Fiscal Responsibility in the Rustbelt: When Management Trumps Politics

Despite industrial decline, population loss and low income levels, Worcester, Mass., has set the standard for financial management and employee cost control.

Much like the way the ancient Greeks defined female virtue, not being talked about could be considered a mark of distinction for an American city these days. Too often, whenever a previously obscure city attracts the nation's attention, the reason is that it's going bust.

Worcester, Mass., has rarely been an object of national concern or fascination. Even Boston media outlets generally ignore Worcester, despite its being less than hour's drive west and the second-largest city in New England. Too bad, because Worcester's impressive fiscal management record of late should make it an example for other struggling cities to follow.

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Worcester's obscurity goes way back. During New England's industrial heyday, while other cities became renowned for certain products, Worcester's factories made machine parts, with which the general public had little contact. Worcester also has kept a low profile in Massachusetts politics: Over the last hundred years, among statewide officeholders Worcester has only managed to produce two lieutenant governors.

The years of industrial decline from the 1950s to the 1980s hollowed out the downtown and caused 20 percent of the population to leave. Worcester still faces income levels below, and poverty and unemployment levels above, those of Massachusetts and the nation as a whole.

But good management, especially in the areas of fiscal planning and public-employee health-care benefits, has in recent years enabled the city to move toward overcoming those post-industrial disadvantages.

In 2006, City Manager Michael O'Brien established a "Five Point Financial Plan," a self-imposed system of fiscal accountability. The plan set precise goals to strengthen reserves and limit borrowing. It also introduced multi-year financial forecasting, a rarity among American local governments. Worcester's adherence to the plan has consistently drawn praise from ratings agencies and led directly to two credit-rating upgrades from Standard & Poor's within the last year.

Worcester also has outperformed in managing its workers' health-care costs. In response to double-digit annual premium growth at the beginning of the last decade, O'Brien set out to bring health-care cost-sharing arrangements closer to those of the private sector. His efforts have yielded well over $100 million in relief to the city's operating budget and lowered Worcester's long-term retiree health-care liability by almost $400 million.

Most of the more-critical union negotiations over health care took place before the recent recession hit, thus bucking the conventional wisdom that reform only comes to the public sector in the event of a crisis or scandal. Since budgetary pressures at the time were less intense than they would become in 2009-11, Worcester was able to grant its employees modest raises in return for health-care concessions. (On a dollar-for-dollar basis, a pay raise in exchange for higher medical co-pays and premium contributions is a good deal for taxpayers because it shifts more of the risk associated with health-care costs' uncertainty to employees.)

Not that Worcester's policymaking record has been uniformly outstanding. It has struggled with a lack of leadership on the part of the city's elected officials. Suburban growth coupled with economic decline has left a political talent pool overfull with demagogues, retirees and uninformed activists with nothing better to do than run for public office.

The Worcester city council sets a high priority on ribbon-cutting opportunities and the lowest possible taxes on homeowners. Meanwhile, property-tax rates for businesses are among the highest in the state and more than double the rate found in nearby, wealthier communities with which the city most regularly competes for economic development.

The high cost of doing business has caused Worcester to make heavy use of tax breaks to stimulate development. These programs have deprived the city treasury of revenues needed to support services and, for the vast majority of businesses still paying the full freight, only compounded the unfairness of the overall tax climate.

For Rust Belt cities, inspired political leadership is only slightly more realistic to expect than a return to peak prosperity. Hence the need for management to fill the gap, as it has in Worcester. On a range of low-but-solid goals -- such as a stronger bond rating, public-employee benefit packages in line with private-sector norms, and the fiscal discipline needed to endure the most severe downturn since the Great Depression without ever coming close to insolvency -- Worcester sets the standard.