Academic journal article Chicago Fed Letter

What Happens after Detroit's Bankruptcy? Lessons in Reform

Academic journal article Chicago Fed Letter

What Happens after Detroit's Bankruptcy? Lessons in Reform

Article excerpt

Detroit's bankruptcy filing on July 18, 2013,1 is historic for its size and symbolism: The largest municipal bankruptcy in U.S. history represents a low point for the once-dominant American industrial icon. However, Detroit is certainly not the first U.S. city to face profound fiscal problems. To examine what lessons might be learned from other episodes of municipal fiscal stress, experts from government, academia, nonprofits, and business gathered at the conference held at the Chicago Fed's Detroit Branch. Conference participants discussed models of local governance reform and state intervention to identify the common strategies and tools that cities have relied on to emerge from their fiscal troubles and then maintain financial stability and boost economic growth.

Fiscal positions of cities today

Michael Pagano, University of Illinois at Chicago, provided an overview of cities' fiscal conditions today and focused much of his presentation on the findings from the National League of Cities' (NLC) annual survey of city finance officers.2 The recent recession had a profound impact on the finances of cities across the nation; however, differences among their fiscal structures due to a number of factors (such as the available types of taxes and amounts of reserve funds) led to significant variation in their ability to emerge from the recession in strong fiscal shape. Turning to the NLC survey results, Pagano stated that 72% of the respondents are expecting modestly improved fiscal conditions for their cities in 2013 relative to 2012. In terms of tax revenues, those from property taxes declined in 2012 and are projected to decline again in 2013; yet this decrease is expected to be offset by continued growth in sales and local income tax revenues. That said, not all local governments are permitted to levy sales and income taxes by their state governments.

Pagano said that according to the NLC survey, the sources of fiscal stress for cities include infrastructure and public safety costs, as well as employee-related costs for health care and pensions. Another source of fiscal stress is declining federal and state aid. Cities experiencing such stress have tended to reduce employeerelated costs (which make up 70% of a typical budget) to balance their budgets.

Focusing on the fiscal health of local governments in Michigan, Debra Horner, University of Michigan, discussed the results from the spring 2013 wave of the Michigan Public Policy Survey.3 She noted that local governments in Michigan have faced about a decade of strained revenues. State aid was reduced cumulatively by $4.2 billion from fiscal year (FY) 2000-01 through FY2011-12.

Moreover, local property tax revenues are down 20% from their 2007 level and are not expected to fully rebound until sometime between 2023 and 2027, she said. These decreases have led to a series of expenditure actions, including drawing down general fund reserves, reducing staff levels, shifting health care costs to employees, and increasing intergovernmental cooperation to share costs. (For the most part, local governments have tried to avoid increases in debt loads and reductions in service levels.) These local government actions have resulted in a downward trend in municipal fiscal stress across Michigan since 2009-10.

To conclude, Horner explained survey respondents' views and concerns about the future of local government funding in Michigan. First, respondents recognized that the funds needed to build new infrastructure and to improve service levels will be difficult to obtain. Second, there is broad-based support (58% of the respondents) for significantly reforming the current funding structure for local governments in order to improve their fiscal performance. This support for reform applies to all major revenue sources, including gas and sales taxes; there is even support for revisiting state constitutional amendments that set particular requirements on how certain taxes and governmental expenditures (e. …

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