What is a Fiscally Healthy City?

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In February 2015, the city of Stockton, California, exited municipal bankruptcy. One core way that the city achieved fiscal solvency was by cutting services. Although this approach was necessary given the circumstances, fiscal health came with a price.

As it turns out, balancing the budget ran counter to alleviating income and racial disparities.

“We cut services to balance the budget, but those services were critical to those most in need in our community. We were increasing fiscal health at the expense of equity” said Kurt Wilson, city manager of Stockton. As a result, the city got creative and is now the first in the nation to experiment with a universal basic income.

Stockton’s experience underscores the limits of defining fiscal health as simply a balanced budget. In NLC’s 2017 City Fiscal Conditions survey, city finance officers reported that general fund revenues are growing, albeit slowly. But the percent who are optimistic about the ability of their city’s finances to meet community needs into the future has waned in recent years.

This is a seeming juxtaposition, but the fact of the matter is that most cities are mandated to balance their budgets each year. This masks the reality that although revenues are growing, so too are short term expenditures, like the cost of providing services and employee healthcare, and long term expenditures, such as infrastructure and retiree savings. These circumstances often result in service cuts to achieve balanced budgets.

“Municipal fiscal health is not a story of austerity,” said George W. “Mac” McCarthy, President and CEO of the Lincoln Institute of Land Policy. “Quality of life is defined by the goods and services cities can provide—and you don’t get high quality of life by cutting services.” So, if a balanced budget is insufficient for fiscal health, what are key characteristics of a fiscally healthy city?

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During the International Conference on Municipal Fiscal Health hosted by the Lincoln Institute of Land Policy in Detroit, May 21-23, elected officials, policy experts and practitioners spoke to the issue of a fiscally healthy city from their unique vantage points. Here is what they said:

Mayor Mike Duggan, city of Detroit
“For Detroiters, the issue of self-determination is a core value…We earned our way out of state oversight through increased transparency, balanced budgets, improved tax revenues, and elected officials willing to say ‘no’ when a proposal takes the city off track.”

Enid Slack, Institute on Municipal Finance and Governance, University of Toronto
“A fiscally healthy city is one that has the ability to provide a reasonable level of service at a reasonable tax rate, now and in the future.”

Nick A. Khouri, Michigan State Treasurer
“To achieve true fiscal health, we must address three critical issues while we have the wind at our back: long term liabilities; efficient provision of services; and new revenues.”

Eric Scorsone, Center for Local Government Finance and Policy, Michigan State University
“A city must achieve both fiscal solvency and service solvency to be fiscally healthy in a holistic way.” 

Tracey Hitchen Boyd, New York State Office of the State Comptroller
“Fiscal health requires management that accounts not only for the city’s fiscal condition, but also the environment which is shaping fiscal health, such as the effectiveness of the services provided, demographics and the economy, and the appropriate levers to pull based on these unique circumstances.”   

The city of Detroit, which was recently relieved of state oversight, took to heart the hard fought lessons of Stockton’s path to fiscal health. After closing most community centers throughout the city to help narrow the budget gap, there was a significant need for safe places for the young people of Detroit to play sports, have fun and be supported. Instead of opening new rec centers, which the city could not afford, Mayor Duggan turned 16 schools, which went unused during the summer months, into summer rec centers, complete with free meals.

A fiscally health city, then, is one with a balanced budget that meets the short and long term needs of the community and is resilient in the face of economic uncertainty. This can’t be achieved overnight, but as leaders from cities that have emerged from the brink of fiscal distress can attest, political will, creativity and vision are good places to start. 

Christiana_McFarlard_ready.jpg About the Author: Christiana McFarland is NLC’s Research Director. She leads NLC’s efforts to transform city-level data into information that strengthens the capacity of city leaders and that raises awareness of challenges, trends and successes in cities. Her areas of expertise include economic development, workforce development, and municipal finance.