Tuesday, March 23rd, 2010

Richard Longworth: Paying for Cities

[ Many of you undoubtedly already know Richard Longworth, who wrote Caught in the Middle, the most important book out there on the Midwest. What you may not know is that he has started his own blog, The Midwesterner about the Midwest in the global age. This blog is a must-read for anyone who cares about the future of the Midwest. Add it to your newsreader now. As an added incentive to check it out, Longworth was gracious enough to supply us with a sample of the type of piece you’ll find there. – Aaron ]

The way we finance our cities is broken and must be fixed. A lot of people know this but, so far, most of the fixing amounts to minor measures, a splint here and a band-aid there, a finger in the financial dike, while the big problems grows and grows.

There could be a big new field of academic study out there called Urban Financing, but it’s pretty sparsely inhabited. A few scholars around the Midwest are probing the issue. But no overall picture has emerged, no real attempt to close the gap between the resources now available and the needs of the future.

I hereby offer the use of an oblong table here at the Chicago Council on Global Affairs for Midwestern scholars who want to come together to imagine the urban future. I will throw in a few stuffed pizzas to fuel their thinking and, at the end of the day, some beers to fortify them as they sally forth into the gales of public debate.

But don’t look to me for any solutions – just a statement of the problem. I can’t sing, but I know when the soprano is off key. I can’t balance a civic budget but I know when something isn’t working, and isn’t going to work.

The problem is this:

Midwestern cities have always counted on state governments for big chunks of their funding, especially in infrastructure and education. In return, states have exercised control over much of what cities can do. This includes the power to define units of local government, set the powers of local government, including taxation rights and zoning, dictate how schools are run, and decide what infrastructure will be built, and where.

But many cities are suffering because (1) all states are in a financial jam and the money for cities just isn’t there and (2) state control over cities is keeping cities from doing what is necessary to reinvent themselves. In other words, both sides of this bargain hurt cities.

So the key to urban financing lies in redefining the relationship between cities and states. This is not something that’s going to happen overnight.

There are two big issues here:

1. Restructuring urban finance to enable cities to pay for themselves much more than they do now.

2. Doing this in such a way that it doesn’t price low- and medium-income residents out of the cities themselves.

The Northwest Ordinance of 1787 dictated where Midwestern state lines would be, even before there were cities or states here. The region’s cities and states grew up together. Indeed, they made each other possible. The states funneled food, raw materials and people into the cities. The great manufacturing cities generated the economic vitality that energized the states. Most Midwestern states looked to their major cities – the biggest city, like Chicago or Cleveland, or the state capital, like Madison – for leadership. In that era, cities and their states needed each other.

That relationship has broken down. Food goes into global markets. So do raw materials, and so do people. For the most part, Midwestern cities no longer project enough economic vitality to enliven themselves, let along their states. Most of the big manufacturing cities are rusted derelicts. Some big cities, like Minneapolis-St. Paul – remain powerful but their states share little of this potency: the Twin Cities generate 64 percent of Minnesota’s economy and 75 percent of its personal income, but much of rural Minnesota is dying nonetheless.

Most of these big cities, having been built on rivers or lakes, lie at the edge of states: think Chicago, St. Louis, Cleveland, Cincinnati, Detroit, Milwaukee. But state capitals, sited in days of poor roads and hard travel, usually lie in the center of states. Some state capitals – Columbus, Indianapolis, Des Moines – were never industrial centers but thrive now. But non-capitals, by and large, are suffering. No surprise: the capitals and non-capitals are where they are for totally different reasons – one political, the other economic – and never really had much to do with each other.

This worked, more of less, in the industrial era, when the Midwest boomed, when not only cities but smaller towns boasted factories and good wages, when there were still enough farmers to keep rural areas strong. State governments had the money then and shared it.

That day is gone. Even before the recession began, state governments were stiffing their cities, cutting funding for infrastructure, schooling, policing, health. This budget-slashing has now gone into overdrive. Illinois has just announced that the state’s municipalities will be getting 7 percent of the state’s income tax revenue, instead of the usual 10 percent, a difference of about $300 million. Mayor Daley, irate, says the state government must go on a diet. The state no doubt will say that Chicago needs to go on a diet. So it goes.

Illinois’ state government may be notorious but, in its attitude toward cities and in its response to the current economic squeeze, it’s no different from other Midwestern states.

All this was going on before the recession started and it will continue after the recession ends. All Midwestern states face the same double whammy – an eroding economy , meaning less tax income, plus the demands that spring from economic decline, such as the costs of welfare, retraining, rural collapse, imploding infrastructure and widespread poverty.

Each state is so consumed by the burdens of the past that it hasn’t the time, focus or money to deal with the needs of the present and the future, like education or the problems of its big cities.

The recession will end. This disconnect between cities and states won’t. This is why cities must realize that their future lies in their own hands. States won’t help, because they can’t help. If the future is to be bought, cities must pay for it themselves.

Few cities have even begun to think about this. It means a revolution in urban financing, and a new relationship not only with states but with citizens.

Some components of this debate are obvious. One is higher taxes – city income taxes, sales taxes, property taxes. Another is user fees, including higher parking meters rates, higher fares on public transportation, higher dockage fees at marinas, even tolls on highways into town. Another is increased taxes on businesses. Another is privatization of public services, such as bus lines, airports, possibly even schools and some policing. Another is special fees, like the tolls that London charges for motorists who want to drive into the center of the city.

Other possibilities present themselves. One is the consolidation of city and suburban governments, to share tax revenue and achieve economies of scale on public services. Other is the reduction of civic costs, especially cuts in government personnel.

All these possibilities, and many more, will be on the table. Needless to say, not all will become policy. Each gores some well-connected oxen. Business hates the higher business taxes. Homeowners hate higher property taxes. Unions hate civic staffing cuts. Commuters hate higher fares.

But almost all of these solutions exist somewhere in the world, and if American cities are to survive, some of them must be adopted here. None of them will mean the collapse of civilization.

Everyone knows that city governments and other public facilities are grotesquely over-staffed. Businesses may hate to pay higher taxes but will do so to be where the action is. There is no social benefit in clogged highways: if commuters insist on driving, they should pay more for the privilege.

The fact is that cities don’t want to be cheap places to live and work: low-cost places draw bare-bones businesses paying minimum wages, guaranteeing that the cities themselves stay poor. The cities of the future will be those that draw people—both residents and businesses — who are willing to pay for the privilege of being there.

In other words, they need to draw the wealthy, those who can afford to pay the higher costs. Which raises the crucial question – what about everybody else? At what point does economic necessity – the need to pay for the city – bump up against social equity – the need to be affordable to the non-wealthy?

Already, the poor are being squeezed out of cities like Paris, New York – and Chicago. At some point, the middle class could be squeezed out, too. At that time, cities become gated communities, golden ghettoes.

This is not a solution that anyone wants. But neither are cities so cash-strapped that they can’t afford to pay for the amenities of civilization.

This is the terms of the debate to come. How do we pay for our cities, not that the old sources of money are no longer there? But how do we do it without undermining the vibrant economic diversity that has always been the soul of cities?

Richard C. Longworth is a Senior Fellow at the Chicago Council on Global Affairs, author of the book Caught in the Middle: America’s Heartland in the Age of Globalism, and host of www.globalmidwest.org.

Topics: Public Policy

9 Responses to “Richard Longworth: Paying for Cities”

  1. cdc guy says:

    Richard, a question:

    What’s your opinion of including commuter/non-resident income taxes as one part of a city’s tax structure? Seems as if that is one way to mitigate the overall tax impact on low-to-moderate income residents.

  2. cdc guy says:

    Richard, it seems that Indianapolis is an outlier. At the risk of engaging in unabashed boosterism:

    The city was most definitely an industrial city, with (historically) big manufacturing operations of GM, Ford, Chrysler, AT&T, RCA, Eli Lilly, Allison Engine and International Harvester. Only Lilly and Allison/Rolls-Royce remain.

    While it started as a “planned state capital”, the city’s growth occurred in the industrial expansion era (1870-1970), just like Chicago, Detroit, and Cleveland. As a state, it was just this year when manufacturing slipped out of the #1 employment spot in Indiana; Indianapolis has for more than 100 years been the biggest city and state capital of the most manufacturing-dependent state in the US. One would expect a worse situation than exists.

    The city has navigated a transition to non-manufacturing jobs, and it continues to have net in-migration.

    While the city budget required some surgery last year, it didn’t require a meat cleaver. There is a relatively balanced tax regime of income, sales, and property taxes.

    Housing is still very affordable, as it has been for several decades.

    The city is diverse (a little less than 2/3 white non-Hispanic) and is represented by one of the two African-American Muslims in Congress.

    What can other Midwestern cities learn from Indianapolis about job creation, resident attraction, fostering diversity, and fiscal management?

  3. Anon says:

    This analysis is extremely Chicago-centric, and therefore useless to places like St. Louis, Cincinnati, Canton and Cedar Rapids. Of the 100 largest cities in the Midwest, only Chicago has expensive CBD rents or residential housing. No poor people are being priced out of Detroit. I assure you.
    Congestion outside of Chicago is negligible. Congestion pricing will just send jobs to the periphery.
    “Pay to be were the action is?” What action? The largest employers in Midwestern downtowns are usually the city, the county, and the local feds. Our larger banks and insurance companies have business lines that don’t require dense agglomerations. If they did, they wouldn’t have grown or survived in places like Des Moines or Fort Wayne. These companies are very mobile and very cost sensitive.
    Some kind of revenue sharing at the regional level would make sense if the people paying the bulk of the taxes (suburbanites) are clearly in control. Otherwise, representatives of the low income can raise the transfer whenever they feel like it. The city needs to provide something like safe and well maintained areas including downtown, campus neighborhoods, and entertainment districts. There has to be a benefit to the suburbanites our they won’t agree to bear the cost.

  4. Ben says:

    “Everyone knows that city governments and other public facilities are grotesquely over-staffed.”

    I don’t work for the government but I find this kind of blanket statment rather odd in an otherwise very well thought out essay. Sure, some governments have corruption, particularly in Chicago and Illinois. However, there are numerous other instances around the midwest where staffing levels are where they should be or even too low. As much as people like to point out where things go wrong, you NEVER hear stories about things going right in the public sector.

  5. Chicago says:

    Have you heard or read the book City Bound? A rather through review of city/state power and finance issues. Diffidently to the tune of stifled cities and powerful states…

  6. Aaron says:

    I can’t disagree more with the idea that cities’ financial future lies in the attraction of the wealthy, or the idea that cities fare best by being destinations for big names and high-capital individuals. This idea underpins so much bad development, and shortchanges the best ways to get cities fiscally and economically stable. A good, economically sustainable city needs a well-educated middle class workforce and solid infrastructure. Those two factors attract more job growth and capital investment than low taxes, lifestyle amenities, or any other strategy to make a city viable in the long-term.

    Wealthy city dwellers are rarely invested in their cities-they can always leave, and rarely involve themselves (or their kids) in city institutions and services. The city will always be a lifestyle choice for those with the capital to move at will. A healthy, well-employed middle class invests and is active in the benefits they get from the city, things like education, transit, planning, and sanitation.

    Those people also make or break urban financing, because they provide the most even value across the three legs of taxation: property, sales, and income. Even if the wealthiest 1% of residents contribute 20% of tax revenue, the other 80% comes from joint-earner, homeowning households. It is not very sexy for urban development promotion, but it’s true.

    The zero-sum game of tax increases and spending cuts is also a fiction-it assumes that more funding begets better service, or that less funding begets worse. City governments need to get better at what they do, and examine from a politics-neutral perspective the lines of business they really need to be in. They also need to have an institutional reckoning with politically imposed costs like pension liabilities and deferred infrastructure maintenance.

    Higher taxes don’t deter business investment-compare Minneapolis with tax-free Sioux Falls. Grotesque overstaffing, as Richard portrays it, is always accompanied by severe understaffing in less visible or politically popular areas of business. For every overstaffed community outreach or parks department, there is a bare bones water utility or payroll department. A city can have fair tax rates without losing jobs, and staff quality services without compromising on pay.

    Cities need, more than anything, the return of the families who left for first- and then second-ring suburbs in the 70s and 80s. Investing in empty-nester developments, waterfront living, or other wealth-attraction will never show the long-term returns that cities need. Quality schools, affordable housing, and good transportation are the best long-term investments for cities looking to stably finance themselves in the long-term.

  7. Thanks to everybody for these good responses. Some answers:

    1. Cdc guy –This idea of using commuter/non-resident taxes is one that’s often raised. My feeling is that, theoretically, it’s great. People who use the city ought to help pay for it. In addition, the city is the core of the metro region and its health is vital to the region, which gives everyone, including suburbanites, an obligation to support it. In practice, there’s a lot of suburban political hostility to this.

    This underlines my main point, which is that we’re right at the beginning of a debate here, not the end. The old system of financing cities is broken, but the new system is not in sight. Any idea, like yours, is on the table. If I had all the answers, I would have written them.

    2. Cdc guy, you and the Urbanophile are making Indianapolis sound like the Emerald City. If it truly has the key to financing itself in a changing time, let’s hear more.

    3. Anon, I’m delighted to hear that St. Louis, Cincinnati, Canton and Cedar Rapids don’t have any urban financing problems. In my Chicago-centric way, I’d kind of thought that there might be other Midwestern cities besides Chicago that are wondering how they’re going to pay for infrastructure, education and other services in a time of increasing stress on urban budgets, including declining state support.

    The fact, as I stated, is that we’re in a new era now that has brought major changes, many of them negative, to Midwest cities. Among these changes is a transformation in the relationship between these cities and their state governments, which have provided financing in the past while restricting the cities’ ability to control their own finances. We have an opportunity now to rethink this relationship and reinvent our cities. Assuming that these cities are going to stay poor, dangerous and dominated by government employers is not the way to start.

    6. Aaron (whom I’m told is no kin to Aaron the Urbanophile): Please re-read my piece. I said specifically that we need to figure out how to enable cities to pay for themselves, and that this requires businesses and residents who can do the paying — but that we have to do this in a way that doesn’t price the poor and middle class out of the city. I didn’t say this was easy, but I do say it’s necessary, and it’s a key to the debate we need to have.

    What we have now in most of the Midwest are cities that are mostly poor, or cities that are becoming refuges of the rich, with the poor moved to the fringes. Aaron is right that any balance absolutely requires a middle class, and that this in turn requires good schools, affordable housing and good transportation.

    Ah yes. But how to we get there from here? How do we pay for these schools, neighborhoods and public transit? That’s the question.

  8. Anon says:

    I didn’t say other cities don’t have finance problems – obviously they do. I’m saying they don’t have the cash cow that Chicago gets to milk. They don’t have a loop with ultra-high income professionals who *have to be* in the loop and therefore pay whatever outrageous taxes are charged.

    No one *has to be* in downtown Toledo. If the taxes/parking fees/rents peek above the national average, everyone is leaving.

  9. cdc guy says:

    Richard, part of Indy’s unique history is that it did a one-time massive annexation called Unigov 40 years ago. Effectively the first-ring suburbs were all incorporated into the city proper. Sort of, that is, as the former suburban townships retained their school districts, fire departments, and Sheriff’s patrols. (The police departments were finally merged in this decade, and fire consolidation is about 60% complete. No schools.)

    The government structure thus created under Indiana law is a fiction called “first class city”, of which there is exactly one in the state. So there is the possibility to pass special laws and provisions within laws for Indianapolis without calling them out as such. When it is a “no big deal” issue, there is no anti-Indy coalition of rural/suburban legislators to stop such laws. When the city asks for special power to tax itself, it usually happens as long as it is not perceived as poaching on state or suburban revenue…as a commuter income tax would be.

    The next test will be a proposed regional transit system funded by local or county-option sales tax [yes, a transit tax with the acronym “LOST” or “COST”]; Indy’s leaders should be able to sell the concept as it won’t cost the rest of the state.

    In fact, Indy can be seen as an incubator for municipal concepts for the rest of the state; if the concept works here, it can be adapted elsewhere. LUG consolidation, a process of merger distinct from annexation (and primarily mergers of two or three adjoining townships, or township remnants joining adjacent growing towns) is now underway in two or three counties.

    Another part of Indy’s game has been to cast itself as the “sports and convention” city, which pays for updates/rebuilds of the Convention Center, sporting facilities, downtown mall and airport. It’s largely financed through a special sales tax district and “visitor taxes” such as hotel, rental-car, and “dining out” levies.

    Regular infrastructure has not fared quite as well; there are significant deferred maintenance and capital backlogs in streets, sidewalks, sewers, and water treatment/distribution. The solution for water and sewer will be offloading those utilities to the public charitable trust that already owns the gas utility and the downtown steam and chilled-water loops. That offload will generate cash for the city to use in updating its remaining infrastructure.

    [Side note: at what point does “deferred maintenance” become “required capital investment” for public-way infrastructure? Cities have long been guilty of capital budgeting that includes some things that should be expensed, and vice versa. This has been exacerbated in the low-interest environment, as refinancing at lower rates enabled cities to increase indebtedness…creating a “capital investment” windfall… while maintaining the same level of debt-service payment.]

    Perhaps it’s risky for the city government to say that it wants to be in the stadium, convention, and tourist game and not in the water or sewer businesses. But it’s doing what Aaron suggested: choosing its lines of business.

    The marketplace seems to be responding, bringing businesses, jobs, and people to replace the old factory jobs without breaking the city budget.

    Aaron is no L. Frank Baum and he does not depict the city as Oz. Read some of Aaron’s pieces on Indianapolis infrastructure, including some stinging rebukes, and especially “Could Marion County Implode?”.

The Urban State of Mind: Meditations on the City is the first Urbanophile e-book, featuring provocative essays on the key issues facing our cities, including innovation, talent attraction and brain drain, global soft power, sustainability, economic development, and localism. Included are 28 carefully curated essays out of nearly 1,200 posts in the first seven years of the Urbanophile, plus 9 original pieces. It's great for anyone who cares about our cities.

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Aaron M. Renn is an opinion-leading urban analyst, consultant, speaker, and writer on a mission to help America’s cities thrive and find sustainable success in the 21st century.

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