The Municipal Financial Crisis — Four Years Later

The municipal financial crisis is more urgent than ever.

It has been four years since my book, The Municipal Financial Crisis, was published by Palgrave Macmillan. I wrote the book to bring to light the root causes of why our local governments are failing to manage administratively, operationally, and financially. Looking back today, I find myself, on one hand, more confident than ever in the book’s core thesis and, on the other, increasingly alarmed by the lack of substantive change at the municipal level. City councils and local agency boards are as lost today as they were four years ago and ten years ago. The failed, recycled solutions to fiscal stability[i] have convinced many that municipal financial stability is unachievable.

If I were to sit down and write that book today, my formulations would be sharper and my communication more refined—but the tragic reality is that the subject of my writing, municipal government itself, has remained stubbornly stagnant.

Refined Formulations, Same Fundamental Facts

With four more years of consulting, observation, and dialogue behind me, I have learned better ways to communicate the primary hurdle: the faulty goals of government. The fundamental problem is not just bad budgeting or unfunded mandates. It is a philosophical failure to identify what government is and what it should be doing.

For example, we have blurred the distinction between a city government–i.e., a legislative body with enforcement powers, and private institutions which rely on voluntary association and trade. Commercial firms are subject to market discipline, while charitable organizations operate under donor discipline. We should not be surprised then, when cities fail at their commercial ventures (e.g., utilities, hotels, convention centers, entertainment venues, etc.) and their charitable ventures (e.g., homelessness, affordable housing, etc.). When a municipality fails to acknowledge its nature and set its scope accordingly, it loses any hope of functioning well. Worse, such government activity crowds out private capital, innovation, and charity.

The Persistence of Scope Creep

Even though most municipalities claim fiscal sustainability and financial accountability as chief governing values, municipal leaders hold a tight grip on the status quo goals, assumptions, and ways of operating that led their organizations to the current brink. The systemic scope creep that I identified years ago continues unabated. This creep is the direct result of vague, open-ended goals and a refusal to define the boundaries of municipal authority.

When a city government views its mission as solving local social ills rather than performing specific, delimited functions, it enters a state of perpetual expansion without the ability to support it. This lack of focus is not a harmless byproduct of good intentions; it is a structural defect that makes organizational and financial stability impossible. The residents and business owners then suffer the consequences.

The Warning Signs are Now Realities

Four years ago, I wrote about a coming crisis. Today, we are watching it play out. We witness cities assuming a zombie-like existence—a state of functional bankruptcy where the lights are still on, but the foundation is rotting. This failure manifests in a predictable, devastating trend:

• Reliance on Serial Tax Increases: Serial tax increases are required to fund ever-expanding organizational scopes. Cities now treat their residents as a financial means to their organizational ends.
• Deteriorating Services and Neglected Infrastructure: As a municipality’s scope expands, the unidentified core suffers. Road maintenance and public safety have become secondary to new, trendy initiatives.
• The Retiree Benefit Burden: Many cities are now in a position where they can never catch up on pension and retiree medical benefit funding. They are running on a financial obligation treadmill that is accelerating faster than they can sprint.

The Need to Budget for Scope

The solution I proposed in the book—Budgeting for Scope[ii]—remains the only viable path forward, yet it requires a wholesale reclamation of the purpose of municipal government. Municipal government should be a means to the ends of the residents and business owners – i.e., it should protect the conditions whereby they can flourish freely. Such a restatement of government requires leaders to stop asking “What else can we do?” and start asking “What should we be doing?”

And, once they answer the question of what they should be doing, municipal leaders need to answer the question of how they should do it. The current service-delivery methods are dictated by tired traditions and the comfort level of long-term employees – all codified in labor agreements that render operational streamlining and optimal use of technology impossible. Cities cannot manage when management’s right to manage has been bargained away.

Many observers view the current municipal financial turmoil as a series of unfortunate, disconnected events: rising costs here, declining tax revenues there. But these are, at most, symptoms. The disease is a principled vacuum at the heart of municipal decision-making.

Looking Ahead

As I look at local government today, I see a nationwide struggle that confirms my earlier study. A government that cannot define its purpose cannot fulfill it. Until municipalities confront this simple fact, no reform, no grant, and no temporary windfall will save them. The $65 billion in federal COVID relief that briefly masked structural financial weakness is nearly gone, and the underlying rot is visible again. The municipal financial crisis was never a failure of resources; it has always been a failure of discipline and restraint.

If municipal leaders fail to define and delimit the scope of their organizations, their organizations will continue drifting toward insolvency disguised as normal operations. The crisis is not hypothetical — it is the current operating condition of local government. The only question now is whether municipal leaders will finally confront the root cause or continue managing decline until there is nothing left to manage. The drift will not stop on its own; only disciplined leadership can pull cities back from the edge.

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 and is available from major online booksellers. 

https://munifinanceguy.com/     X/Twitter: @MuniFinanceGuy

[i] In Chapters 4 and 5 of the book, I discuss how conventional solutions – such as zero-based budgeting, priority-based budgeting, transparency initiatives, operational improvements, privatization, etc. – result in little tangible success.

[ii] I present Budgeting for Scope in Chapter 9 of the book. It consists of (1) managing activities as the drivers of costs; (2) implementing a clear standard by which a government agency decides to engage in an activity; and (3) a phasing out of existing activities which do not meet the standard. From there, a comprehensive overhaul of the methods in which services are delivered can be implemented.