Form and Function: The Changing Landscape of City Finances

Vacant and abandoned properties present both a significant problem, and an opportunity, for many central cities.

October 2015 | by David Delaney

Charged with providing myriad basic services, local governments are challenged by budget hurdles both cyclical and structural. Beyond the booms and busts of the economy, city finances are also often straitjacketed by wage and benefits agreements and taxpayer or legislative limits on the property tax, the largest source of municipal revenue. Additionally, city financial structures vary widely across the nation.

Some cities have responsibility for education, some can levy income taxes, and some charge a sales tax. This study examines the finances of 162 cities from 1977—the year before California’s momentous Proposition 13 tax cut sparked a national property tax revolt—to 2000. Further, survey data from 54 cities collected in 2004 gauges cities’ responses to the recession of 2001. Overall the paper finds that:

While direct federal aid to cities has declined since 1978, it has largely been supplanted with state aid. Federal aid dropped from 17.5 percent of city general revenue in 1977 to 5.4 percent in 2000. Moreover, most state aid to cities has been for education needs. Cities also rely less on the property tax now than 30 years ago. Most city revenue growth has been through local income taxes, where permitted, local sales taxes, and user fees, the fastest growing category of revenues.

Spending in cities grew more slowly than at any other level of government. For the cities in the study, per capita spending grew 35.1 percent from 1977 to 2000, compared to 73.4 percent for states. Education and police were spending priorities for cities, and debt service increased substantially. However, contrary to popular perception, salaries and wages shrank as a percentage of city expenditures since 1977.

Behind these broad trends lie different scenarios for each city, depending on their taxation tools and municipal responsibilities. Cities with only the property tax received the largest increases in state aid and increased user fees faster than average. Cities with ocal sales taxes relied more upon that tool over time while receiving less state aid than average. Cities with an income tax have increased their reliance on that revenue over time as well. Because of their unique circumstances, cities in California are broken out into a separate category. Over time the importance of the property tax declined, while those cities increasingly used utility taxes and current charges to generate revenue.

The cities surveyed responded to the 2001 recession incrementally, hoping to avoid political pain. Though cities increased spending in the 1990s, they also built reserves. In 2001, caught between declining revenues and increasing costs—especially for health care, education, and public safety—most respondents characterized their fiscal shortfalls as both structural and cyclical in origin. Reductions in state aid were the leading source of fiscal pressure, followed by reduced fee revenue. To cope, cities most frequently cut general government expenses followed by education. Reserves were also often tapped to fill budget gaps, and a number of cities adopted creative measures to boost revenue and spend more efficiently.

Despite recent news of improving city budgets, municipal governments will forever be vulnerable to the vicissitudes of the economy unless structural change occurs in their revenue options. Though, like a good portfolio, city revenue sources are more diverse than ever, most of the budget fixes enacted in recent years were short term and one-time only. Most surveyed cities said they would like to expand services, but legislative tax limitations and an anti-tax electorate make such prospects remote.


Executive Editor

Ms Anna Sullivan

Ms Anna Sullivan