Urban fiscal problems: coordinating actions among governments.

• Author: Chernick, Howard

What factors contribute to the fiscal disparities between center cities and their suburbs? What metropolitan-area solutions are available?

When most people think about the fiscal crisis of the cities, they often remember the near bankruptcy of New York City in the mid-1970s and the threat of bankruptcy that Philadelphia faced in the early 1990s. But the real fiscal problem facing many central cities is much more structural than budgetary. The loss of jobs and middle-income residents experienced by many cities diminishes the size of their tax bases. At the same time, federal and state governments mandate city governments to perform a growing number of functions. The continuing concentration of poor persons in cities also is raising the costs of providing a wide range of public services. In addition, city residents usually are responsible for financing services that provide benefits to nonresidents - both commuters and those enjoying the cultural and recreational facilities of the city. Responding to these demands results in higher city spending, which in most cases must be financed by higher taxes.

These structural problems may induce out-migration by the city's most mobile residents and businesses. Their departure further reduces the fiscal capacity of city governments, leading to a new round of out-migration. It may appear that once urban deterioration has started, a continuing spiral of decline is inevitable. The inevitability of this outcome, however, depends on the assumption that out-migration is fiscally induced. It also assumes that there is no intervention in the process by outside forces. And it assumes that city governments respond to structural problems by reducing services or increasing taxes. If, however, city governments can reduce spending without reducing services (i.e., by increasing efficiency), then out-migration may be reversed.

There is no consensus among researchers concerning the importance of fiscal factors in the locational decisions of firms, although some recent evidence suggests that taxes influence locational choices of firms within metropolitan areas but have little impact on intermetropolitan or interstate business location decisions. While the evidence is sparse concerning individuals' residential location decisions, these decisions appear to be affected to some degree by the fiscal conditions of city governments. Determining the importance of taxes and services on individuals' residential choice decisions is complicated by the difficulty of separating the role played by fiscal factors from the role played by other factors, such as crime rates, racial composition of neighborhoods, or lot sizes, that differ between cities and their suburbs.

Measuring Cities' Fiscal Health

The first step in exploring solutions to urban fiscal problems is to determine which cities are in the poorest fiscal health. One begins by drawing a distinction between structural fiscal problems and budgetary problems. To get a good sense of a city's structural fiscal health requires knowledge of the effectiveness of the city government in providing residents a set of basic public services relative to the tax burden placed on its residents. By this definition, a city will be in poor fiscal health if it provides inadequate levels of public services - for example, if police are not generally available, trash is infrequently collected, and there are large class sizes in its public schools - despite the fact that its residents face average city tax burdens. A city also will be considered weak fiscally if its residents must pay extremely high local taxes in order to achieve only minimally adequate levels of public services.

The authors define the fiscal condition of city governments as the gap between the cities' expenditure need and their revenue-raising capacity. A city's expenditure need indicates the amount that it must spend per resident to provide an average level of public services given its service responsibilities and the harshness of the environment for providing services. A city's revenue-raising capacity indicates the amount of revenue per resident it has available if its residents face an average tax burden. Revenue-raising capacities are enhanced by cities' receipt of intergovernmental grants.

The most important element of a need-capacity gap as a measure of a city's fiscal health is that it is a structural measure, one that (at least in principle) measures only those characteristics of the fiscal environment in which a city operates that are beyond the control of local public officials. Using this concept, Professors Helen Ladd and John Yinger, in their well-received 1989 book America's Ailing Cities, find that many of the nation's largest cities are in quite weak fiscal health.

City vs. Suburb: Fiscal Disparities

The fiscal health of cities is substantially worse than that of the average suburb. These fiscal differences, generally referred to as fiscal disparities, exacerbate big city problems. Four factors are associated with these fiscal disparities: 1) relatively low fiscal capacity in many cities, 2) higher uncontrollable costs in cities relative to their suburbs, 3) declining intergovernmental assistance, and 4) a pro-suburban bias in federal housing, transportation, and tax policies.

Low Fiscal Capacity. The fiscal capacity of a government refers to its ability to raise revenues. There are a number of indications that in most metropolitan areas the fiscal capacity of central cities is declining relative to the capacity of the suburbs: a decline in employment, especially manufacturing employment, in many of the nation's largest central cities; the loss of middle- and high-income population; and a shift in the employment structure of central cities, which often means greater suburbanization of high income residents. In sum, the increasing income differential between center-city and suburban residents reflects two geographic trends - suburbanization of jobs and of high-income people working in the...