The economic downturn has made its mark on every level of government – federal, state, and local. In these trying times, many municipalities are turning to creative solutions to changes in their economic base. But which strategies will translate into viable solutions is largely a function of fiscal policy space, which, simply put, refers to the level of autonomy granted to a local government to implement its own financial practices.
Earlier this year, Michael Pagano, Dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago and Christopher Hoene, Director of Policy Research at the National League of Cities, have examined the concept of fiscal policy space over the past several years. Their findings were released in a report entitled, "Cities and State Fiscal Structure," prepared for the Property Tax Roundtable sponsored by the George Washington Institute of Public Policy and the Lincoln Institute of Land Policy.
Dean Pagano explains the highlights of their research in the interview that follows.
MuniNet: For starters, what exactly is “fiscal policy space?"
Pagano: The concept of fiscal policy space refers to the decision-making discretionary power of municipal leaders based on a policy system set forth by state government. Because these structures are determined by each respective state, there are essentially 50 state-local fiscal systems in place in the United States. Some states exert far greater controls over the fiscal practices of local governments than others – and some provide a greater level of financial support as well.
MuniNet: What are the practical implications of fiscal policy space for cities in today’s economic climate?
Pagano: Our research has shown that fiscal inequities among local governments can be reduced by allowing municipalities to have greater control of their economic policies. Starting with the assumption that there is such a thing as an “average city,” what support can be given to help improve the economies of below-average cities? Leveling the playing field, so to speak, in terms of the constraints placed on (or autonomy afforded to) municipalities by state government, is one way in which to help cities – below-average, average, and above-average alike – adjust to changes in their respective economic bases.
The capacity of a city to generate resources for public services is a function of several factors, including the size of its economic base, and whether that base is growing or shrinking.
Consider the case of Libertyville, Illinois, a far-north Chicago suburb with a population just over 20,000. With over a dozen car dealerships on its “Mile of Cars,” auto sales tax revenues have historically comprised a significant portion of Libertyville’s economic base. But the recent economic downturn has strongly impacted auto sales, which has, in turn, caused a sharp decline in sales tax revenues for the village. The strategies that Libertyville can employ to recover these losses will be determined by guidelines set forth by Illinois’ fiscal policy.
… fiscal inequities among local governments can be reduced by allowing municipalities to have greater control of their economic policies.
But unlike Illinois, Florida cities do not have access to sales tax revenues. Therefore, if all five auto dealerships in a hypothetical Florida city were to close their doors, there would be virtually no effect on the city’s revenue stream except for the possible decline in commercial real estate values. But the city’s overall ability to generate revenues would be impacted by other state-imposed guidelines.
MuniNet: In your research, you identify certain attributes that frame fiscal policy space. What are they?
Pagano: We distinguished five attributes that structure the fiscal policy space of local government officials, expanding the size of this space for some communities, and reducing it for others:
- State/intergovernmental context: This aspect of fiscal policy space refers to the vertical (state) and horizontal (other cities in their region) relationships, which can translate into restraints, cooperation, competition, mandates, and even financial resources.
- The economic base of the community: How is a city’s fiscal capacity related to its economic base, as in the case with the Libertyville example described earlier?
- Municipally/locally-imposed fiscal controls and policies: These include city ordinances, tax caps and/or restrictions.
- Service responsibilities and demand: Citizens’ demands, preferences and needs for municipal services depend not only on the wealth of the city and transfers from other governments, but also on local characteristics, including demographics, business and industry, transportation options, and communication facilities.
- Political culture: In many municipalities, the power to invoke change is limited by a sense of tradition. In such cases, people have largely chosen to make their homes in a given community because it embodies the values residents deem important – which makes the prospect for change pretty remote. Let’s say a community’s economic base was supported by the arts, but one by one, all the local theaters closed down. Chances are, area residents wouldn’t be thrilled with a proposal to build a mega-mall in order to replace the theaters’ sales tax revenues.
Cities, like children, possess unique characteristics and are shaped by circumstances that can’t always be transposed to others. Admonitions to “behave like City Y” may be in appropriate and unproductive advice when the fiscal policy space of the city is unlike City Y’s fiscal policy space.
MuniNet: How would you summarize the findings of your research based on the aforementioned attributes into a recommendation for action?
Pagano: Each city is different in how its officials approach the financial challenge. The amount and size of decision-making space of these officials – or what we call “fiscal policy space” – varies across the national landscape. Because each municipality is unique, a solution set that works for one city may not help a neighboring city.
States should also exercise a great deal of caution in designing programs that allegedly “support” or aid municipal governments. A one-size-fits-all approach for state policy makers may benefit some cities, but not all. Cities, like children, possess unique characteristics and are shaped by circumstances that can’t always be transposed to others. Admonitions to “behave like City Y” may be in appropriate and unproductive advice when the fiscal policy space of the city is unlike City Y’s fiscal policy space. Understanding where the fiscal policy space can be exploited to enhance the city’s fiscal well-being is our challenge.
NEW_SECTIONCan Fiscal Policy Space Enhance Cities’ Well-Being?END_SUPP_HDR
Fiscal policy space, defined as the decision-making discretionary power of municipal leaders based on policies set forth by their respective states, can "level the playing field” in terms of the constraints placed on – or autonomy afforded to – municipalities by state government, according to Michael A. Pagano.
Some states exert far greater controls over the fiscal practices of local governments than others, he says. The challenge is in understanding where fiscal policy can be exploited to enhance the city’s fiscal well-being.
About the Expert
Michael A. Pagano is Dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago and Professor of Public Administration.
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 for five years was Principal Investigator for a Pew Charitable Trust project (Government Performance Project) to grade the states on Infrastructure Management, the results of which were published in Governing magazine. Since 1991, Pagano has written the annual City Fiscal Conditions report for the National League of Cities.
He earned a B.A. from the Pennsylvania State University and a Ph.D. from the University of Texas at Austin in 1980.