The economic crisis strikes Main Street
With the world financial system teetering on the brink of collapse, most attention has focused on Wall Street and financial markets globally. “Toxic assets” is a more captivating phrase than “public waste management.” For people across the United States, however, the economic slowdown will affect life most directly through its effects on Main Street. Unlike the federal government, municipalities must balance their budgets each year. With declining revenues from property taxes, sales taxes, and fees, cities across the country are scrambling for ways to cut back on spending.
Given the deepening financial crisis, demand will increase for exactly those services that cities can no longer provide at the same level. As city governments plan for the full extent of the coming fiscal crisis, citizens will need to redefine their relationship with local government by engaging in a conversation about what they expect from it and how much they are willing to pay.
Foreclosure on City Hall?
In order to balance the budget when gaps appear in revenues, cities can tap into reserves, cut services, or attempt to increase revenues by raising taxes and fees. However, with plummeting property values and a decline in consumer spending, most city governments will not touch the politically sensitive topic of property and sales taxes. A city’s greatest source of revenue usually comes in the form of fees from licenses, permits, and parking tickets. Linda Bilmes, a former chief financial officer of the Commerce Department, told the HPR that cities will probably use fee increases as a major method of raising revenue because many of the greatest expenditures, such as pension-fund payments and health care for public employees, cannot legally be reduced.
Christopher Hoene, Director of Policy and Research at the National League of Cities, gave the HPR a more severe evaluation of the situation: “The extent of the problem is already large enough that fee increases will not suffice,” he said. Some cities have already begun to cut budgets of public safety departments, such as fire and police.
The Cost of Cutting
The problems that cities face are partially a result of long-term increases in spending. Marc Molinaro, a former mayor of Tivoli, N.Y. and a current state assemblyman, spoke to the HPR shortly before a legislative vote on his state’s budget package, which introduced several controversial cost-cutting measures. He expressed his concern that “the state of New York has for a decade ignored the increase in state spending. The fiscal crisis is temporary, but we need to address the underlying problem of chronic overspending.” He worried that the state, desperately trying to reduce expenditures, could compound problems that lead to higher costs in the long run.
Without proper evaluation of what is necessary and what is expendable, some of these higher costs will be passed on inequitably. According to Bilmes, cutting services can often translate to shifting certain financial burdens onto citizens, and “this may fall disproportionately on the poor.” She gave an example of a city bus that would stop at poor neighborhoods every hour instead of every 20 minutes, forcing citizens to bear the human cost of waiting in the cold. Bilmes pointed out that many of the cuts “will be done without much thought,” and most cities will attempt first to make cuts that inconvenience individuals who are not powerful or vocal in public affairs.
Fortunately, some mayors and city governments have been taking oversight seriously. Instead of employing across-the-board percentage cuts, Kathleen Novak, Mayor of Northglenn, Colo. and President of the National League of Cities, led a process in which every single program run by her city was evaluated carefully on its necessity and time-sensitivity. “If you cut ten percent from every department, you’re not having the right conversation,” Mayor Novak explained to the HPR.
When cities reduce the services that their citizens enjoy, they will undoubtedly be faced with cries to instead cut “waste, fraud, and abuse”. Most citizens expect that when city governments tighten their belts, they will do their best to increase efficiency instead of placing greater burdens on the public coffers. However, given the strain that cities are now facing in terms of their budgets, there may be very little that they can do in terms of increasing efficiency. Mayor Novak described a running joke within her city council: “We cut out waste in 2001, fraud in 2004, and abuse in 2007. Now what do we do?”
Planning Ahead
Boston is facing a predicted $85 million budget shortfall for 2010, Los Angeles $110 million, and New York City an eye-popping $2 billion. The predictions for budget shortfalls may reach even sharper heights by next year. Since cities receive revenue based on citizens’ income and property value for the year before, the full effects of the economic slowdown may impact city budgets for years to come. Hoene explained to the HPR that cities are currently experiencing revenue shortfalls from the effects of changes in the economy 18 months ago, and since economic forecasters have predicted the economic crisis to bottom out sometime in 2009 and housing markets to stay depressed until 2010, cities are preparing for at least three or four years of downturn.
Furthermore, Bilmes stressed that “next year’s federal budget will have a huge deficit—$70 billion or higher—that will put the squeeze on discretionary spending such as funding for states.” Jeffrey Frankel of the Harvard Kennedy School told the HPR that “the states already have lots of projects that they will have to cut back if they don’t get help.” However, there may yet be hope for local governments, given the possibility of Congress appropriating federal aid to states in the coming months.
The budget crisis that cities are facing shines a spotlight on the importance of local government in the lives of citizens. Local governments provide for citizens’ day-to-day needs, including funding for day care, schools, after-school programs, and public transportation. The fact that many cities will have to cut back extensively on such services will inevitably reopen dialogue about what cities provide for their citizens and how much citizens must be willing to pay for these services. The trend for the past several years has been increasing citizen expectations and demands coupled with decreasing revenues. “My budget is less than it was 10 years ago,” Mayor Novak told the HPR, “but the government still does the same amount. It’s made ends meet until now, but the citizens will start feeling it too for the first time.”
With the world financial system teetering on the brink of collapse, most attention has focused on Wall Street and financial markets globally. “Toxic assets” is a more captivating phrase than “public waste management.” For people across the United States, however, the economic slowdown will affect life most directly through its effects on Main Street. Unlike the federal government, municipalities must balance their budgets each year. With declining revenues from property taxes, sales taxes, and fees, cities across the country are scrambling for ways to cut back on spending.
Given the deepening financial crisis, demand will increase for exactly those services that cities can no longer provide at the same level. As city governments plan for the full extent of the coming fiscal crisis, citizens will need to redefine their relationship with local government by engaging in a conversation about what they expect from it and how much they are willing to pay.
Foreclosure on City Hall?
In order to balance the budget when gaps appear in revenues, cities can tap into reserves, cut services, or attempt to increase revenues by raising taxes and fees. However, with plummeting property values and a decline in consumer spending, most city governments will not touch the politically sensitive topic of property and sales taxes. A city’s greatest source of revenue usually comes in the form of fees from licenses, permits, and parking tickets. Linda Bilmes, a former chief financial officer of the Commerce Department, told the HPR that cities will probably use fee increases as a major method of raising revenue because many of the greatest expenditures, such as pension-fund payments and health care for public employees, cannot legally be reduced.
Christopher Hoene, Director of Policy and Research at the National League of Cities, gave the HPR a more severe evaluation of the situation: “The extent of the problem is already large enough that fee increases will not suffice,” he said. Some cities have already begun to cut budgets of public safety departments, such as fire and police.
The Cost of Cutting
The problems that cities face are partially a result of long-term increases in spending. Marc Molinaro, a former mayor of Tivoli, N.Y. and a current state assemblyman, spoke to the HPR shortly before a legislative vote on his state’s budget package, which introduced several controversial cost-cutting measures. He expressed his concern that “the state of New York has for a decade ignored the increase in state spending. The fiscal crisis is temporary, but we need to address the underlying problem of chronic overspending.” He worried that the state, desperately trying to reduce expenditures, could compound problems that lead to higher costs in the long run.
Without proper evaluation of what is necessary and what is expendable, some of these higher costs will be passed on inequitably. According to Bilmes, cutting services can often translate to shifting certain financial burdens onto citizens, and “this may fall disproportionately on the poor.” She gave an example of a city bus that would stop at poor neighborhoods every hour instead of every 20 minutes, forcing citizens to bear the human cost of waiting in the cold. Bilmes pointed out that many of the cuts “will be done without much thought,” and most cities will attempt first to make cuts that inconvenience individuals who are not powerful or vocal in public affairs.
Fortunately, some mayors and city governments have been taking oversight seriously. Instead of employing across-the-board percentage cuts, Kathleen Novak, Mayor of Northglenn, Colo. and President of the National League of Cities, led a process in which every single program run by her city was evaluated carefully on its necessity and time-sensitivity. “If you cut ten percent from every department, you’re not having the right conversation,” Mayor Novak explained to the HPR.
When cities reduce the services that their citizens enjoy, they will undoubtedly be faced with cries to instead cut “waste, fraud, and abuse”. Most citizens expect that when city governments tighten their belts, they will do their best to increase efficiency instead of placing greater burdens on the public coffers. However, given the strain that cities are now facing in terms of their budgets, there may be very little that they can do in terms of increasing efficiency. Mayor Novak described a running joke within her city council: “We cut out waste in 2001, fraud in 2004, and abuse in 2007. Now what do we do?”
Planning Ahead
Boston is facing a predicted $85 million budget shortfall for 2010, Los Angeles $110 million, and New York City an eye-popping $2 billion. The predictions for budget shortfalls may reach even sharper heights by next year. Since cities receive revenue based on citizens’ income and property value for the year before, the full effects of the economic slowdown may impact city budgets for years to come. Hoene explained to the HPR that cities are currently experiencing revenue shortfalls from the effects of changes in the economy 18 months ago, and since economic forecasters have predicted the economic crisis to bottom out sometime in 2009 and housing markets to stay depressed until 2010, cities are preparing for at least three or four years of downturn.
Furthermore, Bilmes stressed that “next year’s federal budget will have a huge deficit—$70 billion or higher—that will put the squeeze on discretionary spending such as funding for states.” Jeffrey Frankel of the Harvard Kennedy School told the HPR that “the states already have lots of projects that they will have to cut back if they don’t get help.” However, there may yet be hope for local governments, given the possibility of Congress appropriating federal aid to states in the coming months.
The budget crisis that cities are facing shines a spotlight on the importance of local government in the lives of citizens. Local governments provide for citizens’ day-to-day needs, including funding for day care, schools, after-school programs, and public transportation. The fact that many cities will have to cut back extensively on such services will inevitably reopen dialogue about what cities provide for their citizens and how much citizens must be willing to pay for these services. The trend for the past several years has been increasing citizen expectations and demands coupled with decreasing revenues. “My budget is less than it was 10 years ago,” Mayor Novak told the HPR, “but the government still does the same amount. It’s made ends meet until now, but the citizens will start feeling it too for the first time.”