Each month, MuniNetGuide.com features an interview or panel discussion with industry professionals who share their insight and expertise on a variety of municipal-related issues.
This month’s expert: Michael Pagano, Ph.D., Professor and Interim Dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago
Having studied public administration and local government fiscal issues for more than two decades, Michael Pagano has a strong handle on the factors that influence city finances. He recently completed “City Fiscal Conditions in 2007,” an annual report released by the National League of Cities based on a survey of finance offices across the country each spring.
MuniNet: In the broadest of terms, what’s going on in the area of city finances?
Pagano: The City Conditions Fiscal Survey was completed by finance officers in spring, before the magnitude of the real estate slump had really hit home, and property tax revenues were still looking pretty strong. At that time, seven out of ten city finance officers reported that their cities were better able to meet fiscal needs in 2007 compared to the prior year.
But because trends in property taxes tend to lag the economy by 12-24 months, the mood is now a bit more somber. Many municipalities are realizing that it will become necessary to adjust their FY2008 budgets because of the real estate crisis.
MuniNet: Are cities more at risk from the current economic slowdown than in the past?
Pagano: The current economic slowdown is different from the recession we saw in the early part of the decade. That recession hit the retail and manufacturing sectors, but because the real estate market was so strong back then, cities weren’t as strongly affected.
This time around, however, when the next recession hits (which economists predict to be in late 2008 or early 2009), cities will likely find themselves in a different fiscal position due to the rapidly collapsing real estate market.
MuniNet: Other than the real estate crisis, how will cities feel the effects of the recession?
Pagano: Many cities rely on sales tax revenues, which will slow along with decreased consumer spending. Also, because of the stress on their own respective finances, states are cutting back, and passing long less funding to municipalities.
MuniNet: Are these challenges affecting cities of all sizes … regions …?
Pagano: More than size or geographic location, a municipality’s ability to diversify its tax base – i.e., among sales, property, income and other taxes – is perhaps the greatest factor in determining the impact of the real estate market on its financial condition. Cities that derive their revenues from sales and/or income tax will be in a more robust position than cities that simply rely on property tax as a source of income.
In contrast to the earlier recession, there is not much of a regional difference when it comes to city finances, other than the fact that states in certain parts of the country provide municipalities with access to sales tax, while states in other regions do not.
MuniNet: What can cities do to reduce their risk/vulnerability to the economic slowdown?
Pagano: Although it seems obvious, cities – like any organization – should always be looking for ways to improve efficiency and effectiveness.
Cities ought not to be thinking not only about how they deliver services, but also how they price those services. Some services – police protection, for example – ought to be provided to everyone regardless of their income or ability to pay. These types of services can require “direct subsidies” from one group of residents to another, meaning that those taxpayers with a higher assessed value often tend to subsidize payments from taxpayers in areas with lower assessed values.
If the service is provided according to need rather than financial position or property ownership, higher-end payers tend to subsidize the consumption of lower-end payers – or, as is often the case in major or central cities, residents of the city subsidize non-resident commuters.
Yet cities need to examine who is actually benefitting from services, compared with who is paying for those services. Are there better “market-like” devices that could be instituted for services that do not fit the “provide-to-all-regardless-of-ability-to-pay” principle? In other words, are there other government services that could be provided and funded according to usage – like systems most municipalities have in place for water and sewer consumption, or public parking?
Another area to investigate is the extent to which economies of scale can be gained by cooperating with neighboring cities in the purchase of goods and services. Can regional cooperation reduce costs and improve or maintain service delivery?
MuniNet: Are cities likely to use debt to short up their finances when money gets tight?
Pagano: For bonds to retain their tax-exempt status, cities are not permitted to use bond proceeds for operating purposes, so the basic answer is “no.” However, they can issue notes (or short-term debt) to cover certain needs, but those notes could only be issued in anticipation of a revenue stream. The New York City fiscal crisis of 1974 was based on the city’s issuance of long-term debt to resolve short-term (operating) problems.
MuniNet: Have you heard much about cities’ concern with infrastructure, particularly after the Minneapolis bridge collapse? Do you believe that cities will rely on debt to cover infrastructure maintenance, repairs, construction, etc.?
Pagano: Debt cannot be issued for routine maintenance or repair of infrastructure, but it can be issued for rehabilitation, major repairs and renovation. Cities, like other governments, are concerned about their infrastructure, but the real challenge is to establish an infrastructure maintenance policy that ensures that the “life” of the facility or fixed asset is reached – and that requires adequately funding maintenance costs from the operating budget, where it competes with the regular service-delivery responsibilities of the city.
My advice to cities is to build the annual operating and maintenance expenses of each new or renovated infrastructure project into long-term government operating plans. Cities would then be discouraged from building more than they can afford to maintain.
NEW_SECTIONMichael A. Pagano, Ph.D.END_SUPP_HDR
Michael A. Pagano is professor of public administration and Interim Dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago.
He is an elected Fellow of the National Academy of Public Administration, which was chartered by Congress to assist federal, state, and local governments in improving their effectiveness, efficiency,and accountability.
Pagano has published four books and over 60 articles on urban finance, capital budgeting, federalism, transportation policy, infrastructure, urban development and fiscal policy, is co-editor of Urban Affairs Review, Faculty Fellow of the Great Cities Institute, and is currently Principal Investigator for a Pew Charitable Trust project (Government Performance Project) to grade the states on Infrastructure Management.
Since 1991, Pagano has written the annual City Fiscal Conditions report for the National League of Cities and since 2003 he has written a column called “The Third Rail” for State Tax Notes, which examines contemporary local government fiscal issues.
He earned a B.A. from the Pennsylvania State University and a Ph.D. from the University of Texas at Austin in 1980.