Panel Paper: Measuring the Fiscal Health of U.S. Cities

Thursday, November 2, 2017
New Orleans (Hyatt Regency Chicago)

*Names in bold indicate Presenter

Howard Chernick, Hunter College, City University of New York and Andrew Reschovsky, Lincoln Institute of Land Policy

In this paper, we develop a new measure of the fiscal health of U.S. cities. The finances of most big cities in the U.S. were negatively affected by the Great Recession and the bursting of the housing bubble. The increase in unemployment, the decline in home values, and the increase in foreclosures and mortgage delinquencies all had sharply negative effects on revenues from the property tax and other local taxes. In many states, the cuts in local tax revenues were reinforced by sharp declines in state aid. As revenues were declining, the need for public expenditures, particularly for social services, affordable housing, and policing, has grown in response to the recession and the housing crisis. In this paper, we use a specially constructed data base on city finance that accounts for the revenues and spending of the constituent governments that provide public services in cities – municipal governments, school districts, counties, and special districts – to analyze the fiscal health of cities. This approach, called the Fiscally Standardized City, permits comparisons of city finance between cities with widely different institutional structures, e.g. in the importance of counties versus cities in providing services to city residents. To the fiscal data, we have added data on housing conditions, demographics, household income, property values, and other factors. The data set covers 150 large U.S. cities, from 2000 to 2014. This unique data set will be used to construct comparative measures of the fiscal health of U.S. cities. Our methodology for calculating fiscal health is described in Howard Chernick and Andrew Reschovsky, “The Fiscal Health of U.S. Cities,” Chapter 5 in Is Your City Healthy? Measuring Urban Fiscal Health, edited by Richard M. Bird and Enid Slack, Toronto, Canada, Institute on Municipal Finance and Governance, 2015. The methodology involves calculating the expenditure needs of each city based on estimated expenditure functions for the major categories of spending, and estimating the revenue-raising capacity of cities using the Representative Tax System approach. After calculating the fiscal condition of each city, we will analyze the contribution of federal and state aid to cities’ fiscal health, and evaluate the impact of the Trump administration’s proposed cuts in federal grants to cities on their fiscal health.