Fend-for-yourself federalism: the impact of federal and state deficits on America's cities.

• Author: Hoene, Christopher W.

The largest federal and state fiscal crisis in decades is trickling down to city governments, making it increasingly difficult for city officials to balance their own budgets. (1) Faced with $110 billion in state budget shortfalls for fiscal years 2003 and 2004, state governments cut aid to cities for the first time in more than a decade. (2,3) At the federal level, the budget deficit is fast approaching $500 billion dollars because of tax cuts and increased spending. The fiscal relief package passed in May failed to address the needs of cities and their residents or to provide funding for No Child Left Behind Act and homeland security mandates.

These actions continue a longer-term trend of decreasing federal and state commitment to cities that represents an unraveling of the intergovernmental partnership. This trend, if it continues, threatens to undermine the ability of local governments to deliver services to their constituents.

To gauge the impact of decreasing federal and state aid on cities, the National League of Cities conducted an analysis of state budget cuts in fiscal years 2003 and 2004, as well as an historical analysis of state and federal aid to cities. Among the findings:

* Twenty-four states reported cutting aid to cities in 2003 and 2004.

* In 13 of the 16 states where financial assistance to cities was not cut, revenues grew only marginally, at rates of less than 3 percent. (4)

* These changes amount to a 9.2 percent ($2.3 billion) decline in state aid to cities in 2003 and 2004.

* Between 1992 and 1997, state aid to cities increased 4.6 percent per year on average.

* Over the same period, state aid to cities grew more slowly than state aid to non-municipal local governments such as counties, school districts, and special districts.

* Since 1977, federal aid as a share of total city revenues has declined from 15 percent to 5 percent.

* Between 1972 and 1997, cities' share of federal aid to local governments declined from just over 50 percent to 41 percent.

The decline in state aid to cities in fiscal 2004 is a dramatic shift from fiscal and historical trends. The decline points to the depth of the state-local fiscal crisis and expands upon the findings of an NLC report released in May showing that state revenues would fall by 2.1 percent in 2003 after growing by only 0.3 percent in 2002. (5)

FALLING STATE-SHARED REVENUES

From March to August 2003, the National League of Cities conducted an analysis of the types and extent of state aid to cities, using survey and interview data provided by 49 state municipal leagues. (6) Exhibit 1 shows the percent changes and dollar changes in state aid to cities for fiscal years 2003 and 2004. The overall 9.2 percent decrease in state aid to cities is the largest in at least a decade.

A handful of states drove the $2.3 billion dollar decline in state aid to cities. These included California ($1.1 billion), Massachusetts ($400 million), Florida ($136 million), and Minnesota ($110 million). However, given the differences among the states in terms of population and the size of their economies, percent change is a better source for comparison. Cities in some states saw revenue-sharing programs eliminated or nearly eliminated, resulting in large drops in state aid. The states that cut aid the most included Kansas (100 percent), California (59 percent), Texas (47 percent), and West Virginia (39 percent). Cities in several other states lost at least one-fifth of the funding they received the previous year. These states included Alaska (26 percent), Oklahoma (24 percent), and Pennsylvania (22 percent).

In many states, the cuts in state aid began before the current fiscal year. North Carolina cities saw state aid fall by 68 percent between 1999 and 2003, driven largely by the elimination of a state-shared revenue program going into 2003. Large decreases occurred over the same period in Alaska (38 percent), Washington (33 percent), and West Virginia (49 percent).

Given the complexities of each state's revenue system, cuts in state aid can and do take many different forms. These include cuts in revenue-sharing programs, whereby the state provides general purpose aid to cities or shares a percentage of a state-collected revenue source...