The receding economic tide this past year has revealed many city officials to be naked.
Oft-forgotten amid the COVID-19 chaos is that their fiscal crises predated the virus’s spread. According to Truth in Accounting (TIA), a nonprofit fiscal watchdog, 62 of the 75 largest U.S. cities were already in the red in 2019.
That statistic comes from the latest TIA “Financial State of the Cities” report (pdf), which came out in the last week of January. The authors’ objective is to provide citizens with easy-to-understand information and peer comparisons regarding their local governments’ finances.
The total liabilities of the 75 most-populated U.S. cities amounted to $333.5 billion at the end of the 2019 fiscal year. Defined pension and medical commitments make up the lion’s share of the unfunded debt.
Sunshine Cities vs. Sinkhole Cities
The 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 Californian 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, hit by 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, Stockton, and Charlotte 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.
Chicago, the third most populous U.S. city, has been tightening its fiscal belt in recent years. For Kristen Cabanban, the city’s budget and management spokesman, the Windy City has addressed financial liabilities and deficits without significant tax increases. Nevertheless, top ratings agencies do not concur and have sounded the alarm over Chicago’s 2021 budget.
Honolulu, Philadelphia, and Nashville 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.
For them, there’s no light at the end of the tunnel unless officials undertake drastic measures. Cities are facing revenue cutbacks and rising medical costs amid the pandemic; budgetary constraints have forced significant cuts in public services, even postponing maintenance. Higher interest rates, already ominous, are also set to divert precious funds and rub salt into the wound for taxpayers.
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 (1) allocating a larger portion of public spending to debt servicing or (2) 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.
Residents can more easily vote with their feet; so too can companies. Firms and individuals are fleeing New York City, for instance. Goldman Sachs Assets Management may relocate to Florida and take high-paying jobs (and taxes) with it. In fact, more than 300,000 households who were living in the Big Apple changed their postal addresses to out-of-state destinations in 2020.
Last September, the Manhattan Chamber of Commerce urged authorities to retain New York City’s position as “a thriving global center of commerce, innovation, and opportunity.”
The Takeaway From the Pandemic
TIA 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 revenues 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 will also not unfairly saddle future generations with debts for which they bear no moral responsibility.