Being a Fiscal Impact City: Long-Term Planning

Introduction

In recent weeks we looked at how adopting a fiscal impact approach to operating and capital budgeting can help a community make more sustainable choices. This week we apply the same logic to long-range fiscal planning.

Framework for Long Term Planning

Long range planning, according to the National Advisory Committee on State and Local Budgeting (NACSLB)  is a process to assess the long-term financial implications of current and proposed policies, programs, and assumptions. This process creates appropriate strategies to achieve a community’s long-term goals. Though finance officers and budget managers are daily working with a city’s budget, revenue and operating numbers, financial planning expands their awareness of how these statistics relate to each other and to external variables like economic indicators and demographic trends. Taking a long-term perspective helps these local leaders improve their awareness of options, potential problems, and opportunities. The range of issues that they can examine with this approach includes revenues, expenditures, and the service implications of changing or eliminating programs or adding new programs, services, or debt.

A summary of the key steps should include:

  1. Analysis of financial trends
  2. Assessment of problems or opportunities facing the city and potential actions to address them
  3. Long-term revenue and spending forecasts
  4. Consideration of how these trends relate to citywide and departmental goals set out in strategic or comprehensive plans

Such a process is not just a forecast. It engages all internal departments, key external stakeholders and the general public in so far as all these have some role in setting and helping achieve key goals.

The NACSLB identifies several best practices that can support the long-range planning process including:

  • Prepare multi-year revenue and spending forecasts using a variety of methods
  • Evaluating and understanding how changes in the tax base and revenues will impact city operations
  • Examination of tax exemptions, incentives and other policies that can reduce revenue
  • Prepare multi-year projections of spending for each fund and for current and proposed programs
  • Evaluate revenue and expenditure options together, and present these relationships so elected officials and the public can understand the implications of changes in service levels and revenues and how they can impact each other.

Role for Fiscal Impact Models

Other best practices are also presented in the report. For our purposes we want to highlight how fiscal impact analysis can help tie these steps and practices together. The goal is to improve fiscal sustainability with the model, not just use it to evaluate individual projects. Using a full fiscal impact model is the most direct way to use this process to analyze revenue, spending and economic data in ways that help policy makers and the public understand the consequences of budgeting decisions. These decisions may appear harmless when looked at in an annual budget presentation. A community risks making very wasteful and politically damaging decisions without taking a longer term perspective.

First, a good fiscal impact model will make use of extensive, custom information on the city’s spending, revenue and staffing. This detailed data is the only way to make meaningful and accurate predictions of the consequences of changes. At a minimum, the historical data in the model should include enough years of data to see how they budget and how revenues change in good and bad financial times. A full business cycle is a good starting point.

Second, the model will connect these municipal financial statistics to activities in the real economy. Service costs will change based on the population, employment level, industry mix and physical form of the city. As these external factors change, local leaders need to be able to predict how their service demands and resources are likely to change, too.

Third, the model should give local leaders a projection that is long enough to help them make good decisions. A five to ten-year projection is usually adequate for most operations and department-level variables. For capital infrastructure or other longer-lived decisions the projection should go out at least as far as the infrastructure is expected to last and to include maintenance and replacement costs.

Because of these features of a good fiscal impact model, a city can combine its revenue, operation and economic forecasting in a single package that will help the community understand where they stand in terms of their goals and the means to achieve those goals. As always, there needs to be extensive citizen engagement in these processes so that when setting sustainable goals, local leaders can win the support of the community. When the community understands the consequences of these choices, and what can happen when there is a downturn, it will be easier to stay the course.

Being a Fiscal Impact City: Capital Budgeting and Asset Management

Introduction

Last week we saw how adopting a fiscal impact perspective with the operating budget improves municipal sustainability. Even without doing formal analysis on every project, local leaders can start helping the community think in terms of the long-range costs and benefits of city service levels. This week we turn to capital budgeting and capital asset management. Fiscal impact analysis will help a community align its vision with long-term sustainability. Capital assets – long-lived investments such as buildings, infrastructure or equipment are essential to delivering municipal services. They enabling the private sector to operate more effectively. Unfortunately, many communities have over invested in infrastructure given their tax base. Many also fail to properly manage these assets – either because they find that their tax base cannot support appropriate maintenance or because they don’t have simple procedures to help them get a handle on their real capital needs and costs.

Framework for Capital Budgeting

To begin with, cities should have formal policies set out in a capital budgeting process. Even when cities have good processes in place, they tend to run them in isolation. This makes it harder to learn about community needs and the economics of different ways of satisfying those needs. Without going into too much detail, capital budgeting and management process should include clear definitions of what counts as a capital project and what doesn’t. It should also include common sense policies like making sure the city covers maintenance costs first and isn’t doing deferred maintenance on some assets while trying to build new capital projects. It should look at the total lifecycle costs of the assets. That includes routine maintenance and the staff and materials to run and repair the asset. The process should also include metrics for asset performance that are related to the community outcomes the city wants to impact. There needs to be extensive citizen involvement and the process needs to be linked to other major plans like the city strategic plan and comprehensive land use plan.

Cities have been building up their capital assets over decades if not centuries. Often, documentation was an afterthought. It can be a considerable task just to inventory existing assets, but it is the necessary starting point to understand long-term costs and needs. Above the ground assets like streets, buildings, signs and street lights are relatively easy to address. Unseen assets like water mains, wastewater and storm water systems and other utilities are more difficult to inventory. Once the process is in place and the existing assets are mapped how can fiscal impact analysis support long-term sustainability?

Using Impact Analysis for Sustainability

Communities should invest in assets because they help deliver services. Impact analysis helps communities evaluate capital assets in the context of those services. This helps build a strong conceptual link between the city operating budget and the capital budget. Sustainability requires that all the costs of a service be accounted for, and they need to be covered by adequate revenues. Failure to do this is leads to deferred maintenance. They looked at operating and capital costs in isolation and didn’t try to understand how each service and its associating capital resources contribute to the total municipal budget burden. Fiscal impact analysis is a framework that can integrate these two dimensions of the capital decision. At a minimum the analysis should consider four dimensions when evaluating existing capital assets or evaluating potential new investments:

  • The source of funding and its appropriateness to the life of the asset
  • Potential impacts on the supply of the associated service from changing technology
  • Changes in the demand for the service from demographics and economic trends
  • Legal and regulatory issues that may impact the supply or demand for the service

This type of analysis will give decision makers an idea of the cost effectiveness of the asset in question relative to the desired goals. Fiscal impact analysis can help answer several other key questions:

Is the current production process for a municipal service cost effective long-term (this requires including both operating costs and the associated capital equipment?)

Can the government afford to maintain and eventually replace the capital assets? Our cities are full of underused and abandoned capital projects because of poor planning or a misguided belief that the investment responded to a long-term need. Entertainment and sporting venues are prime examples.

Can the city achieve its vision and performance goals with the approach being proposed? Just because the city has always provided a given service does not mean that the old way is still cost effective or effective at all. There are many public, private and hybrid methods for delivering a given service.

Finally, what are the costs of deferred maintenance? How much deferred maintenance can the asset survive, and for how long before its functioning is compromised? For example, Road quality degrades in a nonlinear fashion. There is a gradual decrease in road performance for several years, then, in a very short time, a road will rapidly decay. Cities should understand the consequences of not maintaining their assets.

A fiscal impact model can help decision makers understand the answers to these questions. Such an analysis documents the full lifetime costs of a capital asset or an entire class of assets. These costs can be compared to the overall municipal tax base. Most communities will enjoy many years of near-maintenance-free benefits from their new capital investments. Eventually, they will face the choice of either maintaining those assets or letting them degrade. Failing to maintain an expected level of service reduces the desirability of the community. The response from the private sector may be a swift loss of confidence in the local government. This can start a downward spiral that the community may not recover from. It is too easy for families and businesses to vote with their feet. Building a fiscal impact process into capital budgeting is very cost-effective insurance against this unhappy outcome.

Becoming a Fiscal Impact City: The Budget

Introduction

Once you decide to become a more sustainable organization by becoming a fiscal impact city, and have had the serious conversations we recommended last week, what’ next?

A good place to start is with your budget process. Budgets are an ever-present feature of local governments. Most cities are either in the process of planning for, developing, approving, implementing or reviewing their budget. The calendar is full of budget-related responsibilities, actions and deadlines. In too many communities, the budget process dominates everything else puts staff into a continuously reactive mode. They may be focusing more on the internal demands of the budget process than on trying to connect their resources and processes to solve community challenges.

With some minor changes, your budgeting process can be reoriented into a tool to improve long-term organizational sustainability and a way to proactively help you realize your community’s vision. There will still be hard decisions. Community engagement and politics will still be a central part. The rest of this post shows how a budget process can be gradually reformed through using a fiscal impact mindset. The result will help cities realize their community vision and build a more sustainable organization.

A Framework for Budgeting

As a reference point, we will be using the budget framework developed by the National Advisory Committee on State and Local Budgeting. This framework, set down almost twenty years ago, is still one of the best starting points for local leaders who want to be proactive and focus on long-term sustainability. We will give a quick overview of this framework then talk about how a fiscal impact mindset can work in it to turn budgeting into a true tool for organizational sustainability and community prosperity. Though they define budgeting as the planning, implementing and evaluating the provision of services and capital assets, we limit our discussion this week to the operating budget. We will look at capital budgeting in a later post.

Qualities of a Good Budgeting Process

The National Advisory Council emphasized the need for budgeting to go beyond annual balancing of resources and options. They intended their report to help governments upgrade all phases of budgeting: planning, development, adoption and execution. To begin with, the entire budget process should be goal-driven. These are goals beyond preserving departmental operations with given resources. The critical difference in a good budgeting process is that it starts with community needs, vision and issues. These should motivate the government’s quest to create a suite of services that can meet those needs, realize that vision and address the issues that are most important. The budgeting process sheds light on cause and effect, the real issues, so management and elected officials can make the tough decisions and tradeoffs that are always necessary because resources are limited.

In addition to being linked to goals, they emphasize that a good budget process:

  • Takes a long-term perspective – cities should look at impacts of budget decisions over many years and use the process to determine the sustainability of programs and services.
  • Is focused on outcomes and results – the outcomes of the resource allocation process are the services the city provides. These should have measurable results – impacts on the community issue they are designed to address.
  • Provides information and incentives to staff (and other stakeholders) – budgeting should inform decisions makers and increase stakeholder participation. It should also close the loop with all stakeholders.

Sustainability Budgeting and Fiscal Impact Analysis

Fiscal Impact Analysis is usually associated with evaluation of specific policies or development projects. How can this approach support annual budgeting? It isn’t cost effective to produce a formal fiscal impact analysis for every little decision. What is important and possible is to start thinking in fiscal impact terms when making these decisions. Stakeholders, elected officials and staff should all be aware of how resource allocation decisions produce winners and losers. Shifting funding from one area to address a priority is a good choice, but it is helpful to understand what the community is giving up with these decisions. Adopting the perspective and language of cost benefit analysis is the first step in applying fiscal impact analysis. Being aware of the consequences of tradeoffs in resource allocation and documenting the likely changes in service levels are concrete ways to start the process.

A further step requires collecting more information so local leaders can understand the costs per unit of service for various programs, the outputs of those programs and the associated changes in community indicators. This additional data does not exactly prove cause and effect, but can give hints of the relative effectiveness of different approaches to solving the same problem. Not all programs are easy to measure and have a more complicated relation to community outcomes. Still, the data collection and evaluation process can improve decision making.

The final step is to conduct a complete fiscal impact analysis of a policy change. This analysis will measure program costs and document the budget, revenue and economic impact of that change so that policy makers can see what it means for the organization and the community. Combined with community indicators and standard program performance measures, a fiscal impact analysis will help those responsible for setting the budget be well informed. Those decision makers can also share this information with constituents so that everyone is clear about the tradeoffs and likely consequences. This type of analysis can be applied to a part of the budget, the major programs or departments or to the entire budget. When applied to the entire budget it is a useful input into long-range financial planning which attempts to evaluate budget, revenue and impact out at least three years.

Becoming a fiscal impact city is more than a resource challenge. It is a major leadership and cultural challenge. The difficulty is building the organizational culture that can function in this more transparent way and building in community engagement and education processes so the public can increase their support for the hard choices local leaders need to make. In the following weeks we will look at other areas where local leaders can improve organizational sustainability by becoming a fiscal impact city.

 

Sustainability Questions for Communitywide Engagement

Every city can improve its fiscal sustainability. Fiscal sustainability means the providing the services that meet the needs of households and businesses without taxes and fees that harm competitiveness relative to other cities. A core practice to improving sustainability is building a culture that uses the fiscal impact approach through its decision-making processes. This includes its budgeting, planning, capital programs, operations and economic development. Improving sustainability, however may not mean any given city can still maintain the level of services it offers today over the long run. Local leaders need to start a deliberate process where they engage city government and the private sector. That process will help the community come to terms with the capacity of its economy to support its needs. It will also result in types and levels of public services that strengthen and complement the efforts of households and businesses to create value.

High levels of comprehensive municipal services are a relatively recent development. Before WWII, most smaller cities and towns provided very modest services. Fire departments in most communities were volunteer. Police departments were small. Infrastructure was crude. Post war suburbanization, expanded retail sales and federal grant programs for water infrastructure gave most cities the resources to provide a high and consistent level of services to most Americans living in metro Politian areas. That type of easy economic prosperity is available to fewer cities today.

Economic prosperity is the foundation of sustainable city finances. Economic change in recent decades has separated communities into a small number of big winners and a larger number of losers and also-rans. While most U.S. cities have not experienced the absolute economic decline seen in older industrial cities, most have underperformed compared to the small pack of very high growth metro areas. Most communities are facing an ongoing struggle to maintain roads and other infrastructure, pay staff and cover retirement benefits. There are a few options cities try to address this challenge. They raise taxes and fees. They cut services. They make often wasteful bets on economic development subsidies. Eventually service levels will adjust to the ability of the local economy to support them. The challenge and opportunity for cities is to get to that point as quickly as possible. This frees more resources for private initiative. It also improves the effectiveness of the services government continues to offer. The best way to make this transition is to do so deliberately and before a crisis forces a city to make foolish and damaging fiscal choices.

Rationalizing public services with the capacity of the local economy can happen through a thoughtful and inclusive process. This is more likely to happen when cities are proactive and begin before economic circumstances force them. This does not mean a painless process. It is likely, however, that starting this process now will build a stronger community that is more heavily engaged in local government decisions. This type of community building will help implement the policies that result from the deliberate process to become a fiscal impact culture. To start, local leaders can begin a citywide dialogue around collectively answering three questions.

How do we want to define sustainability as a community? The concept of sustainability needs to be defined in ways that all stakeholders can understand. There is no absolute right answer since sustainability is a relative term. Time frame is one variable. A community can set goals that strive for shorter or longer-term sustainability. Effectively answering this question also means refining the community’s vision of itself and its role in the regional, national and perhaps even international economies. Every community aspires for more and better. That was relatively easy during America’s long history of rapid economic growth. Today, in a mature national economy, and one with opportunities for local growth more limited, communities need to take a realistic look at what they can be. This does not mean there is no hope or role for aspiration. It does mean that successfully reaching a vision will require one that is more imaginative than just more of what they already are.

What is the community will to rationally examine service levels, economic capacity and pick an appropriate balance? Once a community has established a creative, realistic vision, it is in the position to explore the role of its services in achieving that vision. Though most Americans are accustomed to the full set of municipal services, not every city will be able to maintain all these services at the level they currently provide. Communities will need to be much more creative is thinking about how they want to achieve the functions of traditional services. For instance, reduced risk from fire is an important goal. Achieving that goal can be helped by changing the building code to increase the fire resistance of buildings and mandating sprinkler systems. These regulations lower the need for firefighting capacity in the long-run. This does not mean eliminating the fire department, but it does mean rethinking how this and every other major municipal service is delivered and funded.

What is the community’s capacity to carry out this process? This is actually the most important question for local leaders to ask and it should come first in their process. We introduced it last since answering it requires a little understanding of the other two questions. This question requires local leaders to evaluate their own motives. It means assessing the culture of their municipal government and the availability of the right skill sets, time and other resources. If motives, culture and resources are up to the task then a city will be able to start the process of building a fiscal impact culture that enables sustainability.

A community that goes through an inclusive discussion of these three questions will gain many benefits. The most important and enduring benefits of this process include shaping a realistic, creative and shared vision for what the community wants to be, rationally rethinking the purpose of local government and identifying the benefits the community wants. This experience will help local leaders build the administrative infrastructure and city culture that makes sustainability the centerpiece of all its major decisions. Then when it comes time to take up a specific tool like fiscal impact analysis or cost-benefit analysis to inform local decision making, it will be in the best position to put those tools to proper use.

Taking these steps may be a frightening prospect for city leaders, but the potential benefits outweigh the risks. It may be far easier than the alternative where economic crisis, either local or national forces changes in even more painful ways. With growing service costs, taxpayer unrest and an uncertain economy, taking these steps may be the only way for local leaders to effectively accomplish the goals they have set for their community in the long run.

Construction in Dallas

Fiscal Impact Analysis and Sustainability

Development agencies, governments and businesses have long used fiscal impact studies. Sometimes these studies are intended to justify a favored project. Sometimes, there is genuine interest in learning whether the project is a good idea for the community. A fiscal impact analysis is a powerful tool for helping local leaders and the entire community understand whether a project or policy change will improve or harm local-government finances. Doing one-off studies of individual projects can mislead local leaders. This is because stand-alone studies can fail to demonstrate a cumulative impact over time that overwhelms departmental service levels, utility and infrastructure capacity. A more holistic approach is better where the fiscal impact process informs public operating and investment decisions throughout city government.

A community can also miss a golden opportunity by only conducting stand-alone studies of its major projects. It misses the opportunity to use the fiscal analysis process to help reorient local public and private decisions to a more financially sustainable way of doing business. Over the next few weeks we will be showing cities how they can take full advantage of fiscal impact analysis not only to help them understand major, individual developments, but to use the fiscal impact process to improve overall operations. Today we will give you a quick overview of fiscal impact analysis as a primer. You can find more information on fiscal impact studies by downloading our local leader’s guide here.

What is fiscal impact analysis?

Fiscal impact analysis measures how local-government revenues and service costs change because of a change in the economy or the local government itself. The change can be a public or private capital investment or a change in government policy. The analysis subtracts government costs associated with completing and supporting the project from the revenues the project generates for local government. Many types of projects can be evaluated with this kind of model:

  • Construction or renovation of residential or commercial real estate
  • Business expansions or closures
  • Public works investments in facilities and infrastructure
  • Changes in government staffing, equipment and operations
  • Fee and tax changes
  • Land use changes (rezoning, annexations and build-outs)

Cities should use fiscal impact analysis to evaluate any major policy change or development. The time and effort are worth it. Some of the benefits of the study include: discovering potential infrastructure bottlenecks, learning the operating budget and revenue consequences of the project and helping the community understand the timing of these costs and benefits. Still, a community doing one-off studies of individual projects can miss the bigger-picture opportunities fiscal impact analysis offers.

Over the next few weeks we will take a closer look at how local governments should rethink their fiscal planning, forecasting and operations using a fiscal impact lens. Essentially, cities can use fiscal impact analysis as a process to make their key development, financial and operating processes work together to put their organization and their local economy on a more sustainable path. This not only helps them understand the implications of individual choices, it helps them:

  • Connect the dots between economic development, planning and budgeting processes
  • Build an organizational culture that makes short term decisions that are consistent with long-term goals and sustainability
  • Improving citizen and elected official confidence that the city resources are being well managed

Next week, we will look at the strategic and tactical choices a community needs to make if it wants to use the fiscal impact process to help improve long-term sustainability.

History of Fiscal Crises

Introduction

As we pointed out recently, from a fiscal point, there has never been a golden age for American cities. The history of cities in this country is also a history of reoccurring fiscal crisis. Our cities seem to have been in hard financial times since they first grew from small towns and added modern services.

Early Urbanism in the U.S.

There were few real cities in the U.S. until the mid-1800s. City growth was tied to industrialization. Before that, professionalized city services and major capital projects were few and far between. This kept city spending low along with the risk of overextending financially.

The founders did not comprehended cities in the Constitution, which limited its attention to powers of the national and state government. The 10th Amendment reserved rights for states to set policy on the remaining, unnamed issues. States focused their attention on enabling counties to provide limited services to the mostly rural population.

Throughout the century, local communities lobbied state governments to continually increase the scope of city responsibilities. Population growth, new wealth and new technology made cities more complex and challenging to live in. As towns grew, states supported citizen-led charter initiatives to create new cities.

By the end of the 19th century, cities had added the authority to provide the range of services, that a modern urban dweller would recognize and expect: water, sewer, streets, police, fire, waste, parks, libraries, and so on. At the same time, state governments had imposed severe restrictions on local governments that prevented cities from directly administering those services. The most common arrangement was for state legislatures to appoint boards of local citizens who would administer the budgets and staff of city departments. Even the nation’s greatest metropolis, New York, in the 1890s only had direct control over a fraction of its budget.

State control was imposed to establish political party control at the local level. Cities were now important and city jobs and contracts were key prizes in political patronage systems. State control was also motivated by a series of municipal bankruptcies from poorly thought out and executed capital and economic development projects.

Cities were growing and their economies were becoming more complex economically and, as mentioned, their citizen and business leaders were seeking more modern services and infrastructure. Under our fiscal federalism system, localities were in keen competition with each other. They began taking on increasing amounts of debt. A series of financial crises and a major economic slow-down or depression in the 1870s revealed the precarious state of these cities finances. The response was state legislatures imposing those restrictions on city operations.

Modern City Financial Crises

Things didn’t improve much in the 20th century. The public administration revolution brought a more professional civil service to the national and some state governments. The initiative had less impact on localities. Local accounting practices were still poor. This made oversight very difficult. initiatives at There have been a series of financial crisis phases in American cities so that it is questionable whether there has ever been a time when cities were financially sustainable.

Localities also innovated ways to circumvent state debt restrictions. Again, much of the debt was for capital projects, but increasingly cities turned to debt to fund their newly professionalized police and fire departments and to support growing park and library systems. Poor management practices and lack of reporting or oversight requirements meant cities were operating recklessly. This behavior was exposed by the Great Depression.

Following WWII there was another, more surprising fiscal crisis era. Our metropolitan areas were generally booming. The problem, however was that within metropolitan areas, central cities were reaching their peak population. They became land-locked, unable to annex land because they were being surrounded by newly incorporating suburban cities. At the same time, older central cities were losing middle-class households to the suburbs. In addition, there was increasing out-migration from older cities to southern and western states. These changes brought about a period of sever central city financial crisis, especially in older regions of the country.

In the last half of the 20th century, the sunbelt boomed as formerly small cities grew into large multimodal metropolitan areas. New suburban expansion in the form of homebuilding and a retail explosion fueled city coffers in the South and West. Throughout the period, many older cities either continued to decline. As in the past, economic recessions revealed that U.S. cities were not so financially sustainable, even in the Sunbelt.

The 2001 and Great Recession finally saw a change in municipal philosophy. Cities were no longer able or willing cover financial crises with a mixture of tax increases and budget cuts. Cities North, South and West used mostly budget cuts to get through the dotcom recession. The situation was even worse in the Great Recession. Throughout the 21st Century, city spending levels bounced up and down, but in most cities they have not broken through to new highs. It appears that cities seem to have entered a period of sustained fiscal stress in the good and bad years.

What’s Next?

Given this timeline, we can see that there have been city financial crises as long as there have been modern cities. As cities have grown, they have continually run up against external economic pressures that challenge the traditional ways of doing business. Changes in the larger economy have continuously threatened cities as they first scrambled to modernize to serve an industrial population, and in recent decades, as population migration and economic change pulled the rug our from under these cities again. What can be done about it?

The answers are likely to be different for each community. Our brief fiscal history here only hinted at some of the many causes of fiscal stress for U.S. cities. The solutions will involve addressing the ways cities operate, their financial practices and the way they deliver services. A better way forward also means shifting away from the high-cost, subsidized economic development practices that more than once have undermined the fiscal health of communities they were attempting to help. In the following weeks, we will take a closer look at specific fiscal threats to our cities and what can be done about them.

Causes of Fiscal Stress

Introduction

We spent the last several weeks outlining a framework to improve municipal financial sustainability including goals, indicators, community engagement and long-range planning. Today we introduce potential sources of fiscal stress for America’s cities and towns. Every community is unique, but many of these factors are impacting most places.

Two Centuries of Change

There was no golden age of sustainable urbanism in the U.S. Urban America has grown and changed continuously for two hundred years. (Before that there was no significant urbanism, only a handful of small towns.) Towns grew into cities and conditions and concepts of fiscal health changed with them. These changes altered what was economically viable for businesses, households and city governments. Population growth, new techniques and modes of organizing were reinforced by new energy sources like coal and oil. Growing wealth, knowledge about public health and sanitation and political and cultural changes increased demand for more services and influenced the way cities were built and the way municipalities operated. As cities aged and economic competition increased among them winners and losers emerged and economic health varied across the country. Always, these shifts influenced new rounds of public and private cost-benefit calculations.

The simplest definition of municipal financial health is that municipal operations are not so large or complex to be sustained through its existing revenue system. The local private economy that is the source of wealth for government operations may or may not be capable of supporting higher revenues. That circumstance will vary from place to place. When a city’s circumstances change from fiscal health to fiscal stress it may be because of internal or external changes or both. Solutions will also vary depending on local circumstances. Changing service levels, trying to enhance the local economy or both may make sense. Making the right choice as a community depends on what specific factors contributed to the fiscal stress. There are several candidates to consider. Some of these changes have been happening throughout U.S. urban history, others have been more important at certain times. Some are a bigger factor in some parts of the country that others. We present these in no particular order, though evidence exists for all these in at least some cities today.

  1. Landuse that no longer takes advantage of traditional urban form (positive spillovers from proximity and agglomeration.) Spatial segregation of uses, too much private land in unproductive uses like parking and setbacks are examples. This requires more infrastructure per acre and more municipal fleet and staff requirements to serve the private sector.
  2. Economic changes in the location, size and mix of industries and businesses. Technology change and continuing competition shift the fortune of local industries. In some communities, the tax base declines. There are also fewer self-employment opportunities nationally as industries become dominated by larger firms.
  3. Shrinking tax base from a shift in tax types. Over the 20th Century, taxation generally became more regressive. Property taxes and sales taxes tend don’t generally increase proportionately to higher household incomes.
  4. Changes in fiscal federalism. Federal government aid to cities grew over the last century, but began declining in the last 40 years. Many states have not increased local aid, resulting in a net decrease in this revenue source to cities.
  5. Post WWII pension and retirement benefits have become a growing burden for local governments as their workforces matured. The dependency ratio increased as even the Sunbelt boom towns built out. Health costs have recently grown much faster than than any revenue source or other spending categories.
  6. Higher debt service. This may be a symptom of stress when it results from using debt for operations. It can be a contributor to stress when the underlying economic base weakens and what looked like prudent investments in years past become stranded sunk costs.
  7. National and regional population migration that weakens the markets of origin and increases service demand in the destination markets. Origin cities see a decreasing private sector trying to support the operating and infrastructure of a formerly larger city.
  8. City growth. As cities grow in population, their spending per capita increases faster than population growth. This has been the case since industrialization in the mid 19th century. Americans continue a long-term trend of crowding into larger cities and suburbs where demand and provision of services is at a much higher level than in small cities and towns.
  9. New awareness of public health and environmental risks promoted greater demand for infrastructure upgrades especially in water and sewer systems. Citizens have also generally demanded high levels of public safety protection.
  10. Technology innovation has also added to the service burden of cities. For example, development of steam-powered fire engines allowed a smaller crew, and lower brigade costs. However, formerly volunteer or privately funded services moved onto municipal books.

This is a long list and we will spend much of the new year taking a closer look at some of these. Finding answers for financially strapped communities means not making reactionary decisions. Solutions based on fads or what another community tried can squander scarce resources. Cities did not become fiscally stressed overnight. Some of these trends have been in place for well over a century. Change for the better will probably need to be gradual and thoughtful as well. There is no golden age of American urbanism to return to, but most every community has the capacity to make positive changes. We will need to work out the answers that make sense in each place.

Next Week

Next week, we will present a few predictions for economic development and municipal finances for 2017. If you would like to know more about how Axianomics can help you put your community on a more sustainable path let us know.