Tuesday, April 22nd, 2014

Want to Empower Cities? Reform Binding Arbitration by Stephen Eide

[ Many urbanists such as myself have argued cities should be given more power. Today Steve Eide, who runs the Manhattan Institute’s Public Sector, Inc. site devoted to local government finance, talks about one such element of empowerment: eliminating unfunded mandates in the form of binding arbitration rules – Aaron. ]

Local governments dominated domestic policymaking in 19th century America. In general, government was quite small, but most of the services that were provided, such as public education and road-building, were the responsibility of city and town officials.

The Brookings Institution and the political theorist Benjamin Barber have recently advocated for a return to something like the 19th century arrangement. They believe that, at a time when DC and many statehouses seem so corrupt, petty and ineffectual, if we want better policymaking, we should want it to be more locally-directed.

The American people on the whole seem sympathetic: According to a poll published in April, 63% of the American public has a “favorable” opinion of local government, putting it almost 40 percentage points ahead of the federal government (28% “favorable”).

To empower cities and expand their policymaking role, they must first be liberated them from harmful mandates. That should mean binding arbitration reform. Recent events in Scranton, PA and Boston, MA make clear what a nuisance this policy is.

Many blue states grant public safety unions the right to seek an independent arbitration process when negotiations with management hit an impasse. Officially, as the unions are apt to emphasize, this process must exist in order to prevent police or fire from going on strike.

But as the Empire Center pointed out in an analysis of binding arbitration in New York, strikes by public employee unions are illegal anyway and even unions without access to binding arbitration almost never strike.

Binding arbitration laws increase unions’ leverage because the settlements are consistently pro-labor. As Boston mayor Tom Menino put it, “Public safety unions have no reason to negotiate with us in good faith and settle contracts voluntarily because arbitrators have proven that they will always give them more.” Late Detroit Mayor Coleman Young said: ”Slowly, inexorably, compulsory arbitration destroys sensible fiscal management.”

Arbitrators base their settlements on what unions have received in past contracts, or what other unions in nearby communities have received, much more than what a city can afford. The Empire Center found that from 1974-2012, for unions outside of New York City, unions with access to binding arbitration saw their salaries increase almost three times faster than unions without it.

Scranton, PA’s internationally-notorious labor woes began in October 2011, when the PA Supreme Court ruled that the city honor the terms of an arbitrator’s $17 million award to public safety unions, a substantial sum for a community of 76,000 with a $100 million operating budget. The following summer, struggling to find a way to pay for the settlement, Scranton’s mayor reduced all employees’ salaries to minimum wage.

The city eventually secured a bank loan to keep it temporarily afloat, but fiscal chaos reemerged last week when a judge demanded the city come up with the now $21 million+ still owed to the unions, threatening even to allow unions to seize city assets if other revenues can’t be found.

Scranton is poor and broke, having been in Pennsylvania’s Act 47 program for distressed cities for over two decades. Last summer, the city’s parking authority defaulted on bond payments. Scranton demonstrates the insanity of allowing arbitrators to award settlements based exclusively on their definition of what’s fair while giving, at most, token consideration to what’s affordable.

Boston’s experience with binding arbitration demonstrates how flagrantly undemocratic the process is. Last week, a Boston arbitrator awarded the Boston Police Patrolmen’s Association a 25% raise over six years, a value of $80 million.

The patrolmen’s award follows an even more outrageous 21.5%, five-year raise to the Boston firefighters union forced on the city in 2010 by the arbitration process. The origins of that $100 million plus increase lay in the Boston Firefighter Union’s resistance to random drug testing. Since drug testing affects conditions of employment, the firefighters demanded a pay boost to agree to it. Anything less would have been leaving money on the table.

AAA-rated, and in possession of $68 million in collective bargaining reserves, Boston, unlike Scranton, will be able to pay for the police settlement, if at great inconvenience. The larger question for Boston is, can one imagine a less democratic process to shape fiscal policy? In this extremely liberal, pro-labor city, everyone seems to be against this settlement-the City Council Speaker, the mayor (“unreal“), both mayoral candidates, and both newspapers-and yet it or something close to it will likely go into effect.

Binding arbitration is supposed to be “binding” in the sense that the parties must accept the settlement, but it’s really cities that wind up being bound. Wages, normally thought of as operational expenses, turn into legacy costs. Unions drag out negotiations for years, as the old contract with its guaranteed pay bumps stays in effect, and once employers settle up, it’s to pay employees for work they performed years ago.

Legally, cities will always be the creations of state government, never “nation states” of their own, and we’ll probably never see a full return to 19th century conditions. But small victories matter. Urbanists genuinely interested in giving cities’ more autonomy should target for reform those mandates now held in special contempt by local officials. This could be done either by revoking public safety unions’ right to pursue binding arbitration, or imposing, as New Jersey did, a firm cap on awards to ensure their affordability.

This post originally appeared in Public Sector, Inc. on October 2, 2013.

Thursday, July 25th, 2013

Cities Need More Fiscal Supervision By State Governments by Stephen Eide

[ When it comes to local affairs, I’m typically in favor of more devolution of powers to local governments, especially larger ones. On the other hand, Detroit’s bankruptcy shows that local government can easily make a hash out of things. Stephen Eide makes the case for why states should exercise more not less fiscal supervision over cities – Aaron. ]

Four years after the end of the recession, cities’ fiscal outlook remains unpromising (discussions here and here, esp. 53-6). Spending on healthcare and pensions continues to rise faster than revenues, crowding out spending on basic services. Though Detroit-style insolvencies will continue to be rare, without reform, they will be more common than in the past. To strengthen budgets, states should exercise more fiscal oversight over local governments.

This is not a popular idea. For one thing, local government is Americans’ favorite form of government, consistently receiving higher favorability ratings than state and federal government (way higher in the latter case). If we take voter turnout as a rough measure of familiarity with government operations, then we must surmise that American’s widespread admiration for local government is based largely on ignorance. Perhaps if people voted in mayoral and school board elections as regularly as they did in presidential elections, city hall would be as unpopular as Washington. But, as things stand, David Brooks and the public as a whole now seem to regard local governments as those least in need of reform.

Another obstacle to increased oversight is that states don’t want the job. Too often, states are content to pass the buck to local decision-makers. They actively avoid aggressive oversight, which tends to be high-risk and low-reward. State interventions provoke resentment from local officials and produce few new friends. Interventions stabilize budgets; they don’t turn cities around or return them to glory. That may take decades, if it happens at all. Oversight is thankless work, which is why, from New York City in the mid-1970s to Detroit at present, state governments put off intervening until the last possible moment.

Finally, state governments are hardly the model of fiscal competence. They have run up massive pension and retiree healthcare deficits, they are dominated by special interests, and their tax systems are outdated and shortsighted.

But if increased state oversight were an easy sell, we would see more of it. The logic begins at the extreme: insolvent cities clearly need more oversight. Cities become insolvent because of incompetence and a lack of political will. States then must step in to provide expertise over fiscal and administrative functions and/or the will to make difficult choices through a control board or receiver. Since cities are the legal creations of state government, states have an indisputable right to intervene, and they also have a duty to do so. Whether state taxpayers realize it or not, they have potential exposure to local distress, through increased borrowing costs for other municipalities within the same state (“contagion”). Even municipal bankruptcy requires state action—no city can declare bankruptcy without being authorized to do so by its state government.

Most states don’t have general intervention systems in place, which define, in advance, how to manage distress from its earliest warning signs all the way through to bankruptcy, if necessary. Most interventions are executed by means of ad hoc legislation. More states should adopt general intervention laws similar to Michigan’s Public Act 436. Even when a small city falls into distress, it typically requires a major policy response from state government. Events can move rapidly, leaving little time for deliberation; an a priori articulation of the powers state authorities have to address distress will minimize controversy and enable the strongest response.

A general intervention system will require an early monitoring system. New York State comptroller Thomas DiNapoli recently established one; California’s Bill Lockyear would very much like to. Of course, treasurers and comptrollers have little real power. All they can do is raise awareness of the problem. If shame won’t suffice to restore solvency to cities, Governors must get involved.

States should require stronger local fiscal management practices. Of highest priority is multiyear planning. Most localities don’t project their costs and revenues out beyond the coming fiscal year. To give themselves, taxpayers, and the media a clearer account of their fiscal health, local governments should develop and publish plans of at least 4-5 years. States should also consider placing tighter restrictions on reserve balances, debt, and taxes. As the case of Detroit illustrates, high taxes in a poor city is a policy catastrophe. Massachusetts allows its local governments to tax businesses at a higher property tax rate than individuals. Since businesses don’t vote, this power has been grossly abused by poor cities and should never have been granted in the first place.

One useful oversight model is the North Carolina Local Government Commission (LGC), an obscure state agency with something of a cult following in public administration and public finance circles (here, here, and here). The LGC must sign off on all local debt issuances, making North Carolina the only state with this responsibility. It actively monitors property tax collection rates and other fiscal indicators and will not allow localities to issue any debt if their fund balance (reserves) drops below a certain point. Although it has the authority to intervene aggressively, it almost never has to, operating mostly through a milder, advisory role. Ratings agencies regularly cite the LGC’s effectiveness as a factor in granting strong credit ratings for both state and local governments in North Carolina. That’s the clearest evidence that cities benefit from stronger state oversight-their credit rating go up and borrowing costs go down.

As I have argued elsewhere, cities do deserve more autonomy over some functions, such as labor relations. Cities’ most significant fiscal problems are rooted in personnel spending—chiefly pensions and health benefits for active and retired employees—and any way that states can increase local management’s leverage over labor will help provide budget relief. This is obviously most urgent among blue state cities.

But more autonomy won’t be enough, for the simple reason that we can’t trust that all local officials would use their enhanced bargaining leverage. States’ attitude should be “trust but verify”—empower local officials inclined to do the right thing, and pressure those who aren’t.

To sum up, local budgets now have little margin for error. While it would be appropriate to increase local autonomy in some areas, there is little evidence for the view that broad-based mandate relief alone would produce broad-based budget relief. Flawed as they are, states are the only entity in a position to strengthen fiscal management and transparency norms. For the age of austerity, we need more state supervision.

Stephen Eide is a senior fellow at the Manhattan Institute’s Center for State and Local Leadership and editor of PublicSectorInc.

Tuesday, May 7th, 2013

Worcester v. Providence: Is Downtown Revitalization the Sum of Urban Revitalization? by Stephen Eide

Worcester, MA and Providence, RI invite comparison for at least four reasons. They’re the same size (pop. ~180,000), they share the same history of deindustrialization and urban decline, they’re only 40 miles apart, and they’re different, which makes comparison stimulating and worthwhile. By most any fiscal or economic measure, Worcester outperforms Providence. But because of the so-called Renaissance, the revitalization of downtown Providence throughout the 1980s and 90s, Providence has attracted far more attention among urbanists and the national media than Worcester. There has never been a Worcester Renaissance.

So which city is the true urban success story? That depends on the extent to which one believes that downtown revitalization is the same as urban revitalization.


Providence is a destination city able to boast of its tourism, arts, culture and “18-hour day.” Rare for an old, cold, mid-sized former milltown, the New York Times travel section has done two features on Providence in the last five years. Providence played a starring role in an eponymous television show (NBC, 1999-2002) somewhat similar to the role that the revitalized New York City played in Sex and the City. This all would have been unimaginable in the 70s, at the peak of the deindustrialization era, but, throughout the 1980s and 90s, Providence underwent a renaissance. The most notable elements of the Providence Renaissance include uncovering and moving two rivers, relocating a railyard, the construction and rehabilitation of several major retail and commercial facilities, historic preservation, and WaterFire, a public festival that attracts thousands to the city on summer evenings. (For the full account of Providence’s revitalization, including a series of terrific “before and after” pictures, see Francis Leazes and Mark Motte’s 2004 book Providence, the Renaissance City.) No one could claim that the success has been total; both the local economy and city budget remain under strain. But there are many other former milltowns which would do anything (indeed, have done everything) to imitate Providence’s success.

Financing of Select Major Providence Renaissance Projects, 1980-2000
Project Completed Approximate cost Primary financing
Capital Center (Railroad and river relocation, Providence Station, highway interchange, and Waterplace Park) 1981-1987 $169 million Federal
Union Station (parcel 1) 1989 $80 million Mixed private-public
Convention Center/Westin/ garages 1994 $290 million State
Providence Place/garage 1999 $465 million Mixed private-public (land; sales tax rebates/abatements)
Courtyard by Marriott 2000 $16 million Private-public (abatements)
Source: Leazes and Motte, Providence: The Renaissance City

Like Worcester. Worcester’s efforts at downtown revitalization have been unrelenting, and not totally unsuccessful, which has enabled local boosters to believe, at any given moment during the last 30 years, that the Worcester Renaissance was at hand. The most notable project now underway is “City Square,” which involves the demolition of a dead mall in the center of downtown. This is an event of tremendous symbolic significance, as many locals attribute downtown Worcester’s decline to the construction of the mall in 1971. In place of the mall will emerge a new medical center, seven-story office building, and other projects still in the planning stages. City government is thrilled. But, if anything, City Square demonstrates the limits of the Worcester development model, which relies almost exclusively on local investment. The project began under the direction of a Boston developer, but stalled after the developer encountered financing difficulties in the wake of the 2008 financial crisis. To the rescue came a local insurance company and its public-spirited CEO. Predictably, local officials hailed the benefits of local ownership, but they all missed the point. Worcester is simply not wealthy enough to rely on local capital to bring back downtown. Had a Boston developer scored on a project in Worcester, it would have set a powerful precedent for others to follow. At this point, even if City Square succeeds, many outside developers will likely view the local CEO’s “white knight” intervention as at least partly philanthropic.

By contrast, throughout its renaissance years, Providence had access to a key source of outside investment: state and federal grants. This access was in turn due to the city’s enviable position as a “city state.”

The City State

Providence enjoys a statewide profile unlike that of any other American city. In addition to being the capital, it’s the only large (100,000+) city in the nation’s smallest state. Only three other cities in Rhode Island have over 50,000 residents. 17% of Rhode Island’s population lies within Providence’s borders. (Worcester composes less than 3% of Massachusetts’ population.) The Rhode Island statehouse overlooks downtown Providence. Throughout Rhode Island’s modern history, the vast majority of statewide officeholders were either from Providence, went to school there, and/or got their first break in Providence city government. Providence’s comeback would never have occurred were it not for the massive state and federal aid that backed the projects that formed the core of the Renaissance.

Worcester has always lacked statewide clout. Most of the Massachusetts public, even the most politically-engaged among them, cannot name one Worcester politician. True, that could be said of all Massachusetts cities, which dwell in the shadow of Boston, the state’s capital and commercial center. (Everyone in Massachusetts knows who Tom Menino is.) But even when measured against its peers, Worcester underperforms in state politics. Despite being the state’s second-largest city, the only statewide officeholders Worcester has produced since 1900 have been two lieutenant governors. No governors, no Senators, not even a state treasurer or auditor.

When the Joint Center for Urban Studies at MIT and Harvard issued a report on Worcester’s politics in 1960, it described Worcester as a large city with a small-town feel. Still true. Worcester is well-managed. The local government is competent and honest. There have been no noteworthy political scandals in recent times. But there’s no denying that the city has long suffered from a deficit of political talent, and that this has hindered revitalization.

Benchmarking Worcester and Providence

On the other hand, because it’s in Massachusetts, not Rhode Island, Worcester possesses and enormous economic advantage over Providence. Massachusetts’ economic record of late has been respectable. Rhode Island is the only New England state whose economy has not adapted to post-industrial times. It resembles Michigan or upstate New York more than Connecticut or Massachusetts.

Within Massachusetts itself, Worcester is no pace-setter, but a “Gateway Municipality,” a legal term designating a remedial class of cities that lag behind the rest of the state in measures of income and education. (Gateway municipalities are eligible for special economic development assistance.) But when Worcester’s economic advantages are combined with its superior record of fiscal management, it becomes very unclear why Providence, and not Worcester, should be considered the comeback city.

Table: Benchmarking Worcester and Providence
Worcester Providence
Peak monthly unemployment, 2008-present 10.5% 15.4%
Median monthly unemployment 2008-present 8.6% 13.1%
Median household income $45,846 $38,922
Zillow home value index $161,800 $131,100
Median total annual crimes, 2005-2010 (property and violent) 7,914 9,557
Median annual murders, 2005-2010 6 15
Credit rating (Moodys, S&P, Fitch’s) A1,A-,AA- Baa1,BBB,BBB
Pension system funding ratio 68% 32%
FY12 General fund balance + $25.5 million - $11.4 million
Considered Ch. 9 municipal bankruptcy recently? No Yes
Source: BLS, American Community Survey, Zillow, FBI, Providence and Worcester’s annual financial reports

Urban Revitalization and Downtown Revitalization

To what extent is urban revitalization downtown revitalization? Downtowns play an outsized role in shaping cities’ reputations to outsiders and natives alike. Regardless of how much of a city’s downtown is taxable private property, downtowns are best-understood as parks, public property. Downtown serves as the geographic equivalent of 4th of July and Memorial Day rituals. You can’t compel people to participate in these rituals and find them meaningful, but their complete absence would signal the complete absence of national pride. Similarly, cities whose downtowns languish usually lack civic pride.

Urbanists grasp the basic civic importance of a commonly-accepted physical center, but they sometimes oversell the economic benefits of downtown revitalization. There can be backlash. Downtown revitalization sometimes fuels downtown vs. neighborhood tension. Was it all for the tourists, or to satisfy some mayor’s “edifice complex”? Did residents benefit at all? Small businesses such as restaurants, boutiques and art galleries are crucial for downtown revitalization. But businesses that small (50 or fewer employees) with no ambition to grow will do little to strengthen the broader metro economy. The holy grail of urban economic development policy is an abundance of good jobs for workers of all levels of skill and education. Heavy manufacturing used to provide such jobs; boutiques and coffee shops do not. Nor, for that matter, do hotels and convention centers.

Maybe downtown revitalization has nothing to do with economic development. The standard justification for the use of taxpayer money to support private development in downtown is that these funds stimulate private investment. Officially, government is making a bet on taxpayers’ behalf, whose success may be judged through tangible fiscal and economic benefits such as a net increase in tax revenues, lower taxes for homeowners, and more jobs for area residents. But perhaps taxpayers are willing to spend this money because they are ashamed of the decrepit state of downtown, and they want it to come back. If downtown is a de facto public park, public expenditures on downtown revitalization may be justified simply for the sake of itself, even we are talking about tax breaks for Starbucks and luxury condo developers. It’s still a bet—all development is a bet—it’s just that the definition of success is different. Free market advocates denounce all forms of public subsidy for economic development, but the public should be allowed to speak for itself. To many citizens, sprucing up downtown is at least as justifiable as improving parks that they haven’t heard of and never visit.

But this argument that public money should be spent on downtown revitalization to boost civic pride would be easier to swallow were it not for the sneakiness of public subsidies for redevelopment. Most subsidies are tax expenditures, which are inherently less transparent than direct appropriations, even though the budgetary impact is the same. Communities want curb appeal, but seem unwilling to pay for it, or, more precisely, accept the fact that they are paying for it.


What do the people want? What’s possible? Everyone wants jobs, growth and good schools, but also a pleasant downtown. The second goal seems to be more realistic than the first set of goals. How many former industrial cities’ unemployment rates or SAT scores exceed statewide averages? Worcester may outperform Providence, but that’s not setting a very high standard. Perhaps the possible, not the ideal should define standards for urban success. If so, then the conventional wisdom is accurate, and Providence does deserve to be more closely studied and more highly regarded than Worcester.

Stephen Eide is a Senior Fellow at the Manhattan Institute and editor of the blog Publicsectorinc.org, where this article originally appeared.

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