Robert M. La Follette School of Public Affairs
Thursday, April 21, 2011

Analysis forecasts cuts in central city spending through 2013

Large cities in the United States are likely to reduce their per-capita spending by 7 percent from 2009 to 2013 due to the impact of the recession and the housing crisis, a forecast by a La Follette School of Public Affairs economist and his co-authors suggests.

Research available

The study, "The Impact of the Great Recession and the Housing Crisis on the Financing of America's Largest Cities," is available as La Follette School Working Paper No. 2011-008. The paper has been accepted for publication in Regional Science and Urban Economics.

Given the continuous increase in costs faced by local governments for items such as energy and health care, the real level of cuts is probably greater than 7 percent, and in some cities the cuts are predicted to be as high as 15 percent, the new study shows.

"The housing crisis and the recession have placed tremendous fiscal pressure on the nation's central cities," says Andrew Reschovsky of the La Follette School. "Cuts in state government fiscal assistance to their local governments, plus shrinking property tax bases are challenging the ability of local governments to continue their current levels of public services."

Reschovsky and his co-authors use Census data on the financing of 109 of the nation's largest central cities from 1997 to 2008 to forecast the economy's effects on central city expenditures between 2009 and 2013, predicting an average annual spending cut of 1.75 percent after adjusting for inflation. "Because expenditure responsibilities vary among city governments and because overlying governments play different roles, we adjust for these differences by developing the concept of constructed governments," Reschovsky says. "This approach allows us to compare the revenue-raising and spending policies of large central cities."

He and co-authors Howard Chernick of City University of New York and Adam Langley of the Lincoln Institute of Land Policy in Cambridge, Massachusetts, prepared their paper for a Lincoln Institute of Land Policy workshop, Fallout from the Economic Crisis: How Are School Districts & Municipal Governments Coping?, to be held April 22 in Cambridge.

The data illustrate the important role the property tax continues to play in central city financing and the relative stability of the property tax as a revenue source of central city revenue during the 11 years from 1997 to 2008, Reschovsky says. The data indicate that in 2007, on the cusp of the economic slowdown and the housing crisis, state aid was on average the single most important source of revenue for American central cities. "Our analysis also demonstrates the considerable amount of variation both across cities and over time in the level and composition of central city revenues," he notes.

There is very little systematic research on the fiscal conditions of central cities, Reschovsky says, so the analysis attempts to provide a statistical picture to supplement anecdotes circulating in the media and among policymakers that describe public employee layoffs, public service reductions and cuts in spending.

"Understanding the revenue impacts of the great recession and its accompanying housing crisis is crucial to assessing the future fiscal health of cities," Reschovsky says. "Central cities provide essential public services to their residents, including, in many cases, heavy concentrations of disadvantaged people. These cities also serve as the engine of innovation and economic growth for their metropolitan area. For these reasons, maintaining their fiscal health of central cities should be an important national policy goal."

Analysis forecasts cuts in central city spending through 2013, April 21, 2011, University of Wisconsin-Madison News