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COMMITTEE REPORT
33
The changing economic structure of central cities thus has a
number of fiscal implications, and not all of them are gloomy. There
are some opportunities for revenue growth, although state and local
governments have not been especially innovative in adjusting their
fiscal structure in the past.
Urban Fiscal Conditions
Long-term structural economic and demographic changes con-
tinue to transform regional and local economies, but not in the same
ways or at the same rates. These changes have differing fiscal and
managerial implications for an urban government, depending on its
location, the demographic makeup of its population, and the local
economic base. Many central cities, except those in the fastest grow-
ing areas of the South and West, face the revenue and expenditure
consequences of slowly growing or shrinking economic bases and pop-
ulations. Some older suburbs, and even entire metropolitan areas in
the Midwest and Northeast regions, face the same problems. In con-
trast, some metropolitan areas in the South arid West have to adjust
to the fiscal and political consequences of fast growth, which calls for
expanding services and infrastructure.
Urban areas suffered with the rest of the country through sev-
eral recessions in the early 1980s. It is common wisdom that older
metropolitan areas, and especially their central cities, suffer dis-
proportionately from business recessions, which in turn cause fiscal
distress. The same period (the early 1980s) has also witnessed sig-
nificant reductions in federal aid for cities. Have fiscal conditions in
central cities worsened as a result?
RECENT FISCAL TRENDS
A city's fiscal health depends on the balance between the costs
of the services it provides and its ability to raise revenues.7 The
ability of a city to raise revenues through taxes and user charges in
turn depends on the level of economic activity taking place within
7 The complexities of defining and measuring local government fiscal ca-
pacity are discussed in Ladd et al. (1985:Ch. 4) and U.S. Department of the
Treasury (1985:Ch. 83.
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URBAN CHANGE AND POVERTY
its boundaries. A city government also relies on state and federal aid
for some of its budget.
Older urban areas, especially in older regions, have in the past
been affected adversely by recessions. The 1974 fiscal crisis in New
York City and subsequent fiscal problems in some other older cities
coincided with a recession and seemed to confirm this pattern. Also,
metropolitan areas in general, and central cities in older regions in
particular, performed relatively poorly during the 1970s (Garnick, in
this volume:Tables 2 and 5~. As George Peterson (1986) has pointed
out, these trends led to attempts to explain why older cities might
be more vulnerable to economic cycles. The leading explanation
has been that sIow-growth or shrinking urban areas, and especially
their central cities, have higher proportions of obsolete and worn-
out capital facilities and high-cost union labor, which are first to be
abandoned when a recession reduces demand. Also, central cities
tend to be more closely linked to national rather than to local or
regional markets, a factor that could make the cities more sensitive
to national business cycles. This analysis has led some researchers
to predict that metropolitan areas generally would be more sensi-
tive to recessions than nonmetropolitan areas, that sIow-growth or
no-growth metropolitan areas would be more vulnerable than fast-
growth areas, and that central cities would super more than suburbs.
Finally, The cyclical instability of city economies was expected to
spill over to city finances, making them especially precarious during
recessions (G. Peterson, 1986:13~.
These beliefs in urban fiscal vulnerability were consistent with
intergovernmental fiscal policy during the 1960s and 1970s. T~ocal
governments became increasingly dependent on aid from the federal
and state governments until federal aid peaked in 1978. Between
1960 and 1980, federal aid grew nearly 12.6 percent per year (after
adjustment for inflation). The biggest increases (31 percent per year)
occurred during 1970-1974, when federal grants to local governments
grew from $2.93 billion to $8.64 billion (in 1972 dollars). More than
half the increase came from general revenue sharing (U.S. Depart-
ment of the Treasury, 1985:64, Table ITI.10~. In response to the
1974-1975 recession (the worst since the Depression up to that time)
and the belief that urban economies were cyclically unstable, several
anticyclical aid programs were adopted; the Antirecession Fiscal As-
sistance Program, the I,ocal Public Works Program, and the Public
Service Employment Program of the Comprehensive Employment
and Training Act (CETA) provided more than $13 billion to state
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35
and local governments between 1976 and 1978 (U.S. Department of
the Treasury, 1985:371-372~.
By 1980 intergovernmental aid accounted for 44 percent of local
government general revenues, compared with 31 percent in 1960.
Within 3 years, however, federal and state aici dropped to 40 percent
of local general revenues (U.S. Department of the Treasury, 1985:61-
64~. The decline in federal aid to localities that began after 1978
accelerated after 1981 as the new administration succeeded in making
major cuts in outlays for urban programs. In an examination of
nine urban programs, G. Peterson (1986:31) found that 1982 federal
outlays were $5.8 billion less (23 percent) than they would have
been on the bash of 1980 policies. (Most of the reduction $3.7
billion was accounted for by the ending of the CETA Public Service
Employment Program.)
The recessions and federal aid cuts led many observers to pre-
dict that cities in general, and especially large central cities in the
older regions with their declining economies and higher dependence
on federal aid, would experience fiscal crises. In fact, cities currently
are not only in a fairly favorable economic position (although some
central cities and entire metropolitan areas in the Mideast and Great
Lakes regions are still declining), but they are in better fiscal con-
dition than at any time during the 1970s, at least as measured by
balance-sheet indicators. Of course, these favorable fiscal measures
may result from tax increases or service cutbacks or both, which may
have adverse economic and political effects, as well as from tax-base
growth or more efficient operations.
Measuring the fiscal condition of cities is difficult because cities
differ in their scope of services and in their ability to reexports taxes- --
for example, to make commuters and out-of-area buyers assume part
of the tax burden. One approach to measuring the fiscal conditions of
cities, a method that does not adjust for differences among localities,
is to use national income accounts figures giving the balance between
general revenues and expenditures. Analyzing the state-Ioca] sector
of the national income accounts as a whole, the U.S. Department of
the Treasury, for example, recently concluded that "the fiscal out-
look for the States and localities is more favorable today than it has
been at virtually any other time in recent history" (U.S. Depart-
ment of the Treasury, 1985:42~421~. George Peterson (1986:25-26)
found that the annual and quarterly movements of the state-Iocal
fiscal surplus have matched the expansions and contractions of the
economic cycle since at least 1969, with some interesting exceptions.
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URBAN CHANGE AND POVERTY
In the aftermath of the 1974 recession, the state-Iocal sector posted
its largest and longest deficits since World War IT, despite the $13
billion in federal countercyclical aid that was made available. In
contrast, the deficits resulting from the 1981-1982 recession were
smaller than expected and lasted only three quarters, despite cuts
in federal aid. Peterson suggests that the prospect of federal aid
in the 1974 recession, most of which was not approved until 1976,
led states and localities to wait for federal help instead of moving
quickly to raise taxes and cut expenditures. In 1981 they did not ex-
pect countercyclical aid and anticipated additional federal aid cuts;
therefore, they moved quickly to balance their budgets through local
actions. The general surplus figure in the national income accounts
may indicate the state-Iocal sector's overall financial condition, but
it cannot measure the fiscal conditions of individual cities or a group
of cities.
Philip Dearborn has been analyzing the financial statements of
30 large cities since 1971 and has assessed their fiscal conditions
in a series of reports (Advisory Commission on Intergovernmental
Relations, 1973, 1985; Dearborn, 1978, 1979), the latest of which is
contained in this volume.8
Over the period 1971-1984, the 30 large cities (excluding New
York) had current-year general budget revenues that were larger
than their current-year expenditures in 9 years of the period; they
had revenues that were smaller than expenditures 5 years of the
period (Table 9~. All but one of the deficiencies took place in years
following nationalrecessions (1971, 1975-1976, 1983), indicating a
lagged effect on tax revenues (the deficiency took place in the year
of the recession in 1980~. The current-year surpluses a~nounted to
1.5 and 1.2 percent of expenditures in 1981 and 1982 and 2.4 percent
in 1984, the highest percentage since 1977 band the highest ever
in nominal terms). Although revenue growth (in constant dollars)
went down in previous recessions, it actually increased during the
1981 ~1982 recession (Table 10~.
Most of the cities (18 to 20 of the 21 cities Dearborn examined in
detail) purposefully budgeted a general fund deficiency in 1982,1983,
and 1984, but actual expenditures were, as usual, below budget. The
.
The 30 cities were the largest U.S. cities in 1970, except for Washing-
ton, D.C., Honolulu, and San Jose, which were excluded. Dearborn analyzed
only general fund budgets through 1980, but added restricted operating funds
and capital improvement funds to the analysis of conditions in 1981-1984.
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TABLE 9 Current-Year General Fund Revenues and Current-Year
Expenditures in Selected Major Cities, 1971-1984
Excess or Deficiency
Number of of Revenues, All Citiesa
Expenditures Amount
Exceeded (in millions
Revenues of dollars) Percentage
1971 16 -23.1 -0.5
1972 12 16.1 0.3
1973 8 175.1 3.5
1974 9 156.1 2.9
1975 16 -28.4 -0.4
1976 13 -154.2 -2.2
1977 6 230.6 3.1
1978 12 73.6 1.0
1979 9 98.8 1.2
1980 19 -188.7 -2.2
1981 10 212.6 1.5
1982 12 168.9 1.2
1983 16 -164.4 -1.3
1984 6 309.9 2.4
NOTE: The selected major cities were the 30 largest cities in 1970
(except Honolulu, the District of Columbia, and San Jose). New York is
excluded from this table because its size tends to dominate the totals;
other cities are excluded for some years in which information was not
available.
aCities did not necessarily have a deficit on their general fund balance
sheet because they could use carryover surpluses to make up for the gap
between current-year revenues and expenditures.
SOURCE: Dearborn (in this volume:Table 23.
37
1983 deficiency resulted when actual revenues also fell well below
budget estimates in 11, mostly larger cities. Fortunately, there were
relatively large surpluses in 1982 ($336 million), which most cities
used to help fund their 1983 budgets (Table 11~. Although the
revenue shortfall in 1983 reduced the accumulated surplus somewhat,
to $247 million, most cities budgeted surpluses again in 1984. General
fund revenue was greater in 1984 than expected, and the overall
surplus was larger at the end of 1984 than in 1982—$364.7 million.
Not all cities, however, were blessed with general fund surpluses.
Some cities had end-of-the-year surpluses of greater than 5 per-
cent of their spending budgets; others had trouble balancing their
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URBAN CHANGE AND POVERTY
TABLE 10 Annual Revenue Increases in Selected Major Cities,
1972- 1984
__
Percentage Increase
Type of In Annual Revenues
Year Period (in constant dollars)
1972 Expansion 8.0
1973 Recession 3.6
1974 Recession -2.7
1975 Expansion 1.3
1976 Expansion 2.2
1977 Expansion 5.0
1978 Expansion 1.1
1979 Expansion -2.9
1980 Recession -4.4
1981 Recession 0.0
1982 Recession 0.3
1983 Expansion 1.3
1984 Expansion 3.4
NOTE: The selected major cities were the 30 largest cities in
1970 (except Honolulu, the District of Columbia, and San Jose).
SOURCE: Estimated from Dearborn (in this ~rolume:Figure 2~.
TABLE 11 General Fund Unreserved Surpluses in Selected Major
Cities: 1982, 1983, and 1984
Surplus
(in millions Percentage of
Year of dollars) Revenues
1982 336.1 1.1
1983 247.1 0.9
1984 364.7 1.2
NOTE: The selected major cities were the 30 largest cities in 1970
(except Honolulu, the District of Columbia, and San Jose). Data for this
table include New York and exclude Los Angeles.
SOURCE: Dearborn (in this ~rolume:Table 6~.
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39
revenues and expenditures. At the end of 1984, 25 cities accounted
for the $365 million in surpluses, and 4 (San Francisco, Atlanta,
Minneapolis, and Seattle) had surpluses of more than 10 percent of
their previous year's expenditures. Meanwhile, 5 cities had persis-
tent deficits on their general fund balance sheets: Chicago, Detroit,
Cleveland, Boston, and Buffalo. Chicago necessarily has a deficit
because, under state law, it collects property taxes the year after
expenditures are incurred; Cleveland and Buffalo had deficits of less
than 1 percent; only Boston's (6 percent) and Detroit's (3.1 percent)
deficits were worrisome (Dearborn, in this volume:Table 7~.
Dearborn also reviewed the financial condition of the same 30
cities for 1981-1984 using information on all governmental operating
and capital funds and not just the general fund as in his previous
reports.9 He found that aggregate operating revenues were larger
than expenditures in all 4 years, although the difference was very
small in 1983 when the general funds showed deficiencies. Liquidity,
the ratio of cash or cash equivalents on hand to total operating fund
expenditures, was about 35 percent from 1981 to 1983 and increased
to 47 percent in 1984. The liquidity of only one city was less than 15
percent in 1984, compared with six cities in 1982.
One analyst (G. Peterson, 1986) has suggested that one reason
federal aid cuts in 1982 and 1983 did not have a greater impact on
city finances was because federally assisted programs were segregated
from general fund budgets (G. Peterson, 1986:31-32~:
Since the termination of Carter's antirecession federal aid, federal
categorical assistance in most cities has not been used to support basic
services like police or fire protection, sanitation, financial management,
or even schools to a great extent. Federal grants typically were
handled through separate funds and were used to finance auxiliary
activities whose spending could be adjusted upward or downward to
reflect federal assistance levels. By 1981, for example, almost all
cities had moved their Public Service Employment workers out of
general government services, in anticipation that federal funding for
the program would be terminated at some point.
When federal aid was reduced or eliminated, the cuts were passed
through to specific programs, most of which city officials considered
90perating funds include general, debt service, and special-revenue funds.
Special-revenue funds contain proceeds of specific revenue sources that are
legally restricted to expenditure on specified purposes. Capital-improvement
funds use receipts from bond sales and federal grants. Enterprise funds for local
utilities, airports, and the like are not included in the analysis because such
activities are supposed to be self-supporting.
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URBAN CHANGE AND POVERTY
low priority, according to a survey done for the Urban Institute (G.
Peterson, 1986:31-33~. Meanwhile, Congress prevented high-priority
federal programs such as wastewater treatment, general revenue shar-
ing, and mass transit from receiving major cuts. States, however,
increased local aid. For example, many states acted to restore at
least some of the fevers funding cuts in most of the block grants
created in 1981 (G. Peterson et al., 1986:13-15~. State aid to local
governments increased from $82.8 billion in 1980 to $99.5 billion in
1983, a 20 percent increase; but state aid as a percentage of local
revenues decreased from 35 percent in 1980 and 1981 to 34 percent
in 1982 and 33 percent in 1983 (U.S. Department of the Treasury,
1985:Tables V.13 and V.14~. Yet municipalities receive only 16 per-
cent of state aid to local governments. Most such add goes to school
districts (52 percent); the rest goes to counties, townships, special
districts, and other recipients (Gold, in this volume:Table 9~.
Federal aid cuts apparently did not require general budget ad-
justments, except in a few cities.~° Moreover, in the cities examined
by Dearborn, special-revenue funds, for which intergovernmental
aid is usually received, did not shrink in the early 1980s. In fact,
special-revenue funds as a percentage of total operating revenues were
slightly higher in 1984 than in 1981 (27.1 percent compared with 26.4
percent). The elimination of general revenue sharing (GRS), how-
ever, may show more of an effect. The 30 large cities (excluding Los
Angeles because of a lack of data) received $730 million in GRS in
1984, which amounted to 2.2 percent of their overall operating rev-
enues. (The percentage of GRS received by individual cities ranged
from 1.2 percent in Buffalo to 5 percent in New Orieans.) Most of
the cities include some GRS in their financing of current operations
and will have to adjust for its loss. For example, the cities' surpluses
of nearly $365 million at the end of 1984 represented only half of
the $730 million in GRS aid that year. But some cities had less of
a surplus than others. Unless cities without enough surplus funds
had cut services, 15 cities instead of 5 would have had general fund
balance sheet deficits in 1984 without GRS. Dearborn estimates that,
with the loss of GRS, most cities will have to make a 2 percent or 3
percent adjustment in revenues or expenditures or both, which will
Detroit, for example, still had more than 1,800 public service employment
workers in general city positions when CETA was terminated in 1981. This
figure constitutes more than 10 percent of that city's workers (G. Peterson,
1986:32~.
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41
cause problems for those cities already experiencing fiscal problems
(Dearborn, in this volume:274-276~.
Finally, whereas the 30 cities as a group have had their ups and
downs, reflecting fluctuations in the business cycle, at least until the
1981-1982 recession, some cities have had consistently good fiscal
conditions during 1971-1984. Others have had problems for most of
the period. The cities that have consistently enjoyed good fiscal con-
ditions are San Francisco, Minneapolis, Indianapolis, Jacksonville,
Milwaukee, Atlanta, and San Diego (and probably Los Angeles, al-
though its financial reports cannot be analyzed well enough to find
out). Cities that had problems for extended periods were New York,
Chicago, Philadelphia, Detroit, Boston, Cleveland, St. Louis, and
Buffalo. Over time, however, it appears that fewer cities have shown
indicators of fiscal problems, such as expenditures greater than rev-
enues for 2 or more consecutive years, accumulated deficits, and
Tow liquidity (see, e.g., Advisory Commission on Intergovernmental
Relations, 19853. Only Detroit and Boston had major deficits in
1984.
SUMMARY
City finances survived recent recessions and federal aid cuts
remarkably well for reasons that are not entirely understood. They
now have relatively large general fund surpluses to cushion future
revenue shortfalls. But there are individual exceptions to this rosy
picture in the Midwest and Northeast.
One likely factor has been the resilience of urban economies
during recent recessions. Another has been the cities' ability to pass
program cuts directly on to recipients without affecting their budget
balances. George Peterson (1986) reviews the evidence on both
these factors for the recessions of the 1970s and discusses possible
reasons. New theories and more research are needed to understand
this unexpected situation in which urban economies appear to be
mildly countercycTical in recessions.
It is important to note that the fiscal situations of most older
central cities in the Northeast and Midwest may not have been
greatly affected by recent recessions, but their underlying economies
continue to decline in response to long-term trends, as discussed in
the previous section of this report. It is also important. to realize
that good fiscal conditions do not necessarily mean that a city's
social conditions are healthy. In fact, a balanced budget may result
Representative terms from entire chapter:
central cities
