The receding economic tide over this past year has revealed many city officials to be naked.
Sunshine Cities Versus Sinkhole CitiesThe TIA report delivered not a single “A” grade. In other words, no major U.S. city had a taxpayer surplus—available funds to pay bills divided by residents—of $10,000 or more.
However, one California city, Irvine, set an example and at least stayed above water. Retaining the title of the fiscally healthiest city for the second consecutive year, Irvine registered a taxpayer surplus of $4,100 per resident.
Even if Irvine posts a lower surplus in the following fiscal year, because of the pandemic, it has enough resources to weather the storm.
“Irvine’s elected officials have truly balanced their budgets,” the TIA team claims.
Washington, D.C.; Lincoln, Nebraska; Stockton, California; and Charlotte, North Carolina, follow Irvine. Together, they make up the top five “sunshine cities”—those with enough money to pay all their accumulated debt to date.
Surprise, surprise: New York City and Chicago rank at the other end of the spectrum, with the highest taxpayer deficits: $68,200 and $41,100 per person, respectively.
Honolulu, Philadelphia, and Nashville, Tennessee, round out the bottom five “sinkhole cities.” They lack the funds to pay their bills and are passing the severest financial liabilities on to future generations.
Why Balance Budgets?Some local governments disagree with the report’s inclusion of financial liabilities outside the operating budget. Sheila Weinberg, TIA founder and CEO, responds that all debts are relevant for policymaking.
She’s right. There’s no free lunch, and that includes promises of future benefits: someone has to pay the bills when they arrive. Further, if officials meet immediate needs with funds intended for future needs, future taxpayers will pay more and receive less.
Further, getting out of a ditch is more difficult for city governments—since their powers are more limited—than for state governments and the federal government. Municipalities, for example, have limited authority over pension reforms. Their revenue sources are mainly property and sales taxes, and their cost of borrowing is often greater due to higher interest rates.
When city debts balloon, the options are allocating a larger portion of public spending to debt servicing or postponing payments and passing debt on to future generations. Both alternatives hinder economic development and push municipalities into a downward spiral of loose fiscal policy.
The Takeaway From the PandemicTIA is far from alone in its warnings and assessments. In August 2020, the National League of Cities (NLC) released a similar report, warning local governments’ fiscal capacity was as low as during the Great Recession.
According to the NLC report, U.S. cities will have to make do with 13 percent lower revenue in the 2021 fiscal year. As a result, 90 percent of them will see their finances deteriorate compared with the 2020 fiscal year.
The COVID-19 crisis has unleashed unprecedented helicopter money and emergency-relief subsidies. It has also shown how bumpy the road of living beyond one’s means can be. Expecting local authorities to use this crisis as an opportunity to put their houses in order may be too much.
Only residents can turn the situation around by resisting the siren call of demagogues. They can vote with their feet or vote for candidates with credible plans to balance the books. An austere budget may be a bitter pill to swallow now, but it will pay off as residents, workers, and retirees get more than empty promises. It also won’t unfairly saddle future generations with debts for which they bear no moral responsibility.