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<i>The Week in Public Finance:</i> Is Your City Positioned to Weather the Next Recession?

A new report identifies the different factors affecting a city's ability to respond to a fiscal crisis -- and what policymakers can do about it.

minneapolis bridge
In 1971, Minneapolis agreed to share its local tax base.
What’s true for one city isn’t always true for another. Demographics and state policies say a lot about a city's ability to respond to a fiscal crisis.

new report, published by the Brookings Institution's Metropolitan Policy Program, looks at these factors, as well as how state and federal policies may influence how a city weathers a recession or other major disruption in revenue. “Part of what we’re trying to understand here," says Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago and a coauthor of the report, "is if there’s a shock to the system, [how will] cities respond to those changes.”

The report focuses specifically on the different limits cities have on their taxing power, such as the kinds of taxes a city is authorized by the state to levy, limits on raising the rates of those taxes and how a city’s taxing structure aligns with its overall economy.

Cities that the report identifies as "constrained" tend to have very limited revenue options. For example, they can only levy a property tax. Cities with more flexiblity, on the other hand, might be able to levy not only a property tax, but also income and sales taxes and real estate taxes. Or officials in some cities might have to get voter approval to raise a tax rate, whereas officials in others may be able to approve rate hikes themselves.

Pagano further notes that populous cities with a higher demand for services tend to face more budget pressures than smaller cities. That means that in the event of a recession or some other unexpected revenue loss, these places -- many of which are in the Northeast and on the West Coast -- have a harder time raising revenue immediately through tax hikes. "Cities in low-demand areas are more able to address these unexpected events," says Pagano, "than cities that are already at the top of the spending structure.” 

During the Great Recession, for instance, Sacramento, Calif., which has to get voter approval to raise taxes, responded to revenue losses by making major reductions in personnel and by raiding its budget reserve. By late 2012, however, the austerity helped convince voters to temporarily increase the sales tax rate by half a percent. 

Dallas, which faced fewer limits on taxing authority, was able to respond more rapidly. It raised its property tax rate to counteract reductions in both sales and property tax revenue. The city also increased fees and made budget cuts in public safety and other areas.

The report offers state and federal policymakers an idea of how the policies they set may affect a city in times of fiscal crisis, says Pagano. Cuts in state aid to cities, he says, can have a drastically different impact on governments depending on how much flexibility cities have to counteract those cuts.


In other public finance news:

New York’s MTA Downgraded Again

The nation’s largest transit authority has been downgraded again by S&P Global Ratings based on the uncertainity surrounding the agency’s ability to afford its debt payments. New York’s Metropolitan Transportation Authority (MTA), which runs the city’s subway and bus lines and operates the regional rail service, multiple toll bridges and tunnels, has faced chronic budget deficits and has roughly $39 billion in debt. S&P’s downgrade this week follows a previous one in March.

Still, S&P says it believes “the MTA, state, and potentially other local stakeholders will work together, as in the past,” to solve the authority’s structural budget imbalance. The credit rating agency notes that  proposed congestion pricing, which would impose tolls on drivers entering Manhattan's central business district, is one new revenue source that could help achieve budget stability. According to Governing’s Dan Vock, a handful of large cities in other countries -- including London, Singapore, Stockholm and Milan -- use similar “cordoned” toll systems. But New York would be the first U.S. city to impose tolls on its most congested roads.


California Is First State to Sign Green Bonds Pledge

Citing the increasing need to build climate-resilient projects, California’s treasurer announced this week that it will be the first U.S. state to sign the global "green bonds pledge." The pledge was created earlier this year by Christiana Figueres, the former United Nations climate chief. Governments and businesses that sign it are committing to infrastructure that is climate-resilient and low carbon.

It’s no surprise that State Treasurer John Chiang and Gov. Jerry Brown have joined the pledge. Both have been early champions of the idea of green bonds, which tend to require extra reporting on environmental outcomes. Still, it’s unclear whether financing environmentally-friendly projects under the green bond label is worth the extra effort for governments.

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Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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