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Commentary By Stephen Eide

To Revitalize Rust Belt Cities, First Stabilize Their Budgets

Cities Tax & Budget

We seem to be in the process of rediscovering the Rust Belt, as a result of Donald Trump’s surprise victory in the 2016 presidential election. Anyone who has recently visited Detroit, Youngstown or Erie can understand what Trump meant when he spoke in his inaugural address of “American carnage.”

As the President suggested, America’s urban revival has been as uneven as it has been dramatic. On crime, job growth, and numerous other fronts, New York has outperformed what even its boosters were predicting back during the city’s “bad old days,” to say nothing of its doomsayers. But other cities, such as Youngstown, Gary and Flint, would happily turn back the clock to the 1970s, when poverty rates were much lower and population counts about twice or more than at present.

“A healthy city pays its bills in full and on time and delivers an adequate level of basic municipal services.”

One consequence of cities’ divergent fortunes in recent decades has been a variety of definitions of “urban revitalization.” Too often, our conception of what it means to be a successful city relies on subjective factors such as how nice this or that downtown looks compared with the last time we visited.

But urban revitalization cannot be left entirely to the eye of the beholder. At bare minimum, it should mean solvency. A healthy city pays its bills in full and on time and delivers an adequate level of basic municipal services.

As they seek to revitalize themselves, dozens of Rust Belt cities’ budgets are now under strain. In a new research report, I survey conditions in 96 major, poor cities in the northeast and Midwest. Most have a smaller population than they had at some point during the 20th century—in several cases by more than over 50 percent—and all have seen their poverty rates increase since 1970. Still more troubling, about three-fourths of the cities I looked at have seen their real, per capita debt loads increase over the last forty years. In other words, the general trend for Rust Belt cities has been to take on more debt even while tax bases and populations have shrunk.

But whether the federal government can do much about revitalizing the Rust Belt is questionable. Any honest discussion about what former industrial cities need must take into account their legacy costs which are comprised of both bonded debt and retirement benefit obligations (the latter was a greater burden in most of the cities I surveyed for which data were available).

Legacy cost burdens have driven some cities into insolvency. Five cities have gone bankrupt since 2008: Stockton, San Bernardino and Vallejo in California, Central Falls, Rhode Island and Detroit Michigan. Hartford, Connecticut and Atlantic City, New Jersey are still teetering on the brink of insolvency. The 1970s may have been dismal for many cities, but the threat of municipal bankruptcy is greater now than at any time since the Great Depression.

Most cities will not go bankrupt. But all cities face tension between funding current services and the costs of the past. Costly obligations for bonds and retirement benefit liabilities keep tax burdens high and claim space in government budgets that could otherwise go towards strengthening current services. In the municipal finance world, this is sometimes referred to as the “crowd out” effect.

Can Rust Belt cities grow their way out of their legacy cost struggles? It would be risky to assume so, given their persistently high poverty rates. The most significant employers in nearly all the Rust Belt cities are focused the education and healthcare industries, or “eds and meds.” While these industries do not seem poised for a collapse anytime soon, reliance on them has come at a steep cost. Many “eds and meds” employers are non-profit and thus exempt from property taxes. The expansion in Rust Belt cities’ non-profit industries, and stagnation of the traditional for-profit economy, has created imbalances in local tax bases and left city officials scrambling to tap new revenue sources. That 40 percent of Pittsburgh’s tax base is exempt from property taxes is one reason why, despite that city’s heralded revival, it has been in Pennsylvania’s Act 47 program for “financially distressed municipalities” since 2003.

“A city that can’t pay its bills... cannot provide its citizens with an expected level of public safety and infrastructure. ”

Instead of hoping for growth or a federal solution, advocates for Rust Belt cities should turn more of their attention to state governments. States have a responsibility to address fiscal distress because all local decisions regarding debt, taxes and spending are ultimately regulated by states. Almost by definition, municipal insolvency is evidence of a failed fiscal policy at the state level. When a city is on the verge of insolvency, a reluctance to intervene by state government risks a “contagion” effect whereby other cities in the same state face higher borrowing costs on municipal bonds.

A city that can’t pay its bills is also likely already experiencing “service delivery insolvency,” meaning it cannot provide its citizens with an expected level of public safety and infrastructure . Thus, if we are serious about meeting the threats of insolvency and declining city services, we can’t avoid more extensive and assertive forms of state involvement in cities.

It’s fair to say that most city officials view financial restructuring as less exciting than landing Amazon’s “HQ2” or opening a new downtown sports stadium. But, after shedding billions in long-term obligations through bankruptcy, a process that was directed by a state-appointed receiver, Detroit’s future now looks brighter than at any point in decades. New York City began its long road to revitalization when state government imposed a financial control board in 1975 and thereby instituted a culture of relative fiscal responsibility that persists to this day. These examples and other suggest that policymakers, both at the state and local level, should start viewing fiscal health as a prerequisite to extending the urban renaissance in the American heartland.

This piece originally appeared at NewGeography


Stephen Eide is a senior fellow at the Manhattan Institute.

This piece originally appeared in NewGeography