The economy is improving — yes, Virginia, an increase in jobs, a rising stock market and brisker housing sales all betoken recovery — but American cities are still staggering in the aftermath of the Great Recession.
That’s the gist of “America’s Big Cities in Volatile Times,” a recently released report from the Pew Charitable Trusts, whose analysts assessed the fiscal health of the 30 cities that dominate the nation’s most heavily populated metropolitan areas. Why care about them? First, they generate nearly half (49 percent) of U.S. Gross Domestic Product, and second, 10 percent of all citizens live in those 30 urban agglomerations.
More important, as the dominant city of the 15th most-populous metro, Minneapolis is a charter member of the group. And Pew says that it is one of 21 cities whose revenues hadn’t recovered to pre-recession highs by 2011.
How could this be? In recent years, studies by Forbes, the Brookings Institution and USA Today found that Minneapolis had bounced back — or bounced ever so gently — on the galloping waves of the recession. Our economy had somehow weathered the storms with a lower unemployment rate than many other areas of the country. But, of course, those studies were looking at the metropolitan economy, not the city government, which is another story. A metro can be rich in jobs, while its city government can be dirt-poor. Just think Baltimore or Newark.
American cities haven’t, of course, haven’t been paragons of fiscal well-being for some time or maybe ever. They are creatures of the state, and much of their taxing power depends on unsympathetic state legislatures who (not entirely incorrectly) view cities as money pits presided over by renegades, rapscallions and rogues; state lawmakers often choke off city governments’ efforts to raise taxes or fees that would put them on a stable fiscal footing. Or they distribute an oversize chunk of state tax revenues to rural constituents.
Cities have hardly been blameless themselves. Huge streams of their money have drained away in patronage, corruption and cushy pension programs.
And you can hardly overlook the demographic changes of the past half-century which saw millions of the well-heeled abandon cities for suburbs. That shift drew billions of dollars in tax revenues away from city governments, further weakening their finances.
Ergo, most U.S. cities were pretty wobbly before the Great Recession began in 2007. A decade ago, well before its start, the National League of Cities, declared that municipal governments were in crisis. Its 2003 poll of city finance directors reported that: “The struggling economy — combined with soaring health care and pension costs, marked declines in state aid to local government, and other factors — is causing serious fiscal problems for America’s cities.” The NLC went on to say that things hadn’t been that bad since 1993.
According to Pew’s report, however, the economic crisis six years ago delivered body blows that sent municipal revenues plunging further.
Not every city took the same hit. Sacramento, for example, saw its investments (of pension funds and the like) plunge sharply and immediately. For cities in Florida, it was the post-bubble housing market that drastically reduced revenues from property taxes.
Minneapolis saw some of that. Pew estimates that the city experienced a 10 percent drop in property tax revenues in 2010 but then recouped some of that with a 5 percent tax increase in 2011. But its major loss came from an $18 million cut in state aid during Pew’s 2007-11 study period. The city had already lost about $71 million in earlier years. Pew says that even though the city received $65 million from the federal stimulus, “it could not offset the decline.”
Interestingly, cities suffered their revenue hits at different times, most long after the National Bureau of Economic Research declared the recession’s end in September 2009. Some revenue drops, for sales and income taxes, were felt immediately. Lowered property values usually took more time to be reflected. In any case, according to Pew, Minneapolis government revenue climbed up to $724 million in 2009 and only then dropped to $698 million two years later.
Pew envisions a continuing slump. In 2011, eight of the 30 cities, including Minneapolis, “were at their lowest revenue points.” Those cities that had recovered, like Portland and Washington, D. C., did so only after receiving large infusions of federal aid.
Vision of Minneapolis
Still, Pew’s vision of Minneapolis as facing “ongoing fiscal challenges after intergovernmental aid dwindled” did not seem that dire. For starters, by 2011, Minneapolis had recouped nearly all (about 94 percent) of its revenue losses. And some of those challenges faced by the city have diminished in the two years since 2011, when Pew’s study arbitrarily ended. “Not having more current data gives us an incomplete picture,” says P. Jay Kiedrowski, senior fellow at the Public and Nonprofit Leadership Center at the University of Minnesota’s Humphrey School.
For example, as Pew itself notes, the city made significant reductions in debt service payments without boosting spending even while the recession was beating it up. But the city’s overall debt has dropped even more dramatically in the last two years. Michael Albein, the city’s director of capital and debt, estimates that, Minneapolis will have wrestled its long-term debt from a high of $1.3 billion in 2004 to around $732 million by the end of this year. Going forward, the city saves approximately $19.8 million in interest costs. “That gives us the capacity to do other things,” says Albein. Among the possibilities: improvements in the city’s infrastructure and services, a possible reduction in property taxes and hiring more cops.
Kiedrowski points out that the city received more good news this year: an increase in aid from the state. Over the previous decade, Minnesota cut local government aid to the city by nearly a half billion dollars — about $46 million a year. With the return of the Legislature to the Democrats this year, the state gave Minneapolis an extra $10 million. That wasn’t exactly a windfall. As the mayor noted recently, the city still received $35 million less from the state than in 2002, but the era of continuous cutting may be coming to an end.
The city has an adequate rainy day fund, but Pew dinged the city for funding only 76 percent of its pension obligations in 2010. That actually is not terrible. Generally, pension funds are considered adequate if they are 80 percent funded, and current high stock-market returns will have certainly reduced the city’s obligation. (The more the funds invested return, the less the city needs to contribute.) In a move that lightened its pension obligations still further, the city at the end of 2011 managed to transfer its closed pension funds for fire fighters and police to state systems, allowing Minneapolis to stretch out payments and saving the city $20 million last year.
Possibly more important than any other factor that has me discounting Pew’s grim outlook, however, is the city’s recent growth spurt. By August, the city had issued 3,000 building permits worth about $690 million, and there’s been an ongoing spate of apartment construction, particularly downtown. I sent an instant message to Kil Huh, the Pew researcher who was conducting the webinar on the report. “Can new construction and increased population help bail us out?”
He sent back a one-word answer: “YES!”