If Cities are in financial crisis, why aren’t they panicking?

Most U.S. cities are experiencing an administrative and financial crisis. This appears to be at odds with the confident tone of recent budget hearings where most of the attention was placed on how to spend remaining 2021 federal relief funds and so called “discretionary funds.”

Cities have been able to adopt viable budgets this year because of four factors – none of which reflect proficient management. First, the 2021 federal relief (American Rescue Plan Act) mitigated the impact of pandemic-related revenue losses and provided a fresh source for new spending. Second, cities benefited from unplanned passive savings (i.e., slowed spending) as a consequence of the delayed hiring and reduced activity during and following the lockdowns. Third, most cities have recorded better-than-expected sales tax results, driven by changes in consumer spending, sales tax collection regulations, and inflation. And finally, many cities are collecting more property taxes as a result of domestic migration and inflation (e.g., property transfer taxes and reassessments). Not only are these factors unrelated to municipal management; they are all either one-time or cyclical contributors to financial results.

Meanwhile, cities continue to increase the scope of their organizational activity and spending – e.g., in the areas of homelessness, housing, and experimental programs such as universal basic income. This increased spending occurs at a time in which pension contributions are certain to rise. Inflation pressures have driven up benefits for current retirees while simultaneously driving up the salaries of current employees and the cost of their future benefits. At the same time, investment returns are lagging, thus exacerbating pension funding challenges and draining resources that could address deficiencies in retiree medical benefit funding.

Worse, the problems cities are casting money at – homelessness, housing, public safety – are not being solved. Notwithstanding decades of evidence to the contrary, cities continue to act on the premise that they have correctly diagnosed these problems and that city actions and financial resources alone will solve them. For example, treating homelessness exclusively as a housing problem solves neither. And measuring one’s commitment to public safety by the dollars spent ensures only that more and more dollars will be spent.

Now is the time for city leaders to take inventory of what they have taken on and to shed, not double or triple down on, ineffective policies. For each municipal activity, city staff should ask the following questions: Why has the organization taken this on? Do these reasons constitute a legitimate current justification for continuing the activity? And, for each activity that should continue, why should the organization take it on in the way it currently does so? Do we really want to rely on federal bailouts, forced shutdowns/slowdowns of service delivery, and other one-time or cyclical economic activities to squeak by year-to-year? The programs cities have added this year raise expectations for the future and will be difficult to curtail. When the federal relief money runs dry and the next economic downturn comes, it will be too late to avoid a real panic.

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Mark Moses is a senior fellow with California Policy Center. He has thirty years of experience in local government administration and finance. His recent book, The Municipal Financial Crisis – A Framework for Understanding and Fixing Government Budgeting, was published by Palgrave MacMillan in January 2022 and is available from the major online booksellers.