Macro Trends and Fiscal Sustainability

Introduction

Last week, we looked at definitions of fiscal sustainability or fiscal stress. Local leaders need to proactively choose policies that improve their community’s long-term financial health. Today, we will briefly look at four major trend areas that influence City Hall. Economic, demographic, political and technological changes create new challenges and opportunities for local leaders. Asking the right questions about trends in these areas is the first step to improving fiscal sustainability.

Key External Trends

Local leaders can have an important influence on municipal priorities, plans and operations. All these issues have implications for municipal financial sustainability. The choices local leaders make can change service levels and costs or alter revenue options. Making the right call on these issues depends on what is happening outside the municipal organization. Four important trend categories to consider include changes in: economics, demographics, politics and technology. Historically, these trends have changed the dynamics and influenced the costs and benefits of local policy decisions. Each of these four areas are extremely complex and deserve careful attention. What follows is merely an overview of some of the most important items, and what questions local leaders should address to their staff and other community experts.

Economic Trends

The most important items for local leaders to consider are employment and income of their residents. (Changes in their local business industry mix and sales are the second most important.) Too often local leaders focus only on the absolute levels of employment to gauge the health of their communities. Measures of family or household income are equally important. Further, it is also essential to look at how economic rewards are being spread across the community.

The distribution of income in a community matters for the tax base. Income growth in a narrow segment of the population is not as beneficial as improvements across the community. This is because municipal funding sources like sales tax and property tax do not grow proportionately with income. At a certain point, household spending and the size of homes reaches a limit. Beyond that point, family income growth goes mostly into non-taxable activities. In the same manner, as business activity changes, there may be gains or loses because sales taxes apply to only a small share of industries. In Texas less than a quarter of business activity is taxable.

Demographic Trends

The most important demographic trends are counts of households, total population and the age and education distribution of the population. Households are a better measure for fiscal monitoring because each household is a separate, independent economic unit. Families may be spread across multiple households. Total population is similarly grouped into households for economic statistics. Demographic variables influence economic conditions such as the size and location of markets. Other important demographic trends are responses to economic conditions. Better economic conditions lead to more in-migration, family formation and fertility. All these factors influence long-term community needs.

Political Trends

Local government takes place within the larger national and state political framework. Changes in policy at the higher level impact the spending and revenue options of cities and counties. Politics often follows long-term economic trends. The relative importance of different levels of government has changed over time. Before the economic and political crises of the early 20th Century, local governments spent more than the federal government. In recent years, state and local governments have increase their responsibilities slightly.

It is critical for local leaders to continuously engage their constituents. What are their thoughts on municipal finance and service levels? Local governments across the U.S. have been facing increasing pressure from activist citizens to reduce taxing flexibility. This action typically takes place at the state level. In some communities, it is through statewide referendum. In other cases, state legislatures are enacting legislation to limit local responsibility and flexibility.

Local leaders also face a continuous struggle to engage citizens. In an age where national politics dominates issues and social media dominates attention, achieving local fiscal sustainability is an even harder challenge.

Technological Trends

Technology influences the way municipal services are produced. New technology changes the relative prices of labor and equipment and the best way to organize a municipal service. Local leaders need to question whether or not new technologies are really an improvement, or just different. The proof is in how they change prices and effectiveness. Some lower-tech approaches may be better from a cost-benefit standpoint. Truly revolutionary changes are few and far between.

Two examples of revolutionary changes for city services include the steam engine and radio. In the mid-1800s, steam-powered fire engines finally gave firefighters the ability to contain major urban fires. This new effectiveness also lowered the manpower requirements of fire brigades. Cities moved quickly to create municipally-funded, full-time fire departments.

Radios dramatically improved the awareness and responsiveness of police patrols. As cities began to grow dramatically in the early 20th century, radio gave departments the ability to better coordinate patrols and dispatch.

Fire engine capabilities and police communications have been continually refined since, but many basic operating principles of these services have remained unchanged. Local leaders should ask whether proposed new technologies represent real cost savings or improvements in effectiveness. Or, are these new tools more of a fad.

Next Week

Next week, we will look at how local leaders need to engage the public as they proceed with reforms to improve fiscal sustainability.

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