Making Informed Choices About Public Sector Pension Plans

NLC’s latest Municipal Action Guide includes a historical look at public sector pension plans, an overview of approaches to pension reforms, and a worksheet to help local officials navigate decision-making regarding their city’s pension plan.

City leaders across the country are faced with a responsibility to ensure that the municipal workforce has secure retirement. NLC’s latest report helps identify trends, challenges and solutions to pension funding. (Getty Images)

Pensions play a critical role in the ability of local governments to attract and retain the workforce needed to meet citizen demands. The costs associated with this employee benefit, however, can be substantial. NLC’s new report, Making Informed Choices about Public Sector Pension Plans, examines the reforms that cities have made in response to funding challenges and the impact of these changes. It also offers ways that local leaders can become more active and informed decision makers, regardless of whether their city or state runs their employees’ pension plan.

Pension funding took a big hit as the Great Recession in 2008 materialized. The recession had an added component – beyond its depth and length – that previous recessions did not: a nearly decade-long period of exceptionally low interest rates. This feature of the recession resulted in lower expected returns and therefore higher pension funding requirements. In response, many cities instituted reforms, resulting in improvements to public pension funding ratios.

As part of our annual City Fiscal Conditions report, NLC surveyed city finance officers about the reforms made to their plans since the recession, regardless of whether their city or the state administers the plan. The following is an overview of their responses:

City Pension Reforms, 2009-2016

Change %
Increased employee contribution rate 33
Changed plan design 22
Reduced benefits 17
Reduced COLA 12
Increased eligibility requirements 8
Increased vesting period 7
Other

Read or download the full Municipal Action Guide, Making Informed Choices about Public Sector Pension Plans.

About the author:Christiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.

When Cities and States Clash, Women and Families Suffer

Despite ongoing efforts to create more inclusive, gender-equal workplaces, many states currently prevent cities from passing laws mandating employers provide paid leave.

Tens of thousands attended the Women’s March on January 21, 2017 in Washington, D.C., to advocate for legislation and policies regarding women’s rights and a number of other human rights issues, such as gender equality in the workplace. (Wikimedia Commons)

This post was co-authored by Christiana McFarland and Brooks Rainwater.

Today, people around the globe are donning red, attending marches, and participating in walkouts in solidarity for International Women’s Day and “A Day Without a Woman.” With the social campaign #BeBoldForChange, organizers are calling on everyone to forge more inclusive, gender-equal workplaces. One way that cities are doing just that is through local paid leave policies.

The only problem? These efforts are being thwarted in nearly half the country. A new report from National League of Cities, City Rights in an Era of Preemption: A State-by-State Analysis, points to a troubling trend counteracting these local efforts – 19 states currently prevent cities from passing laws mandating employers provide paid leave. These limitations, also known as paid leave preemption laws, leave a great deal of families – and especially, women – with few options to care for themselves, a new child, or aging parents.

This trend is hardened by the fact that the federal government does not mandate paid family and medical leave at the national level. While a 1993 law, the Family Medical Leave Act, provides new parents with a guaranteed 12 weeks off after the birth of a child, it provides no remuneration, and is therefore only an option for those who can afford unpaid time off.

In the global context, most countries provide paid family and medical leave, including all countries in the Organisation for Economic Cooperation and Development (OECD), making the United States an extreme outlier.

As inequality rises and opportunities for those at the bottom of the income spectrum contract, support is needed to lift up rather than hold down our fellow Americans. This fact, tied together with the lack of national, state and private sector action to provide paid leave has spurred momentum forward in many cities to pass such laws.

What does paid leave encompass?

Paid leave, which includes both sick and family and medical leave, is a growing area of action for a number of cities. Paid sick leave laws specifically refer to the federal, state or local government mandating that employers provide sick time for employees that is paid either directly by the employer or through a social welfare benefit administered by the government.

Paid family and medical leave refers to the government providing monetary support to people caring for newborn children or aging parents, or addressing serious health issues. These types of laws typically provide anywhere from a percentage of full pay to 100 percent of a worker’s salary for set periods of time ranging from a few weeks to a year or more.

Which states prevent local action on paid leave?

In just the past couple of years, more than 20 municipalities have passed paid sick leave laws. From Tampa to Seattle to Washington, D.C., cities are working to empower local residents through guaranteed paid leave, which in turn creates better, healthier workforces.

However, this activity at the local level has prompted many state legislatures to stymy city control on the issue of paid leave, often on the grounds of limiting the “patchwork of regulations” for businesses operating throughout the state. But, it should be reiterated that this “patchwork” only exists, because states and the federal government have not taken action. Cities will always lead, but these preemptive measures mean that cities cannot tailor laws to meet local needs and values, and in the case of paid leave, serve to undermine the overall health and well-being of employees and limit economic growth.

(NLC)

New methods of preemption are also beginning to crop up. For example, in the absence of a state law that explicitly prohibits local paid sick leave, Arizona has threatened to withhold revenues from the city of Tempe in order to deter the possible adoption of paid sick leave measures.

Although many cities and their states have antagonistic relationships in the realm of paid leave, some offer solid examples for how to work together to support outcomes for women, families and businesses. Statewide paid leave laws that allow cities to provide levels of support for employees that exceed the state’s minimum requirements is a best practice to both minimize the patchwork of regulations and maintain local control. For example, San Diego and San Francisco are among several California cities that have passed paid sick leave laws that go above and beyond state minimums.

When it comes to social policy, aggressive state action has limited the ability of city leaders to expand rights and provide opportunities to community members. Preemption that prevents cities from expanding rights, building stronger economies and promoting innovation can be counterproductive and even dangerous for cities, states and the country.

Our call for local control is a call to give cities the ability to adapt and to have the tools they need to create an inclusive society that works for everyone. As we all celebrate International Women’s Day, let’s continue to support and lift up the success of our cities on paid leave and fight back against states that would diminish the voice of people in cities. Paid leave ultimately should be a right not a choice. It is in our nation’s cities where our country’s leaders will continue to lead the way in moving the country forward—helping us all to create a more inclusive world.

About the authors:

Christiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.

 

 

Brooks Rainwater is Senior Executive and Director of the Center for City Solutions and Applied Research at the National League of Cities. Follow Brooks on Twitter @BrooksRainwater.

Mayors and the Politics of the Property Tax

This post is the final installment in a series expanding on NLC’s 2016 State of the Cities report.

(Getty Images)

In his 2016 State of the City address, Helena, Montana, Mayor James Smith stated that “Our ability to compensate our employees from year to year depends first and foremost on property tax revenues.” (Getty Images)

Mayors have a love-hate relationship with the property tax. On one hand, it is one of the few fiscal tools they have to raise revenue for mounting needs. On the other, accessing this tax can be an uphill political battle. Given these dynamics, it was no surprise that ‘property tax’ was the hottest budget issue discussed by mayors in their 2016 State of the City speeches.

(National League of Cities)

(National League of Cities)

Tax Profile
Property tax revenues are driven by the assessed value of residential and commercial property. They typically lag the real estate market due to delays in local assessment practices. For example, the sharp drop in the real estate market that set the recession into motion did not hit property tax rolls until 2010. Cities faced several years of declining property tax revenues following 2010, even though real estate markets across the country were stabilizing. In North Ridgeville, Ohio, Mayor G. David Gillock noted that, “Our real estate tax [revenues] increased somewhat during 2011 and 2012, but due to… reevaluation in 2013, they again dropped precipitously. They are appreciating but are still about $300,000 below where they were in 2012.”

In recent years, property tax collections have begun to rebound, attributed largely to improved values catching up with collections, not necessarily rate hikes. Those with high property tax rates are cities like Bridgeport, Conneticut, or Detroit; these cities have low property values and/or high levels of local government spending as well as no access to sales or income tax.

Since the mid-1990’s, irrespective of economic conditions, the number of cities increasing property tax rates in any given year has always been about the same, about one in five. This is reflective of state- and voter-imposed restrictions on local property tax authority as well as the political challenges of raising property tax rates.

Political Challenges
In recent cases of tax increases, mayors have felt the backlash. Despite massive pension and education challenges, the city of Chicago had not had a substantial property tax rate hike in many years… until last year. Mayor Rahm Emanuel made a bold move and increased property taxes for residents and businesses, on average, about 13 percent (or $400 per year).

Given the fiscal challenges facing the city, the increase was overdue, but was not without political consequences.  Vocal opposition came strongest from the business community. A Crain’s Chicago Business columnist recently wrote that “in an action unlike any I’ve seen in decades, the Chicagoland Chamber of Commerce sent a letter to nearly 2,000 businesses in the Northwest Side’s 1st and 35th wards asking them to contact their aldermen and unite against these harmful policies.”

Property taxes have been called the scapegoats of the tax world, “a catch-all for gripes about potholes, traffic tickets and anything else that ails a local economy.” A key reason for the blatant disdain of property taxes is that the tax burden is more transparent (annual tax bill) and harder to avoid when compared with sales taxes applied at checkout or income taxes withheld from a paycheck. Case in point: earlier this year, Ferguson, Missouri, voters approved a half-cent sales tax hike for economic development but failed to garner the two-thirds needed to pass a separate property tax hike.

Undergirding much property tax angst is the continued slow and uncertain pace of economic growth. Mayors from cities as diverse as Buffalo, Baltimore, and Carson City, Nevada, touted their efforts to lower property tax burdens, stabilize property taxes and offer rebates and credits to seniors, low income families and city workers. “This year I am proposing to do even more with the creation of a property tax credit for our sworn police officers, firefighters and sheriff’s deputies who own homes in our city as their primary residence. I want to encourage more of our first responders to live in the neighborhoods they are sworn to protect,” said Baltimore Mayor Stephanie Rawlings-Blake.

Complexities
Mayors also used their speeches to describe the complexities and potential unintended consequences of property tax reductions. While praising recent efforts to lower tax bills to more equitably balance commercial versus residential property taxes, Mayor Steven Adler of Austin, Texas, also noted, “The danger of using the wrong metric to measure whether your government is helping with affordability is not that we’re just measuring the wrong thing – it’s that measuring the wrong thing means we’re not working on what will really have an impact on affordability.” Although property tax reductions are visible, they alone are not the most impactful way to increase affordability within the city. He went on to discuss the importance of transportation, housing and workforce development.

In addition to oversimplifying solutions to complex city goals, property taxes reductions also mean less revenue for city services and the employees who provide them. “Our ability to compensate our employees from year to year depends first and foremost on property tax revenues… the Commission did not approve a cost of living adjustment for city employees for FY16,” said Mayor James Smith of Helena, Montana. “It’s a classic balancing act. It really captures the dynamic tension that exists between government and the private sector of the economy.”

How to Pay
Political challenges often keep local governments from accessing the property tax. This means that the question of how to pay still looms large. One of most common responses is to raise fees for services, which of course brings equity concerns as poorer families pay a larger share of their income for services. Some cities, like Syracuse, New York and Boston, have reengaged nonprofit tax-exempt institutions to contribute more cash and community programming to offset use of city services and provide unique benefits city residents. Some, like New Orleans and Denver, have focused on cost-cutting innovations in service delivery. In most cases, cities are using a mix of strategies to balance their budgets, provide services, tackle broad goals and meet obligations.

To learn more about the performance of the property tax and its impact on city fiscal health, don’t miss the release of NLC’s annual City Fiscal Conditions 2016 report on Thursday, October 13 at 11 a.m. EDT.

christy-mcfarlandAbout the Author: Christiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.

The New Equity Imperative for Local Economic Development

The city of Austin has set out to create the prototype for how communities of the future compete in a global marketplace.

Austin has a substantial local economic development goal: to remove an entire generation of kids from poverty and get them on trajectory to be competitive for the world’s top STEM and entrepreneurial jobs. (Getty Images)

With a fast growing tech economy and population, the city of Austin is a hotbed of growth and innovation well on its way to economic dominance… or is it? Closer examination reveals an economy inaccessible to large swaths of the local workforce, with divergent income growth for Latino and African-American families and gentrification hostile to traditionally underserved populations.

By the numbers, the Austin-Roundrock metro is second in the nation for overall strength and size of its economy and third for wealth and productivity – but the area comes in at an unimpressive 60th for inclusion. In other words, it ranks high among metros on traditional economic indicators, but low on how the benefits of this growth and prosperity reach all people in the region.

Unfortunately, this trend is not unique to Austin. It is an inherent feature of local economies across the country, reinforced by traditional economic development. A new report released this week by the Brookings Institution, Remaking Economic Development, calls on cities and regions to aim higher.

Equity Imperative

Although local leaders can be lulled into a false sense that inequitable growth is nonetheless sustainable growth, the recent recession and disappointing recovery have proven it to be, at best, short lived. “If the next generation of workers is not prepared to meet the needs of major employers, that stifles business development and retention efforts. If people are unemployed, they cannot purchase many of the goods and services the economy produces, hurting small businesses and entrepreneurs. Inefficient use of land and infrastructure hampers job access, limits productivity, and hurts property values,” notes Amy Liu, report author and Vice President and Director, Metropolitan Policy Program at Brookings.

Today’s equity imperative for local economic development is not only a moral one but an economic one. In order to thrive, cities must strengthen untapped and underutilized assets and deliberately rectify disparities by race, place and income. This new vision of economic development holds the promise to raise the standards of living for everyone, setting regions on a higher growth trajectory.

Leaving market forces unchecked – or, worse yet, reinforcing them with traditional economic development tools, – often means that growth occurs at the expense of lower-skilled, minority, younger workers. (Getty Images)

Leaving market forces unchecked – or, worse yet, reinforcing them with traditional economic development tools, – often means that growth occurs at the expense of lower-skilled, minority, younger workers. (Getty Images)

Ensuring Deep Prosperity

But, of course, this approach is easier said than done. Ensuring “deep prosperity” means turning the tides on seemingly intractable politics, complex systems and incentives that favor the status quo. Moreover, inclusive growth requires strong market fundamentals that are matched with data-driven, networked and diverse civic leadership.

But it can be done.

The Brookings report suggests several actions that city leaders can take to start the hard work of remaking economic development:

  • Setting the right goals — expand the scope and metrics of economic development to reflect a more foundational and holistic understanding of how to expand the economy and opportunity;
  • Growing from within — prioritize established and emerging firms and industries, invest in the ecosystems of innovation, trade, talent, infrastructure, and governance to support globally competitive firms and enable small businesses to start and grow in the market;
  • Boosting trade — facilitate export growth and trade with other markets in the United States and abroad in ways that deepen regional industry specializations and bring in new income and investment;
  • Investing in people and skills — incorporate skills development of workers as a priority for economic development and employers so that improving human capacities results in meaningful work and income gains; and
  • Connecting place — catalyze economic place making and work at multiple geographic levels to connect local communities to regional jobs, housing, and opportunity.

Keeping Austin Weird, and Educated

The city of Austin gets it. Although Austin weathered the recession better than many, rapidly rising poverty and inequality were becoming major economic concerns. In the not-too-distant future, businesses would not have a sufficient local workforce base to draw upon. Additionally, growing social service needs have become a serious fiscal drain on the city.

Led by then-new Economic Development Director Kevin Johns, the city of Austin set out to create the prototype for how communities of the future compete in a global marketplace. For Austin, taking the economy to the next level means a core focus on equity-based outcomes through a quality built environment and creative workforce.

“We began this journey in January 2010 to eliminate poverty and come to a full employment economy. This was the principal path to exiting the Great Recession, and continues today as we gain speed towards the next recession,” said Johns. “It includes our commitment to help musicians, artists and creatives living in poverty, as well as equity to residents of color and all citizens seeking a prosperous future but drawn into poverty.”

The Einstein Project is one cornerstone of this approach. The Project is a public private economic and education partnership in which Austin’s high technology and scientific companies teach 40,000 children in poverty. There has been a groundswell of support for the Einstein Project from companies including IBM, Samsung, Silicon Labs, National Instruments, Google, GM Research and Apple.

A key element of the Project is that it is incentivized through the company’s receipt of small property tax breaks (also known as Chapter 380). Using this revamped financial incentives program as a contract for the partnership allows the city to hold companies accountable to performance measures, which are evaluated by the Ray Marshall Center at the University of Texas.

This is important because the goal is substantial: to remove an entire generation of kids from poverty and get them on trajectory to be competitive for the world’s top STEM and entrepreneurial jobs… but hopefully stay in Austin, of course.  “This could save us as much as $20-30 million a year. That could be 40,000 kids who will not need subsidies as they become heads of households. Instead, these kids will become a huge talent base for our high-tech companies,” said Johns.

Adapting its financial incentives program – a tool traditionally deemed to deliver economic growth at the expense of local residents and businesses – is a signal that there is new era of doing business with and in the city of Austin. Maybe it’s easier for Austin because it already has a strong market, but it’s certainly an indication that taking the risk to remake economic development can pay steady dividends… and make the world a better place in the process.

christy-mcfarlandAbout the Author: Christiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.

3 Steps Cities Can Take to Anchor Economic Partnerships

With a new approach, anchor institutions have the ability to accelerate economic development priorities and reshape their hometowns for the better.

This is a guest post by Neil Kleiman.

Anchor institutions — colleges, universities and hospitals — are predominant local economic actors, often the largest employers within a city. These institutions provide a knowledge foundation for their home cities while also being drivers of local development. Medical centers and research universities foster an entrepreneurial climate that attracts young professionals and leads to spin-off companies in the growing tech economy. In virtually every city in the United States, there is recognition of this mutual interdependence, but rarely does that awareness extend to a consistent working relationship. The full potential of these partnerships has not been realized because of mistrust, half-starts and half-realized results.

While partnerships — the best of which rely on the combined efforts of the philanthropic, anchor and public sectors — have been lacking, they are getting stronger. Smaller cities, to their credit, tend to have a greater connection to their anchor leadership. Cities like Wilkes-Barre, Pennsylvania, Waco Texas, and Kansas City, Kansas are great examples of turnaround strategies jointly planned by anchor institution and local leadership. However, partnerships between anchors and cities often go awry. A university or hospital may work with local government on one specific project or community service program, but on others relationships can be marked by tense negotiations around real estate expansion, arguments over tax-exempt status and miscommunications stemming from a lack of understanding about how to engage productively with one another.

In our recently released report, Striking a (Local) Grand Bargain, the National Resource Network, NYU Wagner and the Urban Institute provide the following steps to establishing a productive and far-reaching connection between anchor institutions and cites that will lead to structured, systematic partnerships in pursuit of mutual self-interest and large-scale improvements.

Step One: Establishing the Bargain

Building a grand bargain may sound intuitive, but it means local leaders must take the initiative with the following actions:

  1. Identify clear community priorities appropriate for anchor institution partnership.
  2. Identify the best external partners from the philanthropic sector, business community or the federal government to advance local effort.
  3. Build on what you have. Many local communities felt that they don’t know where to begin, but invariably there is already some collaborative activity — even if at a small scale — that can be built on.
  4. Engage senior level leadership at local institutions to craft shared goals and strategies together.

Step Two: Leveraging Supportive Mechanisms

There are a number of mechanisms that can greatly advance any local compact. The federal government, as in years past, has developed tools and programs that can support partnership efforts, but it’s incumbent on local leaders to put them to good use. Tactics for leveraging supportive mechanisms include:

  1. Build a platform to increase community engagement in the community health needs assessment process (part of the new Affordable Care Act) so that hospitals and community groups can drive investment tailored to specific community needs.
  2. Use the tax code to encourage hospital community and economic development activity.

Step Three: Maintaining an Ecosystem for Collaboration

Without strong, consistent and regenerative leadership, compacts and partnerships will not withstand the test of time. An infrastructure of education and support must be put in place to keep the local ecosystem healthy. Even those anchor institutions that engage in major outreach efforts find that the focus and cultural change needed within their institutions is significant. The following are tactics for maintaining an ecosystem for collaboration:

  1. Rally all stakeholders around a laser focus on local and regional workforce needs. Colleges should use data and engage local firms to build curricular-based pathways around the exact skills and credentials employers need.
  2. Implement leadership trainings for institutions, public officials and community leaders. Regionally based trainings can clarify roles and interests and establish clear lines of communication.

Anchor institutions, despite their namesake, are not holding cities back. With a new approach, a Grand Bargain based on shared interests, anchor institutions have the ability to accelerate economic development priorities and reshape their hometowns for the better.

About the Author: Neil Kleiman is the Director of NYU’s Wagner Innovation Labs, and serves as the National Resource Network’s Deputy Executive Director for Policy and Research.

New Evidence That the Tax Exemption Matters

Tax-exempt municipal bonds provide support for infrastructure projects such as the Leonard P. Zakim Bunker Hill Bridge in Boston, pictured above. (photo: Will Damon)

Walking down Commonwealth Avenue in Boston this summer, it was hard to imagine more than six feet of snow in this very place not more than a few months prior. Although the snow has melted (finally), a wake of potholes is a daily reminder to residents, businesses and government of the critical need for sound infrastructure.

Most infrastructure projects, including roads, schools and sewer systems, are paid for by tax-exempt municipal bonds. This places municipal bonds squarely at the center of inquiry between increasing infrastructure needs and decreasing public investment.

A new white paper released this month by ICMA and GFOA, Municipal Bonds and Infrastructure Development – Past, Present and Future, helps to untangle the relationship between bond market conditions and infrastructure investment. Demographics and politics appear to play a larger role in capital spending levels than do interest rates, the study finds, but of critical importance is the tax-exempt nature of municipal bonds.

The post-recession slowdown in local and state infrastructure investment would have been significantly worse had the tax-exemption not been in place. “If the federal tax exemption for municipal bonds were repealed, state and local governments would have paid $714 billion in additional interest expenses from 2000 to 2014,” notes author Justin Marlowe, University of Washington. “For a typical bond issue this would mean $80-210 in additional interest expenses per $1,000 of borrowed money.”

Other key findings from the new report include:

  • In 2014, state and local governments invested nearly $400 billion in capital projects, a significant slowdown in spending. Total state and local capital spending has not yet returned to pre-Great Recession totals.
  • Approximately 90 percent of state and local capital spending is financed by debt.
  • There are more than one million municipal bonds in the market today, issued by more than 50,000 units of government, and their total par value is just over $3.6 trillion.

Financing methods, such as pay-as-you-go and public-private partnerships, are explored as alternatives to tax-exempt municipal bonds. Although effective for some types of capital projects, these methods should be viewed as complements to tax-exempt financing, not robust alternatives, notes the report. For example, “[PAYGO] can take decades to save up the requisite capital, and on a present value basis, debt becomes cheaper at some point in the intermediate to long-term future.”

With limited alternatives, the instability of a federal funding stream and a recession hangover that continues to stifle political inclination toward financial risk, the importance of the tax-exempt municipal bonds cannot be understated.

About the Author:christy-mcfarlandChristiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.

The Dual Reality of Economic Recovery in Cities

This post was co-written by Emily Robbins.

This is the first post in a series about NLC’s new economic analysis, Cities and Unequal Recovery, which reveals ways that cities can support and accelerate inclusive economic growth.

To better understand the specific, local-level impacts of unequal recovery and the policy implications for city leaders, we conducted the Local Economic Conditions Survey 2015. Cities and Unequal Recovery analyzes that survey and offers a place-based perspective on economic recovery from the unique vantage point of those who are held most accountable for prosperity and equity in cities: chief elected officials.

Here’s what we found:

At the local level, most cities experienced either greatly improved or slightly improved conditions.New businesses and business expansions are widespread in cities, however, labor force challenges threaten to stymie this business growth.The trend of increased home values is great news for local property tax rolls and for existing property owners, but bad news for the growing number of individuals that are currently priced out of the housing market.The widening income inequality in cities is striking, and underscores the fact that local economic recovery is not taking root across the entire socioeconomic spectrum.While comebacks in key business sectors and property markets are stabilizing local economies, rising tides do not lift all boats. As cities continue to attract more residents and businesses, they are faced with the challenge of ensuring that the benefits of growth reach everyone in the community. This new local economic reality must be matched with strategies to address inequality not only as a deeply concerning social problem, but an economic one as well.

About the Authors:

christy-mcfarlandChristiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.

Robbins_small (2)Emily Robbins is the Senior Associate of Finance and Economic Development at NLC. Follow Emily on Twitter: @robbins617.

Can Cities Beat the Fiscal Odds?

Can Cities Beat the Fiscal Odds?Beating the fiscal odds means cities are able to not only balance budgets, but continue to pioneer innovative solutions to the country’s most intractable challenges and lay the foundations for fiscal and economic growth. (Getty Images)

As the economy continues to show hopeful yet nascent signs of recovery, cities remain cautious about their fiscal condition. They continue to face rising costs of services, stark infrastructure needs, employee obligations, and omnipresent state and federal funding cuts and uncertainties. Still, cities have proven remarkably resilient. Despite a couple of high-profile cases, the vast majority of cities are balancing their budgets and making good on their debt.

But this hasn’t come easy or without consequences. The harsh reality is that municipal governments are operating at 90 percent of their pre-recession revenues, with little growth in sight and limited prospects for tapping into growth sectors within their local economies. Balancing local budgets in this environment is an ongoing process of revenue and expenditure choices that affect the types, levels and costs of services provided in a community. These choices often involve tradeoffs, even among investments critical to growth and innovation, such as infrastructure and workforce.

Take the city of Charlotte, for example. The city is currently looking to close a $21.7 million budget gap left by the state repeal of a business license tax and a surprise drop in property tax values. The city is reviewing its options, which include: pay freezes and eliminating positions; transferring some maintenance expenses from the general fund to a tourism fund (thereby decreasing funds for tourism activities); cutting funding to an arts and science program; and increasing development fees.

After all of this, the city will still be $10-15 million in the hole. Increasing property taxes may be politically infeasible, which likely means deeper and more widespread service cuts, higher fees, and less funding for programs and investments. No doubt, though, the city of Charlotte will find a way to close the gap, but at what cost to their future economic and fiscal health?

Even under these circumstances, our cities are leading change, progress and solutions to the most difficult issues of our time. Chattanooga is bridging the digital divide; Louisville and Buffalo are closing the skills gap; Seattle and San Francisco are raising the minimum wage. If we want grassroots innovations that are even more widespread and sustainable and that drive national economic growth, then cities need more than the fiscal cards they’ve been dealt. They need more than creative workarounds – but instead a consistent toolbox of resources to create the conditions that will accelerate their local and regional economies.

Their Hand: City-State Fiscal Structure

Cities, of course, are creatures of their states. The choices local governments can make are constrained by legal limits on their revenue raising authority.

In a new National League of Cities report, we examine the Cities and State Fiscal Structure across the 50 states and determine that a city’s “hand” is unique within each state and is a mix of:

  • Municipal fiscal authority: access to sales, income and property taxes. A mix of revenue sources is needed to provide cities with stability to buffer against economic downturns, and to allow them to capture revenue growth during periods of economic growth. No state uniformly authorizes its municipalities to utilize all three tax sources. Maps for export-03
  • Municipal revenue reliance and capacity: the amount of revenue (taxes and fees) a city generates that can be used to fund services and their share of resident needs. On average, U.S. municipalities derive approximately 71 percent of their general fund revenues from own-source revenues, including 24 percent from property taxes, 13 percent from sales taxes, 3 percent from income taxes and 32 percent from fees and charges.
  • State aid: the amount of state support for a municipality as a proportion of its total revenues. While it could be argued that too much state aid makes municipalities beholden to the state, in general, well-structured state aid can increase the capacity of all cities by equalizing the base support for cities that may lack sufficient resources. State aid has been decreasing despite increases in state mandates and cuts to state services that in turn force cities to pick up the slack (i.e., cuts to higher education or mental health services).
  • Tax and Expenditure Limits (TELs): constraints on local fiscal autonomy through voter imposed or state-imposed taxing or spending limitations, most frequently limits on property tax rates, growth in property value assessments, or caps on the total revenue allowed from these taxes. Forty-one states currently have some form of a TEL.

Incredibly, no state has afforded its cities an expansion of municipal fiscal authority since the start of the recession. Local fiscal health remains below pre-recession levels despite burgeoning broader economic recovery in part because authorization of more local revenue authority and other enhanced capacity measures are so rare.

States are balancing budgets too, and in some cases fulfilling tax reform promises on the backs of local governments.  Cities in Texas, for example, have traditionally traded lower levels of state aid for more local control but are seeing revenue threats as the state pursues caps on the local property tax. Last week, the state Senate Committee on Finance heard a bill, S.B. 182, which would lower the cap from 8 to 4 percent. This reduction would only provide a typical homeowner in McKinney, Texas a savings of $29.65 annually, but the city would have a revenue loss of $1.4 million. Similar threats are being considered in statehouses across the country.

Hold or Fold

Within these constraints, cities are using the tools available to them, and in some instances, implementing creative financing strategies. In the best case scenarios, strategies like social impact bonds, crowdsourcing, participatory budgeting and even ballot measures can help meet specific needs or increase engagement with the community. But they do not offer long-term, broad-based, reliable, general revenue streams.

Fees and charges have become an increasing proportion of local revenue due to a lack of access to other sources and the political difficulty of raising taxes. Fees and charges include development fees, waste disposal fees, court fees and service fees such as libraries and parks. They can be regressive, making it difficult for lower-income residents to access services, or impose charges on development that can negatively impact economic growth.

Beating the fiscal odds means cities are able to not only balance budgets, but continue to pioneer innovative solutions to the country’s most intractable challenges and lay the foundations for fiscal and economic growth. This requires more local tax authority, access to a mix of revenue sources, state aid that enhances the fiscal base of less-wealthy cities, and a revision of existing tax and expenditure limitations to make them less binding, or better yet, nonexistent.

We are gambling with the economic future of our country if we do not offer our cities more flexible fiscal structures that align with new economic realities and the responsibilities that we lay on their doorsteps.

Read the full 2015 Cities and State Fiscal Structure report here.

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About the Author: Christiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.

Carrots and Sticks: How Cities Are Taking a New Approach to Regulatory Compliance

This post is a response to the recent Governing article on regulatory compliance.

carrot stick(Getty Images)

There has been some recent buzz about the dangers of local regulatory compliance. Regulating businesses is necessary – you wouldn’t want to eat at an unsanitary restaurant, or take your car to an auto mechanic who wasn’t certified. However, some say that regulating businesses can be counterproductive, costly and raise equity concerns. Holding up examples of cities coming down hard against large swathes of businesses on relatively minor infractions can certainly make that case.

But these instances are the exception, not the rule.

Less Stick, More Carrot

While local governments would be wise to heed the warnings of fallout from “inspector zeal,” the regulatory reality is that most cities aren’t filling their coffers with health inspection fines. Ensuring that businesses operate in a healthy and safe way is clearly an important function of city government, but paying for inspectors can be expensive. And because cities are still facing fiscal challenges, many are approaching compliance with caution, carefully scoping out the financial, social and economic costs and benefits of their compliance approaches.

As a result, the regulatory environment emerging in most cities is guided by a clear articulation of the end game – to ensure safe, healthy communities and prosperous businesses. This means a more informed, sensible carrot-andstick approach: punitive “stick” measures when necessary, paired with a bushel of “carrots” in the form of compliance incentives and supports.

The “stick only” approach characterized by harsh, blanket enforcement is giving way to targeted compliance that leverages innovations in data and analytics, reforms bureaucratic red tape and makes it easier for businesses to comply in the first place.

Driving Innovation: The Impact of Analytics and Legislation 

New York City and others have enlisted the help of online review tools like Yelp to proactively identify health and safety concerns. A new Pew analysis noted that “[New York City’s] Department of Health and Mental Hygiene launched a nine-month pilot study in July 2012 that used data-mining software to screen and analyze about 294,000 Yelp reviews. It searched for keywords such as ‘sick’ or ‘food poisoning’ to find cases of foodborne illness that may not have been officially reported.”

Some cities – such as Boston, which has created a Problem Properties Taskforce – are even starting to use predictive analytics to better understand and pinpoint particular cases where compliance interventions can have the greatest impact.

Despite efforts to target the worst offenders, compliance “crackdowns” can disproportionately affect lower-income and legacy businesses that don’t have the skills or time to navigate government regulations and can’t afford to pay for fees, tax increases or compliance upgrades to their business. For these reasons, San Francisco is currently considering Legacy Business Legislation to help businesses that have been in operation for over 30 years remain in compliance and in their original locationThese businesses would be eligible for certain types of assistance, including priority access to pre-inspections for ADA compliancy, pro bono legal advice on leases, and property tax rebates. The legislation will predominantly support small mom-and-pop restaurants and cafes, and smaller bars and retailers that cater to the LGBT community.

Regulatory Overhauls

Even more common than predictive analytics and legacy business legislation is simply regulatory reform. Take ChicagoBoston, Cleveland, Kansas City, Mo., and Seattle, for example. These cities are making it easier for businesses to comply by reducing the number of permits and licenses, improving approval times, making requirements and timelines more transparent, revisiting outdated and onerous laws, and creating accessible ways for businesses to interface with government and obtain information.

Improving the ease of doing business is not only the most impactful compliance carrot available to local governments, but it is also a top contributor to a business-friendly environment (often surpassing low taxes). By using carrots and sticks in an innovative approach to regulatory compliance, cities are creating a win-win scenario in which the community is protected and businesses are encouraged to contribute to a vibrant, healthy economy.

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About the Author: Christiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.

Local Government Employment Buoys Stagnant Public Sector

Today’s BLS February jobs report shows a slight improvement in public sector employment, with local government employment responsible for the majority of the gains.

Total public sector employment is up 7,000 jobs in February; local governments added 4,000 jobs, and state governments added 3,000. There were no gains in Federal government employment. Within local government employment, local governments (excluding education) added 2,600 jobs, and local schools added 1,200.

Despite these improvements, local government employment remains 512,000 jobs below its July 2008 post-recession peak.

March jobs report graphic

View the January Local Government Jobs Report.

christy-mcfarlandAbout the Author: Christiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.