Municipal finances face a shaky future

The entry, "The real lesson from Flint Michigan is about municipal finance" (2016) makes the point that in the US, financing systems for local government were created when the nation experienced rapid growth, and for the most part they've never been addressed in a substantive way since many cities have moved to a position of either equilibrium or shrinkage.

The problem with equilibrium or shrinkage is that personnel is the biggest cost for cities, and wages go up not down, not to mention the issue with retirees and pensions--typically local governments may stint on wages but in return offer great pensions often with health care, but these are underfunded creating significant financial overhang.

Center cities rely in large part on commercial property taxes, and the ancillary revenues that come in association with officer workers.

But the work from home phenomenon that has been driven by the pandemic is going to crash the value of commercial property, both in terms of office space and retail--which is worth a lot less when there are fewer customers ("Hold on tight: How NYC and state must prepare for the possible implosion of commercial real-estate values," New York Daily News).

The Philadelphia Inquirer has an article about this, "City finances, including Philadelphia’s, could go bad fast in this economy, bond expert says."  From the article:

Here are Kozlik’s observations on threats to city finance, many of which fell on his audience like a door slamming shut:

Scared borrowers. As recently as last spring, Kozlik and other analysts were predicting municipalities would borrow a record $500 billion this year by selling bonds to pension funds and other investors. But as interest rates have spiked, cities have been delaying commitments to long-term funding, and bond sales are unlikely to reach $400 billion, this year, or next, either. That translates into fewer jobs and business contracts, and a slower economy.

Rising interest rates. Pension funding, which has cost Philadelphia more than law enforcement in recent years, is no longer Wall Street’s main worry about local governments. Even though public pensions have been drained by the financial markets’ fall and many are badly underfunded, a recent survey shows analysts are even more concerned about rising interest rates and prices, the shrinking U.S. labor force, and divisive politics that prevents decisive policy, as causes for concern that cities will go broke.

Empty offices. Workers aren’t returning to office centers, including Philadelphia’s Center City. Nationally, restaurants, air travel, and apartment rentals have recovered, post-pandemic, but only half of workers have returned to office locations; in Philadelphia and San Francisco, it’s more like 40%.

Lower revenue. With offices shutting, property valuations and taxes are heading down, too.

Crime. Polls show Americans are more worried about crime, and less confident police will protect them.

Construction challenges. Labor and material shortages and cost increases have crimped construction to the point where, even if the federal government resumes billions in funding to cities, city managers have told Kozlik they would have a hard time spending it on projects in the near future.

Politics. Politicization of public policy, which has stalled Congress on immigration and other key issues since the 1980s, has been spreading among state and local governments. States like Texas are banning East Coast investment banks that have adopted anti-oil and anti-gun policies; in California, activists are pressing to punish banks that finance fossil fuels and weapons makers. What that means, in practical terms, is fewer banks available to sell public debt in those restrictive states, and, therefore, higher borrowing costs for taxpayers.

“The speed and magnitude of change, and the number of variables that are evolving is not being recognized by most people,” Kozlik said later in summary. “Most people across various industries are reacting to one or two changes in the landscape. Very few recognize the major transformation going on across the board with labor, technology, education, demographics, and politics.”

Communities growing have less at risk.  But rising prices and interest rates will press budgets, especially for capital planning.  

Constant pressure to reduce taxes is another risk.  But the other risk not mentioned is the constant pressure to reduce taxes.  For example, in Utah, the State Legislature does this every year "to share the benefits of growth."  But when you're growing you need to spend more money, not less, on infrastructure and other programs.  

Cities and counties face real pressure to provide the kinds of programs and facilities people want, as costs and demands rise.  

As conditions become more turbulent, cutting taxes increases risk.

The New York Daily News editorial suggests the following actions, to be proactive, in the face of declines in commercial property tax revenue:

• rethinking zoning. There’s no good reason that in a modern city, buildings are so rigidly categorized into classes, with minimal flexibility between light industrial, commercial, residential, medical and other. A nimbler New York would end unnecessary distinctions to let people find the best uses for space with minimal regulatory hurdles.
• budgeting smartly. Profligate spending that piles ever more recurring spending into the city’s $101 billion-and-growing fiscal plan risks throwing New York off a cliff if and when property receipts revenue plunges (personal income and related tax revenue is already expected to fall sharply this year). 
• Building up reserves and responsibly dialing back bureaucracy are the wisest insurance policies against sudden downward shifts — especially if those coincide with a recession.
• rethinking property tax collections, which have become unfair and incomprehensible over generations. Not only must New York rationalize levies on rentals, condos, coops and single-family homes; it must accept that golden-goose employers whose taxes have defrayed those from residences might not lay eggs forever.
• more sensitively implementing statutes that inflict huge costs on commercial real estate, like the law that will soon start punishing noncompliant buildings with big fines. That’s likely to accelerate a commercial exodus.