three major categories: revenue diversification, federal aid modifi-
cations, and centralization. In this section the major policy options
will be discussed under three levels of government (i.e., local, state,

and federal).

Local Government Options

 

The most immediate avenue available for relief of fiscal
pressure at the local level is to attempt expenditure reduction. The
most direct way of doing this is to curtail public services. Much of
this has already been accomplished, but this strategy may be self-
defeating, especially if the services are those of great need. Many
types of service reductions will impair cities' positions relative
to their suburbs.

The possibility of reducing costs by increasing efficiency of

municipal services is an alternative. Contracts with private firms

41

42

for provision of public services and new management techniques have
been proposed and sometimes tried, as possible ways of cutting spend-
ing.54 Whether these means will reduce costs to any significant
degree or whether they are politically feasible for all local govern-
ments is yet questionable.55
Revenue base diversification appears to be a promising Option.
Of course, such actions will generally require state action. For
example, income taxes imposed on commuters and city residents are an
attractive alternative to increasing property taxes. By taxing the
incomes of nonresident commuters, the city can reduce the fiscal dis-
parity between itself and surrounding jurisdictions. Commuters would
also pay for some of the external benefits received from the central
city. While city income taxes can contribute toward easing existing
financial problems of central cities (for those not already using
them), according to Oakland, their long-run contribution may be negli-

gible.56

 

54See Donald Fisk et al., Private Provision of Public Services:
An Overview (Washington, D.C.: The Urban Institute, 1978; and Lyle
C. Fitch, "Increasing the Role of the Private Sector in Providing
Public Services," in Improving the Quality of Urban Management, ed.:
Willis 0. Hawley and David Rogers (Beverly Hills: Sage Press, 1974),
pp. 533-553; also see Jeffrey D. Straussman,"A Typology of the
Budgetary Environment: Notes on the Prospects for Reform," Administra-
tion and Society 11 (August 1979): 216-226; and Jeffrey McCaffery,
"Revenue Budgeting: Dade County Tries a Decremental Approach," Public
Administration Review 41 (January 1981): 179-183.

 

 

 

 

 

55Jeffrey D. Straussman, "More Bank for Fewer? or, How Local
Governments Can Rediscover the Potentials (and Pitfalls) of the Mar-
ket," Public Administration Review 41 (January 1981): 150-158.

56William Oakland, Financial Relief for Troubled Cities
(Columbus: Academy for Contemporary Problems, 1978), p. 6.

 

 

43

Some reformers also suggest land taxation as an Option
because it is not as likely to induce migration and discourage

57 This

property improvements as does general property taxation.
policy would help avoid central city-suburban disparities in the
future.

Other reformers argue that cities should rely more on user
charges, especially for vital services provided to the metropolitan
area, but controlled by the central city. User charges would promote
use efficiency and could with discriminatory pricing, generate more
revenue from the suburbs. User charges are proliferating and are
expected to increase even more. However, they may conflict with public
policy regarding equity if compensatory mechanisms are not employed.

Centralization proposals have received a great deal of atten-
tion from economists and appear to offer considerable aid, but are
severely limited by political opposition. A centralization device,
annexation, was surrendered by many central cities sometime ago, thus
limiting options to capture land outside their boundaries. Moreover,
annexation has been met increasing resistance from suburbanites for
fiscal reasons, and by central city residents fearing a political
power shift.

Metropolitan consolidation is also widely opposed. Generally
supported on efficiency and economy grounds, since centralized metro-
politan services offer economies of scale and efficiency. Con-

solidation is frequently regarded as an effective means of dealing

 

57See for an opposing argument, Henry J. Aaron, Who Pays the
Property Tax?: New View (Washington, D.C.: Brookings Institute, 1975),
pp. 87-90.

 

 

44

with central cities' problems. Oakland estimates that a typical
central city could reduce its tax burden by roughly one-third; how-
ever, financial consolitation of independent school districts would be
necessary.58 Others suggest, however, that this option has signifi-
cant drawbacks; they question whether consolidation can really pro-
vide economy of scale or efficiency.59

Tax base sharing, on the other hand, offers some benefits of
annexation and consolidation, with possibly less opposition. Under
such arrangements, local jurisdictions would return their identity
and maintain existing responsiveness to citizen needs, while avoiding
costs of increasing government size.

The Minneapolis-St. Paul area has introduced a tax base shar-
ing plan among existing independent jurisdictions. While the arrange-
ment has lessened the competitive scramble among local jurisdictions
for new industrial property, its effect on tax bases have been very

60

small. One serious limitation of this option is that it does not

take into consideration higher expenditures by central cities, hence

 

58Ibid., pp. 10 and 11.

59See for discussion of disadvantages, John D. Hutcheson, Jr.
and James Prather, "Economy of Scale or Bureaucratic Entropy? Impli-
cation for MetrOpolitan Governmental Reorganization," Urban Affairs
Quarterly 15 (December 1979): 164-182; also, Werner Z. HirsCh,"Expendi-
ture Implications of Metropolitan Growth and Consolidation," Review of
Economics and Statistics 41 (May 1959): 232-241; and Robert L. Bish and
Victor Ostrum, Understanding Urban Government: MetrOpolitan Reform
Considered (Washington, D.C.: American Enterprise Institute for
Public Policy Research, 1973).

60

 

 

 

 

Peterson, "Finance," p. 80.

45

significant tax rate discrepancies remain. Nevertheless, it can

offer substantial relief over time.

State Options

 

In addition to accommodating local solutions as needed,
state governments have a number of different options which can aid
distressed cities. Centralization of particular services, such as
reassignment of education and welfare services expenditures to the
state level will provide some relief. However, a study by the Urban
Observatory Network questions the validity of this proposition.61

The shift of public welfare financing has been practically
accomplished except for some states such as Wisconsin and New York
where a substantial fraction of welfare costs remain at the county
level.

Education outlays absorb by far the largest share of aggre-
gate local revenues within city jurisdictions. Despite this, some
urban economists recently concluded that state assumption of educa-
tional costs will generally not provide significant relief to central
cities for a number of reasons.62

First, expenditures per pupil in the central city are gen-
erally above the state average, often exceeding those in the city's

own suburbs. Outlays in other areas particularly rural reas, will

rise sharply with state takeover of educational costs. This reflects

 

61See Roy Bahl and Walter Vogt, Fiscal Centralization and
Tax Burdens (Cambridge: Ballinger, 1975)}

 

62Oakiand, Financial Relief for Troubled Cities, p. 14.

46

the tendency of centralized service providers to standardize expendi-
tures, between jurisdictions. This leveling would raise total educa-
tion outlays.

Second, under present intergovernmental aid programs, cities
receive grant-in-aid revenues per pupil above statewide averages, as
well as substantially more than suburbs. The effect of reassignment
of the educational costs to the state level because of this factor,
would provide greater additional assistance to noncity jurisdictions,
particularly in the suburbs. Since existing aid programs are mildly
equalizing, the effect would be disequalizing.

Finally, the number of public school children per capita is
lower in central cities than in suburbs. Because of central cities'
relatively low pupil-resident ratio, they would receive less to spend
per capita than the suburbs. Even if cities received equal per pupil
increases in aid, they would obtain less per capita financial relief.

Each of these factors suggest cities' shares of additional
state outlays will not be great as population size would indicate.
Also, tax burdens of city residents would rise as fiscal pressure on
a city relates directly to fiscal burdens on its residents. State
assumption of education costs is thus not to cities' fiscal advan-
tage. However, to the extent that such a shift leads to integration
of central city and suburban schools, out-migration may be substantially
curtailed.

Some reform of education finance has been accomplished. To
date, they have focused primarily on eliminating tax base inequali-

ties, generally through the power equalizing approach, which

47

essentially opens to each pupil the tax base for the state as a whole.
Some states have adjusted this mechanism or used other measures to
compensate for the expenditure burdens of big cities. However, as a
class, the central cities are not greatly benefited by the principles
of power equalization.63 Application of pure power equalization would
cause a one-time reduction in tax revenues for the majority of central
city school districts, but would tie them to more rapidly growing

tax bases for the future.

The equalization principle generalized on a statewide basis
offers some promise for the central city. According to the ACIR, less
than half of state general purpose aid in the 1957-1974 period, was
provided on a fiscal equalizing basis.64 Moreover, half of the aid
was allocated on a per capita basis and provided only minimal relief
to fiscally disadvantaged cities. The other half of the assistance
was provided on a tax point-of-origin basis. If the equalizing prin-
ciple were applied to more of the general purpose aid and such factors
as tax effort, the proportion of the pOpulation which is poor and per
capita assessed valuations were taken into account, the cities' share
of general purpose funds would increase.

This strategy is politically promising since rural,inner
suburban and big city residents in most states would stand to gain

from such a move. General purposes aid carries no restrictions on

 

63Peterson, "Finance," p. 99.

64Advisory Commission on Intergovernmental Relations, The
States and Intergovernmental Aids (Washington, D.C.: U.S. Govern-
ment Printing Office, 1977), p. 27.

 

48

use and has the desirable effect of not altering local priori-

ties.

Federal Options

 

The federal government could aid central cities in a number
of ways. It could expand and modify the grant-inpaid programs; imple-
ment new programs that are expected to have a significant impact on
urban areas, or it could provide incentives to induce states and
metropolitan areas to come to grips with their cities' problems on
their own. Only options which entail expanding and modifying present
aid, and new programs will be considered here.
First, the most prominent of the existing programs, General
Revenue Sharing (GRS) which was enacted in 1972 has had a favorable
impact on declining cities.65 Despite this generally favorable impact,
GRS has a far greater potential for reducing disparities than it cur-
rently produces. Unrealized potential exist mainly:
1. Limits placed on jurisdictional entitlements--gen-
erally to 145 percent of the statewide average--
severely restrict receipts of co-terminous cities
and counties
2. It is not designed to keep pace with inflation

3. It is too small to have substantial impact

 

65See for details on GRS and other federal grants, Break,
Financing Government in a Federal System, Chapter IV; see also Advisory
Commission on Intergovernmental Relations, General Revenue Sharing: An
ACIR Re-evaluation (Washington, D.C.: U.S. Government Printing
Office, 1974), p. 3.

 

 

49

A number of alternatives have been advanced to increase bene-
fits to cities. One proposal calls for elimination of the state
component of the program. It has been estimated this would increase

local entitlements by 50 percent.66

Another is to earmark a portion
of the federal income tax. This would cause aggregate entitlements
to grow rapidly over time, particularly during periods of inflation.

Congress could substantially increase the federal commitment
to revenue sharing. Combined with elimination of the jurisdiction
entitlement limit and state participation, this could reduce urban
fiscal disparities considerably.

Other general assistance programs include: Community Develop-
ment Block Grants (CDBG) and countercyclical aid programs. The
latter include: (1) an expansion of public service under CETA;

(2) a program of accelerated public works; and (3) countercyclical
revenue sharing.

Although the CETA program was originally designed for man-
power training due to a recession-produced desire to create jobs
quickly, Congress augmented its funding and dropped legislative
requirements that money be used for new services to help meet pre-
viously unmet service needs. This freed the funds for use in hiring
persons to supply existing public services. As a result, CETA
closely approximates a program of general budgetary support for state

and local governments. The accelerated program of public works has

had similar budgetary effects.

 

66Oakland, Financial Relief for Troubled Cities, p. 22.

 

50

The aggregate impact of these programs has meant startling
revenue gains.67 However, as the forces of decentralization con-
tinue to Operate and other problems arise, the need for assistance is
increased. The current programs are of a temporary and ad hoc
nature. Assistance is needed on a more permanent basis.

One alternative prOposed by Oakland entails state or federal
government compensation to local governments for the fiscal costs of
their poor, since much of the problem is related to locational dis-
tortions and inequities arising from central city-suburban disparity.68
This fiscal disparity reflects the fact that the poor do not pay fully
for the public services they consume. The deficit is born by higher

income residents and businesses. If federal or state governments would

absorb these costs, the fiscal disparity could be eliminated.

Other Views

 

Of course there are those who suggest policy intervention of
this nature will do little, if anything, to affect the cities' fiscal
situation. Those who ascribe to the Banfield perspective of a “no
crisis" situation, believe that policy intervention serves no useful
purpose.69 According to Banfield, despite some recent recentralization

tendencies, centralization of people and physical facilities will

 

67Peterson, "Finance," p. 90.

68Oakland, Financial Relief for Troubled Cities, p. 351.

 

69Edward C. Banfield, The Unheavenly City: The Nature and the
Future of our Urban Crisis (Boston: Little, Brown, 1968); and Banfield,
The Unheavenly Citnyevisited (Boston: Little, Brown, 1974).

 

 

 

51

continue, with outward expansion checked only by limits on the supply
of vacant land. He argues that changes in the metropolis are
determined by the inevitable logic of demographic, technological,

and economic imperatives. Furthermore, governments are generally
unable to shape or cope with the consequences of these forces. ”If
towns are to grow into cities and cities into metropolises, old
residential districts must decline and disappear."70

Banfield's perspective is, of course, extreme. His work is
highly speculative and lacks scientific rigor. Some of his observa-
tions are significant, but he clearly ignores other evidence.

An alternate hypothesis is advanced by Marxist economists
who suggest the ultimate answer to urban problems is reconstruction
of the socioeconomic system. They argue the crisis is rooted in the
capitalist political economy.71

They envision the development of socialist cities, arguing
that government investment (at all levels) will only speed the fiscal

72 Marxists recognize that

crisis and attendant political disorder.
the political obstacles facing the transformation they recommend

would be enormous, and that its realization is unlikely in the short

 

70Banfield, "The Unheavenly City: The Nature and Future of
Urban Crisis," p. 42.

7lDavid Gordon, "Capitalism and the Roots of the Urban Crisis,"
in The Fiscal Crisis of American Cities, eds.: R. E. Alcaly and David
Mermelstein (New York: Vintage Books, 1976), pp. 82-112.

 

72David Mermelstein, "Austerity, Planning and the Socialist
Alternative," in The Fiscal Crisis of American Cities, eds.: R. E.
Alcaly and David Mermelstein((New York: Vintage Books, 1977).

52

run. Persuaded that liberal government programs are "counterproduc-
tive," they turn to political organizing at the neighborhood level as
the only useful short-term solution. Although urban neighborhoods
cannot resolve the problem, they are viewed as having the potential
to arouse class consciousness that labor unions once had. Community
activism becomes a means of politicizing economic relations, which
the state seeks to depoliticize, to build a political movement that
can survive the demise of the capitalist political economy and erect

a new system on its remains.73

Implication of Alternatives

 

Diverse perspectives on causes and solutions for urban fiscal
difficulties exist and it appears there is no consensus on any par-
ticular set of causes or a solution. Moreover, no one solution, given
a vareity of possible causes, appears to be adequate to the problems
the central cities present.

Analysis of various hypotheses suggests the problem-solving
implications for political authority are significant in resolution
efforts. The intergovernmental arena in which urban problem-solving
takes place is complicated. There is no formal single locus of
political control in the United States.74 Political authority is
divided vertically among federal, state, and local levels or units of

government. It is also divided horizontally within each level among

 

73Richard C. Rich, "The Complex Web of Urban Governance,"
American Behavioral Scientist 24 (November/December 1980), p. 290.

 

74Bryan T. Downes, Politics, Change and the Urban Crisis
(North Scituate, Mass.: Duxbury Press, 1968), p.‘35.

 

53

government institutions, whose primary responsibilities involve making,
implementing, and adjudicating rules.
Authority to solve urban problems is thus highly fragmented
and there is no clear-cut division of political authority.
Given its present political organization . . . the urban
policy-making system is incapable of producing coherent
decisions, developing effective policies or implementing
state or federal programs . . . city government is an
intractable puzzle because of inherent fragmentation of
urban service delivery and the historical fragmentation of
urban policy-making.75
Perhaps reformers should first come to grips with this recalcitrant
dilemma of fragmentation; it is a serious obstacle to urban problem

solving.

 

75Douglas Yates, The Ungovernable City (Cambridge, Mass.:
MIT Press, 1977), pp. 5 and 7.

 

CHAPTER IV

SUMMARY AND CONCLUSIONS

Urban economists generally agree that Ameica's cities are
facing serious fiscal problems. While there is no consensus on
causes, the problems are generally characterized by rapidly rising
expenditures and slowly growing, or even declining revenues. Numer-
ous efforts and classification of cities that are fiscally distressed
has been attempted using various measures.

A review and analysis of research findings in this area sug-
gest that a number of developments have contributed to the crises of
the cities. Several hypothesis were proposed to explain this crisis.
Two broad categories of hypotheses that have been reviewed in this
paper: (1) the decentralization hypotheses, which encompass intra-
metropolitan decentralization and interregional population and employ-
ment shifts and their impact; and (2) the over-expenditure hypotheses
which deals with the impact of public employee compensation costs and
inflation.

The degree to which decentralization and over-expenditure have
contributed to the urban fiscal problems is found to be a subject of
interminable debate and remains primarily undetermined. In addition

to these major hypotheses, the potential impact of recent developments

54

55

(i.e., the fiscal limitation movement and declining federal aid for
cities) has also been discussed.

There appears to be no more consensus on solutions to the
problem than there is on its causes. The alternatives reviewed here
are representative of a spectrum of alternatives offered and are, for
the most part, consistent with the causal hypotheses discussed in
this report. As the literature suggests, there are numerous causes
and the nature of the causes seems to dictate the application of
varied alternatives. Generally, the most pressing difficulty with
such applications rests with a lack of political feasibility, given
the present political climate.

Beyond this obstacle, the authority required to most effec-
tively resolve the problems appears to be held by higher levels of
government (state and federal). Whether central and state governments
will provide the leadership and effort required to significantly
affect the problem, considering the current mood of budget austerity
and an ailing American economy, remains to be determined. There is
reason to suggest, given the budget cuts proposed by the current
administration, that such leadership and effort may not be attainable
in the short term. Nevertheless, there is hope for resolution of cen-
tral cities' fiscal problems in the long term, as long as people keep

caring and researchers keep searching for answers.

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56

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