Recession Over, but Cities Still Struggle

  • April 01, 2014
  • by Tom Ferrick

Pew looks at the 30 biggest cities to find ways to help policymakers cope with the Great Recession's lingering fiscal effects.

The fiscal impact of the Great Recession did not hit America’s big cities first, but it certainly hit them hard.

While economists say the downturn officially ended in June 2009, don’t tell that to the mayors of the nation’s 30 largest cities. In many, the full fiscal effects of the recession were not felt until 2010 and linger today because revenue has yet to rebound to prerecession levels.

Those effects are detailed in a report by Pew’s American cities project, which looks in-depth at the fiscal well-being of the country’s large cities. As one expert on municipal finance puts it, the report is a “look under the hood” into the often complicated world of big-city finances. And it grimly determines that “by 2011 many cities still faced challenges, the consequence of declining revenue, reduced spending, shrunken reserves, and rising pension and health care costs.”

“America’s Big Cities in Volatile Times” was issued in November and is the first in a series that will focus on the center city in each of the nation’s 30 largest metropolitan areas, which collectively are home to 34 million people—more than 1 in 10 Americans.

The project will help fill a gap in our understanding of urban issues. While there is a lot of research about issues within a particular metropolitan area—Pew itself operates the Philadelphia research initiative to do just that in its hometown—the American cities project is a step forward because it was created to offer comparative data and highlight effective policy approaches. On the surface, it would seem there is little in common between, say, Sacramento and Cleveland, but cities share many traits, especially when it comes to governance and public finances.

“Anything that provides greater transparency into finances and drivers of revenues is valued in the marketplace,” says Lisa Washburn, a local government financial analyst with Municipal Market Advisers. “From that perspective, the report is valuable, especially since cities generally are more difficult to compare.” 

Many Cities Had Not Recovered from Recession

2011 revenue as percent of previous peak

For Washburn and others, the report provides insight into the reliance of cities on aid from other government entities, particularly state and federal governments. It also shows what they had in common when it came to handling difficult times.

“We saw that despite the variation among them, they seemed to handle the financial downturn in much the same way,” says Pew’s Kil Huh, who oversaw the research team that produced the report. “They dipped into their reserves. Some raised taxes. When push came to shove, they reduced their labor force, whether through furloughs, layoffs, or job freezes.”

No one would confuse Pittsburgh with San Antonio, but all big cities share a reliance on intergovernmental aid—money that comes from statehouses and the federal government. As the Pew researchers discovered, intergovernmental aid was the leading factor in 14 cities’ revenue declines and rebounds.

Most cities also are heavily reliant on property taxes as a major source of revenue. While the housing bubble was a main cause of the recession, the effect of declining real estate prices was not felt immediately because the assessed values of those properties did not immediately change. Only in 2010, when the lower assessments came into effect, did property tax revenue sag, sometimes steeply, just as the federal stimulus money began to taper off.

Nor could cities readily tap other sources of revenue. The residents of big cities like to think of themselves as citizens of sovereign states, but the reality is quite different. As Huh notes: “They don’t have much control over their own tax structures.” Most cities cannot decide on their own to, say, impose a local income or sales tax. That power rests in their state capitols.

Pew’s project team drilled deeply into the fiscal affairs of the cities, providing additional detail and facts. For instance, while it is known that cities rely heavily on property taxes, the study measured the extent and depth of that dependence. “We found the empirical evidence behind the trends many were observing,” says Huh.

The report provides insight into the reliance of cities on aid from other government entities, particularly state and federal government.  

When confronted with the economic downturn, most city governments did what you would expect them to do: empty their rainy day funds, raise taxes and fees, trim services and payroll. But what is surprising, says Huh, is that once knocked down by the recession, cities found it hard to get up. The research found that as of 2011 revenue had yet to rebound to prerecession levels in most cities.

What’s more, as the report notes: “When any city returns to its previous peak, it is only back to where it started before the recession. The city could still be short of what is needed to simply maintain public services if, generally, population and costs have grown.”

The continuing, detailed study of these urban areas is the mission of the American cities project. Huh says the goal is not only to produce comparative reports, but also to find “evidence-based best practices across cities.”

For instance, “America’s Big Cities” clearly shows the value of building up financial reserves in normal times to cushion the blow in hard times. The report finds that 29 of the 30 cities had reserve funds that they often tapped before resorting to spending cuts.

“We knew cities had rainy day funds on hand,” Huh says. “We didn’t know the extent of reserve levels and how common the practice was.”

Over time, these studies will result in the discovery of best practices, creating a resource for urban policymakers.

“The way I would describe our research is we look to see what works and then we try to rigorously examine it,” Huh says. “If we feel it can be implemented and make a difference, we highlight the policies or practices for decision-makers.”

For more information, go to pewstates.org.