by Mardee Handler
Current Trends in Municipal Finance: A Birdseye View
Flint, Michigan made national news headlines when it experienced its water crisis in 2014. During the crisis, 12 people died and at least 87 others became sick from unsafe drinking water. Seven years earlier, all eyes were on Minneapolis, where the I-35 bridge over the Mississippi River collapsed, killing 13 people and injuring 145 others.
Detroit made history when it filed for municipal bankruptcy in 2013. The credit ratings for both Illinois and the City of Chicago, have hovered dangerously close to junk bond territory.
Are these isolated challenges, or signs of current trends in municipal finance? MuniNet Guide recently sat down with Michael Belsky, Executive Director of the Center for Municipal Finance at Harris School of Public Policy at the University of Chicago, who shared his insights about the issues states and cities around the U.S. are facing in 2019—and for the foreseeable future.
MuniNet: What are today’s top issues in municipal finance?
Belsky: The pension and healthcare liability crisis beleaguering so many cities and states across the country remains a critical public finance challenge. In many cases, the liabilities loom so large that they’re limiting the respective government’s ability to fund basic services to their residents.
Another significant municipal finance issue is the need to repair—or, in some cases, rebuild—our nation’s crumbling infrastructure. Along with a concern for public safety, as raised by the Flint, Michigan 2014 water crisis, infrastructure systems that facilitate commerce (e.g., roads and bridges) are top priorities. While most places might consider issuing bonds to make infrastructure repairs, there needs to be a dedicated source from which to repay the bonds.
And some states and municipalities simply don’t have that source.
Flint’s water crisis was exacerbated by its need for outside funding as a result of its shrinking economic base. Cities with healthier economies would have been able to maintain their water and sewer systems through the ability to charge customers for an essential service and issue debt against that same source.
Motor fuel tax revenues, for example—often used to repay infrastructure repair bonds—have taken a hit in many states (as well as at the federal level) as a result of more fuel-efficient and electric-powered vehicles, as well as the increasing prevalence of rideshare services like Uber and Lyft.
Third, cities and states are—and will increasingly be—finding themselves in a position to adapt to technological change. What impact will self-driving cars have on our roads? How will cities repurpose parking structures that were built to accommodate more vehicles than necessary? What are the ripple effects of the trend to utilize more passive sources of energy, like solar power?
MuniNet: What types of solutions are municipalities considering to address these challenges?
Belsky: Most cities and states have been successful in fixing their pension and healthcare liability issues by implementing new policies. On the pension side, for example, governments have extended the retirement age and/or have required employees to contribute more money to the plan.
In a similar vein, governments have reduced the automatic cost adjustments and/or required employees to contribute a higher percentage of their insurance premiums in an effort to reduce healthcare liabilities.
While there are a host of ways to restructure pension systems, many state constitutions prohibit reform—and labor unions typically fight it. Still, several states—including Rhode Island and Arizona, as two examples—and cities have been successful in executing a series of reforms that have held up in court.
Moving forward, most states and municipalities are offering more sustainable retirement plans to new employees. Many have adopted more 401(k)-type or hybrid plans, where the pension portion is smaller than the 401(k) portion. These solutions are not tenable for active employees, who entered into their jobs with certain expectations related to these benefits.
MuniNet: Are smaller cities, towns and villages facing different issues than larger urban municipalities?
Belsky: Most definitively, especially when you consider Chicago or other large central cities whose economies are sluggish versus their surrounding suburbs. Because the inner cities have lost their population and economic base, they tend to struggle more than their suburban counterparts. Suburbs, which might be facing similar issues, typically have higher income levels and more property wealth to provide the resources to address them.
As a result of the changing landscape in manufacturing, a lot of mid-size cities have suffered along with the large inner cities. Again the Flint, Akron, Gary and Bridgeport type cities.
It can be a vicious cycle. When major employers either close or move out of the area, people who need jobs will often leave as well. The remaining population is typically those with less ability to fend for themselves—and who require more government services. These states and municipalities are literally tasked with doing more with less, as the tax base shrinks and expenditures rise. The fiscal strain also hinders their ability to provide quality-of-life services—such as education, healthcare, parks and recreation centers—to attract new residents. And so the cycle continues, as we’ve seen in many older Midwest and Northeast legacy cities.
Smaller towns face similar problems because of scale. With the demise or purchase of each family-owned farm by a large corporate farming company, a small rural area suffers a loss to its population and economy. In addition, demographic trends show younger people leaving rural America due to the lack of opportunities. Dwindling populations affect the health of local retail businesses, restaurants, service providers. In extreme cases, the exodus results in a ghost town.
MuniNet: Turning to the positive side, can you point to any “triumphs” in municipal finance over the past decade or so?
Belsky: Chicago is a great (and yet somewhat puzzling) example. Many of Chicago’s struggles have been the result of imprudent political decisions made over the years. And yet, more and more corporate headquarters are making Chicago their home. As a result, the city is attracting young people from all over the country, including graduates of Ivy League and Big 10 schools. Unfortunately, despite this growth, which should render the city able to afford services and amenities, its pension and healthcare liabilities are straining its budget.
By contrast, many cities around the country recognize these liabilities—and are planning for them by setting aside money from their growing tax base. Phoenix, for example, has experienced an economic boom, adjusting to a demographic shift as a result of its efforts to attract younger residents. Austin is growing rapidly, driven by Dell Computers and other technology firms that have settled in the area. Of course, the downside of this growth is that it has the potential to drive housing prices up to unaffordable levels, pricing some potential residents out of these markets, especially where there is gentrification.
The most successful cities recognize a need for residents of all socioeconomic levels—not just the top tier. These places are home to teachers, police and firefighters as well as doctors and lawyers, who all come together and form a community. When cities experience a steep increase in housing prices, it is difficult to maintain this sense of community.
Michael D. Belsky is a Senior Fellow and Executive Director of the Center for Municipal Finance. He has also spent over 35 years in the municipal bond industry including 15 years at Fitch Ratings where he headed the Public Finance Rating Group. Mr. Belsky also served as Mayor of Highland Park, Illinois from 2003-2011.