Many cities across the nation are facing a fiscal crisis. While pandemic-related problems that were self-induced or otherwise play a part, many of these issues have plagued cities for a long time. A serious cultural shift concerning finances among local governments is critical if people want to flourish in cities.
I recently interviewed Mark Moses who is a municipal government expert and author of the recently published book The Municipal Financial Crisis: A Framework for Understanding and Fixing Government Budgeting. He contends that “many local governments are on track for bankruptcy.” And this downward trajectory can be expected to continue as municipalities fail to restrain their spending and overreach, crowding out opportunities for the private sector to work.
We’re seeing this play out in places like New York City, where city-funded expenses have been asked to be cut by 3% and on track to be slashed more in response to their recently reported $10 billion deficit.
Moses says that “there’s a lack of economic understanding in lots of municipalities.” This absence of understanding often results in collecting more taxes to fund more “solutions” as a band-aid to the broken system and struggling local finances. As he puts it, “local governments give up trying to balance budget sheets.”
But failing to assess and address the tangled economic approach that’s led them to a place where more taxes and regulations seem like the only answer leads to long-term issues and a path that’s difficult to leave.
Local governments must limit their scope and focus on core issues. That means letting new initiatives and departments take a back seat while they get spending under control.
This is difficult, however, especially after the 2021 American Rescue Plan Act that gave $45.6 billion to municipalities, which temporarily and artificially inflated local finances. More money under lousy management is a weak fix. And now, with rising inflation and energy costs, these municipalities are ill-equipped to thrive in a recession that wasn’t helped by the huge bailout package.
A good start to overcoming these challenges would be to get government out of the way in most cases so that the the private sector can solve key issues, which has proven to be the best antidote for most problems throughout history.
Overinflating their role instead of sticking to limited governing, such as property rights and a few public goods, is a trap that many cities fall into and that comes at a huge cost. But philanthropic and other private-led solutions tend to be crowded out through higher taxes and regulations when city hall makes promises they can’t fulfill.
Moses describes this as municipalities “seeing themselves as an end to themselves,” which is why many local governments resist spending limits or find ways around them.
This is an ongoing issue in Texas which is contributing to an affordability crisis.
Texas is blessed to have constitutional amendments against state-controlled personal income taxes or property taxes, so all property taxes are local in Texas. While there have been attempts recently by the state to limit their growth, property taxes have increased by 169% in the past 20 years compared with an increase of 104% in the rate of population growth plus inflation. This indicates that property taxes are growing well above the average taxpayer’s ability to pay for them.
Some argue that Texas has high property taxes because it has no personal income taxes. But the reality is that it is really from excessive local government spending.
For example, Texas has the 6th most burdensome residential property tax according to the Tax Foundation but other states without a personal income tax like Florida and Tennessee rank 26th and 36th, respectively. This is because the latter two states do a better job restraining spending.
The best way to get budgets and taxes back on a fiscally conservative track is through a strict spending limit that covers the entire budget and grows no more than the rate of population growth plus inflation. This would help cities, and all local governments, stick to just addressing what’s in their purview.
A city’s scope shouldn’t be evaluated from one council meeting to the next but should be assessed in the long term if its local government hopes to see future success and a prosperous economy.
The same principles of economic success apply to all government institutions; people flourish where liberty is preserved, and that’s best achieved under limited government whereby politicians’ interventions remain inside their limited scope so that free markets and free people can innovate and thrive.
Just as we’re witnessing with this recession, there’s always a trade-off to overspending and unbalanced budgets. The sooner local governments realize that and reel in their spending, which is the ultimate burden of government, the sooner financial crises will be averted.
Vance Ginn, Ph.D., is founder and president of Ginn Economic Consulting, LLC. He is chief economist at Pelican Institute for Public Policy and senior fellow at Young Americans for Liberty. He previously served as the associate director for economic policy of the White House’s Office of Management and Budget, 2019-20. Follow him on Twitter @VanceGinn.
READER COMMENTS
Thomas Lee Hutcheson
Nov 23 2022 at 2:54pm
I think think main problem is failure to budget long term, especially in the area of municipal pension obligations.
Narrowly on the funds for S&L governments, it should have been distributed on the same principle as unemployment insurance, to jurisdictions on the basis of their losses of income from the recession.
Johnson85
Nov 23 2022 at 3:37pm
It seems like a bigger problem is cities having the same incentives as other governments to rely on debt financing too much because they can hide the cost of spending and make it a future taxpayers problem.
They also essentially run up off balance sheet debt by deferring maintenance and not accruing any reserves for life cycle maintenance. Our local cities love having developers build new roads and water and sewer infrastructure and then dedicate it to the city. The taxes for the property don’t generate enough income to replace the infrastructure at the end of its expected useful like (much less pay for other city services that the residents utilize). But the city leadership boasts about the “assets” that have been added and never address the fact that they aren’t collecting enough revenue to maintain them…
But it’s really even worse than that. The requirements for the infrastructure are underengineered, so their actual useful life is less than the expected useful life, which means the actual shortfall is even worse than what it shows on paper. And these developments are usually big cookie cutter subdivisions where the developers and builders cut every corner they can, so they end up falling apart in 10-15 years and being a source of blight.
Jim Glass
Nov 23 2022 at 7:23pm
places like New York City…
New York City already has gone bankrupt once (1975). It was put under financial supervision for a generation, removing the politicians from fundamental budget control, then came roaring back to an historic peak. The supervising agency ceased functioning in 2008, and for years now the city has been sliding backward.
“there’s a lack of economic understanding in lots of municipalities.”
Here in NYC, off our experience, there’s ample understanding of the economic problems — but little understanding of how to deal with the political processes driving their return.
Local governments must limit their scope…
IMHO is it pointless and futile to declare what “must” be done when one has no way to get anyone to do it. The problem isn’t what “must” be done, that’s obvious, the problem is changing the incentives that drive what actually is done.
A very simple illustrative major example from NYC history, the subway system… [next comment]
Jim Glass
Nov 23 2022 at 7:42pm
[continuing…]
Circa 1900 a million people lived in massive over-crowding south of 14th St, Manhattan. Many plans for a city transit system stretching into the “wilds” north of there were stymied by the necessary massive up-front capital cost for tunnels, stations, trains, etc., before any revenue could come in.
Then the city and private transit operators reached a deal where the city borrowed the capital funds while private operators ran the system and paid off the fund bonds. It was a huge success for all. The system was deemed a marvel of the modern world. The population spread out into whole brand new neighborhoods with ample new housing, and could commute to work downtown. The operators (system riders) paid for the whole thing. Win-win-win. Public-private partnership can work.
Next the system expanded using the same model — but the politicians decided the city would be better off by switching to taking a share of the system’s hefty profits in exchange for paying off the bonds itself. Risky, but a fair deal.
THEN as double-digit inflation hit post-WWI into the 1920s, the politicians price-controlled the 5-cent fare — even though this wiped out the system’s profits and killed the city’s revenue from it, leaving the city paying the whole cost of the bonds (capital cost of the system) itself. Financial suicide! Willful, informed, financial suicide.
Even the politicians who created the system and knew how bad this idea was supported it because, you know, if they weren’t reelected socialists would be and then things would be even worse.
Then began the epic slide, operators cut back maintenance, service decayed, on the verge of bankruptcy they sold out to the city (1940), the now “nationalized” system run by city employees became hugely inefficient, service decayed further but now with repeated fare hikes, until on the verge of total collapse (see movies of the 1970s) the system was removed from the city politicians’ control and began a long rebuild.
OK. You have a time machine, and your task is go back to stop that “financial suicide” and its long chain of unhappy consequences. You are armed with 100 years of hindsight and all of our modern advanced political-economic insights.
You “must” stop those politicians from price-controlling the 5-cent fare. How do you do it?
Personally, I haven’t a clue.
Craig
Dec 3 2022 at 6:27pm
“You “must” stop those politicians from price-controlling the 5-cent fare. How do you do it?
Personally, I haven’t a clue.”
It was a condition imposed on the leases and the issue would ultimately be adjudicated up to the Supreme Court in Gilchrist v. Interborough Rapid Transit Co., 279 U.S. 159 (1929).
The easy answer is for the court to simply acknowledge inflation and that the price cap imposed by the contract with the city was $.05 in 1904 dollars.
Monte
Nov 23 2022 at 11:18pm
That may be, but the reality is that local government officials are more inclined to discard fiscal austerity in favor of this advice:
America’s Cities Are in Crisis. They Should be Allowed to Raise Debt to Save Themselves
The constant refrain of “limited government, lower taxes, less regulation” coming from libertarians and conservatives isn’t resonating. Growing numbers of gen z/x and millennials are prepared to embrace socialism and dump capitalism. Even one of Libertarianism’s own, Brink Lindsey, writes in his 3-part Niskanen Center piece:
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