Cities' Fiscal Health in the Aftermath of the Great Recession

There are positive signs, but there also is a lot of variation in how they fared through the downturn and beyond.

The wake of the Great Recession has confirmed that, as with earlier recessions, state and local governments tend to be hit later. By the same token, they take longer to recover and experience a harder time coming back -- even when the broader economy is improving. Nevertheless, in October the number of state- and local-government jobs rose to 19.5 million, the greatest year-over-year increase since 2009.

This is still well below the peak reached in 2008, but at least it signals a significant change in momentum. Indeed, 72 percent of city finance officers believe that their cities are better able to meet their financial needs this year, according to the National League of Cities' 2013 City Fiscal Conditions report issued in October. That's the most positive reading since 2000.

While this upturn offers cheer to state- and local-government leaders, the trend is hardly universal. From Detroit to Jefferson County, Ala., to San Bernardino, Calif., hard fiscal challenges continue. Moreover, with little evidence of progress in the congressional budget negotiations going on in Washington, another round of sequestration spending cuts could be triggered on Jan. 1 that would disproportionately affect state and local governments -- especially those with the weakest tax bases and greatest essential service demands.

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The role of intergovernmental aid was emphasized in the Pew Charitable Trust's report issued in November, "America's Big Cities in Volatile Times." As Pew pointed out, governments that are more reliant on federal intergovernmental assistance see their financial flexibility greatly strained during downturns. In its study of 30 cities, Pew found that for 80 percent of them intergovernmental aid played a key role in whether they achieved or exceeded pre?recession revenues in the 2007-2011 time frame.

Another way to measure the relative financial performance of cities is demonstrated in a report issued in November by the Chicago Civic Federation, whose blogs track local-government financial indicators. The November report, which stems from a larger, ongoing project, used nine indicators to measure the relative financial performance of Chicago versus a dozen other cities from fiscal year 2007 to 2011, a time frame encompassing the Great Recession and its aftermath.

City financial indicators table
The Civic Federation analyzed the five most recent annual audited financial statements of Chicago, Baltimore, Boston, Columbus, Detroit, Houston, Kansas City, Los Angeles, New York, Philadelphia, Phoenix, Pittsburgh and Seattle and ranked them based on an average of all nine indicators. As the accompanying table indicates, only Boston and Detroit consistently performed worse than Chicago by these metrics.

The federation's blog points out that it is important to note that the top 11 cities' average ranks were within a close range, between 5.1 and 7.4, indicating that none of those 11 cities was consistently out-performing the others. Boston's and Detroit's averages, however, tell another story. Those two cities, the federation wrote, "had trends that were relatively poor more consistently."

In its report, the federation noted that to measure a city's financial condition it is important to assess the direction and magnitude of changing ratios over time. And while the federation employed useful, familiar financial indicators that make intuitive sense, its report does not prescribe the way in which all governments ought to be examined since there are hundreds of possible indicators of financial condition.

Moreover, the 13 cities the federation examined represent vastly different governmental conditions and demographics. "Each city has unique governmental operations, social and demographic compositions and local and state laws, all of which could influence the indicators but are not accounted for in the analysis," the federation noted.

The federation also pointed out that municipalities may and do implement accounting changes for any given fiscal year, and that such changes can have a significant impact on how financial data is reported. That, in turn, can over time create a misleading trend. Still, the Civic Federation's report and those from the League of Cities, Pew and other organizations that dig deeply into the fiscal health of local governments provide useful tools for public officials looking for ways to weather the next economic downturn.

Director of the Center for State and Local Government Leadership at George Mason University