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Fiscal Conditions in Large American Cities, 1971 1984 PHILIP M. DEARBORN The period 1971-1984 was a difficult one for major U.S. cities. Many had to cope with a Toss in population and tax base or with the need to provide services for a fast-growing population. Of 30 major American cities, two-thirds lost population, with decreases of more than 20 percent in 5 cities. At the other extreme, 4 cities grew more than 20 percent, and 1 grew by more than 40 percent. Overall, the population of these 30 cities shrank by 4.4 percent from 197~1984 (Table 1~. Over this same period, some cities had fiscal crises; others ex- perienced good times. In some years, policy makers and researchers were very concerned about urban problems; at other times they and the public lost interest in cities. In view of these shifting currents, which have affected cities from 1971-1984, it is therefore appropriate to ask some questions about major city finances in the context of this history. Are fiscal conditions in major cities better or worse than they were a decade ago? Have changes in federal policy in the 1980s affected urban fiscal conditions? What are urban fiscal conditions today? These are seemingly simple questions; yet the answers to them are important as we evaluate past urban policies and consider the appropriate future role of cities in our federal systerr`. Unfor- tunately, the answers are also not easy to discern, the reasons for 255

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256 Philip M. Dearborn TABLE 1 Population Changes (in thousands) of Selected Major Cities 1970-1984 Population Difference, Percentage Citya 1984 1970 1970-1984 Change St. Louis 429.3 622.2 -192.9 -31.0 Detroit 1,089.0 1,511.3 -422.3 -27.9 Cleveland 546.5 751.0 -204.5 -27.2 Buffalo 339.0 462.8 -123.8 -26.8 Pittsburgh 402.6 520.2 -117.6 -22.6 Cincinnati 370.5 452.6 -82.1 -18.1 Minneapolis 358.3 434.4 -76.1 -17.5 Baltimore 763.6 905.8 -142.2 -15.7 Philadelphia 1,646.7 1,948.6 -301.9 -15.5 Atlanta 426.1 497.0 -70.9 -14.3 Milwaukee 620.8 717.1 -96.3 -13.4 Kansas City 443.1 507.2 -64.1 -12.6 Chicago 2,992.5 3,362.8 -370.3 -11.0 Boston 570.7 641.1 -70.4 -11.0 New York 7,164.7 7,894.9 -730.2 -9.2 Seattle 488.5 530.9 -42.4 -8.0 New Orleans 559.1 593.5 -34.4 -5.8 Indianapolis 710.3 744.6 -34.3 -4.6 Denver 504.6 514.7 -10.1 -2.0 San Francisco 712.8 715.7 -2.9 -0.4 Nashville 462.5 448.0 14.5 3.2 Memphis 648.4 623.8 24.6 3.9 Columbus 566.1 539.4 26.7 4.9 Jacksonville 578.0 528.9 49.1 9.3 Los Angeles 3,096.7 2,816.1 280.6 10.0 D alias 974.2 844.2 130.0 15.4 San Antonio 842.8 654.3 188.5 28.8 San Diego 960.5 696.6 263.9 37.9 Houston 1,705.7 1,232.4 473.3 38.4 Phoenix 853.3 581.6 271.7 46.7 Total 31,826.9 33,293.7 -1,466.8 -4.4 -These were the 30 largest cities in 1970, excluding Honolulu, the District of Columbia, and San Jose. SOURCE: Bureau of the Census. which this paper will discuss. Taking these difficulties into account, the paper will then provide some answers based on an analysis of the 30 large cities listed in Table 1.

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FISCAL CONDITIONS IN LARGE AMERICAN CITIES BACKGROUND 257 In 1972 it was said (Advisory Commission on Intergovernmental Relations, 1973:33: An incredible and seemingly insoluble array of financial difficulties confront urban governments in America today.... It is in cities that are found outdated capital facilities, demands for increased services for minorities and poor persons, worn-out equipment, the inability to increase the tax because of tax restrictions, the inability to exceed debt ceilings, citizen tax rebellions, competition with other governmental units for state and local revenue sources, and a general inability to make revenue resources stretch to fit the expenditures mandated by the state and demanded by the people. With a few minor changes this statement might describe a gen- eral view of the urban financial situation in any year since 1972. There were, of course, years in which urban financial problems were more discussed than they were in others, such as when New York defaulted on its bonds in 1975, when Proposition 13 was approved in California in 1978, and when President Reagan announced his intention to make major reductions in federal aid to cities in 1981. But despite the continuing interest and concern about how urban areas are doing financially, there are few quantitative measures of urban fiscal conditions; even more scarce are measures that describe changes that have occurred over time. There are several reasons for this lack: (a) problems in defining what we mean by "urban fiscal conditions"; (b) difficulties in getting good information; and (c) an inability to understand how urban finances are affected by local and national actions. Before discussing what we do know about urban fiscal conditions from 1971 to 1984, let us review these problems of measurement so that the reasons for the paucity of information and the difficulties involved in getting a clear picture of urban finances can be understood. MEASURING URBAN FISCAL CONDITIONS There are two distinctly different approaches to viewing urban fiscal conditions. The first might be characterized as the local, or "bottom up, view taken by officials within a local government and those directly involved with the policies of the government. The sec- ond is the "top down," or external, view typically taken by most academic researchers, federal policy makers, and others with a na- tional concern as opposed to a local concern about urban finances. Each view will be described briefly.

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258 Philip M. Dearborn The Local View Local officials are generally concerned with fiscal conditions only in their own city, and they are concerned in a very real and pragmatic context. Their judgment of the city's fiscal condition often relates to the next bond sale or local election. Some of the criteria that are used to judge fiscal condition, and whether it is getting better or worse, are the following: What is the government's record on balancing revenues and expenditures? Overspending revenues, unless it is intentional to use up some excess revenues from a prior year, is usually considered a sign that the government has encountered fiscal problems. . Are the government's fund balances in a surplus or deficit condition on its balance sheet? Fund balances give both a cumulative view of past budgetary performance and a measure of the reserves available to meet unexpected financial demands on the government. A fund deficit is a clear sign that the government has had serious problems balancing its budget and is in weakened financial condition to cope with future problems. Are tax rates stable or declining? Most local officials judge the need for increased tax rates as a symptom of problems in the government's finances. Achieving a stable tax rate depends on several factors: (a) government revenues keeping pace with inflation and local real economic growth; (b) the government work force increasing only enough to meet real growth in the community's needs; and (c) the cost for needed capital facilities, as measured by the percentage of operating expenditures needed for debt service, remaining about the same from year to year. If the above three conditions are being met, revenues and expen- ditures will probably grow at about the same rate over time, and tax increases will not be necessary to balance budgets. ~ Is the government able to meet its cash needs internally, or if it borrows for cash flow, can it repay the borrowings well before the end of the fiscal year? ~ Does the government have a good bond rating? Although rat- ings are related to a variety of factors, they also depend on the same internal financial indicators looked at by city officials themselves and thus are perceived as an independent confirmation of fiscal condition. The above criteria obviously do not describe all the ways in

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FISCAL CONDITIONS IN LARGE AMERICAN CITIES 259 which local officials judge their fiscal condition, but they constitute some of the most common ones. Two well-publicized national surveys (Matz and Petersen, 1983; National League of Cities, 1986) have been conducted to determine local conditions as local officials view them. Both of these surveys were based on the declarations of local officials who estimated how their finances would fare in current or future years. Although the conclusions of the surveys were as valid as the views of local officials, they were not based on auclited financial results. The 1983 study found that many cities raised taxes, reduced work forces, ant] ran operating deficits in 1982 and 1983. A later study by Petersen and Matz (1985) found that government finances had recovered in 1984 and 1985. The 1986 National League of Cities study found that cities were reducing fund balances to finance revenue-expenditure imbalances. All of these conclusions are consistent with the findings in this paper. Cities did have problems balancing their budgets in 1983, apparently as a result of the recession, but they had recovered by 1984. Cities routinely budget to reduce fund balances, as shown in the 1986 projections, but actual results often reverse the plans and add to balances. The National View At the national level, much of the work on urban fiscal conditions has been comparative. The following are some of the approaches used - n ma ring comparisons: ~ Ranking of fiscal stress by combining a variety of economic, fiscal, and demographic measures into an index number for each city. This type of work became so extensive that in 1978 the U.S. Treasury listed the results of six separate rankings of fiscal strain, including its own, which was a composite of the other five rankings (U.S. Department of the Treasury, 1978~. ~ Comparative tax burdens, tax capacity, and tax effort. These studies have suggested that a key determinant of fiscal condition is the amount of resources available to meet the government's needs and the extent to which they must burden their residents to meet their needs (Advisory Commission on Intergovernmental Affairs, 1981~. iSome cities are now using the International City Management Association Financial Trend Monitoring System indicators to formally review their condition. See Poister (1986~.

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260 Philip M. Dearborn . Comparisons between groups of governments, such as central city/suburban or Sunbelt/Frostbelt. These studies usually focus on disparities between the economic situations of governments as a measure of fiscal condition. Another general type of research related to fiscal condition has been directed at determinants of urban revenues and expenditures. This work has attempted to quantify the inherent spending needs of urban governments relative to their ability to obtain resources. Those cities that need to spend unusually large amounts because of their economic or demographic characteristics but have low ability to generate revenues are considered to be in a poor fiscal condition (Ladd et al., 1985~. Another important direction in evaluating urban fiscal conditions has been the analysis of national aggregate trends, as measured by such indicators as the surplus or deficit in the state-Iocal sector of the national income accounts (U.S. Department of the Treasury, 1985~. Although there are other types and examples of national studies of urban fiscal conditions, this sampling shows that there are very different views of such conditions at the national level, compared with the local level. The most controversial of these studies found that "the fiscal outlook for the states and localities is more favorable today than it has been at virtually any other time in recent history" (U.S. Department of the Treasury, 1985:420~. State and local officials took strong exception to this conclusion on the basis that it was derived from national income accounts information and not from local financial information (see, for example, U.S. Department of the Treasury, 1985:442~. Developing Alternative Measures of Fiscal Condition The wide variety of approaches to measuring urban fiscal condi- tions has enriched our perspective, but they are often controversial and inconclusive. There remains a major unmet need: an evaluation of urban fiscal conditions on a national basis in the context used by local officials. Such an evaluation should be based on actual financial information and be acceptable to officials at all levels of government. Developing a consensus about urban fiscal conditions is important as we move into a period of federal budget retrenchment and changes in the structure of federalism, both of which may result in increased financial burdens on local governments. It would be helpful to be

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FISCAL CONDITIONS IN LARGE AMERICAN CITIES 261 able to look at urban fiscal conditions nationally through the eyes of local officials to see the extent to which our urban governments are in good fiscal condition and to see whether conditions have been get- ting better or worse under the changing federal policies of the 1980s. Unfortunately, there are some serious problems in evaluating fiscal conditions nationally in a local context. A key to any research is good data, and such data are hard to obtain on the internal financial workings of local governments. Sources of Information The comprehensive information provided by the Bureau of the Census about city governments does not contain most of the key elements used by local officials to evaluate their financial condition. Census information recasts each local government's ciata into a single national format that ignores the fund structures of local governments, treats capital spending and debt service in a manner different from that required by local accounting practices, and makes it generally impossible to determine whether operating revenues and expendi- tures are in balance. There is, of course, no information about how results compared to what was budgeted, so that, for example, there is no way to tell the difference between a decline in revenues caused by a planned tax cut and a decline caused by worsening economic conditions. Balance-sheet information at the end of the fiscal year is not presented, and it is impossible to determine the relationship between a local government's current assets and its current liabilities. Information about debt and the costs of debt service is also confus- ing and not usable. The Bureau of the Census (1976:4) itself has cautioned researchers that "development of a measure of the ability of a city to deal with its problems is not possible through a purely statistical approach" using its data. The alternative to using census data is to collect financial infor- mation directly from local governments by using questionnaires or the governments' own financial reports. Questionnaires are difficult to use, however, because of the diversity of accounting terminologies and definitions used by local governments and because of the com- plexity of government finances. Take, for example, the apparently simple question of whether the city's budget balanced last year. This question is not as simple as it appears once we begin to look at the details. For example, the survey must specify whether the question refers to the general fund or all governmental funds; whether the

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262 Philip M. Dearborn balance was on a GAAP (generally accepted accounting principles) basis or the government's budgetary basis; whether the definition of "balanced" includes the use of prior years' surpluses as revenues; and whether transfers to and from other funds should be counted. Questionnaires are probably most feasible for collecting opinions of local officials about their finances or for gathering a very few clearly defined bits of financial information. The financial reports of the governments provide a wealth of financial information, but these, too, have problems in providing comparable time-series information. After New York's financial crisis, analysts, accountants, and city oh ficials recognized the need for better accounting and reporting by local governments. Changes were made in generally accepted ac- counting principles, and by the early 1980s every major city except Los Angeles substantially conformed to the revised principles. This transition from old accounting, which was often on a cash basis, to new accounting creates comparability problems between the years before and after the change was made. Because not all cities made changes in the same year, it also creates problems of comparability ., . among cltles. The general conformity to uniform accounting principles since 1980 has eased the problem of comparability; yet some changes in the principles have created new problems. A particular difficulty arises because many cities report operating results on two separate bases: to conform to GAAP, they report on one bash, but to conform to their non-GAAP budget, they also report on a budget basis. Some cities end up with revenues and expenditures that are balanced on one basis but out of balance on the other basis. In such situations, it is confusing to try to understand the government's budget intentions, to say nothing of trying to compare these intentions to actual results. Nevertheless, short of conducting onsite financial case studies, the financial reports of the governments are the best source of fi- nancial information about them. The data used in this paper have been taken from these financial reports unless otherwise noted. In some cases, especially in the years prior to 1980, adjustments were made to make information comparable. In addition, New York City information has not been included in most totals because its general fund revenues and expenditures are larger than the other 29 large cities combined and would distort results. It has also been necessary to omit some cities from the analysis for some years because they changed fiscal year definitions, made major changes in accounting, or did not publish a financial report for that year.

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FISCAL CONDITIONS IN LARGE AMERICAN CITIES Presentation of Financial Information 263 The financial reports of cities are organized by accounting funds. Funds exist because of the restrictions imposed on a government's use of its resources. For example, revenues from gasoline taxes often must be used only for highway purposes and thus must be segregated in a separate fund. Similarly, proceeds from bond sales usually must be used only for capital improvements and therefore must also be kept in a separate fund. Any analysis of a city's internal financial condition must cope with the problem of how to present information from different funds in an accurate, meaningful fashion. Although maintaining separate funds is necessary for legal and accounting reasons, the funds can be grouped into three general categories for the purpose of reviewing government finances: 1. Governmental operating funds. These funds receive revenue from most taxes, federal and state operating grants, and other general revenue sources, and are used to pay for salaries, supplies, debt service, and other operating costs associated with providing basic government services. The most important fund in this category is the general fund, which receives all unrestricted revenues and which may be spent for any legal governmental purpose. All governments have a general fund, but they do not necessarily have other funds. The other funds, when used, are classified as either special-revenue funds or debt service funds. 2. Governmental capital-improvement funds. Major expendi- tures for property, plant, and equipment to support basic govern- ment services are recorcled in these funds. Proceeds from bond sales and federal capital grants are the principal sources of receipts into capital funds. 3. Proprietary funds. These funds account for certain operations of the government that are similar to businesses, such as water supply, sewage treatment, or the municipal airport. Revenues come from service charges that are usually set at rates sufficient to recover full costs including depreciation. Previous examinations of major-city financial health by the au- thor were primarily concerned only with the general fund. These studies were published in 1973 by the Advisory Commission on In- tergovernmental Relations, and later updated in 1977 and 1978 for The First Boston Corporation, in 1979 for the Urban Institute, and in 1985 for the Advisory Commission on Intergovernmental Rela- tions again. For most local governments, the general fund is the

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264 Philip M. Dearborn largest fund and the most important. It customarily receives most tax revenues, and it contains discretionary funds that can be used to support inadequacies of resources in other funds. Yet the general fund does not provide information about most capital expenditures or restricted federal and state operating grants. Accounting for these activities occurs in capital funds and special- revenue funds. Debt service expenditures are usually shown in a separate debt service fund and thus are also not included in general fund expenditures. There is an additional problem of general fund comparability among cities because the amount of activity accounted for by the general fund varies from city to city. New York, for example, accounts for about 80 percent of its expenditures in the general fund, whereas Phoenix, at the other extreme, accounts for less than 20 percent of its revenues in the general fund. New Approaches to Measuring Fiscal Condition This paper, in addition to reviewing and analyzing the histori- cal and current general fund financial results of 30 major cities, will consider more comprehensive measures of financial activity encom- passing all governmental funds, both operating and capital. Propri- etary funds, because they are self-supporting, will not be included. Because of data problems, this analysis of the combined funds will cover only four years 1981 to 1984. The broader scope of the anal- ysis, however, makes it possible to look at changes in the funding of debt service and capital improvements, federal aid, and overall government liquidity. This paper wiD also consider the extent to which government operating results occur because the governments purposely budget for an imbalance between their revenues and expenditures to use up accumulated surpluses. If financial condition is judged by gov- ernment's annual balancing of revenues and expenditures, then such purposeful imbalances must be taken into consideration in judging performance. One other feature in the analysis of fiscal condition that was considered but found not feasible for this paper is an evaluation of changes in property tax rates. Most governments provide information in their financial reports about property tax rates, both for the

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FISCAL CONDITIONS IN LARGE AMERICAN CITIES 265 current and past years. For several reasons, however, this information is not readily usable. Comparability is a problem because some governments include only the tax rate that supports general city services, whereas others include rates for other independent agencies, such as school districts, and for special purposes, such as retirement funding. Another problem with comparing changes in tax rates arises from differences in assessment policies. Governments that reassess annually get the benefit of inflation growth and may not need to change rates. But governments that reassess only periodically may need to increase their tax rates to provide inflationary growth in their revenues in those years when reassessment does not occur; they can then reduce rates in the years when assessments are increased. Further work will be necessary to develop a reasonable measure of major-city tax rate changes, a key indicator of financial condition in the eyes of most local officials. RESULTS OF THE ANALYSIS We now turn to the results of our analysis, bearing in mind the difficulties described. The general fund operating results and balance-sheet condition of the 30 large cities will be presented first in the same general framework that has been used in previous re- ports dating from 1971. New data series on other funds special revenue, capital improvement, and debt service in the period 1981- 1984 will then be reviewed. Most of the information in both parts will be in summarized form. A discussion of individual cities is a problem because presenting various types of information for 30 cities requires large, complex tables and because it is not possible for this paper to present what would amount to case studies of 30 cities. In some instances in which reference to an individual city is necessary to understand! the point, the reference will be made. The conclud- ing section of the report presents the author's views on a general categorization of cities by financial condition. General Fund Results of Operation Every local government is concerned about balancing its oper- ating revenues with its expenditures because experience has shown that a persistent or unusually large amount of spending in excess of revenues leads to a weakened financial condition and, in a few in-

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FISCAL CONDITIONS IN LARGE AMERIC44N CITIES TABLE 7 General Fiscal Condition (balance or deficita as a percentage of total revenues) of Selected Major Cities for Selected Years City 1971 1976 1981 1984 New York (9.2) (31.1) (0.5) 0.1 Chicago (47.5) (24.8) (10.5) (8.5) Los Angeles N.A. N.A. 3.1 N.A. Philadelphia (6.1) (10~2) 4.4 1.8 Detroit (3.7) (5.6) (16.2) (3.1) Houston 10.8 7.4 15.5 3.7 Baltimore 2.4 8.1 2.7 0.7 D alias 4.3 6.7 6.9 5.9 Cleveland (16.6) 0.2 (7.4) (0.9) Indianapolis 4.5 2.7 3.8 6.1 Milwaukee 12.3 21.8 18.6 6.8 San Francisco 15.8 9.5 23.5 21.8 San Diego 7.3 8.3 8.6 9.5 San Antonio 5.7 (3.9) 10.0 6.8 Boston 13.4 (10~7) (7 5) (6.0) Memphis 6.7 2.7 5.0 9.3 St. Louis (2.9) 1.2 (0.7) 0.8 New Orleans (1~2) 4.5 8.4 2.3 Phoenix 4.4 3.0 0.1 4.4 Columbus 3.3 3.4 (0~2) 4.3 Seattle 22.9 1.3 6.3 12.3 Jacksonville 26.3 11.9 11.4 6.6 Pittsburgh 7.9 5.6 1.1 0.7 Denver 8.2 6.4 5.1 3.1 Kansas City 1.2 4.5 9.6 6.5 Atlanta 17.3 25.0 17.5 18.2 Buffalo 2.1 (15~0) (0~3) (0.03) Cincinnati 0.9 2.7 10.6 5.9 Nashville 6.3 16.9 6.3 4.2 Minneapolis 12.9 6.6 15.7 14.4 Unweighted Average 3.8 2.0 5.0 4.7 NOTE: Values within parentheses are deficits. N.A. = not applicable. aBecause of deficiencies in financial reporting, especially in 1971 and 1976, many balances or deficits are not in accordance with generally accepted accounting principles. Pro forma adjustments were made to reported balances and deficits in some cases to make them more compatible with accepted accounting principles. For 1981 and 1982 balances, the undesignated fund balance was generally used, but in some cities it was referred to as unrestricted. SOURCE: Data were derived from the published annual financial reports of the cities. 273

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274 Philip M. Dearborn early 1980s has made possible a broader and more detailed exami- nation of major-city finances. Instead of examining only the general funds, we can analyze all governmental operating funds and capital funds. Governmental operating funds include the general fund, debt service funds, and special-revenue funds. The review that follows covers the 30 cities discussed earlier, except for Los Angeles, for 1981, 1982, 1983, and 1984. For most purposes, New York is again omitted because its size dominates the totals. Information about several cities is not available for 1983. The early 1980s was an unusual period that was marked by a high inflation rate in 1981, a recession in 1982, and relatively high municipal bond interest rates that peaked in January 1982 and declined somewhat in 1984. In addition, federal aid to states and cities was reduced in 1981 and 1982. In short, a great deal happened in those 4 years, and it is difficult to determine which factors accounted for various changes in urban finances. A review of several of the trends over the period, however, gives some insight into what may have influenced urban finances. Operating Results First, it is helpful to assess whether this broader measure of operating results reflects the same cyclical operating results as the general fund. For each of the 4 years, the aggregate operating rev- enues of the major cities exceeded their operating expenditures. The excess revenues expressed as a percentage of expenditures was as follows: 1981 1982 1983 1984 1.9 1.1 0.2 2.2 Thus, although there was not a deficiency in 1983, as occurred when only the general funds were used as a gauge, the considerably poorer operating results of the cities in 1983, compared with 1982 or 1984, were repeated by this broader measure.

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FISCAL CONDITIONS IN LARGE AAfERICAN CITIES Liquidity 275 Earlier reports in this series included a measurement of govern- ments' liquidity as a test of the governments' financial condition- that is, whether they had cash available to meet obligations. For this purpose, liquidity is defined as the government's total cash and in- vestments~except for retirement fund investments, and its proprietary fund-restricted cash and investments, less any short-term loans. To be meaningful, liquidity needs to be compared with a measure of the cash demands on the government. In previous reports, we compared liquidity with general fund spending. With the broadening of the analysis to include all government operating funds, we can compare liquidity as a percentage of the more relevant measure of total gov- ernment operating fund expenditures. On this basis, liquidity was relatively unchanged from 1981 to 1983 but surged in 1984 as shown below: 1981 1982 1983 1984 33.0 37.4 35.8 46.9 Confirming this improved liquidity is the fact that although 6 cities had liquidity below 15 percent in 1982, in 1984 only 1 had liquidity below that figure. From 1983 to 1984,28 cities improved the total dollar amount of their liquidity, and 21 of those also increased their liquidity as a percentage of spending. The liquidity of major cities was clearly very good in 1984, especially as compared with the preceding 3 years. This improvement was obviously the result in part of the excess revenues received in 1984, but it may also have been due to governments issuing bonds at lower interest rates in 1984. Local governments typically stockpile capital funds, and thus increase liquidity, by issuing bonds in periods of low interest rates and suspending down" funds in periods of high interest rates. Effects of Changes in Federal Aid Federal grants, except for capital grants, are usually received by a city as a revenue that goes into special-revenue funds, but gener- ally they are lumped together with state aid for reporting purposes and shown only as intergovernmental aid. Thus, it Is impossible to

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276 Philip M. Dearborn ascertain from financial reports the exact extent to which changes in federal aid affected governments over the period in question. If a decrease in federal aid had any substantial effect on a city's fiscal condition, it should show up as a decrease in the importance of restricted revenues, with a shifting of expenditures to the gen- eral fund. This did not occur. Special-revenue fund revenues were slightly higher in 1984 at 27.1 percent of total operating revenues, compared with 26.4 percent in 1981. If there were any effects from federal aid reduction, therefore, they must have been offset by faster growth in state aid or other restricted revenues. There was a dip to 23.3 percent for restricted revenues in 1982 that could have been attributable to the 1981 federal budget cuts, but the recovery to the higher percentage in 1984, despite the lack of a significant increase in federal aid, makes it likely that nonfederal funds were causing the fluctuation. The ejects of federal aid reductions on capital spending will be discussed in the next section. Despite the lack of evidence that changes in federal aid levels in the 1980s have had any adverse ejects on major-city finances, cities are faced with the prospect that elimination of the general revenue- sharing program will have an effect in 1987. To evaluate the possible consequences of such a loss, we can examine the relationship of general revenue sharing to local finances in 1984. The 30 large cities, excluding Los Angeles, received $730 million in revenue sharing in 1984. This amount was equal to 2.2 percent of their total operating revenues, with a range from a low of 1.2 percent of Buffalo's revenues to a high of 5 percent of New Oriean's revenues (Table 8~. Most of these governments consider revenue sharing a basic part of their financing of current operations. As a result, over the long term, they will- have to increase their local operating revenues or decrease their operating expenditures by about the percentage loss of revenue sharing. The ability of the cities to absorb the loss of revenue sharing in the first year, without straining their current financial condition, depends on their ability to adjust their budgets quickly and on the availability of general fund surpluses to cushion the loss. As was reported earlier (see Table 6), the cities had unreserved surpluses at the end of 1984 totaling $364.7 million. This amount represents about half of the $730 million general revenue-sharing receipts for that year. If all of the cities had had to finance the loss from their surpluses (which they would not have done), 15 cities instead of 5 would have ended the year with balance-sheet deficits (Table 9~.

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FISCALCONDITIONSINLARGE AMERICAN CITIES TABLE 8 General Revenue Sharing (in millions of dollars) Compared with Total Operating Revenues for Selected Cities, 1984 City Total Operating Revenue Percentage of Revenue Sharing Total New York 17,420.3 272.2 1.6 Chicago 1,652.5 68.2 4.1 Los Angeles N.A. N.A. N.A. Philadelphia 2,417.1 45.8 1.9 Detroit 1,054.9 32.3 3.1 Houston 710.5 23.5 3.3 Baltimore 994.5 23.7 2.4 Dallas 498.7 14.3 2.9 Cleveland 371.5 13.6 3.7 Indianapolis 260.7 12.1 4.6 Milwaukee 389.8 10.7 2.7 San Francisco 912.8 21.4 2.3 San Diego 278.8 11.3 4.1 San Antonio 337.5 9.2 2.7 Boston 827.9 18.8 2.3 Memphis 540.2 12.6 2.3 St. Louis 347.9 10.5 3.0 New Orleans 353.4 17.8 5.0 Phoenix 407.8 10.6 2.6 Columbus 273.0 9.2 3.4 Seattle 356.6 10.0 2.8 Jacksonville 292.1 9.9 3.4 Pittsburgh 269.7 11.5 4.3 Denver 430.9 12.2 2.8 Kansas City 301.5 10.4 3.4 Atlanta 229.4 7.5 3.3 Buffalo 413.7 4.9 1.2 Cincinnati 244.7 9.1 3.7 Nashville 401.6 10.5 2.6 Minneapolis 286.8 6.2 2.2 Total 33,276.8 730.0 2.2 NOTE: N.A. = not applicable. SOURCE: Data were derived from the published annual financial reports of the cities. Revenue Sharing Information was obtained from the U.S. Department of the Treasury, Office of State and Local Finance. 277

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278 Philip M. Dearborn TABLE 9 General Revenue Sharing Compared with General Fund Surplus/Deficit (in millions of dollars) for Selected Cities, 1984 Surplus/ (Deficit) Less Revenue Surplus/ Revenue City Sharing (Deficit) Sharing New York 272.2 24.9 (247.3) Chicago 68.2 (101.9) (170.1) Los Angeles N.A. N.A. N.A. Philadelphia 45.8 25.5 (20.3) Detroit 32.3 (27.3) (59.6) Houston 23.5 23.8 0.3 Baltimore 23.7 4.6 (19.1) Dallas 14.3 24.4 10.1 Cleveland 13.6 (2.2) (15.8) Indianapolis 12.1 12.2 0.1 Milwaukee 10.7 20.9 10.2 San Francisco 21.4 177.S 156.4 San Diego 11.3 23.3 12.0 San Antonio 9.2 14.7 5.5 Boston 18.8 (41.1) (59.9) Memphis 12.6 23.5 10.9 St. Louis 10.5 2.2 (8.3) New Orleans 17.8 7.4 (10.4) Phoenix 10.6 10.6 0.0 Columbus 9.2 7.5 (1.7) Seattle 10.0 26.6 16.6 Jacksonville 9.9 15.0 5.1 Pittsburgh 11.5 1.6 (9.9) Denver 12.2 9.5 (2.7) Kansas City 10.4 14.1 3.7 Atlanta 7.5 32.1 24.6 Buffalo 4.9 (0.1) (5.0) Cincinnati 9.1 8.0 (1.1) Nashville 10.5 9.3 (1.2) Minneapolis 6.2 17.8 11.6 Total 730.0 364.7 (365.3) NOTE: N.A. = not applicable. SOURCE: Data were derived from the published annual financial reports of the cities. Revenue Sharing Information was obtained from the U.S. Treasury, Office of State and Local Finance.

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FISCAL CONDITIONS IN LARGE AMERICAN CITIES 279 Although the effects of federal aid Toss were not apparent through 1984, the likely loss of revenue sharing in 1987 can be expected to require a 2 or 3 percent adjustment in revenues or expenditures by most cities. This adjustment will create budgetary strains, especially for those cities that are already experiencing problems in keeping revenues and expenditures in balance. Capital Spending It has generally been observed that city governments have been decreasing capital spending in recent years. A comparison of capital expenditures as a percentage of government operating expenditures confirms this trend from 1981-1984 as shown below: 1981 1982 1983 1984 11.6 10.6 8.8 7.6 It should be noted that the governmental capital fund expendi- tures user! in this analysis do not contain capital expenditures for proprietary fund purposes such as water, electric, and sewer utilities and airports. Nevertheless, the clear downward trend is apparent; the reasons for it are less clear. Capital spending could be going down because needs are decreasing, because federal grants are less, because interest rates were high for most of these years, or for other reasons. The exact causes cannot be determined with precision, but circumstantial evidence suggests that federal aid reductions and re- duced bond sales (because of higher interest rates) may have been mayor causes. Federal capital grants are received into capital funds as revenues, together with state capital grants, interest on invested capital funds, and a few other minor revenue sources. Bond proceeds are not treated as revenues. An examination of capital fund revenues shows a decline that parallels the capital spending decline over 1981-1984. Actual capital revenues as a percentage of operating revenues were as follows: 1981 1982 1983 1984 7.6 5.8 5.1 3.9

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280 Philip M. Dearborn This decrease suggests that federal capital grants lost some of their significance as a source of capital spending over those years. Although it is possible that the decline resulted from other revenue losses, such a cause is unlikely because state grants and interest earnings are not generally major revenue sources for capital spending. High interest rates in the early 1980s may have caused an increase in debt service costs as a percentage of total operating expenditures, as shown below: 1981 1982 1983 1984 7.8 7.7 8.0 8.8 As was discussed earlier, local officials prefer to keep debt service costs stable as a percentage of overall operating expenditures. When interest costs rise, officials must either divert money from current programs to finance the increase or raise taxes. Neither is a desirable alternative, and it is thus likely that reductions in bone] sales and subsequent capital spending may have occurred from 1981-1984 as officials sought to keep debt service costs from escalating even further. Regardless of the reason, it appears that the cities were not spending as much of their budgets on capital improvements in 1984 as they had been in prior years. Whether this change was caused by the unusual series of economic conditions in the early 1980s cannot be determined, but it does not seem to be the result of any overall weakness in the cities' financial condition. It is more likely to be the result of political decisions marle in light of the city's needs, the availability of capital revenues, and interest rates. Categorizing the Cities by Financial Condition This paper has considered 30 major U.S. cities primarily as a unit over the period 1971-1984 for the purpose of looking at urban financial conditions. It is obvious, however, that the composite does not do justice to the varied experiences of individual cities. Despite the ups and downs of these cities when viewed in the aggregate, some cities have had consistently good financial conditions while others have faced problems in most years or for extended periods. Not surprisingly, bond ratings and general impressions of the major cities closely align with the cities' financial experiences. The

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FISCAL CONDITIONS IN LARGE AMERICAN CITIES 281 cities that have maintained a consistently good financial condition in virtually every year, as measured by their revenue-expenditure balance and balance-sheet condition, include San Francisco, Min- neapolis, Indianapolis, Jacksonville, Milwaukee, Atlanta, and San Diego. In addition, Los Angeles would almost certainly fall into this category if its financial reporting permitted a clearer view of its financial results. On the other hand, at one tune or another for extended periods, New York, Chicago, Philadelphia, Detroit, Boston, Cleveland, St. Louis, and Buffalo have had fund deficits, low liquidity, and severe or persistent revenue-expenditure imbalances. The rest of the cities fit no clear pattern. They have generally had good but not exceptional financial experiences and only occasionally years with indications of potential problems. This categorization, although based on financial facts, is still subjective because there are other facts that might be pointed to by local officials to justify a different categorization. Also, it may not give sufficient credit to such cities as New York, Cleveland, and Philadelphia and their belief that they have permanently reformed their finances. Such confidence may be justified, but it is also the case that for most years of the 1980s, except 1983, all of the major cities have shown good results and improving financial conditions. Thus, until the next period in which major cities generally experi- ence financial troubles, it ~ hard to judge whether these cities have permanently recovered. CONCLUSIONS The record from 1971-1984 shows that national recessions have caused major-city finances to falter, with lower revenues than ex- pected in the year following the end of the recession. This revenue deficiency then weakens the cities' balance sheets by reducing their balance-sheet operating surpluses or by increasing deficits. The ma- jor cities have weathered several such difficult years since 1971 and as of 1984 were in perhaps the best financial condition they had been in since 1971, as judged by their success in balancing budgets and maintaining balance-sheet surpluses and liquidity. This favorable condition can be expected to continue for most major cities, at least as long as the national economy remains healthy. Because of the city financial problems that are likely to occur following the next national recession, some preventive measures should be considered, either in

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282 Philip M. Dearborn the form of federal antirecession aid or improved methods for cities to predict recession-causec] revenue problems and take action to avoid them. The changes in federal aid in the 1980s do not appear to have had an erect on operating results, but the probable end of general revenue sharing can be expected to reduce overall city revenues by about 2.2 percent in the first year it occurs. The end of revenue sharing will create a problem for some cities with weak balance sheets and difficulties in balancing revenues and expenditures. As long as the economy is strong, however, one-time budget adjustments of this magnitude should be manageable. The loss of federal capita] grants probably contributed to a de- cTine in capital spending by major cities. In addition, high interest rates caused debt service costs to increase and may also have con- tributed to the decrease in capital spending. Measuring the financier] condition of urban governments in a way that is meaningful from both local and national perspectives remains a difficult challenge, but improvements in accounting practices have made some advances possible. There ace still many unanswered questions, but we are now able to observe at least a few key indicators of financial condition on an annual basis and to make judgments about the general financial performance of major cities, as well as about the condition of individual cities. REFERENCES Advisory Commission on Intergovernmental Relations 1973 City Financial Emergencies: The Intcrgoucrnmcntal Dimension. Report A-42. Washington, D.C.: Advisory Commission on Intergovernmental Relations. 1981 Measuring the Fiscal Capacity and Effort of State and Local Arcas. Report M-58. Washington, D.C.: Advisory Commission on Intergovernmental Relations. 1985 Bankruptcic* Defaults, and Other Goucrnmcnt Financial Emergencic`. Re- port A-99. Washington, D.C.: Advisory Commission on Intergovern- mental Relations. Bureau of the Census 1976 FinancialEnvironmcntIndicator~for City Governments. Washington, D.C.: U.S. Department of Commerce. Dearborn, Philip M. 1978 ThcFinancialHeakhofMajorU.S.C*ic~inFi~call977. New York: First Boston Corporation. 1979 The Financial Health of Major U.S. Cities in 1978. Washington, D.C.: Urban Institute Press.

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FISCAL CONDITIONS IN LARGE AMERICAN CITIES 283 Ladd, Helen F., John Yinger, Katherine L. Bradbury, Ronald Ferguson, and Avis Vidal 1985 The Changing Economic and Fiscal Conditions of Cities. Draft Final Report to the U.S. Department of Housing and Urban Development. State, Local, and Intergovernmental Center, Kennedy School of Go~r- ernment, Harvard University. Matz, Deborah, and John E. Petersen 1983 Ire rids in the Fiscal Condition of Cities: 1981-1985. A study prepared for the use of the Subcommittee on Economic Goals and Intergovernmen- tal Policy, Joint Economic Committee, Congress of the United States. Senate Print 98-119. Washington, D.C.: U.S. Government Printing Office. National League of Cities 1986 1986 Fucal Survey. Washington, D.C.: National League of Cities. Petersen, John E., and Deborah Matz 1985 Trends in the Fiscal Condition of Cities: 1983-1985. Unpublished study prepared for the Joint Economic Committee, Congress of the United States. Government Finance Officers Association, Washington, D.C. Poister, Theodore H. 1986 A HUD capacity sharing effort: The financial trend monitoring sys- tem. Public Budgeting and Finance 6(Spring):20-32. U.S. Department of the Treasury 1978 Report on the Fiscal Impact of the Economic Stimulus Package on 48 Large Urban Governments. Washington, D.C.: U.S. Department of the Treasury. 1985 Fcderal-Statc-Local Fiscal Relations: Report to the Prcaider~t and the Congress. Office of State and Local Finance. Washington, D.C.: U.S. Depart- ment of the Treasury.