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The pandemic is pushing US city budgets into a new age of austerity

Economists warn that local budget cuts could counteract federal stimulus money.

2020 was supposed to be the year when Philadelphia finally cleaned up its act. 

Notorious for being one of the most litter-strewn cities in America, the country’s sixth largest city planned to introduce a street sweeping program. That announcement was one of the biggest applause lines in Mayor Jim Kenney’s 5 March budget address, where he unveiled an ambitious agenda for his second term in office and framed the success of the city as an antidote to gridlock in state and federal governments.

“With the dysfunction of governance at the national level, it is clear that cities large and small must lead,” Kenney said at his budget address. “We will not be stopped by thinly disguised racist rhetoric. We will not be stopped by fake news or the lies of those who claim to be leaders. No matter where the United States is headed … Philadelphia will not be stopped.”

But the Covid-19 pandemic brought a new reality. Last week, Mayor Kenney unveiled a radically redrawn version of his budget, pared back to match the loss of revenue in a locked down city. If the city follows Kenney’s plan to cut $650 million, the city’s arts office will be eliminated and a new tuition-free aid program for low-income community college students will be scaled back. The street cleaning program will again be just a dream.

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This pandemic-bred budget crisis is a microcosm of the one confronting cities across America. The federal government’s numerous rounds of aid, including the $2.2 trillion CARES Act, are an attempt to stave off a depression. But these federal efforts could be offset by brutal austerity at the state and local levels.

A mid-April survey of the National League of Cities and the U.S. Conference of Mayors showed that nearly half of local leaders expected to reduce the size of the police and fire departments – something Mayor Kenney vowed not to do – while more than half expected they would cut back city services. Another April survey by the National Association of Counties found that 50 of its members had started furloughing employees, and many of the largest states have begun doing the same. Pennsylvania already stopped paying 9,000 workers.

“It’s like the federal government is putting money in one pocket and state and local governments taking it out of the other pocket by either increasing taxes at the wrong time or cutting spending that is income for people like firefighters and teachers,” says Tracy Gordon, senior fellow with the Urban-Brookings Tax Policy Center.

Gordon fears the situation will only grow worse over time. She points to an estimate from the Brookings Institution which purports that each percentage point increase in unemployment leads to a $45 billion budget gap at the state level. The Upjohn Institute in Michigan estimates that each point of unemployment leads to a $22 billion budget gap at the local level.

Those budget gaps mean states, cities and other localities will have to cut wages and jobs, leading to further declines in demand. That will reverberate throughout the economy and result in still harsher budget cutting. It’s a cycle of austerity and pain that could keep the economy mired in a depression for years. 

Philadelphia is already making some of those moves. Revenue loss is already five times greater than what the city projected after the Great Recession hit in 2009, Kenney said in a budget address posted on YouTube. To accommodate that, municipal funding will be slashed. All city workers paid above $35,000 will see pay cuts. Small tax increases have been proposed. The hours of libraries and recreation centers will be shortened. Philadelphia’s massive network of public pools will not open this summer.

“This is not what I want for our residents—and I understand if this leaves many of you angry,” Kenney said in his video.

Economists fear what’s coming is a super-sized replay of the dynamics that unfolded after the Great Recession. 

“One of the biggest drags on the recovery between 2009 and 2016 was cutbacks in state and municipal funding,” says Yakov Feygin, associate director of the Future of Capitalism Program at the Berggruen Institute. “You had increases in federal spending, but those were eaten up by austerity at the state level. It’s one of the primary reasons we had such a big drag on the recovery.”

When the federal government offered stimulus to fight the Great Recession, it initially provided $150 billion in flexible relief for state and local governments with additional $80 billion in support for businesses that lost income because of public-sector cutbacks. But that money ran out by 2009, while state and local budgets continued to get hammered by lower revenues for years. It’s easier to cut spending and jobs than to raise taxes, so that led to major amounts of bloodletting in the public sector. 

In some ways, local and state governments never recovered. Only by 2018 did local governments employ almost as many people as they did in 2008, while state-level non-education jobs were still 5% below where they had been before the Great Recession. Per capita, levels of public-sector employment are back to where they were in the 1990s. Gross public sector investment is lower than it was before the last recession.

This dynamic is especially devastating in smaller counties and cities, where the public sector often offers the best paying jobs. With those jobs cut down, GDP levels in a quarter of American counties are still lower than they were before the Great Recession.

The federal government has extended some aid to cities and states so far. The Federal Reserve intervened to stabilize municipal bond markets, which are essential to keep city services humming.

The CARES Act included money to reimburse states and cities for direct costs of the pandemic. In Philadelphia that money covered city government purchases of medical equipment and the transformation of a basketball stadium into a field hospital. In Tucson, Arizona, it’s being used to improve the telework capabilities of the city workforce and for new accommodations for homeless residents. In Portland, Oregon, city officials want to use the money for rental assistance for those who have lost work because of the pandemic.

But so far there’s no federal aid to account for the loss of tax revenue.

Historically, the federal government mostly provides aid to states, with the expectation that they will bail out their cities. But it often doesn’t work out that way – state governments are required to pass balanced budgets, and they see to their own needs first. Many states also have contentious relationships with their cities, especially where the mostly white Republican Party controls state legislatures that oversee mostly black and Latino cities.

But local governments actually provide many of the services that citizens rely on. In many places, they pay the teachers, fill the potholes, and inspect construction sites for safety violations.

“The federal transfer should be very aggressive to cities, because that’s how our system is set up – we are extremely locally governed,” said Feygin. “What I do worry about a lot is smaller cities, especially minority-majority cities, not getting the kind of support from the state budgets they need.”

Democrats in Congress are calling for $1 trillion in support for state and local government. But prominent Republican Party leaders have disdained that idea. Senate Majority Leader Mitch McConnell said states should be able to declare bankruptcy, allowing them to escape their pension obligations. President Donald Trump said the aid could only be considered in exchange for dismantling local pro-immigrant laws. Local and state aid did not appear in the last round of stimulus, despite Democratic efforts to include it.

“It’s not obvious they will do the right thing,” says Mike Konczal, director of progressive thought at the Roosevelt Institute. “Maybe political realism will kick in [so they fund local government to stave off a worse depression], but I think the ideological view of it will be stronger than the urge to have the right policy.”

That means city governments like Philadelphia, which has a legal requirement to set a new city budget by 1 July, cannot rely on getting adequate federal aid. Cuts will have to start coming hard and fast. 

For Mayor Kenney, who devoted his first four years to bolstering funding on education and municipal infrastructure, that may mean spending the next four years rolling back his previous accomplishments and forgoing the additional changes that could have shaped his legacy, including bringing back street cleaning.

The city does not yet have an estimate of how many city workers will lose their jobs. But to fill the $650 million budget hole, Kenney is only proposing $50 million in tax increases. The rest will come from cuts to city services and the municipal workforce.

“The hardest part of this budget has been having to tell people they have to be laid off,” Kenney told reporters on Friday. “It’s really heartbreaking and it’s very difficult. But that’s the largest part of your costs, the salary and benefits for city employees.” 

No one on Friday’s conference call asked Kenney about the defunct street sweeping program, a topic that was a fixture of local media coverage and City Hall debate until March.

Jake Blumgart is a staff writer for CityMetric.

Jake Blumgart

Jake Blumgart

Staff writer

Jake Blumgart was a staff writer for City Monitor.