The Local Government Budget Crisis

While the budget crisis at the state level appears to be easing (tax revenues are up, spending is steady), a problematic reality has been some states getting local governments dependent on state aid and now balancing their budgets by slashing that aid. From the New York Times:

Ohio plans to slash aid to Columbus, Cleveland, Cincinnati and other cities and local governments by more than a half-billion dollars over the next two years under the budget proposed last week by its new Republican governor, John R. Kasich. Nebraska passed a law this month eliminating direct state aid to Omaha and other municipalities. The governors ofWisconsin and Michigan have called for sending less money to Milwaukee, Detroit and other local governments.

And it is not only Republicans who are cutting aid to cities: Gov. Andrew M. Cuomo of New York, a Democrat, decided not to restore $302 million in aid to New York City that was cut last year, while Gov. Deval Patrick of Massachusetts, another Democrat, has called for cutting local aid to Boston and other cities by some $65 million.

My home state of California has raided state aid to local transit districts in particular, sparking both service cutbacks and innovative strategies to do more with less.

In some ways, local governments can better handle it: property tax collections haven’t really dipped and that tax has more tools (valuation, rates, assessments) to keep revenue flowing, unlike income or sales taxes, even if property owners are struggling. Cities can also be more reluctant to adopt problematic tax regimes or poor quality services, given how many options Americans have about where to live. Nonetheless, the impact has been uneven and fast. Although a vast range of municipal bankruptcies are unlikely (only a few have happened), residents should be concerned about the interplay of state and local governments in budget battles.