Demographics Can Spell Trouble for a City's Finances

New Census data shows some cities have a lot of residents who consume more public services than they contribute in taxes. That can cause fiscal problems down the road.
by | September 15, 2016
Flint, Mich., has the highest share in the country of people either living in poverty or older than 75. (AP/Carlos Osorio)

Demographic data can say a lot about who lives in a city. It can also be an indicator of that city's finances.

Generally speaking, if a city has a high number of residents who consume more public resources than they contribute to the tax base, there will more likely be potential problems for that city's fiscal outlook.

New 2015 estimates from the Census Bureau’s American Community Survey published Thursday provide an updated demographic snapshot for localities. We’ve compiled data on a few key measures -- poverty, aging populations and employment status -- for the 500 largest cities, showing places facing steeper demographic hurdles.

High poverty rates, high unemployment and older populations can stretch a city's services thin. While state and federal programs provide a lot of support, localities inevitably are burdened with additional costs.

In fact, some research suggests there's a tipping point when it comes to these measures. The more services a city needs to provide, the more tax revenue it must raise from residents. If the proportion of a city's residents who are either elderly or living in poverty gets high enough, it could cause middle-class residents to move away.

Robert Inman, a University of Pennsylvania professor, has conducted research exploring how “bad” demographics act as a risk factor for cities. He’s devised a figure -- 35 percent of a city’s population being either elderly or living in poverty -- that, if exceeded, could signal significant fiscal problems. It’s based on the assumption that at this level, middle-income residents will pay roughly 20 percent higher taxes for the same services as they would in nearby jurisdictions, leading them to consider moving out of the city.

“Cities are going to feel this kind of demographic pressure on their budgets,” said Inman. “But good economies and good policies can overcome the demographic disadvantage.”

In Flint, Mich., the latest Census estimates suggest that people either living in poverty or age 75 and up account for a staggering 45 percent of the total population -- the highest share in the country. Estimates for Detroit and Cleveland aren’t too far behind.

Of the nation’s 500 largest localities, 22 exceeded the 35-percent population threshold in 2015. Nationally, about 20 percent of Americans were living in poverty or at least 75 years old.

Within some regions, stark demographic divides exist.

Consider Camden, N.J., where 43 percent of residents live in poverty or are elderly, compared to about 18 percent for the rest of the Philadelphia-Camden-Wilmington metro area.

Factoring both poverty rates and employment serves as an alternative measure. The cities where more residents are either unemployed or hold jobs and earn less than the poverty rate mostly mirrors Inman’s metric. On average, about 55 percent of cities' total population -- including children and those of retirement age -- fall into this group.

SOURCE: Governing calculations of Census 2015 1-year ACS estimates for 500 largest cities. See note for methodology.

Economically depressed cities, along with a few college towns, are characterized by exceptionally steep demographic hurdles. By contrast, the elderly and poor make up less than a tenth of the population in 30 other jurisdictions reviewed. Places where large portions of the population are both employed and earn more than the federal poverty rate include Somerville, Mass.; Arlington, Va.; and Cambridge, Mass.

But poor demographics don't necessarily spell doom for a local government’s tax base. For one, strong economies help overcome demographic disadvantages in many cities.

Cities can also prosper under more-favorable revenue structures or those that incorporate greater revenue sharing with the state or other local jurisdictions. Inman contends that efforts like regional funding for poverty obligations or increased state aid can help overcome cities’ demographic woes.

“This burden should not fall entirely on the budgets of the cities,” he said.

Revenue sharing takes many different forms. Allegheny County, Pa., provides poverty services for Pittsburgh and other localities within the county, for example. Inman also cited the Minneapolis-St. Paul, Minn., region, which shares a portion of new commercial property tax revenue among its local governments.

By and large, though, such polices remain relatively rare. Given the political realities involved with convincing voters in better-off suburbs to share their taxpayer dollars with larger cities, that’s unlikely to change anytime soon.

Data notes

Percentages for the first measure represent each jurisdiction’s share of the total population (for whom the poverty status was determined) living in poverty plus the share of residents age 75 and over not living in poverty. The alternative measure represents the total population share (for whom the poverty status was determined) not employed or not reporting income in the past 12 months at or above the poverty level. Data are one-year estimates with larger margins of error for smaller jurisdictions. Estimates are shown for the 500 most populous Census-designated places.