The Local Squeeze
Falling Revenues and Growing Demand for Services
Challenge Cities, Counties, and School Districts
PEW American Cities Project
June 1, 2012
http://www.pewstates.org/research/reports/the-local-squeeze-85899388655#
Executive Summary
While states slowly recover in the wake of the Great
Recession, local governments have been hit with a one-
two punch: State aid and property taxes, which together
account for more than half of local revenues, are
dropping simultaneously for the first time since 1980.
The blow comes as demand for government services rises,
driven by stubborn unemployment rates, population
growth, and other factors.
State Aid
State aid funds nearly a third of local government
budgets on average. It fell by $12.6 billion, or 2.6
percent, in fiscal year 2010, the most recent year for
which comparative data are available.[i] This trend has
continued, with 26 states reporting cuts for fiscal year
2011 and 18 doing so thus far for 2012.[ii] Some cities,
counties, and school districts are fighting back with
lawsuits. Before 2010, state funding was covering a
smaller share of local localities' growing expenses,
falling from 33 percent in 2000 to 30 percent in 2009.
Property Tax
Property taxes, which amount to 29 percent of local
government revenues, also are shrinking, reflecting the
drop in real estate prices during the recession. In
2010, property tax revenues were $11.9 billion, or 2.5
percent, lower than the year before, the first annual
decline since the mid-1990s and the largest in decades.
They fell again in 2011, by another 3.1 percent, or
$14.6 billion, and are expected to decrease further in
2012 and 2013.[iii] This is different from past economic
downturns, when home values and property tax revenues
remained relatively stable.
The Local Squeeze
Some localities have raised taxes and fees to try to
generate more revenues. But most have tackled budget
pressures by reducing spending. Policy makers have
increased class sizes and shortened school days; cut a
wide range of services, from public safety to trash
collection; and privatized or consolidated certain
functions, such as maintaining parks and handling 911
calls. They also have eliminated public sector jobs,
shedding half a million employees, or more than 3
percent of the local government workforce, since
September 2008 through layoffs and attrition. Half of
those were teachers and other school administrators or
staff members.[iv]
The local squeeze will be felt for years to come. The
nation's ongoing housing crisis and fragile economic
recovery, the likelihood of additional cuts in federal
and state aid, and greater demand for services all
presage a rough road ahead for local governments.
A Drop in Key Revenues
In 2011, Ohio state policy makers cut $36 million from
Cleveland's fiscal year 2012 budget, about 7 percent of
the city's annual general fund revenues.[i] Cleveland
laid off more than 300 employees that year-more than
half of them police officers and firefighters-and left
another 145 vacant positions unfilled. It also shut down
five fire companies. With six trash crews eliminated,
residents waited longer to have their refuse and
recycling collected.[ii]
Meanwhile, the small town of Saline, Michigan, has
struggled to balance the school district's budget with
less state aid, fewer federal grants, and a drop in
student enrollment. To close a deficit in fiscal year
2012, the school board dipped into its fund balance, cut
18 teachers, and negotiated union concessions. It was
"the most difficult budget year in the last three years"
and appears to be "the end of the road," Scot Graden,
superintendent of schools, told a reporter for
AnnArbor.com in 2011.[iii]
The Range of Local Governments
About 90,000 local governments-or localities-operate
across the country, including 3,033 counties, 19,492
large and small cities, 16,519 towns, 13,051 school
systems, and 37,381 special district governments with
narrow responsibilities such as hospitals and fire
protection.
Each type raises revenue through a particular
combination of sources, provides a specific set of
services, and has a different degree of authority and
autonomy. For instance, some cities have access to
multiple revenue sources, including sales, income, and
property taxes. School districts, on the other hand,
tend to rely heavily on local property taxes and state
aid.
Similarly, responsibilities for delivering services vary
by type of government and state. A city will usually
exist within a county but have a separate government
structure, although the two may cover very similar
geographic areas, such as Boston and Suffolk County, or
even be formally consolidated, as in Denver and San
Francisco.
Some states have a direct say in local fiscal decisions,
such as controlling which taxes local governments may or
may not use to generate revenue, while others take a
more hands-off approach.
On the other side of the country, Stockton, California,
saw its property tax revenues plummet and its
foreclosure rate jump to the second highest in the
nation in 2011, just below that of Las Vegas. The city
now teeters on the verge of bankruptcy. This is a
dramatic change from its boom years, when construction
in Stockton tripled between 1997 and 2005 as new
residents flocked to Silicon Valley.[iv] But when the
housing market crashed, state aid also fell. Revenues
flowing to Stockton from California's sales and use
taxes dropped by more than 30 percent between 2006 and
2010.[v]
A Fiscal Vise
Cities, counties, and school districts across America
are struggling with unprecedented challenges that have
slowed their recovery from the recession. Many are in a
fiscal vise, squeezed on one side by reduced state aid
and property tax income-which together make up more than
half of local revenues-and growing demand for services
on the other. In fiscal year 2010, local governments
lost 2.6 percent of their state aid and 2.5 percent of
their property tax revenues from the previous year, for
a total of $25 billion. The two revenue sources had not
declined simultaneously since 1980.[vi]
In recent decades, state aid and property taxes most
often counterbalanced one another-one would rise as the
other fell, effectively softening the blow. Since 2006,
however, the growth of both sources slowed relative to
local spending, and then dropped. By 2009, state aid and
property taxes together covered a smaller share of local
expenditures than at any time since the Census began
tracking these funds in 1972.[vii]
State Aid
The Great Recession was devastating for states. By late
2009, their tax revenues were 13 percent lower than
before the downturn. In the majority of states, this
income has crawled back above its 2007 peak level, but
growth remains slow.[i] With expenditures continuing to
rise, states had to find more than $500 billion to close
budget shortfalls between fiscal years 2009 and
2012.[ii] While some states raised taxes and used one-
time fixes, most closed their gaps with cuts, including
in funding to municipalities. Nearly every local budget
and service has been affected, including education,
libraries, police and fire protection, roads and
transportation, health, and housing. "Over the last
three or four decades, every time there's been a
recession and states have made cuts, those aid programs
have taken the hit," said Chris Hoene, director of the
Center on Research and Innovation at the National League
of Cities.[iii]
States fund on average close to a third of local
budgets.[iv] Many states provide grants for general
operations; in other cases, money is set aside for
certain uses, such as road repair. States also sometimes
share a portion of tax revenues with cities, counties,
and school districts based on factors like population,
need, and the community's existing tax burden.
Even with an infusion of federal stimulus funding, state
aid overall declined in 2010 by more than $12.6 billion,
or 2.6 percent.[v] Cities of all sizes were hit. In
Phoenix, for example, Arizona cut $58 million in shared
revenue, more than 11 percent; in Wheaton, the seat of
Minnesota's least populous county, a loss of just
$82,500 amounted to a 12 percent reduction in its aid
from the state.[vi] Some of the hardest-hit localities
have been in the Sunbelt area of the Southwest. In New
Mexico, for instance, funding shrank by more than 10
percent, or nearly $500 million. California cut more
than $5.7 billion in state support, a 6 percent
reduction from the year before. Arizona and Nevada
reduced their aid by more than 5 percent. Minnesota,
Texas, Virginia, and Wyoming also were among those that
made the largest cuts that year.[vii]
Elementary and secondary education-traditionally
shielded from cuts-is now a common target. In the
2011-2012 school year, 37 states cut aid to local school
districts.[viii]
For many localities, state aid was dropping even before
the recession. In Florida, for example, it fell by $3
billion, or 14 percent, between 2007 and 2009.[ix] Even
when these funds were not shrinking, on a national level
they were covering a smaller share of local governments'
growing expenses, dropping from 33 percent in 2000 to 30
percent in 2009.[x]
More recently, at least 26 states reported they reduced
aid to localities for fiscal year 2011 and at least 18
have done so to date for 2012.[xi] Nebraska, for
instance, canceled all funding to cities and counties in
2011.[xii] In Maryland, state aid for local health
services declined more than 40 percent, and support for
counties and municipalities dropped 60 percent between
2007 and 2012.[xiii]
Not all states have had to make cuts. Alaska is one of a
few that could afford to be generous to localities in
recent years because of its severance tax revenue from
oil. In fact, Alaska helped municipalities pay down
unfunded pension obligations by more than $1.7 billion
between fiscal years 2010 and 2013.[xiv] Even though
Connecticut faced a budget gap larger than a quarter of
its general fund in 2010, the state increased local aid
by more than 10 percent that year, and has not reported
cuts since then.[xv]
The State-Local Relationship
Some policy leaders who believe that cuts will encourage
efficiency and force tough spending choices have
promoted longer-term changes. For example, after
reducing state aid by nearly $500 million for fiscal
years 2012 and 2013, Ohio established the Local
Government Innovation Program to provide $45 million in
competitive grants for localities that enter into
shared-service agreements or that centralize certain
services.[i] Governor John Kasich (R) said he hopes the
financial incentives, along with cuts in state aid, will
force Ohio's cities to change the way they do business.
In New Jersey, Governor Chris Christie (R) is taking a
hard line on streamlining local governments to save
money. He has led the charge for a cap on property
taxes, local salary freezes, and regional cooperation.
"If the state comes in and says, `If you share services
with the guy next door and you can save a certain amount
of money,' and you choose not to do it, then we will
reduce municipal aid by that amount," Christie said at a
town hall meeting in March 2012.[ii]
As state aid decreases, some local governments are
reducing their expectations for state aid going forward,
but other localities are fighting back. In Texas, for
example, more than half of the school districts sued the
state for cutting $4.3 billion from school funding in
fiscal year 2012. Many of the districts that have not
joined the lawsuits say they cannot afford the
litigation. The trial is expected to take place in
October 2012.[iii]
In 2011, the League of Minnesota Cities supported a
petition by the attorney general to keep $725 million in
appropriated local government assistance despite a state
government shutdown that July. The court ruled in favor
of the league, but the legislature and governor agreed
to reduce the amount by $138 million the day before the
funds were distributed.[iv]
Federal Aid
Meanwhile, measures to reduce the federal deficit could
hurt the portion of state revenues-about a third-that
comes from federal grants, an impact likely to be shared
with local governments.[v] In particular, if the
automatic spending cuts put in place as part of the 2011
Budget Control Act go into effect, grants to states and
localities for education programs, low-income housing
vouchers, community development, and workforce
development programs could be among those affected. On
the other hand, according to the Congressional Budget
Office, federal deficit reduction could have long-term
benefits for state and local budgets by stabilizing the
national economy and keeping borrowing costs low.[vi]
Property Taxes
With less money from federal and state governments, many
localities are relying increasingly on their own
revenues. Property taxes currently amount to nearly a
third of their total revenues, more than any other
locally raised source, especially in small towns and
school districts.[i] In 2010, however, collections fell
by 2.5 percent nationally, or $11.9 billion. This was
the first real decline since 1995 and the largest in
three decades.[ii] The drop was even greater in 2011,
bringing total property tax revenue down by an
additional $14.6 billion, or 3.1 percent from its peak.
The Housing Crisis
In previous economic downturns, the property tax was
steadier than other major revenue sources, including
sales and income taxes, primarily because home prices
remained stable in those periods.[iii] This time, the
housing market collapsed and was a key driver of the
Great Recession.
The impact on local budgets, however, was not immediate.
Because properties in many communities are not assessed
annually, tax collections between 2006 and 2009 were
largely shielded from the consequences of plummeting
home values.
Home prices fell by almost 20 percent between 2007 and
2011, with some states seeing much sharper declines. In
Arizona, for example, values dropped almost 50 percent
over that period.[iv] These losses led to millions of
mortgages going underwater, with unpaid principal
balances larger than what the properties are worth.
Meanwhile, 1.5 million houses were sold nationally
because of default or foreclosure, fueling a downward
spiral in prices and reducing the number of homeowners
paying local property taxes.[v]
Besides reducing the value of nearby homes and shrinking
the tax base, vacant and foreclosed properties can drive
up local costs for demolition, legal proceedings, and
public safety.[vi] In Baltimore, Detroit, and Chicago,
the money required to demolish significant numbers of
vacant and abandoned properties is eating up more of
city budgets than they can afford, according to
officials. Federal funds that have helped localities
address these problems in the past also are beginning to
shrink or expire.[vii]
Rate Changes and Limits
Lags in assessments, along with additional foreclosures
and the sheer magnitude of the drop in home values, will
likely prolong the time it takes for revenues to
recover. Moody's Analytics predicts that average
property tax revenues will decrease by another 4.4
percent during 2012. The hardest-hit states-Arizona,
California, Florida, Georgia, Illinois, Michigan, and
Nevada-could experience even higher losses.[i] The
Government Accountability Office projects that property
tax receipts peaked as a share of the national economy
in 2009, and will not surpass that peak until 2039.[ii]
Some local governments have responded by raising
property tax rates. Sarasota, Florida, for example, has
lost nearly a third of its tax base, or $3.5 billion,
over the past three years. In September 2011, the city
closed its budget shortfall by increasing property rates
for the first time since 2007.[v] In Washington, local
governments set a target amount of property taxes to
collect each year. If values fall, as they did in 2010,
the tax rate rises automatically.[vi]
But in many cases, states limit what municipalities can
do to generate revenue. Following California's
Proposition 13 in 1978, all but four states now in some
way restrict their local governments from raising
taxes.[vii] Recently, in 2008 and 2011, respectively,
Indiana and New York enacted caps on tax rates despite
objections from localities.[viii] States also can limit
the amount levied on a given resident, the total revenue
generated, or the share of property assessed as taxable.
The Impact
With little margin in their budgets, even small declines
in revenues can present huge challenges for local
governments. Many counties, cities, and school districts
are rethinking the level of services they provide, the
way they do business, and how they spend money. "Imagine
that each of these local governments had 70 cents on the
dollar," explained Frank Shafroth, director of the
Center for State and Local Government Leadership at
George Mason University. "They cannot simply cut every
budget line by 30 percent. One could hardly opt to
respond to only 70 percent of 911 calls, or fill only 70
percent of potholes."[i]
Policy makers have shrunk the workforce and trimmed back
services or found new ways to deliver them, among other
actions. Meanwhile, they are monitoring the long-term
impacts of the squeeze on public-sector pensions, debt,
and credit ratings.
Downsizing Workforces
In 2009, localities spent $572 billion, more than 35
percent of their total costs, on salaries and wages.[ii]
Through a combination of layoffs, attrition, hiring
freezes, and furloughs, local governments shed half a
million jobs, or 3.4 percent of their overall workforce,
between September 2008 and December 2011, with half of
this loss coming from the education sector. At the same
time, states eliminated an additional 150,000 jobs, or
about 2.9 percent of their workers.[iii]
Cities, counties, and school districts in Nevada, for
example, lost nearly 15,000 jobs, 13.5 percent of all
employees, in this three-year period. Localities in
California trimmed close to 100,000 from their public
sector workforce. Some states, like Texas, added net
employees, but at a rate slower than population growth;
as a result, the number of local government workers per
capita there declined nearly 5 percent.[iv]
Cutting Key Services
From trash pickup and public safety to welfare programs
and schools, local services affect residents' everyday
lives. In many places, the recession has put greater
strain on government programs by driving up demand. A
number of their costs result from state mandates that
require localities to provide specific services, such as
special education, or to comply with certain reporting
or competitive bidding requirements.
Welfare and Social Services
Many counties and some cities administer and partially
fund public welfare programs such as cash or food
assistance, healthcare, low-income housing, and
workforce development. During the recession, the number
of Americans in poverty grew to 46 million-a 14 percent
increase between 2007 and 2010. In some states, the
growth was at least 20 percent.[i] Meanwhile, national
unemployment reached a high of 9.6 percent in 2010; by
March 2012, it had fallen somewhat to 8.2 percent.[ii]
As in past recessions, all of this has driven demand for
local health and safety net programs.[iii] In Racine
County, Wisconsin, for instance, participation in
programs for rent assistance, energy assistance,
Medicaid, Wisconsin Food Shares, and child-care support
all grew about 12 percent between 2008 and 2011. In
Maryland, the number of residents coming to Harford
County for food stamps has more than doubled since
2007.[iv]
But many local offices serving these constituencies are
shrinking budgets and staff. For example, overloaded
county-based systems in California, Ohio, and Alabama
now rely on workers specializing in child protective
services to also cover adult cases involving elders and
people with disabilities.[v] The New York City Housing
Authority has struggled with backlogs in repairing and
renovating public housing units. In June 2011, the
agency launched a Work Order Task Force to deal with the
issue, but 280,000 outstanding repairs remained in the
queue at the end of the year.[vi]
Education
Public school resources also are being stretched in the
wake of the recession. Rising poverty rates have
resulted in more poor students who require greater
attention and resources-as evidenced by the number of
students receiving federally subsidized lunches, which
increased 17 percent since the 2006-2007 school
year.[vii] Some school officials also are seeing a
growing number of students whose parents choose to send
them to public instead of private schools.[viii]
Meanwhile, many schools are receiving less financial
support from states. Since 2008, 17 states have reduced
per-student funding by more than 10 percent. The impact
was buffered by the infusion of about $90 billion in
federal stimulus funds for education in 2010 and 2011.
[ix] But the expiration of the funds this year leaves
local governments on their own in the face of additional
reductions in state aid.
Changes in state aid hit some districts harder than
others. After Texas enacted $4.3 billion in cuts to
school districts in 2012, for example, poorer districts
wound up with $800 less per pupil than wealthier
ones.[x]
With fewer resources, some school districts have
eliminated courses; reduced the school week from five to
four days; laid off teachers, support staff, and
guidance counselors; or asked families to pay for sports
and extracurricular activities.
In Portland, Oregon, class sizes grew as the school
district was forced to eliminate teaching positions to
balance its budgets in 2010 and 2011. To mitigate the
impact, high schools replaced class time with study
halls supervised by teaching assistants or other
adults.[xi] Similarly, the loss of 5,100 school
employees across Pennsylvania, including more than 1,600
teachers, led to larger class sizes and fewer electives,
such as foreign languages and music. In fiscal year
2012, the Philadelphia school district-the state's
largest-cut 12 percent of the workforce, eliminated
programs, and received a $53 million aid package from
the city, funded by property tax and parking fee
increases.[xii]
Public Safety
Maintaining safe streets is another critical
responsibility for most cities and counties. With
budgets increasingly tight, local leaders have begun
weighing the costs and, in many cases, trimming
services.
Foley, Minnesota, near Minneapolis, stopped paying
nearby Benton County Sheriff's deputies to patrol
streets, replacing them with private security guards
who, while cheaper, do not have the authority to
investigate crimes or make traffic stops.[xiii] Los
Angeles' budget for fiscal year 2012 cut overtime pay
for police by $80 million, and eliminated ambulances and
fire trucks at one in four fire stations throughout the
city.
Nearly two-thirds of finance officers said that public
safety costs have increased in recent years, putting
pressure on city budgets, according to a 2011 survey by
the National League of Cities.[xiv] Some counties have
seen costs rise even though crime rates have remained
constant or even declined during the recession; among
other reasons, offenders spend more time in jail because
they have less money to pay bail or because public
employee layoffs cause backlogs in criminal trials. [xv]
Other Services
A range of other day-to-day responsibilities long
provided by local government also have been hit, taking
a toll on residents' quality of life. Services such as
trash pickup, park maintenance, and library programs are
now often on the chopping block.
The small town of Belvidere, New Jersey, for instance,
opted in early 2012 to cut garbage collection entirely,
but still faced a projected deficit of $250,000.[xviii]
Residents now have to haul their own trash to the
landfill or pay for private service. Trash collection
also has had an unexpected impact on Tampa, Florida,
where foreclosures and hard economic times have
translated into less volume dumped in the city's
incinerator, reducing the revenue from that facility.
Local officials have maintained regular trash services,
but only by imposing a 15 percent fee increase.[xix]
As Dallas closed a $130 million budget shortfall for
fiscal year 2011, it cut its workforce by 450 employees-
nearly 4 percent of the total-with more than half from
the parks department. As a result, park maintenance was
performed less frequently and recreation centers reduced
their hours.[xx]
Cities across the country are struggling to keep
libraries staffed and open, even as the numbers of
visitors climb. Since the start of the recession,
Phoenix laid off a quarter of its full-time library
staff and trimmed hours by nearly 40 percent. When
budget gaps grew in Philadelphia in 2008, Mayor Michael
Nutter's (D) proposal to close 11 of the city's 49
library branches sparked public outcry, protests, and
litigation. Nutter backed down, calling the attempt his
"biggest mistake" as mayor. But the city still reduced
library funding by nearly 20 percent over the next two
years.[xxi]
Other Options
Increasing Efficiency
Some policy makers have promoted privatization, regional
partnerships, or technological innovations to try to
reduce costs and increase efficiency. The New Jersey
Privatization Task Force, commissioned by Governor
Christie in 2010 and composed primarily of business
leaders, concluded that "through sensible planning and
implementation, privatization offers a variety of
benefits to governments and taxpayers, including lower
costs, improvements in the quality of public services
and access to private sector capital and professional
expertise." The report cited cost savings in other
localities, such as when Indianapolis opened more than
80 services to competitive bidding throughout the
1990s.[i]
In recent years, Anaheim, California, and Luzerne
County, Pennsylvania, contracted out park maintenance,
graffiti removal, and the collection of delinquent taxes
to the private sector. Facing a $190 million deficit in
the 2010 budget, the Dallas City Council turned over the
operations of the city zoo to a nonprofit
organization.[ii]
Others have restructured departments or consolidated
services with other localities. The city of Olathe,
Kansas, recently partnered with surrounding Johnson
County to build and run a single 911 dispatch facility,
saving the city more than $300,000 in annual staffing
and equipment costs. In Nevada, Washoe County and the
cities of Sparks and Reno have started issuing
streamlined, multi-jurisdictional business licenses from
a single location in an attempt to improve
efficiency.[iii]
Even before the recession, some localities made
investments in technology that reduced the number of
workers needed to deliver services. For example, trucks
that lift and dump garbage cans using hydraulic arms,
such as those used in Beaverton, Oregon, require only
one worker per route. Santa Clara County, California,
implemented an online tool for visitation requests for
inmates in its large jail system, lowering the demand
for staff and reducing complaints.[iv] Officials in
Glendale, Arizona, now employ remote technology to
monitor outages in traffic lights instead of having
volunteers drive around the city once every three to six
months.[v] On the other hand, these improvements and the
cost savings they yield often require large upfront
investments that tight budgets may make impossible.
Using One-Time Fixes
Some localities have turned to one-off measures,
including spending emergency funds or selling assets to
avoid drastic cuts. For instance, in fiscal year 2011,
Minneapolis moved $1.8 million from its general
contingency fund to the fire and police departments to
avoid cutting staff or closing stations. The transfer
saved 31 firefighter positions.[vi]
In a 2011 survey, 40 percent of counties reported using
rainy-day funds, and almost half said they delayed
purchases and repairs to keep their finances in order
the previous fiscal year.[vii] Cory Booker (D), mayor of
Newark, New Jersey, sold the police and fire
headquarters and symphony hall at the end of 2010 to
fill budget gaps anticipated in the following
year.[viii] In 2008, Chicago leased its parking system,
the third largest in the country, to a consortium led by
Morgan Stanley to balance that year's budget. The city
received more than $1 billion, but the company now
expects to make at least $11 billion over the course of
the 75-year deal.[ix]
Long-term Obligations
Exacerbating Pension and Debt Woes
Local governments are legally obligated to pay for some
large-ticket costs, such as debt service and pension
obligations, which can consume a large share of their
budgets. For many municipalities, those costs had been
growing for years, but the Great Recession exacerbated
the impact.
In 2010, for example, debt service on incinerator bonds
in Harrisburg, Pennsylvania, had grown to $68 million,
more than the city's entire general fund budget.[i] The
capital city soon found itself unable to make payments,
and the state passed legislation allowing the governor
to mandate oversight of Harrisburg's finances.
When Central Falls, Rhode Island, filed for bankruptcy
in 2011, the small city owed $80 million to its public-
sector retirees. Since then, the state-appointed
receiver for the insolvent city signed new contracts
with retired employees that reflected deep concessions,
reducing the unfunded pension liability by almost 50
percent.[ii]
Risking Credit Ratings
Despite the fiscal squeeze, true debt crises at the
local level-defaults and bankruptcies-are rare. Only 54
of more than 15,000 municipal issuers rated by Moody's
Investor Service defaulted between 1970 and 2009, and
most were in the healthcare and housing sectors.[iii]
Bankruptcy is equally uncommon; since 1980, less than
half a percent of all issuers have gone through the
process, a rate that remained unchanged during the
recession.[iv]
Reneging on obligations to bondholders has traditionally
been a last resort for struggling localities, in part
because of the associated costs-penalties, fees, and
potentially higher borrowing costs in the future.
States, also concerned with these costs, have gone to
great lengths to prevent local defaults and
bankruptcies. Fearing ripple effects in the credit
markets, for instance, Pennsylvania in 2011 appointed a
receiver for Harrisburg and blocked the city from filing
for bankruptcy.[v] Michigan also seized control over
several struggling communities, including Flint and
Pontiac, to restore stability and prevent default. Under
Michigan law, emergency managers in these takeovers can
change union contracts, lay off workers, and recommend
the consolidation or privatization of functions.[vi]
Still, state aid cuts, declining property tax
collections, and a slow recovery have hampered some
localities' ability to borrow. Early in 2011, Moody's
warned that it would be the "toughest year yet" for
local government budgets, and in some instances, their
credit ratings have begun to reflect that-based on
declining core revenues, high unemployment, and falling
real estate values.[vii]
In 2010 and 2011, there were 87 municipal super credit
downgrades-downgrades of three or more ranks. A third of
these involved cities, counties, or school districts
(the remainder occurred in special purpose governments,
largely in the housing sector). In November 2010,
Atlantic City, New Jersey, was downgraded by three
notches, based on the likelihood of declines in gambling
revenues following the recession. Sarasota County,
Florida, largely because of its eroding property tax
collections, fell by six ranks in fall 2011.[viii]
Conclusion
Localities' dependence on two faltering sources of
revenue-property taxes and state aid-presents profound
challenges. The housing market is still struggling and
additional cuts in federal and state funding are likely.
At the same time, demand for government services is
rising. More tough choices lie ahead as leaders look to
balance the day-to-day needs of their communities with
their long-term prospects. Their decisions may produce
temporary fixes or permanent changes. Either way, the
impact of the local squeeze will be felt for years to
come.
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