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Government / Budgets

Absent aid, few US cities will be able to avoid austerity

Congress appears unlikely to help with the looming Covid-related budget disaster that nearly every local government in America now faces. And cuts in the public sector will only worsen the recession.

Austin City Council member Jimmy Flannigan knows his city is lucky. 

The fourth-largest city in Texas suffered a nasty shock at the beginning of the Covid-19 pandemic when Mayor Steve Adler canceled its signature event, South by Southwest.  The annual ten-day extravaganza draws luminaries from the entertainment, tech and media industries and brings over $350m to Austin’s economy.

A view of downtown Austin, Texas.
Austin’s economy is doing better than most US cities since the outbreak of Covid-19. (Photo by Tom Pennington/Getty Images)

Flannigan is the former head of the city’s LGBT Chamber of Commerce, and he immediately rallied venue and bar owners to discuss the economic fallout. But the loss of the conference, and its tens of thousands of attendees, was quickly eclipsed by, well, everything else. 

“There was the cancel South by stage, where we all thought, ‘This is going to suck, but it’s not coming here,’” says Flannigan. “Then very quickly, you realize that this is a globally interconnected city and Southy by is not the problem. In a short period of time, it became clear that this was going to be shutting down a lot more than music venues.”

The cancellation of South By Southwest was one of those moments, like the National Basketball Association’s decision to pause its season, when Americans started realizing the pandemic wasn’t just happening somewhere else. But in the months since, Austin is looking like one of the luckiest urban areas in the United States. Unemployment in the city fell to 5.5% in August – far lower even than other wealthy US cities such as San Francisco or New York. After a 20% year-over-year dive, sales tax revenues are recovering (although they have not yet returned to pre-pandemic levels). Austin is one of the only major cities in Texas that hasn’t furloughed or laid off public-sector workers thanks, in part, to the city’s approach to addressing another crisis roiling the US: Black Lives Matter and the demand for police reform. 

But despite the relatively sunny outlook, Austin faces the same daunting dilemmas as do other cities across the United States.

“I think most cities are basically going to be broke for the foreseeable future,” says Bill Fulton, director of the Kinder Institute for Urban Research at Rice University in Houston. “I’ve been the mayor of a city, and if you lose 10 to 15 percent of revenue, it is impossible to maneuver or do anything. In a situation like this, you see a rapid drop in revenue and very slow restoration. And it’s impossible to know what business travel and the tourist economy is going to do in the years ahead.”

To make matters worse, for many cities, the fallout from the Great Recession never ended. Although the Obama administration’s stimulus package in 2009 provided aid to state and local governments, it ran dry in 2011. Revenues continued falling for years, only bottoming out in 2014.

Economists such as Amanda Page-Hoongrajok, an assistant professor of economics and finance at Saint Peter’s University, argue that austerity at the local and state levels fully offset the federal stimulus during the Great Recession. That’s part of why the recovery took so long and was so uneven: in cities and regions that weren’t doing as well, those public-sector jobs never fully came back. That meant a lot of private-sector jobs that relied on them died too. 

“Pretty much any spending cuts at the state and local level are going to be a huge drag on the overall economic recovery,” says Page-Hoongrajok. “If state and local governments are condensing their balance sheets, they’re laying people off. They’re cutting spending on equipment. Capital spending is cut early during downturns. All of that is sucking demand right out of the economy.”

union protesters at the state capitol in Lansing
Thousands of union members from around Michigan rally at the State Capitol to protest Governor Rick Snyder’s proposed budget cuts on 13 April, 2011. (Photo by Bill Pugliano/Getty Images)

Compared with many other rich nations, America governs itself with a relatively messy form of federalism. The powers of federal, state and local government all overlap somewhat, which means the higher branches can sometimes leave the lower ones to fend for themselves. Unless Congress steps in, it’s up to state and local governments to balance their own ledgers. This time, despite the massive stimulus efforts put forward in Washington, the only lifeline was a $150bn cut of the $2.2trn CARES Act, which then had to be split between states, cities and tribal governments. The funds could only be spent on efforts to ameliorate the pandemic. 

That did nothing for the Covid-size hole blown into municipal budgets by skyrocketing unemployment, declining sales taxes and the overnight evisceration of revenue derived from pandemic-vulnerable sources like hotel and liquor taxes. As the pandemic rages, some governmental duties require less input, but public responsibilities like social services grow more costly.

Without further federal aid, this will pose a problem for many localities. Left to their own devices, the layers of American government below the federal level have a limited toolkit. States cannot print their own money, and many have balanced-budget requirements. Even those that don’t have explicit strictures about the need for current revenues to cover expenditures are afraid to get too creative with their financing for fear of making the costs of borrowing more expensive. 

City governments, meanwhile, live at the whim of their states and face even tighter restrictions. In cases like Austin, where state governments are of a different ideological persuasion than municipal politicians, the ability of liberal local leaders to raise taxes can be limited by conservative elected officials in the statehouse. Their borrowing capabilities are even more tightly constrained than those of the states because their tax bases are much smaller and predecessor city governments have suffered fiscal crises after being disciplined by the bond markets. 

That just leaves current revenues on the table, which are looking precarious. The mainstay of municipal finance, property taxes, mostly haven’t been paid yet this year. But the National Association of Counties reports that 27% of respondents to their membership polling have already experienced a lag in collection or a decline in revenue from this usually reliable source. Experts fear that property taxes won’t bring in what they once did in the medium term, either. What owner of a mostly empty commercial office building won’t be challenging their assessment? 

In a mid-August report, the National League of Cities outlined the dire reality facing its membership. Almost 90% of cities anticipated being less able to meet their needs in fiscal year 2021, while the hundreds surveyed anticipated an average 13% decline in general fund revenues. A third of the nation’s 3 million city workers are expected to be furloughed, laid off or required to serve on reduced pay. In April alone, almost 800,000 jobs in local governments were lost. Employment in the sector has been growing again since June, but it lags overall job growth. 

All of this has been a nasty shock for a sector that only just recovered from the last (supposedly) once-in-a-generation crisis a little over a decade ago. Page-Hoongrajok says inflation-adjusted state and local government spending did not return to pre-Great Recession levels until 2019. Public-sector employment has fallen back to the same level it was in the 1990s, when the US population was roughly 60 million people fewer than it is today. Many key services were never restored to pre-Great Recession levels: infrastructure spending is at a 70-year low point, while capital spending on schools is below what it was in 2008.

foreclosure sign in front of a house
A foreclosure sign sits in front of a home for sale on 29 April, 2008, in Stockton, California. (Photo by Justin Sullivan/Getty Images)

Fulton remembers the pain of the Great Recession well. In the late 2000s, he served as mayor of Ventura, California, a city of just over 100,000 people midway between Santa Barbara and Los Angeles.

Ventura’s experience during the Great Recession was harrowing: Fulton recalls the city’s tax revenues plunging almost 15% overnight. It took years to restore, despite the city’s relative affluence – today Ventura’s median income is almost $13,000 higher than the national average.   

The downturn turned the position of mayor into a depressing bookkeeping exercise. Instead of cutting ribbons at new parks and infrastructure projects, Fulton spent his days cutting budgets and, more painfully, staff. Austerity proved even more painful elsewhere in the state. Cities across California’s Central Valley, which has not prospered alongside the coastal regions, eliminated their planning departments and never replaced them.

In Fulton’s estimation, there is an order to how local politicians implement austerity measures. First, they put a halt to capital projects and, then, services. The National Association of Counties found that 71% of its members have already cut back on capital spending and 68% on services. Then non-personnel spending goes. After that, staff is cut through attrition as job vacancies open up but go unfilled. 

“The second-to-last resort is that they cut staff, they lay people off,” says Fulton, “and then the last resort, when everything else fails, they actually start to rethink what they do.” 

Fulton says that an emergency of this magnitude will force cities to make hard decisions. But it can also provide an opportunity to change long-established ways of operating that have proved resistant to crusading councilmembers or activist campaigns. 

In Austin, easily the most left-wing city in Texas, the city government patched holes in municipal finances and funded needed city services by redistributing some of the police department’s budget. In the midst of the Black Lives Matter protests this summer, activists demanded moving funds – and responsibilities – away from law enforcement and to other agencies. Instead of having armed cops reacting to, say, a suicide threat or a domestic disturbance, why not have a social worker or another less threatening public worker be the first responder?   

For Flannigan, the decision could be seen as risky. He won his seat in 2016 by knocking out the last Republican-aligned politician in Austin city politics, and he is up for re-election this year. The district he represents is suburban in character, auto oriented and contains some of the city’s wealthier neighborhoods. 

But Flannigan, who chairs the public-safety committee, voted with the rest of his colleagues to strip almost $150m from the police budget. Upfront, that meant a $21.5m reduction through eliminating 150 vacant positions in the department, canceling three cadet classes and reducing overtime. Another $128m was moved into two transitional funds, one of which will be used to end police control of a variety of civilian functions and the other to provide funds to alternative forms of public safety over the next year.

The councilman frames it as a prudent measure made in the shadow of Covid-19 and its economic fallout. 

“For all of the racial-equity and public-safety impacts that are underpinning this moment, for me, a lot of the work has been fiscal,” says Flannigan. “The police department, in every city, is the department that ate the budget. It’s ginormous.”

In Austin, Flannigan says the police department’s budget has doubled in the past ten years, while the population grew by roughly 30%. By peeling funds away from that behemoth, Austin was able to push Covid-limited revenues toward other public goods in high demand like emergency medical services, public-park maintenance and mental health. A city spokesperson says there have been no other cuts beyond those to the police department.

“Course-correcting that trajectory on the police department budget is another big reason why we were able to keep the city moving forward even in these crazy-ridiculous times,” says Flannigan. 

The backlash from conservative politicians at the state level has been intense and highlights another fiscal threat facing American cities. Republican Governor Greg Abbott has threatened that when the Legislature is back in session, he will move to freeze property tax revenues for cities that shift funding from their police departments. 

Texas Governor Greg Abbott addresses the media on March 29, 2020 in Austin, Texas.
Texas Governor Greg Abbott addresses the media on 29 March, 2020, in Austin, Texas. (Photo by Tom Fox-Pool/Getty Images)

This comes amid a larger landscape in Texas, and America as a whole, that is increasingly stacked against urban areas. The Republican base is centered primarily in the exurbs and in rural areas, and passing legislation that harms cities dovetails nicely between the party’s electoral strategy of stoking us-versus-them resentment politics and its ideological goal of shrinking the public sector. 

This can be seen at the national level in the refusal of most Senate Republicans to countenance needed aid and at the state level in laws like the property tax cap that Abbot and his allies passed to prevent cities from increasing rates by more than 3.5% without putting the question directly to voters.

Last summer, the Republican speaker of the Texas House, Dennis Bonnen, was caught on tape gloating: “My goal is for this to be the worst session in the history of the Legislature for cities and counties,” while State Representative Dustin Burrows, his close ally and then chair of the Republican caucus, was recorded saying, “We hate cities and counties.” Abbott’s new proposal to freeze property taxes of cities that “defund police” is supported by Bonnen, who sat next to the governor at the press conference where the policy was unveiled.  

“In other countries, there’s always politics around bailouts from region to region, but they get on with them because they realize if you allow a number of regions to stagnate and suffer economically, that’s not good for the country overall,” says Mark Blyth, a professor of international political economy at Brown University. “In America, you have a political party that believes in the defenestration and dismantling of the administrative state. Every time this happens, it’s good news [from their perspective]. You’re destroying governments at that level. It’s a feature, not a bug.”

That leaves many American cities stuck in a bind between a federal government that is unwilling or unable to help them if Republicans command even one branch of Congress, state governments that are often controlled by those who seem to actively wish them ill and an economy that unrelentingly focuses its fruits upon a handful of regions. Most cities are not like Austin. Even before the pandemic hit, over a quarter of American municipalities expected to see their general funds shrink in 2020, and nearly every US city is now awash in red ink. For those at the top of Fulton’s pyramid of austerity measures, where governments in extremis are forced to radically rethink how they operate, there are nightmarish options, too. 

In already disadvantaged cities, local authorities can be removed or disempowered, and states can appoint policymakers who are insulated from the political demands of voters. Municipal functions can be eliminated whole-cloth, swathing neighborhoods in darkness as the streetlights are cut off. In Flint, Michigan, it was fiscal austerity measures that resulted in an unelected emergency manager abandoning the city’s old water system and changing to a new source, which stripped the pipes of their protective coating and poisoned a generation of city children with lead. 

“If there is no aid coming, then city leaders will have to make some very drastic choices,” says Michael Wallace, legislative director for housing and economic development with the National League of Cities. “Flint was a situation where fiscal concerns overrode public health. Imagine if every state had three or four situations like that, with cities in complete fiscal jeopardy. What’s it going to look like when every state has a Flint on their hands?”

This kind of bleak scenario won’t unfold in Austin, which is inarguably in one of America’s handful of winning regions. It is buoyed by the state capital (although public-sector cuts at that level will hurt the city, too), one of the nation’s largest universities, a rapidly growing tech sector and a climate that allows restaurants and bars to continue outdoor seating into the winter. Others are positioned to do relatively better too. Although San Francisco is seeing signs of Covid-related flight, the larger Bay Area has not seen substantial out-migration or a real-estate sell-off because of the pandemic (the toll of wildfires on the highly successful metro regions of the West Coast is still unclear). The National League of Cities projects that Connecticut’s urban areas will suffer the smallest revenue shortfalls in the nation. 

“Rich counties don’t suffer many recession costs, then they bounce back faster,” says Blyth, who authored Austerity: The History of a Dangerous Idea. “Are the suburbs going to bounce back faster? Yes. Are the white middle class going to have their schools funded? Yes. Are the cities that have no tax base, that have been in trouble, that are racially divided, are they going to have even less money? Absolutely. Is that unusual? No. That’s how America works.”