Managing the Fiscal Metropolis

The Financial Policies, Practices, and Health of Suburban Municipalities

Rebecca M. Hendrick

• Publisher: Georgetown University Press
• Year: 2011
• ISBN:
  9781589017900
• Topic: Politics & International Relations
• Subtopic: Public Policy
• Index: Politics & International Relations

Managing the Fiscal Metropolis: The Financial Policies, Practices, and Health of Suburban Municipalities is an important book. This first comprehensive analysis of the financial condition, management, and policy making of local governments in a metropolitan region offers local governments currently dealing with the Great Recession a better understanding of what affects them financially and how to operate with less revenue.

Hendrick's groundbreaking study covers 264 Chicago suburban municipalities from the late 1990s to the present. In it she identifies and describes the primary factors and events that affect municipal financial decisions and financial conditions, explores the strategies these governments use to manage financial conditions and solve financial problems, and looks at the impact of contextual factors and stresses on government financial decisions. Managing the Fiscal Metropolis offers new evidence about the role of contextual factors— including other local governments—in the financial condition of municipalities and how municipal financial decisions and practices alter these effects. The wide economic and social diversity of the municipalities studied make its findings relevant on a national scale.

Chapter 1
Introduction

This book is about how municipal officials in the suburbs of a large metropolitan region improve, maintain, or fail to maintain the financial health of their governments. Elected and appointed officials at the local level pursue many objectives in their respective roles, but ultimately their governments need to maintain a reasonable level of financial health to achieve many of their goals. Some officials are even elected on platforms to improve government financial health to make the government more sustainable financially. Many more are elected to reduce or limit spending and taxes. Others see political advantages in expanding government’s scope and resources, and a small number will even try to divert public funds for personal gain. Whatever their political or professional objectives, however, no government official has a desire to see their government bankrupt, and most will strive to maintain or improve its financial health. But, we know from example that many government officials make decisions that severely undermine the financial condition of their government to the point that their government becomes insolvent or defaults on its debt.

Severe financial crises have been documented in numerous major cities and counties, especially those that have come close to financial collapse.¹ Many people are familiar with New York City’s near default on its debt in 1975 from in-depth analyses of the event (Tabb 1982; Brecher and Horton 1985; Shefter 1992). Other visible but less well-documented cases of fiscal crises are Cleveland, Ohio (1978); Philadelphia, Pennsylvania (1991); Orange County, California (1994); Miami, Florida (1996); Buffalo, New York (2003); Pittsburgh, Pennsylvania (2003); San Diego, California (2004); Vallejo, California (2008); and Jefferson County, Alabama (2008). Severe and continuous financial crises have been noted in many smaller, chronically distressed cities such as Flint, Michigan; Hamtramck, Michigan; East St. Louis, Illinois; Bridgeport, Connecticut; West Haven, Connecticut; Camden, New Jersey; and East Cleveland, Ohio. Undoubtedly, there have been many more municipalities and other local governments facing similar circumstances since 1975 that have gone relatively unnoticed by the press and the academy, and the Great Recession of 2007–9 is still producing widespread financial crises at the state and local levels of government at the time of this writing.²

The specific reasons for past crises vary tremendously, but there is one obvious similarity. Large cities such as Cleveland, Philadelphia, Buffalo, Pittsburgh, and Detroit and the smaller cities mentioned above (some of which are suburbs) all have entrenched economic deficits that make it very difficult for them to collect enough revenue to cover spending demands irrespective of what is happening with the national economy. Their local economies simply do not provide sufficient wealth for them to draw enough revenues to provide good quality or even adequate services to citizens and property owners. Their situation becomes progressively worse from the continuous exit of wealthier taxpayers, and the remaining taxpayers have greater service needs. These governments must continually raise the tax burden on remaining taxpayers to provide basic and necessary services. These governments may be well-run politically and administratively, but their financial condition severely compromises their ability to provide quality services in a consistent manner. In effect, these governments are not fiscally sustainable in the long run. They also are likely to have significant challenges in managing their financial affairs in the short run, such as cash shortages, that are less likely to be publicized but are an important part of their financial picture and descent into financial crisis.

By comparison, the financial crises in San Diego, Orange County, Miami, and Jefferson County are not rooted in economic deficits and, given each city’s relative revenue wealth, seem out of place and very unlikely. The income levels of residents in San Diego and Orange County are some of the highest in the nation, and their revenue resources are more than adequate to meet basic spending needs and citizen demands. Although less wealthy and needier, Miami and Jefferson County also do not have the economic deficits apparent in the northern central cities mentioned previously. So what caused the financial crises in these four cases?

In all instances, the crises were produced by some combination of political fragmentation, lack of fiscal discipline and controls, incompetence, illegal activities, and bad financial decisions. The proximate causes of the crises in San Diego and Orange County were risky investments and in Jefferson County risky borrowing, but the opportunities and incentives to engage in these practices were created by these cities’ governing institutions. Similarly, Miami’s financial crisis was facilitated by governing institutions that did not promote good financial management practices and sound financial decisions (Dluhy and Frank 2002; Baldassare 1998; Alabama Policy Institute 2008; Hirth 1996; Fields 1996; Whitmire and Walsh 2008; Dewan 2009; San Diego Union-Tribune 2006; Perry 2006).

It is also not uncommon for governments with entrenched fiscal deficits to exacerbate their problems with budgeting and financial practices that ignore the economic deficits. Buffalo relied too strongly on state aid and grants to fund critical services, which disappeared when the state of New York had to redistribute resources to New York City to recover from the terrorist attack of 9/11 (Braun 2003; Robinson 2003; Buffalo News 2001). Although Philadelphia’s divisive politics and strong unions prevented it from making the tough spending and revenue decisions necessary to adapt to a declining revenue base, its financial management system also did not promote decisions or practices necessary to improve efficiency or provide appropriate checks and balances to increase accountability. There were few controls on overtime; little vigilance in collecting many fees and some revenues; and inadequate monitoring of grants, contracts, and cash flow (Inman 1995; Meyers 1990; Williams 1991). Similarly, Pittsburgh avoided operating deficits for a short period of time by using one-shot fixes, such as selling assets and refinancing debt, but eventually recovered by adopting dramatic spending cuts and fundamental changes to its tax structure (Conte 2001; Pittsburgh Post-Gazette 2002).

We know from San Diego, Orange County, Miami, and Jefferson County that good external fiscal capacity (defined generally as high revenue wealth and low spending needs) does not always protect local governments from fiscal crisis and poor financial condition.³ Does it also follow that some governments with poor fiscal capacity or entrenched economic deficits are not destined to experience financial crises? What are the independent effects of politics and administration on financial decisions and financial condition? Besides recessions, what other challenges do local governments face in managing and maintaining financial condition? How do they respond to different financial threats, including recessions, and opportunities? Given the same circumstances, do some responses lead to better financial health and produce governments that are more financially sustainable than others?

Our knowledge of the answers to these important questions with respect to local government, especially suburbs, is somewhat narrow. A lot of research has been conducted on at least part of several questions: What are sources of fiscal stress, and how do governments respond to it? But there has been no investigation of fiscal opportunities or munificence (the opposite of fiscal stress). There is also a large body of research on the effects of governing and administration on financial decisions, but little is known about how these factors affect financial condition. As noted previously, case studies (and news reports) document the financial experiences of large governments during periods of extreme fiscal stress and the negative impacts of decisions on financial condition. But we know little about governments that have successfully negotiated severe fiscal threats to maintain good financial condition, as the failures are much more interesting and thus garner the most attention. Other in-depth research on financial policymaking has produced a broad understanding of how financial context, internal politics and administration, and financial policies in local governments are linked, but the linkage to financial condition is missing, and findings are limited to specific governments (Fuchs 1992; Dluhy and Frank 2002; Levine, Rubin, and Wolohojian 1981; Sharp and Elkins 1987; Chapman 1999; Badu and Li 1994).

This book strives to fill some of the gaps in our understanding of this subject matter through comprehensive investigation of 264 Chicago suburban municipalities from the late 1990s to the end of the first decade of the 2000s.⁴ More generally, this book focuses its investigation on four broad areas of financial concern about these governments. First, it identifies and describes the primary contextual factors and events that are likely to affect their financial decisions and financial condition. Some of these factors have been noted or alluded to previously. They include fiscal capacity (internal and external), governing institutions, and administrative approaches, especially with regard to fiscal policy and financial management practices. Fiscal threats, including recessions, and fiscal opportunities, such as grants and population growth that constrain or expand government choices, also are identified and discussed in detail. Current financial condition is another important contextual factor in future financial condition as it establishes the boundaries on officials’ financial choices for handling fiscal threats and taking advantage of fiscal opportunities.

Second, this book identifies the financial strategies these governments use to manage financial condition and solve financial problems and the decisions they make in response to fiscal threats and opportunities. Financial decisions (and strategies) examined here focus on fiscal policies about tax rates or debt levels, for instance, changes to fiscal policies (e.g., the decision to raise taxes), and financial management practices such as approaches to budgeting or cash management. Third, this book examines the impact of contextual factors and events on government financial decisions. Finally, it examines the impact of contextual factors, events, and decisions on financial condition overall.

While the main purpose of this book is to improve understanding of the finance and financial management of local governments in general and those in metropolitan settings in particular, the book also has practical and pedagogical value. Understanding the financial decisions these governments make and linking them to context, events, and financial condition provides a sound basis for making recommendations about how suburban local governments should be managing and governing their fiscal affairs. This investigation also yields clues about the minimum capacity requirements for maintaining a reasonable level of financial condition and financial sustainability and what types of governing and administrative arrangements are likely to promote more sound financial decisions at the local level.

This book uses numerous concepts from public finance and financial management to describe the phenomena observed here and to assist with the investigation. By its very nature, this subject matter is laden with concepts and terminology that are explained and applied throughout the book (see glossary). Some of the terms will be known to financial managers. Other terms that are not known will be useful in helping them to think about and understand conditions and events they are likely to encounter.

Other terms such as financial condition and fiscal stress are used imprecisely throughout the literature and have numerous meanings. These are given precise definitions in the next chapter. For now it is enough to recognize that the concept of financial condition is complex and generally refers to a government’s ability to meet current and future obligations. Complete measurement of the concept must take account of different features of government fiscal capacity and fiscal structure, such as debt levels and reliance on different revenues. Investigation of financial condition, especially as a result of financial choices, is complicated further by the fact that many of its aspects are a direct function of government fiscal policies and decisions over time. Thus, investigation of the impact of financial choices on financial condition is limited by the relatively short time period examined here, although the book’s findings will help direct future research in this area.

In addition, this research offers some important lessons about financial problems and solutions that may be especially relevant to local governments dealing with the Great Recession that began in late 2007. However, this book is not just about fiscal stress, the causes of financial crises, or municipal governments’ responses to negative financial pressures. These situations offer a worthwhile opportunity to observe financial choices in response to fiscal threats in general and the impacts of capacity, politics, governing structure, and administrative conditions on choices and financial condition, but they are not the only circumstances local governments face in managing their finances and maintaining financial health. Indeed, municipalities in the Chicago region experienced a wide range of threats and opportunities during the time period examined, even during the 2001 recession. Although the Great Recession promises to produce more severe financial crises in greater numbers of local governments than observed in previous recessions, local government experiences with this recession and its impacts also are likely to vary greatly. The moral of the story in this case is that it is important to document a wide range of conditions and events to fully understand how and whether municipalities improve, maintain, or fail to maintain financial health.

The Study of Financial Condition and Decisions in Metropolitan Governments

Although the majority of people in the United States live in suburbs, we know little about how suburban governments manage and govern their fiscal affairs, and why some fail and others succeed under different and similar conditions.⁵ Much more research in this area has been conducted on central cities and large municipalities (Clark and Ferguson 1983; Barrett and Greene 2000; Burchell et al. 1981; Ladd and Yinger 1989), leaving a gap in our understanding of such events for the type of local governments experienced by most of the US population. Recent trends toward suburbanization have given rise to numerous books and a large volume of published research on suburbs and metropolitan regions in the fields of urban studies, economics, and political science (Orfield 2002; Gainsborough 2001; Oliver 2001; Lewis 1996; Schneider 1989; Weiher 1991; Rusk 1995; Oakerson 1999; Altshuler et al. 1999; Foster, 1997). But knowledge gained from these sources is limited primarily to questions about the gross impacts of fiscal or institutional environments on aggregate behavior (e.g., how do economic and demographic characteristics of suburbs affect expenditures or voting patterns) and how these patterns have changed over time (e.g., inner ring versus outer ring).

Why is it so important to distinguish between large municipalities, especially central cities, and smaller, suburban municipalities in the study of financial condition? First, many contextual factors that are likely to affect financial decisions and conditions are significantly different for central cities than suburban governments. This point is demonstrated by the story of East St. Louis, Illinois, a suburb of St. Louis, Missouri (see Reardon 1997 and www.uic.edu/cuppa/pa/faculty/vitae_pdf/The_Story_of_E_ St_Louis.pdf for a detailed description of problems and events in East St. Louis).

From 1980 to 1990, the City of East St. Louis struggled greatly with trying to deliver basic services to citizens and meet payroll. But it was not until 1990 at the urging of its neighbors, including the City of St. Louis, who were tired of dealing with the spillover of problems from the municipality, that the State of Illinois established a means of assisting the seemingly insolvent government. In addition to debt guarantees and loans, part of this assistance included granting a highly coveted riverboat gambling license to the city. However, by late 2005 the city appeared to be heading toward the same level of insolvency it faced in the early 1990s and their financial condition and practices do not seem to have improved substantially in the late 2000s.

Cities and counties that are at the center of a metropolis usually have enough assets, in one form or another, to attract significant investments and financial opportunities from a large set of public and private entities to help solve their financial problems as compared with small suburban governments. To date there is no documentation of a central or major city government having continuous fiscal distress over as long a period of time or at the same level of fiscal insolvency as East St. Louis. Many more parties are likely to have a stake in the financial success of central and major cities compared to small suburban governments, especially ones with as many fiscal problems and as few amenities as East St. Louis.

Although the City of East St. Louis has a council-manager form of government according to statute, its history of machine-style politics based on an aldermanic structure with separate wards promotes a very political approach to policymaking that is most often associated with older and larger central cities such as Chicago and New York (Theising 2003). Such cities tend to be more partisan and patronage based, and also conflict laden. Representation of political interests in policymaking is not inherently bad. Indeed, it is an important tenet of democracy. But the incentives in local governments with strong political systems are structured for political gain, and the importance of financial condition can be overlooked in policy and personnel decisions.

Central and major cities have an advantage in this respect because their large size ensures that professionals with expertise and technical knowledge are represented at high levels of executive and financial decision making (Svara 1999). Such professionals are likely to be better informed than elected officials about what types of fiscal policies and practices are going to help a government maintain or improve financial condition and adapt to changing fiscal environments. Their position also will provide a voice for these options in the political debate. East St. Louis has the disadvantage of being both highly political and nonprofessional administratively. In other words, it has little administrative and technical capacity in areas that would help it maintain or improve financial health.

Central and larger cities with populations greater than seventy-five thousand are also different from smaller, suburban municipalities in that the latter tend to be much more homogenous demographically and economically (Weiher 1991; Lowery 2000). This makes the environment within which most suburbs operate and their options for solving financial problems very different from the governments that have been studied in the past. Compared to each other, however, suburban municipalities within the same metropolitan region are likely to be very fiscally diverse and highly segregated on many dimensions, making it impossible to find the “typical” suburb in any one region (Orfield 2002).

For instance, some suburbs may be predominately commercial or industrial and serve as job or commerce centers for the entire region and beyond. Suburbs within the same region can be rich or poor, rapidly growing or stagnant, old or new, white collar or blue collar, and their residents can have unique tastes and lifestyles that place particular service pressures on the government. Not surprisingly, the governing systems adopted by suburbs can vary as greatly as their socioeconomic and demographic features and reflect a mixture of political (e.g., fiscally conservative or service driven) and administrative approaches (e.g., politically or professio...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication
• Contents
• List of Illustrations
• Preface
• List of Acronyms
• 1 Introduction
• 2 Local Government Financial Condition and Fiscal Stress
• 3 Financial Decision Making in Municipal Government
• 4 Suburban Fiscal Governance
• 5 Fiscal Threats and Opportunities: What Creates Fiscal Stress and Munificence
• 6 Financial Problem Solving: Tools for Managing Threats and Opportunities
• 7 Financial Problem Solving: Tools for Managing Financial Condition
• 8 Municipal Fiscal Health: Practice, Governance, and Policies
• Appendix 1: Operationalization of Financial Condition Measures and All Other Variables
• Appendix 2: Sampling Methodology for Interviews of Municipal Governments, 2003
• Appendix 3: Interview Questions, 2003
• Appendix 4: Interview Codes, 2003
• Appendix 5: News Article Codes, 2001–6
• Appendix 6: Interviewed Agencies, 2009–10
• Appendix 7: Grouping of Municipalities and Their Features
• Glossary
• References
• Index