GoverningtheBrokeCity:FiscalCrisisandtheRemakingofUrbanGovernance

by

SaraMargaretHinkley

Adissertationsubmittedinpartialsatisfactionofthe

requirementsforthedegreeof

DoctorofPhilosophy

in

CityandRegionalPlanning

andtheDesignatedEmphasis

in

GlobalMetropolitanStudies

inthe

GraduateDivision

ofthe

UniversityofCalifornia,Berkeley

Committeeincharge:

ProfessorTeresaCaldeira,ChairProfessorAnanyaRoyProfessorMaloHutson

ProfessorMarionFourcade

Summer2015

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Abstract

GoverningtheBrokeCity:FiscalCrisisandtheRemakingofUrbanGovernance

by

SaraMargaretHinkley

DoctorofPhilosophyinCityandRegionalPlanning

UniversityofCalifornia,Berkeley

ProfessorTeresaCaldeira,Chair

OnJuly18,2013,thecityofDetroitfiledforthelargestmunicipalbankruptcyinU.S.history.DespiteDetroit’sapparentlyextremedemographic,economic,andfiscalchallenges,thecityhasbeendeployedasbothamodelofcrisisresponseandasawarningofimminentfiscaldistressforallU.S.cities.IarguethatDetroitisanimportantsitewherethenarrativeofwidespreadurbanfiscalcrisisisconstituted.ThisdissertationexaminesthedominantnarrativesofurbanfiscalcrisisandtheimplementationofausteritybudgetsandrestructuredgovernanceinU.S.citiesinthewakeoftheGreatRecession.UsingdatafromtheCensusAnnualSurveyofLocalGovernmentFinances,citybudgetdocuments,ratingsagencycomments,newsarticles,andpublicspeechesbylocalofficials,Idescribeboththenationalemergenceofurbanfiscalcrisisfrom2007‐2013andfourlocalcasehistories:Detroit,Dallas,Philadelphia,andSanJose.IfindthatthesamethemescharacterizingDetroit’scrisisarereflectedinmanyotherAmericancities:ratingsdowngrades,high‐riskdebtinstruments,reducedautonomyvisavisstategovernments,restructuringobligationstopublicemployees,expandedprivatizationofgovernmentgoodsandservices,exhortationstoadapttoa“new”economy,andthehandingoveroffinancialmanagementtounelectedexperts.Thesepoliciesarejustifiedbyacommonnarrativeofurbanfiscalcrisisthathasbecome“commonsense:”ataken‐for‐grantedexplanationofwidespreadurbanfiscalcrisisthatblamesgovernmentoverreach,municipalfiscalirresponsibility,excessivepublicemployeecompensation,anda“newnormal”ofscarcityandeconomicvolatility.Throughthereproductionofthiscommonsensebylocalofficials,austerityandexternalfiscaldisciplineareframedastheonlyalternativestofinancialemergency.Iarguethatthecurrentwaveofurbanfiscalcrisiscontrastswithearlierperiodsofcrisisinseveralimportantways:(a)thescaleandbreadthofdeepcrisisafteryearsofdisinvestmentandeviscerationofthepublicsector;(b)thepromotionoffiscaldisciplineasgeneralgovernance,pushedbyfinancialinstitutions,budget“experts,”andstate

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legislatures;(c)theframingofcitiesasisolatedfiscalentitiesthatmustpractice“individualresponsibility”andbeheldsubjecttothesameconsequencesasprivateactorsinfinancialmarkets.Finally,unlikethecrisesofthe1970sand1980s,whichwerecloselyassociatedwiththeabandonmentofpeopleandcapitalfromthecentralcity,andanaccompanyingdiscourseofinnercitycrimeandpoverty,thecurrentnarrativesoffiscalcrisismustbeunderstoodinthecontextofanewpoliticaldynamicofcityrevitalization,innercitywealth,andsuburbandecline—alongwithgrowingspatialinequality.Myworkissituatedwithinthreeempiricalandtheoreticalengagementsthatcutacrossurbanplanning,economicgeography,andpoliticalscience:(1)thepoliticsofpublicbudgeting,inparticularthepoliticsofcollectiveconsumption,taxequity,andretrenchment;(2)theembeddingofneoliberallogicsofmarketgovernanceinurbanpolitics,particularlythroughthecirculationofnarrativesandpolicymodels;and(3)thefinancializationofurbanpolicy,andtheroleofpoliticalandeconomiccontextinshapingtherelationshipbetweencitiesandcircuitsoffinancialcapital.Myprojectdemonstratesthefertilityofcitybudgetingasaterrainforstudyingbroadshiftsinpoliticalexpectationsandtherelationshipbetweenpublicfinanceandurbandemocracy.

Formymother,whomadeeverythingpossible.1941‐2015

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TABLEOFCONTENTS

Listoffigures................................................................................................................................................ii

Listoftables................................................................................................................................................iii

Acknowledgments.....................................................................................................................................iv

PartOne:AnatomyofUrbanFiscalCrisis........................................................................................1

Introduction............................................................................................................................................2

Chapter1:NarratingUrbanFiscalCrisis.................................................................................18

PartTwo:ProducingAusterity..........................................................................................................47

Chapter2:ProducingScarcity......................................................................................................53

Chapter3:RestructuringthroughRetrenchment................................................................82

PartThree:NormalizingCrisisGovernance................................................................................99

Chapter4:FinancializingGovernance...................................................................................105

Chapter5:GrowingStatePower..............................................................................................142

Conclusion:WhoGovernstheBrokeCity?................................................................................166

References...............................................................................................................................................170

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LISTOFFIGURES1.1 Populationchange,casecities,1940‐2013...................................................................................15

1.2 Stateandnationalunemploymentrates,2000‐2013..............................................................31

1.3 Unemploymentratesinfourcities,2000‐2013.........................................................................32

1.4a‐dUnemploymentdivergesbetweencity,MSA,andstate,2000‐2013..........................33‐34

2.1 Generalrevenue,FY2007‐12..............................................................................................................54

2.2 Detroitgeneralfundrevenue,FY2007‐12....................................................................................54

2.3 Dallasgeneralfundrevenue,FY2006‐F12...................................................................................55

2.4 Philadelphiageneralfundrevenue,FY2006‐12.........................................................................55

2.5 SanJosegeneralfundrevenue,FY2006‐12..................................................................................56

2.6 Shareofmajorrevenuesources,FY2007‐12...............................................................................57

2.7 Citypropertytaxrevenue,FY2007‐12...........................................................................................59

2.8 Detroitpropertytaxrevenue,FY2007‐13....................................................................................62

2.9 Dallaspropertytaxrevenue,FY2007‐13......................................................................................64

2.10 Philadelphiarealestatetaxrevenue,FY2007‐13......................................................................65

2.11 SanJosepropertytaxrevenue,FY2007‐13..................................................................................67

2.12 Detroitincometaxrevenue,FY2007‐13........................................................................................70

2.13 Philadelphiaincometaxrevenue,FY2007‐13............................................................................71

2.14 Citysalestaxes,citiesover75,000,FY2007‐2012....................................................................72

2.15 Dallassalestaxrevenue,FY2006‐2013.........................................................................................73

2.16 Philadelphiasalestaxrevenue,FY2007‐2013............................................................................73

2.17 SanJosesalestaxrevenue,FY2006‐2013.....................................................................................74

2.18 Growingrelianceonfeesandcharges,FY2007‐12...................................................................75

2.19 Totalintergovernmentalrevenue,FY2007‐12...........................................................................77

2.20 Federalintergovernmentalrevenue,FY2007‐12......................................................................78

2.21 Stateintergovernmentalrevenue,FY2007‐12...........................................................................79

2.22 Detroit’slossofstaterevenuesharing,FY2007‐13..................................................................80

3.1 Totaldirectgeneralexpenditures,FY2007‐12...........................................................................89

4.1 Generalobligationdebt,FY2000‐13,casecities.....................................................................116

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4.2 Primarygovernmentdebtpercapita,FY2000‐13.................................................................117

5.1. EmergencyPowersIntheHandsofthePeople.......................................................................161

LISTOFTABLES

1.1 Populationchangeanddemographics,casecities....................................................................14

1.2 Unemployment,povertyandjobs,casecities.............................................................................14

2.1 Censusrevenuecategories..................................................................................................................50

2.2 Sourcesofgeneralrevenue,FY2007and2012..........................................................................57

2.3 Sourcesofgeneralrevenue,casecities,FY2007........................................................................58

2.4 Citypropertytaxingpowers...............................................................................................................60

3.1 Commonversusnon‐commonspendingfunctions..................................................................85

3.2 Functionalcategoriesofcityspending...........................................................................................86

3.3 Spendingcategoriesbycity.................................................................................................................87

3.4 Spendingbycityfunction,1997‐2012............................................................................................89

4.1 Outstandingdebt,casecities...........................................................................................................116

4.2 Municipalbondratingsscales.........................................................................................................123

4.3 Moody’srating,largestU.S.Cities,2006and2014................................................................124

4.4 Moody’sratingfactors........................................................................................................................124

4.5 SelectedMoody’scommentsonfiscalcrisis,2000‐2014....................................................127

4.6 Detroitratingsactionsandkeyfinancialevents,2005‐2014............................................128

4.7 SelectedMoody’scommentsonpensions,2008‐2014.......................................................136

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ACKNOWLEDGMENTSWritingtheacknowledgmentspageofanendeavorthishugeshouldbean

outpouringofgratitudeandrelief.Instead,itisovershadowedbythefactthatmybelovedmotherdiedsuddenlyjustweeksbeforeIwassupposedtofinish,ashockthathangsoverthesepages.Butsuchaprofoundandabruptlossalsocreatesanexpandedsenseofgratitude.WhenmylifegroundtoahaltonFebruary17,2015,anextendedwebofsupportsurroundedmeandmyfamily.Friendsmadedinner,deliveredgroceries,hostedsleepovers,playedwithmykids,broughtflowers,andsenttextmessages,emails,andvoicemailsofsympathyandlove.Theymademygriefasharedexperienceandremindedmeoftheinfiniteconnectionsthatrunbetweenus,bearingbothsorrowandjoy.Beckyinparticularcarriedmethroughthetwomostdifficultweeksofmylifewithgoodhumor,perspective,andjusttherightmixofsympathyandsnark.

Ioweofcoursetremendousthankstothosewhohaveshepherdedmethroughthe

pastsevenyears.TeresaCaldeira,whogavemeeverythingshehad,includingmeetingmeatacoffeeshoptogolinebylinethroughmyinsidefieldstatement,readingdraftsdiligently,andcultivatinganinvaluablesupportnetworkofadvisees.Itmeantalottomethatmyadvisorwasalsoamother,becausebeingamotherinacademiacanbelonelyandfrustrating,butalsorewarding.Andtherestofmycommittee:AnanyaRoybelievedinmeasateacherandacolleagueandprovidedinsightatkeymoments.MaloHutsonalwaysmademefeelbetteraboutmyprojectandmyabilitytocompleteit.MarionFourcadeindulgedmyattemptstoengagewithsociologistsontheirturf,andbelievedinthevalueofmytopicandmyabilitytodoitjustice.IalsotreasurethemanycolleaguesfromDCRPandbeyondwhohavereadterribledraftsandneverbeenanythingbutencouragingandkindwhileprovidinginvaluablecriticism.Ihavebeenunbelievablyluckyinneighbors(Kayko,Noriko,Maria,Carmen),babysitters(Shelby,Liron),andteachers(toomanytoname),nottomentionthemanychildrenandparentswhoshareourchildren’sdailylives.

Howdoyouacknowledgetheimportanceofthosewhokeepyoualive,real,and

happyeveryday?IoweeverythingtoPhil,mypartnerineverythingforadozenyearsnow,andmytwochildren,EthanandAustin(whoremainconvinced,despitemyfirmassurancesotherwise,thattheywillsomedayenjoyfindingmy“book”attheirlocallibrary).Ihavespentthebetterpartofmymarriageandtheirchildhoodsworkingonmydoctorate.TheirtoleranceformyconstantworkinghassurpassedanythingIhadarighttoexpect.

Iamespeciallygratefulforthefriendsofmymother’swhotoldme,overandover

again,howproudshewasofme;andformybrotherandmyfather,whoshowedupwithloveandsinceritywhenitmatteredmost.AndIamsoverythankfulformymother,andeverythingshedidforme,butespeciallyforherbeliefthatIwouldalwaysbefine.

AndfinallyIwanttoacknowledgethecivic‐mindednessofmyparents,andmy

mother’sfamilyinparticular.Theydemonstratedthroughtheirlivesthatwearealwaysresponsibleforthingsgreaterthanourselves,thatanycollectivethrivesonlybecauseofthedevotionofpeoplelikethemtoitssustenance.MygrandmotherwasthefirsttownwelfarecaseworkeraftertheGreatDepression;sheandmygrandfatherkneweveryoneintheir

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town.Istillmeetpeoplewhoseparentswerehelpedbymygrandmother:withabagoffood,awashingmachine,akindword.“Civiclife”wasjustlifetothem.Aftermymotherdied,Ispentmanydayscallingtheorganizationsthatshewasstill,at74,involvedindaily.Theyalllamentedthatherabsencewouldbeatremendousblowtotheirorganization,thatshewasthepersonwhoalwayssigneduptohelp.Thatcommitmenttosociety—aprofoundandlivedbeliefintheresponsibilityweallhavetoeachother—humblesanddrivesme.Ihopethisprojectfurtherstheagendaofarobust,democraticsocietycapableofprovidingforitscitizens.

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PARTONE:ANATOMYOFURBANFISCALCRISIS

Thebudgetistheskeletonofthestatestrippedofallmisleadingideologies.(Schumpeter1954)

Onlyacrisis—actualorperceived—producesrealchange.Whenthatcrisisoccurs,theactionsthataretakendependontheideasthatarelyingaround.(FriedmanandFriedman2002,xiv)

[T]hecrisisishere.Thequestionis,willitbearticulatedintermsofbonddefaultsorlargerkindergartenclasses—ornokindergartenclassesatall?(Lowenstein2011)

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INTRODUCTION

OnMarch1,2013,theNewYorkTimesmadetwostrikingdeclarationsonitsfrontpage:first,PresidentObamaandHouseSpeakerBoehnerhadreachedanimpasseinthehigh‐stakesnegotiationsoverthe“fiscalcliff”1(ShearandWeisman2013),andsecond,Michigan’sRepublicanGovernorRickSnyderwouldreplaceDetroit’selectedgovernmentbyappointinganemergencyfiscalmanagerforthecity(Davey2013a).BotheventsgrewdirectlyoutofthewaveoffiscalcrisesthathadbeensetoffbytheGreatRecession,andbotheventswereevidenceofthegrowingpoliticalstruggleoverthescopeofgovernment,themoraleconomyofdebt,andtherelationshipbetweendemocracyandbudgeting.Bothnewsstoriesalsoraisedthequestionofhowdeeplypublicservicescouldbecutbeforethecontractbetweenagovernmentanditscitizenswasstretchedtothepointofbreaking.TheseandsimilarstorieswouldcometoreflectthemeaningofcrisisforcitiesacrosstheUnitedStates,asonelocalgovernmentafteranothergrappledwiththeconsequencesofprolongedrecession.

SixmonthsafterGovernorSnyderappointedanemergencyfiscalmanagertotakeoverDetroit,thecityfiledforthelargestmunicipalbankruptcyinUnitedStateshistory.ThecoverstoryinTimeMagazinethefollowingweekasked:“Willyourcitybenext?”(Foroohar2013).ThiswayofframingthestoryofDetroit’scrisis,asadominofallinginalonglineofdoomedothers,reflectstheanxietyover,andtherisingimportanceof,citybudgetwoesinAmericanpoliticaldiscourse.Inthisdiscourse,fiscalcrisisisakindoframpantcontagion,withtotteringcitygovernmentsreadytocollapseatamoment’snotice.Andtheblameforthatfragilitywasimplicitlylaidonthecitiesthemselves.

IarguethatDetroitisbestunderstoodnotasanisolatedorevenextremecase,butratherasawidely‐circulatingmodeloftherelationshipbetweencrisisandpolicyinU.S.citiestoday.ThesamepowersMichiganlawgivestoDetroit’semergencymanager—tobreakunionagreements,selloffpublicassets,privatizebasicservices,terminateentiredepartments,andclaimgeneralfundmoneysfordebtrepayment—arebeingpushedoncitiesaroundthecountry,eitherbystatelegislaturesorbylocalofficials,totheacclamationoffinancialratingsagenciesandthefinancialpress.ThesamethemescharacterizingDetroit’scrisisechoinmanyotherAmericancities:ratingsdowngrades,high‐riskdebtinstruments,reducedautonomyvisavisstategovernments,restructuringobligationstopublicemployees,expandedprivatizationofgovernmentgoodsandservices,exhortationstoadapttoa“new”economy,andthehandingoveroffinancialmanagementtounelectedexperts.

Thestoriesofurbanfiscalcrisisframedbylocalactorsframessuchdisciplinarypoliciesasthe“onlyalternatives,”inpartbyforeclosingdiscussionsofthepolicydecisions

1Thefiscalcliff,ofcourse,wasitselfaconstruct,basedonatheoreticalmodeloftheidealnationaldebtlimitthatturnedouttobebasedonfaultycalculations(Herndon,Ash,andPollin2013).

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thathaveproducedlocalizedfiscalcrisis(seePeck2010).Thereareimportantpoliticalpurposesservedbypresentingthefactofcrisisasself‐evident.Inhisanalysisoftheurbanfiscalcrisesofthelate1970s,Marcusearguedthatorthodoxexplanationsoftenemphasizedeclineasorganicandinevitable,naturalizingpoliticalphenomenaandframingthepreferredsolutionsascommonsense(Marcuse1981).Inthatera,thedominantnarrativeofurbanfiscalcrisisemphasizeddecliningcentralcitypopulation,thedwindlingsignificanceofmanufacturingcities,expansionofsocialspending,governmentincompetence,andtheexcesspowerofpublicemployees.Thisexplanation,Marcuseargues,failedtoexplainwhyeconomicchangesshouldleadtoafiscalcrisisinthepublicsector,andwhytheydosoatcertaintimesbutnotothers(Marcuse1981).Thenarrativesofcontemporaryfiscalcrisismirrorthe1970sinthisrespect.Theglobalfinancial‐economiccrisishasbeen“socializedintoafiscalcrisisofthestate”(OosterlynckandGonzalez2013),andthenotionthatcitieshavenochoicebuttocutservicesandtakethesafetynetfromtheirownworkersseemstohavebeeninternalizedbylocalpoliticians.Whatisdescribedasnecessaryinresponsetocrisisthenbecomesnecessarytoavoidit.

Criseshavethepotentialtocreatepoliticalspaceforsignificantshiftsingovernance,inexpectationsaboutcities,andeveninfinancialrelationships(Hackworth2007;Weikart2009).Whilewidespreadurbanretrenchmentinthe1970sand1980sseverelyreducedurbanservices(FainsteinandFainstein1986),thepost‐2008U.S.urbanfiscalcrisisismorefundamentallyreshapingthenormativeframingoflocalgovernanceandthescopeofthecity(Pinch1995).Whileretrenchmenteffectivelyshrinksthestatethroughspendingcutsandprivatization,thepowerofcitiesisalsodiminishedbysignificantrestructuringofurbanfiscalgovernance,reflectedinthenationalmovetowardpensionrestructuringandstateinterventionism(seealsoMerrifield2014).

Thepersistenceofausterityasthepolicyresponseatalllevelsofgovernmenthasledtoanongoingdebateovertheresilienceofneoliberalideologydespitethedevastationcausedbyderegulationoffinancialmarkets(seee.g.Peck,Theodore,andBrenner2010b).Whilethatliteraturehasdocumentedtheglobalandnationalpersistenceofausterity,theaspectsofdifferentiationthatformanapproachtocomparativeurbanresearcharemissingfromcontemporarydebatesabouttherelationshipbetweenneoliberalideologyintheU.S.andlocalizedausterity.InordertounderstandDetroit’sparadoxicalfigurativerole,Iwantedtostudyfiscalcrisisnotasaneventinonecitybutoneconstitutedinmultiplesites.Thenationaldebatesoverurbanfiscalcrisis(occurringinthefinancialandmainstreampress)areproducedthroughlocalnarrativesandpoliciesofcrisis,whichinturnshapeandreinforcelocalnarratives.Howacitycomestobeunderstoodasfacingcrisis,howitsrelationshiptonationalcrisisisframed,andhowcrisisismanaged,areallprocessesIobservedbeingmadeinreference(bothdirectandindirect)toothercities.Thiscirculationofbothnarrativesandpoliciesconstitutesanimportantspaceinwhichthemeaningofcrisisisconstructed.Iwantedtoanswerthefollowingquestions:

Whatexplainsthepersistenceofneoliberal,austerity‐drivenapproachestolocalcrisis,especiallyafterthefinancialcrisisgeneratednewpoliticalspaceforrethinkingfinancialization?

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Wastheausteritypracticeincitiesacontinuationoftheresponsestopreviouscrises(retrenchment,dismantlingsocialwelfare,etc.),orsomethingdifferent?

Whatroleisplayedbytherelationshipsofcitiestofinancialmarkets,andhowdidthataffectdifferentcitiesdifferently?

Theadoptionoflocalausterityrequiresthatfiscalcrisisbedefinedanddescribedinawaythatlegitimatesausterityasthepolicyresponseinthatspecificcityatthattime.Iarguethattheabsenceofsignificantlocaldebateoverausterityisaproductofthefactthatcertainexplanationsforfiscalcrisishavebecometakenforgranted,inthesensethatWedelsuggests,anditisthosetaken‐for‐grantednarrativesinwhichIbecamemostinterested.Ifoundthatseveralkeyshiftscharacterizedthecurrentnarrativesofcrisis:thereframingofpensionsas“debt”(andthenofpensionersasinvestors),theframingofallcitiesasbeingincrisis,andtheframingofstatesasthegatekeepersofcityfiscalautonomy.

Althoughtherecessionofficiallyendedin2009,2Americancitieshaveseendecliningrevenuesforsixstraightyears,withtheworsteffectsoftherecessionhittingonlyin2012(Pagano,Hoene,andMcFarland2012).Persistentunemployment,stagnantwages,andlaggingpropertyvaluesarefuelingbudgetshortagesasstrugglingresidentsrelyongovernmentsupportingrowingnumbers.Citiesfaceseveralobstaclestofiscalstability:theyareheavilyreliantonstagnantpropertytaxvaluesanddepressedsalestaxes,arerequiredtobalancetheirbudgetsannually,andfacestrongpoliticalandpolicyobstaclestoraisingrevenues.TheconcentrationoftheGreatRecessionintheU.S.housingmarkethasbeenparticularlydevastatingforcities,ashousingpricesbegantofallin2006‐2007,eventuallydroppingbyasmuchas50%insomestates(UrahnandPewAmericanCitiesProject2012).Citygovernmentreservesdeclinedby25%from2008to2012,leavingcitiesmorevulnerabletoshocksandvulnerabletoratingsdowngrades,whicharebasedinpartonacity’sassets(Pagano,Hoene,andMcFarland2012).Morethan500,000localgovernmentjobswerecutfrom2010to2012alone(DewanandRich2012).Theearningslostbecauseofthesejobcuts(andoutsourcingtolowerpaidworkers)contributestoaviciouscycleofdecliningincomes,unemployment,andforeclosures,furtherdecimatingthelocaltaxbase(Norris2011).Wellinto2013,localtaxrevenueslaggedwellbehindpre‐recessionarylevels,andfinancialinstitutionshavetightenedtheircontrol(bothdirectandindirect)overcities’accesstomoneythroughmunicipaldebtmarkets(UrahnandPewAmericanCitiesProject2012;FitchRatings2012).

By2009,thefederalgovernmentshiftedfromstimulustoausterity,andstatesdevolvedtheirowngapingbudgetdeficitsontolocalgovernments.Governorsandstatelegislatureshavenotonlymadeenormousreductionsin(orinthecaseofstatessuchasIdaho,completelyeliminated)fiscalaidtolocalgovernments,theyhavesignificantlycutmoneyforprogramssuchaslibraries,medicalclinics,andmentalhealth,whichareoftenoperatedbycities(Kellogg2012;Cooper2002).ManyscholarshavenotedthattheU.S.federalsystemdevolvesfiscalcrisistothelocal,ensuringthatthepoliticsofausterityare

2TheNationalBureauofEconomicResearchidentifiesthestartofrecessionasDecember2007anditsendasJune2009:http://www.nber.org/cycles.html.

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mostdeeplyfeltbycitiesandtheirresidents(GonzalezandOosterlynck2014;Peck2012).Inthecurrentrecession,thedynamicsofstate‐localpoliticshavebeenparticularlyimportant,althoughtheyreceivelessscholarlyattentionthanfederal‐levelpolicy;ItakethisupinChapter5.

Inearly2010anarrativeofwidespreadurbanfiscalcrisistookholdinthenationalmedia,promptedinpartbyreportsinthefinancialpressthatcities’debtsweremountingandthattherewasarealpossibilityofpoormunicipalratingsspreadinglikecontagion.Inacautionaryarticleaboutthe2008bankruptcyofVallejo,California,theNewYorkTimesasked“IsthisAmerica’sfuture?”(Lowenstein2011).FinancialexpertsfromtheNewYorkFederalReservetoMoody’spublishedreportsoutliningtheirconcernsaboutthelikelihoodofwidespreadmunicipaldefault(Appleson,Parsons,andHaughwout2012).Afinancialadviserrenownedforpredictingthe2008financialmeltdownpredictedthatstateswouldbalancetheirownbudgetsbycuttingaidtocitiesandtherebytriggerawaveofmunicipaldefaults(Tully2010).Nosuchdisasterfollowed,butitreflectsthecontemporaryatmosphereofpanicaboutthefinancialsolvencyoflocalgovernments(mostoftenframedintermsoftherisktoinvestorsinmunicipalbonds).

In2015,morethansixyearsafterthefinancialmarketcollapse,popularnarrativesofurbancrisisfocuslessontheoriginaleventofbank‐drivenmarketfailure,andinsteadongovernmentasanobstacletoeconomicrecovery,withcitiesdraggeddownbyirresponsiblepublicbudgetingandunsustainablemunicipaldebtandpensionburdens.Insteadofarticulatingavisionforgovernment’sresponsetoarecessionaryeconomy,thenarrativeofurbanfiscalcrisisthatdominatesheadlinescentersongovernmentsneedingtomake‘toughdecisions,’jettisonunsustainablepublicbenefits,eliminatethefewremnantsofthewelfarestate,andadapturbangovernancetoaneweconomicreality(R.L.Florida2009).Thesenarrativesoflocalcrisislargelyomitthelocalandnationalpolicyhistoriesthathaveproducedurbanfiscalcrisis.Perhapsmostimportantly,theyfailtoarticulateavisionforwhathappenstoawitheredlocalstatewhentheeconomyrebounds.Avisionoftrimmedgovernmentintimesofshortagemorphsintoanimpliedfutureofpermanentlylimitedurbanservices.

Inthiscontext,theverynotionofthecityhasbeenreshapedusingalanguageofnecessity,scarcity,andabsenceofalternatives.Urbanfiscalpolicyspace—revenues,spending,debt,andgovernance—hasbeenakeysitefortheseprocessesofremaking,throughthepromotionofdiscipline,expertise,andausteritymadepermanent.Theseprocesseshaveeffectivelyforecloseddiscussionsabouthowcitiesraisemoney,thecity’sroleinredistribution,andpowerrelationshipsbetweencity,county,suburban,state,andfederalgovernments.Allofthesedynamicsbuildonyearsofmaterialausterityproducedbythesteadyretreatoffederalurbanspending,taxrevolts,andthelegaciesofretrenchmentfromwavesofurbancrisisinthe1980sand1990s.

Iarguethatthecurrentwaveofurbanfiscalcrisiscontrastswithearlierperiodsofcrisis(especiallyNewYorkCity’s1975encounterwithbankruptcy)inseveralimportantways:(a)thescaleandbreadthofdeepcrisisafteryearsofdisinvestmentandeviscerationofthepublicsector;(b)thepromotionoffiscaldisciplineasgeneralgovernance,pushedby

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financialinstitutions,budget“experts,”andstatelegislatures;(c)theframingofcitiesasisolatedfiscalentitiesthatmustpractice“individualresponsibility”andbeheldsubjecttothesameconsequencesasprivateactorsinfinancialmarkets.Finally,unlikethecrisesofthe1970sand1980s,whichwerecloselyassociatedwiththeabandonmentofpeopleandcapitalfromthecentralcity,andanaccompanyingdiscourseofinnercitycrimeandpoverty,thecurrentnarrativesoffiscalcrisismustbeunderstoodinthecontextofanewpoliticaldynamicofcityrevitalization,innercitywealth,andsuburbandecline—alongwithgrowingspatialinequality.

Whatisafiscalcrisis?

Thedecisiononwhetherornotacrisisexistsistheessenceofthepolitical.(Brash2003,78paraphrasingSchmitt)

Thisdissertationaimstotreatfiscalcrisisasaconstructedconceptinordertoexplorethewaysthatcrisisisdeployedasajustificationforpromotingparticularpolicies.AsKeilsays,thereismuchinktobespilledonthecategoryofcrisisanditstrajectoryinurbanpolicy;Iwillnotattempttoelucidatethepossiblemeaningsofcrisishere(Keil2010,649).Thecurrentiterationsofcrisesinfinancialmarkets,mortgageindustry,andhousingmarketsaresimultaneouslydistinctandoverlappingphenomenawithimportantlineagesintherelationshipbetweencrisis,neoliberalism,andrestructuring(seee.g.SoureliandYoun2009).

Whileacknowledgingtheseimportantconceptualcomplexity,therearealsoaremeasurabledimensionsofmunicipalfiscalcrisis,reflectedbothinpolicyandingeneralunderstandingsofvulnerabilitytoinsolvency.Thehighestlevelof“crisis”foracityisfiscalinsolvency:whenacitycannotpayitsbillsbecauseitlacksaccesstocash.Onadaytodaylevel,citiesfundoperationsthroughshort‐termborrowing,tobridgetemporarygapsbetweenrevenuecollectionsandregularspendingneeds.Thosetemporarygapscangrowlargerthanexpectedifrevenuesfallbelowprojections(ashappenedduringtherecession),orunexpectedexpensesoccur(suchasnaturaldisasters).Insolvencycanalsofollowseveralyearsofoperationaldeficits(whenacitydrawsdownitsreservesattheendoftheyear,orreliesonborrowingtofillthegapcreatedbythedeficit).Whenacity’saccesstoshort‐termcreditbecomesrestricted(i.e.onlyatveryhighinterestrates)orunavailable(aswhenbanksrefusedtolendtoNewYorkin1975),insolvencymaybecomeimminent.WhenDetroitfailedtomakeacreditpaymentinJuly2013,itbecameinsolventandimmediatelyfiledforbankruptcy.3

3Butnotethattherearesofewexamplesofcitiesfailingtomakedebtpaymentsandbecominginsolventthatwecan’tgeneralizeaboutwhathappensnext;Detroitstoppedmakingpaymentswhenitwasclearthatitwouldpursuebankruptcy;NewYorkCitynevermissedapaymentafterbanksfrozeaccesstoshort‐termcredit,banksandthestateintervenedtonegotiatea“recoveryplan”thatentailedthereopeningofcreditmarkets.

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Butacitymaybeconsideredasinfiscalcrisislongbeforeitfacesinsolvency.Acitymayalsobeconsideredinfiscalcrisiswhenitsgovernment(itsmayororcitycouncil)decidestotakestepstoavertinsolvency(projectedmonthsoryearsinthefuture).Externalactors,suchasstategovernmentsorfinancialratingsagencies,mayalsodecidethatacityisinfiscalcrisis.Whensuchdeclarationsaremade,theywillrefertomeasuresoffiscalstrain(suchasdebtburdenorrecurringdeficits);thesemeasuresarecontinuallyevolving,sometimesembodiedinpolicybutjustasoftenarefluidmeasures.ItalkmoreaboutsuchexternaldefinitionsinChapters4and5,butthoseexternaldecisionsareenabledbyavastliteratureontheindicatorsoffiscalcrisis,whichIdescribenow.

Thereisadenseliteraturedevotedtoconstructingdefinitionsandindicatorsofcrisis,publishedinprofessionalmanualsforpublicfinanceofficialsandpublicadministrationjournals.Thisliteratureplaysanimportantroleinshapingwhatismeantby“crisis”andinguidingpoliciestomanageurbanfiscalpolicy.Effortstopredictcrisisarelargelymotivatedbythequestionofhowpolicymakerscan“intervene”beforecrisiserupts,andtaketheformofindicatorsoffiscalstress.TheInternationalCity/CountyManagementAssociation(ICMA)’sFinancialIndicatorsforLocalGovernmentisoneofthemostcirculatedguidelines,regularlyupdatedinmanualsforlocalofficialstouseinexertingfiscalself‐discipline.4Intheearly1980s(whentherewasagreatdealoffederalinterestinmunicipalfinance),therewasaproliferationofthese“indicators”offiscalcrisis,particularlyinthepolicy‐makingarena,inpartdrivenbyafederalresearchinfrastructureforevaluatingfiscalpolicyandurbanissues.Federalresearchdepartmentsplayedasignificantroleinstudyinganddevelopingindicatorsandtestingapproachestoretrenchment,suchastheDepartmentofHousingandUrbanDevelopment’sMunicipalfiscalindicators(reprintedinCarr1984).CitiesUnderStress,a700‐pagetomebytheCenterforUrbanPolicyResearchatRutgers,containsdozensofessaysonmeasuringurbanstressandidentifyingcausesforwidespreadfiscalstress(BurchellandListokin1981;seealsoBahl,Martinez‐Vazquez,andSjoquist1992).

Therearemanyvariationsofsuchlists,andtheyareoccasionallymodified,buttheyshareacoresetofindicatorsandmeasures.Thefirstfocusesonrevenues:totalrevenues,revenuespercapita,theshareofdifferentrevenuesourcesasashareoftotalrevenues(toidentifypossiblyvulnerabilities,orsignificantchangesinonerevenuesource).Thesecondfocusesonexpenditures:totalspending,spendingpercapita,andspendingasashareofrevenues(i.e.theoperatingdeficitorsurplus).Thirdistheamountofavailablereserves(i.e.moneynotearmarkedforanotherpurposethatcouldbeusedforemergencies),asapercentageofallrevenues.Fourthisthemeasureofthecity’sdebtburden:totaldebtpercapita,orasapercentageofrevenues(GrovesandInternationalCity/CountyManagementAssociation2003).5Muchofthisliteraturetreatsfiscalcrisisassomethingbothquantifiableand,inturn,predictableifonlytheindicatorsarecalculatedandmonitored.Inman,inhisdiscussionofPhiladelphia’sfiscalcrisis,says“[a]simpleaccountingidentity

4SeeforexampleareportbytheStateAuditorinOhioonfiscalindicatorsthatreliesonICMA’sguidelines(Taylor2009).5Inmanystates,thesemeasuresaregovernedbypolicy(forexampletheamountofreservescitiesmusthold,ortheamountofdebttheycanissue).

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clarifieswhenafiscalcrisiswilloccur”(Inman1995,378).Suchmodelselidethepoliticalandexternalfactorsthatbringcitiestoapointofdeclaringcrisis.

Amoreexpansiveapproachtostudyingfiscalcrisisdefinesasetofcircumstancesthatputacityatriskoffiscalstrain;thissetofdefinedindicatorscanthenbedeployedaspredictorsoffuturecrisis(andthusalsojustificationfortreatingacityasatriskofcrisis).Forexample,Fuchs(1992)usesfiscalindicatorsincludingthediversificationofrevenuesources,propertytaxbase,andratiooflong‐termversusshort‐termdebtaspredictorsofcrisisvulnerability(Fuchs1992,151).Localeconomicconditionsmayalsotriggerfiscalstrain—highunemploymentanddecliningtaxbases,whichmaybedrivenbyanationalrecessionorlocaleconomiccircumstances(C.ClarkandWalter1991,685).ClarkandWalter(1991)citerisingdemandsuponurbangovernments(1)pressuresfrompublicemployees,(2)stateandlocalmandates,(3)demandsfortaxcuts,(4)highinflation,(5)demandsforincreasedpublicservices,aswellasstatepressuresoncities(lossofstaterevenues&statelimitationsonurbanfinancialpowers),andlossoffederalrevenues(seealsoBahl,Martinez‐Vazquez,andSjoquist1992).Thesemorecomplexfactorsreflectthebroadarrayofpoliciesandpoliticsthatshapeacity’sfiscalhealth.

Effortstopredictcrisisbegantoreceiverenewedattentionafterthe2001recession,andagainafter2008.Hendrick(2004)developsametricofdimensionsoffiscalhealth,groupedintoenvironmentalfactors(revenuewealth,spendingneeds,andsocioeconomicfactors),theadaptationofagovernment’sfiscalstructuretothoseproperties;andthefinancialchoicesofcityofficialsandothers(reflecting“government’sadaptationtotheenvironmentandotherstructuralfeatures”)(Hendrick2004,82).

Localperceptionsoffiscalstressbylocalofficialsareperhapsthemostsignificantfactorindeterminingwhetheracityframesitselfasbeingincrisis.ClarkandWalterfindthat“objectiveindicesturnouttobemuchlessassociatedwiththeutilizationofretrenchmentstrategiesthanaretheperceptionsofstressbycityofficials”(C.ClarkandWalter1991,684).BothLobaoandAdua(2011)andMaherandDeller(2007),alsofindthatperceived,ratherthanreal,fiscalstressdriveslocaldecisionstopursueausteritypolicies(LobaoandAdua2011;MaherandDeller2007).MaherandDelleralsofoundthatself‐reportsoffiscalstressweremorepredictiveofausteritystrategiesthanCensus‐basedmeasuresofstress(MaherandDeller2007,1567).Theimportanceofperceptionsandself‐policinginrelationtodeclarationsofcrisismakescleartheimportanceoflookingatlocalofficialnarratives,andalsofurtherchallengestheideaoffiscalcrisisasan“objective”externally‐producedphenomenon,andassomethingthatcanbeinternally‐produced.

Twotermsfrommytitleneedfurtherexplanation.First,Iusethetermthe“brokecity”toshorthandthenotionthatcitiesareinaperpetualstateofshortfallandfiscalprecarity.Detroithasoftenbeendescribedas“broke”inpopularmediaandlocalpoliticians.Whenpoliticiansduringtherecessiontouttheirownabilitytomanagecostsandnavigatefiscalcrisis,theimagepresentedofthecityisstilloneofleanresources,ofscarcity.Iusetheterm“brokecity”inthetitletoinvokethesensethateverycityisbroke,thatthe“newnormal”forurbangovernanceisthisconstantthreattorunninginthered.

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Secondly,Iusethetermurbangovernancetoreferspecificallytothecontroloverurbanpolicy,inparticularurbanfiscalpolicy(theabilitytoraise,borrow,andspendmoney).Itisnotjust(orevenprimarily)citygovernmentitselfthathasbeenrestructuredthroughnewformsoffinancialadministrationwithinthestructureofcitygovernment,butgovernance:themultiplerealmsinwhichcitypolicyisshapedandthepowerrelationsthatsaturatethoserealmsconstitutetheurbangovernanceinwhichthisdissertationisinterested(Newman2014;SeeespeciallyMerrifield2014).

Researchdesign

AdissertationonurbanfiscalcrisiscouldstudyonlythecityofDetroit,positioningthecity’sdeclineandbankruptcyasanapocryphalstoryofourera,muchlikeNewYorkCity’snear‐bankruptcyin1975(seee.g.Tabb1982).SuchastudycouldhighlightDetroit’sexceptionaldemographicandeconomicchallenges:thecityhasexperiencedgreaterpopulationdeclinethananyotherU.S.city(itisexpectedtofallbelow700,000peoplein2014,fromahighof1.9millionin1950);anestimated30,000homessitvacantinanareathreetimesthesizeofSanFrancisco;andin2012thecityowedanestimated$15billionindebt,withannualrevenuesofjust$1.1billion(StateofMichigan2013).Detroit’slevelsofpoverty,unemployment,andindustrialabandonmentposeeconomicandfiscalchallengesthatdefycomparisonwithanyothercity.

WhatIfoundwhilefollowingthediscussionsofurbanfiscalcrisisacrosstheU.S.isthat,despiteitsapparentuniqueness,Detroithas,since2010,beendeployedinthemediaandinpolicydebatesasbothamodelofcrisisresponseandasawarningofimminentcrisisforallcities.Thus,Detroitisanimportantsitewherethenarrativeoffiscalcrisisisconstituted,andfromwhichitcirculatestootherplaces.ThisjuxtapositionofacityweatheringuniquecircumstancesanditsfunctionasageneralizablemodelisthepivotonwhichIdesignedmystudy.

Ibecameconvincedthatlookingatmultiplecitieswasimportant,butwhatkindofmulti‐sitedprojectwouldthisbe?Thereisalonghistoryinplanningofdoingcomparativeresearchbyreducinginformationaboutcitiestodiscretepointsofcomparison.Ididnotwanttobeinthisgenreofresearch;theideaofmulti‐sitedcasestudieswasnottoproducecomparisonsofequivalencebuttoexploretherelationsbetweenplaces.Tworecentmethodologicalinnovationsheldpromiseforusingmultiplecitiestoanswermyresearchquestions.

Firstistherecentrevitalizationofcomparativeurbanresearchthatseekstomovebeyondtheconventionaltreatmentofcitiesasdiscreteandanalyticallydistinctunits(Brenner2007).Robinsonarguesthatthepushformorecomparativeurbanresearchisnecessarytounderstand“differentiated,butrepeatedurbanoutcomes”(Robinson2014,6).Thisapproachtocomparisontreatsmultiplecasesnotasseparateinstancesofvariationbutassitesofparticipationinsharedprocesses,whichareconstitutedinandthroughthatvariation.Thisrelationshipbetweendifferentiationandrepetitionechoesmy

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understandingofneoliberalismanditsconstitutioninandofthelocal(Icomebacktoneoliberalismlaterinthisintroduction)(Peck,Theodore,andBrenner2010a).

Guidedbythisunderstandingofcomparison,Idecidedtostudytheconstructionofpoliciesrelatedtofiscalcrisisinfourcities,andhowthosepoliciesarerepeatedindiversecases,whilealsoreflectingthedifferentiationofthoseplaces.Iapproachmystudyofthesefourcitiesnotasseparatecasestudiesbutthroughtheirrelationtothenationalnarrativeofurbanfiscalcrisis.Throughoutthisdissertation,Iusethedifferencesbetweenthosecitiesasameansforunderstandinghowthecommonsenseideasaboutfiscalcrisisareframedandreproducedindifferentplaces.

Ihopethatthiscomparativeapproachcandoatleasttwothings.Itcancounteranarrativethatsingularizesoneplace’sstorybyfindingsimilarcircumstancesinotherplaces.Itcanalsocounterauniversalizingnarrativebyrevealingimportantdifferencesbetweenplaces.Thequestionsraisedbythosedifferencesdrawattentiontolocalpoliticalhistoriesthatarelargelyabsentfromdominantnarrativesaboutfiscalcrisis.Comparingplacesalsodrawsattentiontothealternatechoicesthatcouldbemade,anddemonstratesthatthecrisisislivedindifferentwaysindifferentcities,whichseemsobviousbutisnotalwaysapparentintheliteratureonurbancrisis,norinthenewscoverage(seeOosterlynckandGonzalez2013,1081).

Therecentworkonmulti‐sitedworkincriticalpolicystudiesisalsohelpful,particularlytheworkonthepowerofpolicymodelsandtheirinteractionwithlocalprocessesandpolitics,whichtreatsnewvenuesofknowledgeproductionasimportantresearchsites.Criticalpolicystudies,originatingintheanthropologyofpublicpolicy,takesasitsstartingpointtheseeminglyobviousideathatpolicyresponsestocrisismustbeexaminedaseventsenabledbyspacesofpoliticalpossibility,shapedbylocalcontextsandevents(seee.g.Wedeletal.2005).Unlikeapproachestopublicpolicythatuserationalmodelsofdecision‐makingtoexplainhowsomepoliciesarechosenoverothers,thisapproachtostudyingpolicyseekstounderstand“howtaken‐for‐grantedassumptionschannelpolicydebatesincertaindirections,informthedominantwayspolicyproblemsareidentified,…andlegitimizecertainpolicysolutionswhilemarginalizingothers”(Wedeletal.2005,34).Exposingtheseassumptionsrevealsthepoliticsatstakeinnarrativesthatframetheneedforurbanfiscalreform,particularlyinthelanguageoffinanceandmarkets.Itisespeciallyimportanttotakesuchanapproachtostudyingpoliciesthatare“clothedinneutrallanguage,”andpoliciesimbuedwiththelanguageofefficiencyorproductivity,suchasfiscalandbudgetaryreforms(Wedeletal.2005,33–34).

Criticalpolicystudiesitselfexpandstheworkonpolicytransferinpoliticalsciencebypayingattentiontothe“socialandideologicalcontextsofthepolicy‐makingprocess,”andthemore“indeterminatezonesofpolicyimplementationandpractice”(PeckandTheodore2012,23).Itreatthesitesinwhichresponsestofiscalcrisisarediscussedandnarratedassuch“indeterminatezones:”investors’conferencesandpresentationsbyratingsagenciestostateofficials.Thesesites,inwhichnarrativesoffiscalcrisiscirculateandare(re)produced,oftenexplicitlydisavowtheirinterestindirectlyinfluencingpolicy,buttheymustbetreatedasimportantvenuesinwhichthejustificationsforpolicyare

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producedandcirculate.Ibelievethiselementofnarrativeproductionandspacesinwhich“knowledge”becomestreatedascommonsenseareimportantinnovationsinthecriticalstudyofpolicy‐making.

PeckandTheodorearguethatthepolicy‐makingspaceofknowledgeproductionandexpertiseneedstoencompassactorsthatoperateatmultiplescalesandarenas,butmuchoftheworkincriticalpolicystudieshasprivilegedglobalandnationalnetworksofpolicy‐making,payinglessattentiontotheintermediatezones:stateandregionalpolicy‐makinginparticular(PeckandTheodore2010,23).Ifindthatthesenetworkscanconsistofspheresthatoverlapincomplexways,suchasstateexpertsandofficialsandfinancialactors,inparticularthebondratingsagencies,whohavemultiplepositionsinrelationtostateactors.Isuggestthatthesemodesofknowledgeproductionsometimesdonotresemblenetworksbutratherthatknowledgeitselfbecomes“commonsense.”Thatcommonsenseemergesfromconferences,legislation,andotherarenasthatrequiretheattentionthatmustbepaidto“hierarchicalandnodalsourcesofpower,”andthatsuchsourcesofpowercanbetextsaswellasactors(PeckandTheodore2010,25).Inparticular,thecombinationoflegislationandfinancialcontrolcanbringmodelsintobeing,andthatalsoplayaroleinshapingthenarrative,bytellingastorythathasaparticularweightthatenablesittobeacceptedasfact.

Thesestoriescirculateasstoriesofnationalcrisisandalsoascitiescomparethemselvestoothercitiesincrisis.McCannandWardoutlineamethodologyofcriticalpolicystudiesthatidentifiestwokeycomponents:followingandsituations(McCannandWard2012).“Following”definespolicies,stories,orconflictsasresearchsites,whichcanbefollowedastheytravelbetweenplaces.“Situations”canbethoughtofas“relationalsiteswherepast,present,futureofapolicyexist,”suchasconferences,publichearings,speeches,andothersiteswhere“policyknowledgeismobilizedandassembled”(McCannandWard2012,47).PeckandTheodorealsoemphasizethatpolicyisoftenconstructedthroughprocessesofcomparisonwithotherplaces(PeckandTheodore2012).Theideaofcrisisitselfasmobile,andcontagious,characterizesmuchofthenationaldialoguearoundcitiesandfiscaldistress,justifyingtheadoptionofpoliciesfromcitiesincrisis(suchasDetroit)evenintheabsenceofseverelocalcrisis.

Inordertoinvestigatethisformofimplicitknowledgethat,Iargue,constitutesanimportantpolicy‐makingsiteinurbanfiscalcrisis,Iusetheideaof“commonsense:”taken‐for‐grantedassumptionsthatshapetherealmofpossiblepolicyoptions(seealsoKingdon2003).Byidentifyingthoseideasandassumptionsthatoperateas“commonsense”intimesofcrisis,Iincludeboththeexplanationsforfiscalcrisisandthepolicyresponse.AsMarcuseargues,thedominantnarrativesoffiscalcrisisanditsappropriateresponsesrelyonastoryofcrisisasorganic,inevitable,rampant,andcontagious(Marcuse1981).6That

6Thereisalways,ofcourse,morethanone“dominant”narrative,andtherearealsocounter‐narrativesthatseektomakeexplicitwhatcommonsenseframingsofastoryrenderinvisible.Thisdissertationacknowledgesthepresenceofsuchcounter‐narratives,buttheyarenotmysubject(noristheimportantquestionofhowsuchcounter‐narratives).Myfocusisratheronthegenerationandcirculationofacommonsensenarrativeofcrisisthathasbeenreproducedandreiterated(withvariations)acrossawiderangeofcities.

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storyisrepeatedoftenenoughthatittakesontheauraofcommonsense—itbecomestakenforgranted.Akeyelementofthiscommonsenseistheidentificationofcauses(andassigningofblame)forfiscalcrisisthatarethengeneralizedtoevaluatethefiscalstructureofallcities.Storiesoffiscalcrisisarestoriesofcausation:ofacauseandeffectrelationshipbetweenaspectsofurbanpolicyortheurbanconditionthatgeneratecrisis.Duringthe1970surbancrisis,discussionsofurbanpolicytookforgrantedtheideathattechnologicalchangeandtheincreasingcompetitionforglobaleconomicactivityhadrenderedpreviousmodelsofgovernanceandurbandevelopmentobsolete(Marcuse1981).Duringtherecentrecession,thedominantnarrativeofcrisisblamestheoverreachofgovernment,thefiscalirresponsibilityofthepublicsector,thepowerofpublicemployees,theobsolescenceandburdenofthewelfarestate,andtheneedformarket‐basedgovernance(Addie2008).

Inthepublicrealm,thiscommonsensecanechoGramsci’snotion,abroadtermheusestoexplainhowconceptsandimbalancesofpowerbecomeinternalizedasthenaturalorderofthingsbypeopleinasociety(Crehan2011).Gramsciproposedthat“commonsense”hasalogicandahistory,whilebeingepisodicandnotnecessarilycoherent,adaptingtonewrealities(HallandO’Shea2013;Gramsci1971).

Itmaybetrue,assomeargue,thatneoliberalideologiesinparticularhavebecomeembeddedincommonsenseafteryearsofpolicydominance(StuartHallandO’Shea2013),meaningthattheapparatusandideologyofneoliberalideasisnolongerapparent,asalternativestothoseideasdisappearfromcommondebate.Peckalsoarguesthatneoliberalismisfundamentallycharacterizedbyanethosofrestructuring,andshouldbeunderstoodasaregulatoryprojectthatencompassestechnocraticnormalizationandenforcedpublicausterity,trendsthatIencounteranddescribeinthisstudy.Therelationshipbetweenrestructuringandcrisishasalsobeencloselyassociatedwiththeexpansionofneoliberalurbanism.HarveyproposedthatNewYork’snarrowly‐avertedbankruptcywasthe“iconiccase”ofwhatwouldlaterbeunderstoodasapatternofcrisis‐assistedtransformationtoneoliberalurbanism,emphasizingthereplacementofthecity‐as‐welfare‐statewithanewurbanvision(Peck,Theodore,andBrenner2010b,140).

Manyscholarshavealreadyarguedthatneoliberal,market‐logicideologieshavecometooperateascommonsense(Keil2002).Addiearguesthatneoliberalismconstructsthe“discursivenaturalization”ofmarketsandglobalizationaspoliticaleconomicforces(Addie2008).Cernyarguesthatneoliberalismhasmovedfromadoctrineinto“akindofcommonsenseforthe21stcentury,”inwhichapoliticalconsensusemergesaroundbasicneoliberalprinciplesevenasconflictandmutationcontinue,an“embeddedneoliberalism”(Cerny2010).Neoliberalpolicyapproachesbecomeembeddedincommon‐senseunderstandingsofproblemsandsolutions,ideologicallyanddiscursively,institutionally(throughregulation)andthroughclassrelations(Cahill2011,486).Thusascrisiscreatesthedemandfornewstrategies,thesecommon‐senseideasarewhatis“lyingaround.”This“mutuallyconstitutivenature”ofneoliberalismandcrisis,however,needssomedefinitioninorderhelpusunderstandtherelationshipbetweencrisisandcitiesinparticular(Peck,Theodore,andBrenner2009).Theformsofpolicyinnovationbeingpromotedinthecurrentcrisis—inparticularregardingpensionsanddebt—arealsospecificproductsofthelocal,state,andnationalpoliticssurroundingtheemergenceofthisparticularcrisis.My

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dissertationlendsneededspecificitytothisrelationshipofcrisis,neoliberalism,andrestructuring.Ultimately,theproductionandmanagementoffiscalcrisisisapoliticalquestionthatmustbeansweredlocallyandwithreferencetobroadernarrativesandphenomenathathelpproducelocalpolicy.

Datasourcesandcaseselection

Myresearchdrawsfromfoursourcesofinformation:

(1)Publicandmedianarrativesoffiscalcrisis:Fortheperiodof2007‐2013,Igatheredabroadrangeofstatementsaboutthefiscalhealthofcitiesinordertodevelopapictureofthedominantnarrativesoffiscalcrisisthattookholdshortlyaftertherecessionbegan.Icollectedmediacoverageoffiscalcrisisfromlocalnewspapersinmycasecities,nationalpaperssuchastheWallStreetJournalandNewYorkTimes,andfinancialnewssourcessuchasBondBuyerandBloomberg.Ialsousestatementsmadebyratingsagencies(Moody’s,S&P,andFitch),andguidancestatementsissuedbyprofessionalassociations(theNationalLeagueofCities,GovernmentFinanceOfficersAssociation,NationalGovernorsAssociation,andU.S.ConferenceofMayors)aswellasstatementsbynationalbodieschargedwithregulatingmunicipalfinance.

(2)CitybudgetsandCensusfinancialdata:Inordertoanalyzerevenuesandspending,IusebothCensuslocalandstategovernmentsurveydataandoriginalcitybudgetdocumentsandannualaudits(CertifiedAnnualFinancialReports,orCAFRs).IhaveconstructedanationaldatasetfromtheCensusBureau’sAnnualSurveysofState&LocalGovernmentFinancefrom1997through2012(thedatasetforyears2007‐12wasbuiltfromscratch,astheCensusceasedpublishinggovernmentdatabycityin2006).Inmyfivecases,IanalyzeadoptedbudgetsandCAFRsfromfiscalyears2007to2013inordertoexaminetherestructuringofrevenuesandexpendituresimmediatelybeforeandduringtherecession.7Ianalyzetrendsinrevenueandspending,aswellasdebtissuanceandintergovernmentaltransfers.Iidentifypost‐2008shiftsincityspendingbyasetofcomparablecategories,inabsolutetermsandrelativetopopulationdetailedinPartTwo.

(3)Cityandstatefiscalpolicy:Usinginformationfromcitybudgets,Iidentifiedlocalpolicychangesthataffectedrevenuestructures,suchastaxratechanges,andexaminedthehistoryofthosechangesthroughmunicipalregulationsorlawsandpublicvotes,focusingon2001‐2008and2008‐2012.Ialsoresearchedstatepolicyresponsestourbanfiscalcrisis,focusingonthreecommonformsoffiscaldisciplinethathavebeencommonlypursuedbystatesduringthisrecession:changesinstatemunicipalbankruptcylaw,statefiscalmonitoringsystems,andreceivershiplawspermittingstatetakeoveroflocalgovernments.Inordertounderstandhowthesepoliciesareframedintermsofspecificlocalcrises,Ireviewgovernmentanalystreports,floorspeeches,committeereportsandminutes,legislativepreambles,andcourtinterpretationsofthelaws.

7Ichosethistimeperiodbecauseitincludesonefiscalyear(2006‐07)beforecitiesbegantofeeltheeffectsoftheslowdowninrealestateandfinancialmarkets,whichbeganaround2007‐08.

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(4)Budgetpresentations:Inordertoexaminehowtherecessionwasbeingdescribedbythosemanagingthebudgetprocesswithinmycases,Ireviewedpublicstatementsandpresentationsmadeduringbudgetprocessesoffiscalyears2009through2013.Ireviewedvideoofpublicmeetings,proposedandadoptedversionsofthebudget,analystreports,andlocalnewscoverageofbudgetprocesses.

Indesigningthiscomparativeproject,Ichosefourcitiesalongaspectrumoffiscalstressandpoliticalcontext:Detroit(Michigan),Dallas(Texas),Philadelphia(Pennsylvania),andSanJose(California).Twocasestypifycitiesundergoingmultipleurbancrises:industrialandpopulationdecline,andatraditionofhighservicedemandandprovision.Thethird(Dallas)appearsoftenonlistsofthemostresilientor“recession‐proof”cities(Zumbrun2008),andexemplifiesaleanurbanismapproachtoserviceprovision.ButtheTexasstategovernmenthasenactedaggressivetaxcuts,leavinglocalservices(inparticulareducation)andcityinfrastructurecriticallyunderfunded,leavingcitiestofendforthemselves(seee.g.Fernandez2012).ThefourthcityIchose,SanJose,hasalsoperformedrelativelywelleconomically(itrankedfirstontheBrookingsInstituteevaluationofmetroeconomicrecovery)(FriedhoffandKulkami2013),butCaliforniawasoneofthestateshardesthitbytherecession(fourCaliforniacitiesfiledforbankruptcyafter2008).SanJose’sMayorhascapitalizedonthisatmosphereofcrisisbypushingforradicalreformsinpublicpensionsandreducingserviceprovision,leavinglibrariesandfiretrucksunused,sacrificedtoanethosofeconomiccompetitiveness.Thesefourcases,representativeofthevariouseconomicandpoliticalchallengesfacedbycities,offerawindowintoboththeunevenexperienceofcrisisandthemobilityofcrisisasaconceptshapingurbanpolicy.

Table1.1Populationchangeanddemographics,casecities

2013

population

1990

population

Non‐HispanicWhite

Hispanic Black

Detroit 688,701 1,027,974 8% 8% 83%Dallas 1,257,676 1,006,877 29% 42% 25%Philadelphia 1,553,165 1,585,577 43% 13% 37%SanJose 1,000,536 782,248 29% 33% 3%U.S. 63% 13%Sources:2013Censuspopulationestimates,1990Census;2013AmericanCommunitySurvey

Table1.2Unemploymentandpoverty,casecities

Poverty UnemploymentDetroit 38% 18.1%Dallas 24% 6.4%Philadelphia 27% 10.4%SanJose 12% 7.3%U.S. 15% 6.7%Sources:LocalAreaUnemploymentrates2009,2012annualaverage(BLS);AmericanCommunitySurvey

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Figure1.1Populationchange,casecities,1940‐2013

Source:AmericanCommunitySurvey

Organizationofthedissertation

Thedissertationisorganizedasfollows.InPartOne,Imaketwoargumentsaboutthisrecentunfoldingofurbanfiscalcrisis.First,Iarguethattheemergenceoffiscalcrisishasbeenover‐simplifiedbydescribingcrisisassomethingthataffectsnearlyallcitiesandthatrarelyencompassesthepolicychoicescontributingtocities’fiscalinstability.Second,Iarguethatinthenameofpost‐crisisrecoveryandstability,aparticularsetoffiscalpolicyresponsestotherecessionhasdominatedurbanpolicy:downsizinglocalgovernment,privatizingbasicpublicfunctions,promoting“self‐help”forcities,andincreasingtheroleoffinancialexpertsinurbangovernance.Idemonstratethisbydescribinghowstoriesoffiscalcrisisarerecounted,analyzed,andexplainedinfourcitiesduringthecurrentperiod,andduringpreviouserasofurbanfiscalcrisis.

Next,IturninPartTwotoanempiricaldemonstrationofthematerialeffectsthatfiscalcriseshasoncities.Chapter2showshowcitiesarerestrictedintheirrevenueoptions,producingagrowingrelianceonregressiveandunstablesourcesofrevenue.Chapter3showsthematerialeffectsofretrenchment,orspendingcuts,oncitiesincrisis,centeringoncutstopublicemployeebenefits.Myapproachiscomparative;thatis,Ihighlightcommonthemesacrossmyfourcasesandalsopointoutvariations,unevenness,andpointsofdifference.Basedonthispictureofscarcerevenueandsharpspendingcuts,Iarguethatthecurrentwaveoffiscalcrisesdiffersfrompreviouscrises(duringwhichthewelfarestatewasdismantled)inimportantways—particularlythefocusonrestructuringpublicpensions(whileitechoespreviouscrisesinitspreservationofdevelopmentspendingandholdingdowntaxrates).TheargumentofPartTwosupportsmylargerpointthatfiscalcrisis,farfromhavingonlyonepossiblepolicyresponse,generatespolicy

‐

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1940 1950 1960 1970 1980 1990 2000 2010 2013

CITY POPULATION, 1940‐2013Detroit Dallas Philadelphia SanJose

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prescriptionsthatemergefrombothlocalandnationalpoliticalcontextsinwhichthosepoliciesareshaped.

Finally,inPartThree,Itakeupthesubjectofhowmunicipalgovernanceisremadebyfiscalcrisis.AsIwillshow,thegovernancechangesmadeintimesofcrisishavelong‐lastingeffectsforcities.Chapter4examineshowthecrisishasdeepenedtrendsoffinancializationthathavereducedcities’fiscalautonomyandstability.Theseincludetheshiftingofmanyfundingsourcesandprogramsofftheprimarybudget(usingauthorities,methodsofprivatization,andenterprisefunds),andtheincreasingroleoftechnicalfinancialexpertiseinsettingurbanpolicy.Iexaminetheroleofbanks,ratingsagencies,andfinancialpolicy‐makinginstitutionsinshapingurbanpolicy,facilitatedbythegrowingcomplexityofmunicipaldebtandthenarrativeofimpendingmunicipalcollapse.Chapter5describesthecomplexpoliticalrelationshipsbetweenstatesandcitiesinthecurrentrecession.Iexaminethenationalandlocalhistoriesofdecentralizationanddevolution,andhowthoseprocessesfacilitatedthegrowingdependenceofcitiesonstatepolitics.Ithendescribehowthespecificrelationshipbetweeneachofmycasesandtheirstates’politicshasaffectedthecities’experiencewithrecession.Ifocusonseveralstrategiesusedbystatestoexertpoweroverthepoliciesofcitiesinfiscalstress,andhowthosepolicieshaveexpandedtoencompassstateoversightintimesofnormalcy.Intheconclusion,Isummarizethesearguments,demonstratingthatthedominantpolicyresponsestourbanfiscalcrisiswereconstructedbyrelyingonaverylimitedrepertoireofalternativesthatcirculatedduringthisperiodofthenecessaryapproachtodealingwithcrisis.

Contributions

Byexaminingthenarrativesofurbanfiscalcrisisinmultiplesites,thisprojectexploresthepoliticalconflictsatstakeinhowfiscalcrisisisframed.Thereisperhapsnomoreimportantquestionfordemocracythanhowthegovernmentraisesandspendsmoney,whichmakesthelocusoffiscaldecision‐making,andthenarrowingofpoliticaldebatearoundcitybudgeting,avitalpoliticalquestion.Whatdoesitmeanforurbandemocracyifcitiesarenolongerabletocontroltheirownbudgetsandfinances?Howshouldweframetheimplicationsoftheinabilityofcitiestoprovideservicesthatwereconsideredbasiclessthanagenerationago?Byframingtherelationshipbetweencitybudgetsandradicalpoliticalshiftsinurbanpolicy,IdemonstratethatDetroitrepresentsadirewarningnotforcitiestopaycloserattentiontotheirfinances(astheheadlinesproclaim),butforcitizenstopaycloserattentiontotheirgovernment,broadlyconceived.Thenotionofcrisisisoftenusedtobolsterclaimsforthenecessityofradicalchange,ofwholesaleexperimentation,ofdemolishingwhatcamebefore(Klein2008).Inhisstudyof2001NewYorkCity,Brashasks“whatdoestheideaoffiscalcrisisdo,andwhatdoesitdonow?”(Brash2003,61).Thesearequestionsthatbothscholarsandcitizensshouldbeasking.

Thisdissertationalsomakesthecaseforthebudgetasanimportantbutunder‐researchedsiteofstudyforurbanscholars.Studyingcitybudgetshasbeenlargelyleftto

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politicalscientists,whotendtoexaminediscreteprocessesofpoliticalnegotiationandisolatethebudgetprocessfrombroaderforces.Thisprojectmakesclearthatbudgets,infact,bothreflectandshapesharedideasaboutthescopeofurbangovernance,includingthedividebetweenpublicandprivate,theobligationscitieshavetotheirresidents,andtheroleoffinanceinpolicydecisions.Bytreatingthebudgetasapivotalsiteforpolicycirculation,Idemonstratethefertileterrainofcitybudgetsforstudyingbroadshiftsinwhatcitiesdo,whichshouldbeacentralquestionforallurbanists.

Theimportanceofbudgetingandtaxationtothemaintenanceofdemocracybearsrestating.Inbuddingdemocracies,publicinputandcontroloverbudgetsisacentralfocusofinitialreform.Thecirculationofparticipatorybudgetingoverthepastseveralyearssuggestsboththecentralityoftheideaofbudgetsasfundamentaltodemocracy,andthesignificantchallengeofmaintainingthatrelationship(BaiocchiandLerner2007).InmanyU.S.cities,atthesametimethatkeyaspectsofcitygovernanceareremovedfromdemocraticcontrol,therehaveemergednewchannelsofpublicparticipationinthebudgetprocess:suchasparticipatorybudgeting,effortsbycitiestoinvolvethepublicinbudgethearings(“townhalls”),andthereleaseofgovernmentfinancialdataforpublicconsumption.Wemustnotconfusetheseeffortsat“transparency”withtruedemocracy;thisprojectfocusesontheerosionofurbanfiscalautonomyatthehandsofratingsagenciesandstategovernments,withdireresultsforworkersandresidents.

Finally,thisprojectisframedbythenationalcontextofdeeptensionsoverU.S.fiscalpolicy,nationalandurbanincomeinequality(higherthananytimebuttheyearsimmediatelyprecedingthe1929crash),andaneconomicrecoverythatishistoricallyanomalousinitsdisproportionatebenefitingofthetoptenpercentofearners(Piketty2014;Noah2010).Theearly1930sintheU.S.alsosawagreatreworkingoftherelationshipbetweengovernmentandthepublic,forgedbypoliticalresistanceandlabororganizing.AsAnderson(2013)editorializedintheLosAngelesTimes,wearenowatamomentwherethepublicmustexamineourexpectationsforthebasicgoodsandservicesweexpectcitiestoprovide,becauseultimatelythatisthebattlebeingfought,inDetroitandelsewhere(Anderson2013).Today,inaclimateoffederallegislativeinaction,citieshavebeentheprimarysitesofpolicyresponsestoinequality,throughminimumwages,publicpreschool,immigrationhavens,andhousingsupport,whilestateshavemovedpoliticaltotheright.Thefiscalautonomyofcitiesisthusavitalquestionforthecountry’spoliticalandeconomicfuture.

Widespreadchangesintechnologiesofgovernance(particularlythosethatemphasizetechnicalexpertise)alter,infundamentalways,theabilityofcertaininterestsandvoicestoaffecturbanpolicy(RoseandMiller2010).Wemustbeattentivetothelandscapeofpoliticalpossibilitybeingshapedbythecurrentcrisis.

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CHAPTER1:NarratingUrbanFiscalCrisis

Whileneoliberalcapitalismpromotesacollectivesocialamnesia,animportanttaskofcounter‐hegemonic,insurgentplanningistostimulatehistoricalcollectivememoriesandhistoricizetheproblemsarisingfromtheactionsandinactionsofauthorities.(Miraftab2009,45)

Whatdoestheideaoffiscalcrisisdo,andwhatdoesitdonow?(Brash2003,62)

Ihaveproposedinthisdissertationthatfiscalcrises(likeallcrises)arekeyconjuncturalandconstructedmomentsofremakingurbangovernance.Urbanfiscalcrisisisnotadiscreteevent,butaconstructionthatemergesfromadominantnarrativethatisreproducedandtakenforgranted,whilebothitsconstructionanditsparticularityareignored.Brash,above,referstofiscalcrisisasan“idea,”onewiththepowertoshapepolicyandtherebyproducematerialchangesincities.Theframingofcrisisnarrativesandpolicysolutionsiskeytounderstandingthatremaking.Historiesoffiscalcrisisarebothdeeplyinformativeandinfluentialinsubsequentcrises.Agreatdealdependsonwhichhistoriesaretold,andhowtheyareplacedintemporal,social,economicandpoliticalcontexts,andcomparedtocurrentevents.Storiesofpastcrisescanalsochangeovertimeandbedeployedindifferentwaysinlateriterationsofcrisis;theyarealwaystoldinrelationtootherstories:citiesarecomparedtoothercitiesandothertimes.Thenarrativeoffiscalcrisisisnotconstructedthesamewayeverytimeandineveryplace,anddoesnotperformthesamepolicies.

Inthischapter,Iconnecttheconstructionandnarrationofhistoricalandcontemporaryurbanfiscalcrisesinanefforttoanswertwoquestions:First,whatarethecentral“lessons”ofhistoricalcrisesthatarecarriedinto,orcontrastedwith,contemporaryepisodesoffiscalcrisis?Second,howarecrisesexplained?Whereisresponsibilityfortheproductionofcrisissituated?

1.1Historiesoffiscalcrisis

Thischaptertreatsthe“historyoftheevocationofcrisisitself”asamatterofcentralimportance(Brash2003,62).Whiletherehavealsobeenisolatedincidentsofcrisis,therearethreemainperiodsinwhichurbanfiscalcrisishasbeendescribedaswidespread,generatingbothpublicandacademicattention:the1930s,the1970s,andthelate1980s‐early1990s.

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The1930s

FuchsarguesthattheGreatDepressionprovokedapivotalperiodforcityfiscalpolicy,shapingexpectationsfortheservicescitieswouldprovide,theexpansionof“professional”citygovernment,andseveraltransformationsinintergovernmentalfiscalrelations.Thefederalgovernmenttookamoreactiveroleincityservices,thankstomayorallobbyingforreliefinaneraofwidespreadfiscalcrises.Cities’dependencyonstategovernmentsforlegalfiscalauthorityalsotookcentralimportance,ascitiesfoundthemselvesconstrainedintheiroptionsforrecovery(particularlyasrelatestothepropertytax)(Fuchs1992,5).Citiesatthattimewerenot,largely,providingsignificantsocialservices;infact,theGreatDepressionprovokedasignificantexpansionatalllevelsofgovernmentintoserviceprovision.Thecreationoffoodassistance,jobsprograms,andanexpansivewelfarestateassociatedwiththe1930soccurredalongsidewhatFuchscallsthedepoliticizationofthebudgetprocessinmanycities,aswellaslocalretrenchmentinmanycities(Fuchs1992).This“rationalization”ofcitybudgeting,however,occurredinthecontextofpoliticalsupportforpublictaxationandspendingtostimulatetheeconomyandcreateemployment,andwasaccompaniedbytheregulationoffinancialmarketsandactors,insignificantcontrasttotoday,whenearlycallsforfinancialregulationdisappearedintoamazeofabandonedandweakenedpolicies.WidespreadmunicipalcrisisduringtheGreatDepressionledtoseveralreformsinmunicipalfinancingandmunicipaldebtinparticular(seee.g.Chapter3inMonkkonen1995;Sbragia1996).

The1960sand1970s

AfterthelongperiodofnationalprosperityfollowingWorldWarII,the1960swereatimeof“urbancrisis”andnationalreckoningwiththeincreasinglyvisibleproblemsofurbanpoverty,racialdiscrimination,anddemandsbyurbanresidentsforservicesandpoliticalrepresentation.Beginninginthe1950s,theflightoftheaffluentoutsidecityboundarieshadleftcitieswithdecreasingrevenueandgrowingeconomicneed.Evenwherecitiesretainedmostofthejobs,thepeoplewhoworkedthereleftthecityboundariesatnight,takingtheirmoney(theirpropertytaxes)withthem.Peoplewithresourcesmovedtosuburbanareas,wheretheywouldonlybepayingforthegoodsandservicestheywouldusethemselves(seeTiebout1956).Residentswillingandabletopaymoreforsafety,greenspace,andeasierroadsleftforthesuburbs,insteadofpayingforservicestheywouldn’tuse:publichousing,welfare,publicdefenders,foodstamps,andMedicaid(SwartzandBonello1993,5–6).Citiesnowcouldn’taffordtopayforsuch“luxury”itemsasparks,zoos,libraries,giftededucation,summerrecreationandcrafts,golfcourses,swimmingpools,insteaddevotingtheirdwindlingrevenuestotheurbansafetynet(SwartzandBonello1993,6).Thoseleftbehindeitherlackedtheresourcestomoveorwhowerelegallyproscribedfromlivinginsuburbsbyracialexclusionlaws.Thepoliticalandeconomicconsequencesofthesedynamicsforcentralcitiesandtheirresidentsarewell‐describedinSugrue’sstudyofDetroit,butthepatternrepeateditselfacrossthecountry(Sugrue2005).

Asurbanproblemsincreased,sodidpressureonthefederalgovernmenttoaddressvastinequalitieswithinandbetweencities.TheWaronPovertycreatedavast

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infrastructureofurbaninterventionsmanagedbythefederalgovernment;thefederalgovernmentalsofounditselfatoddswithmanystategovernmentsinaddressingracialinequities.Theconsequencesofwhiteflight—andthelossofcapital—forcitieswasbecomingapparent.Whilethe1960shavebeendescribed(inparticularbyconservativeassessmentsofNewYorkCity’sfiscalcrises)asatimeofgovernmentexpandingandoverspendinginresponsetodemandforsocialprograms,infactresidentswereclaimingbenefitsthathadlongbeenaccruedtothemiddle‐class,upper‐classandwhiteresidents:infrastructure,housing,decenteducation,andasafetynet.Thefederalgovernmentsteppedintoaddressthesemountingfiscalinequalitiesbyusingfederalrevenuestosignificantlyexpandtheurbansafetynet,inparticularhousing,communitydevelopment,educationfunding,andsupportforcitygovernmentsthroughGeneralRevenueSharing(SwartzandBonello1993).

Butinthe1970s,thefederalgovernment’spolicyshifted,asaneraof“competitivefederalism”tookhold(SwartzandBonello1993;seealsoT.N.ClarkandFerguson1983).Aglobalrecession,combinedwiththewithdrawaloffederalfunding,ledtoaperiodofsustainedfiscalcrisis.Hill(1977)callsthemid‐1970saneraoffiscalcrisisrivalingtheGreatDepression(Hill1977,76).In1975,NewYorkCityalmostdeclaredbankruptcy,becomingthecoverstoryforthewoesoflargecentralcitiesinthe1970s,muchasDetroitservesasasymbolofurbanfiscalcrisistoday.

NewYorkCity,1975

NewYorkCityfirstbegantoexperiencefiscaltroubleinthe1960s,butcrisisofficiallyeruptedin1975whenthebanksthathadprovidedshort‐termloanstocoverintermittentshortfallsrefusedtoissueanymoreshort‐termdebt,andthecitywasforcedtoenterintoarecoveryplantoavoiddefault.NewYorkCity’snear‐bankruptcyin1975isoftenviewedasapivotalmomentinU.S.urbanhistory,adefiningcaseoffiscalcrisisthatcontinuestoshapemunicipalpolicyanddiscourse(seee.g.Brash2003).Manynarrativeelementsfrom1975NewYorkechointhediscoursearoundDetroit’sbankruptcy(and“experts”fromNewYork’srecoveryhavebeeninvitedtospeaktoDetroitofficialsandresidentsaboutthebenefitsofstatereceivership).NewYork,likeDetroit,alsoplaysaparticularroleintheAmericanimaginationofurbanlife,citygovernment,andrace.

ThereisavastliteraturedevotedtothecausesandimplicationsofNewYork’s1975crisis;Ihighlighttwodivergentperspectivesheretoillustratethedebate.KenAuletta’sTheStreetsWerePavedwithGoldrepresentstheconservativeargument.HeattributesNewYork’stroublestoalocalinabilitytomakegooddecisions,tofacefacts,tostaredownthedemandsforspending,toacknowledgethe“plague”ofpovertyanddeclineeatingtheglitteringcityfromwithin(Auletta1979,8).Thecity’seconomy,heargues,wasbeingeatenawaybyglobalizationandthemobilityofcapitalandamisguided“politicallypopularandcompassionateefforttocareforthelessfortunatebytaxingthemorefortunate”(Auletta1979,30).HequotesRobertWagner,thecity’sMayor,in1965:“’Idonotproposetopermitourfiscalproblemstosetthelimitsofourcommitmentstomeettheessentialneedsofthe

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peopleofthecity,’”asembodyingthesentimentbehindan“explosion”ofspendingonbothunionsandthepoor,withmiddle‐classresidentsleavingasfastastheycould(becausethejobswereleaving,orbecausetheyweren’tgettingtheshareofspendingtowhichtheywereaccustomed)(Auletta1979,30–31).Spendinggrewatfirstbecauseofstateandfederalaidsubsidizingthegrowthofanti‐povertyprograms.Butwhenthataidwasreduced,thecitycouldn’tshrinkitsownspendingaccordingly.Sometimestheserviceswerestillrequiredbylaw,butmoreimportantly,“powerfulnewconstituentswereloose,”makingitpoliticallydifficulttocutprograms(Auletta1979,36).

WilliamTabb’sTheLongDefaultarticulatesanalternativeexplanationtoblamingthewelfarestateanditsconstituents.Hefurtherarguesthatafocusonthefiscalelementsofcrisisdistractsfrommorecomplexpoliticalcauses,inparticularthefailureofgovernment,broadlyspeaking,todealwiththesocialcostsofprivatedecisions,ofcorporaterelocationsandsuburbanizationthatleftcentralcitiessorelydeprivedoftheresourcesneededtoservethepopulationleftbehind(Tabb1982).HetakesapoliticaleconomyapproachtoemphasizethepoliticalstruggleattheheartofNewYork’snear‐bankruptcy,inoppositiontothosewhoframeretrenchmentashistoricallyinevitable(Tabb1982,4–5).

Thecynicaldistortionsofthepowerfulhavebeenacceptedbythemedia,andhaveaffectedtheverylanguageinwhichthecrisisisdiscussed.Totellthestorydifferentlymeansmovingbeyondthewaytheissueshavebeenpresentedinthemediaandcongressionaldebate.(Tabb1982,5)

Bothauthorsarguethatthecityrepresentsasymbolicandaliteralcentralplace,thattheimplicationsofNewYork’scrisishadnationalorevenglobalconsequences.The“urbancrises”ofthe1960sand1970s,inparticularNewYorkCity,servedtogalvanizeconservativeattacksonliberalismandthegreatsocietyproject(A.O’Connor2008).8Despitetherockypathtorecovery,theapproachtakentoresolveNewYork’scrisisistreatedinhindsightasagreatsuccess,producingwhatFreemanreferstoasa“post‐fiscalcrisisconsensus”(Freeman2000).Inhisdiscussionofthepost‐2001crisisinNewYork,Brasharguesthatthe1970sspecterisevokedasan“ideologicalprop”foraparticularsetofpolicies(Brash2003,62).Afterthe1970s,theideathatacitymustbalanceitsbudgetwaswrittenintomoststatelaws,andbecamea“naturalizedlegalfact”(Brash2003,78).

The1980sand1990s

Citiesemergedfromtheseverecrisesofthe1970sinverydifferentways.DeindustrializationanddecentralizationcontinuedtotakeatollparticularlyontheeconomicandfiscalresourcesoflargercitiesintheMidwestandNortheast,whilecitiesinthe“Sunbelt”addedpopulationandbusiness.Bythe1980sthefulleffectsoftheshiftin

8NewYorkwasjustoneofmanycitiesembroiledinfiscalcrisisinthe1970s.In1978,astandoffdevelopedinClevelandbetweenbanksandtheMayor(DennisKucinich)overhisresistancetoprivatizingthecity‐ownedpowercompanycausedthecitytogointodefaults(Glasberg1989).

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federalpolicywerebeingfeltbycitiesandstates;especiallywhenRonaldReaganendedfederalrevenuesharingin1986.Statestriedtomakeupsomeofthedifference(seeSwartzandBonello1993,9),buttheirabilitytodosowaslimited,andstateaidbegantofallsharplyintheearly1980s.Thisperiodledtoanexplosionofliteratureonretrenchment,inpoliticalscience,publicadministration,andplanningthatmakesupthebetterpartofthearticlescitedinthischapter.

Therewaslessattentionpaidtocityfiscalcrisisintheearly1990s,eventhoughcitieswerestillsufferingfromtheseverecutsmadeinthe1970sand1980sandtheirfiscalsituationswerecontinuingtodeteriorate,inpartbecauseofthereductionsinstateandfederalaidandtheirfailuretocutspendingdeeplyenough(Bahl,Martinez‐Vazquez,andSjoquist1992).9Asnationaleconomicgrowthtookoffinthe1990s,therewasmuchlessdiscussionofcutbacks,althoughafewcasesofisolatedfiscalstresshappenedthroughthedecade.10Throughoutthe1990s,therestructuringoffederalwelfarespendingandurbanprograms(suchaspublichousing)significantlyshapedurbanpolicy.

Post‐2000

Thebeginningofthe21stcenturybroughtthe2001and2002financialmarketdeclines,andthefirstrecessionafterthelongesteconomicexpansioninU.S.history.Manycitiesbegantoseedecliningrevenuesandpropertyvalues,bringingsomemediaandpolicyattentionbacktotheissueoffiscalstrainandeconomicdownturns,butlittlesignificantacademicattention.11Theescalationofhomevaluesfrom2002toabout2007inmosturbanareaskeptpropertytaxesgrowing,althoughothereconomicindicatorsshowedaweakpost‐2001recovery.Thetrue“urbancrisis”ofthepost‐1990seraisoneofongoingeviscerationoftheelementsofcityspendingthataren’tassociatedwithpublicsafetyoreconomicdevelopment(Peck2012;Leitner,Peck,andSheppard2007;Hackworth2007).Evenperiodsofrelativefiscalstabilitythiscenturyhavebeencharacterizedbyongoingretrenchmentofsocialservices,humaninvestment,andbasicinfrastructure.

1.2Analyzingfiscalcrisis

Therearethreemainapproachestothestudyofthesephasesofurbanfiscalcrisis.Thefirstisabodyofliteraturethatseekstopredictand/ormeasurecrises,throughthedevelopmentofindicatorsofcrisisthatconstructdefactodefinitionsofcrisisintendedtofacilitatepredictionofcitiesthatavertorsuccumbtocrisis.Thesecondcategoryexamines

9Intheearly1990s,Philadelphiawasforcedintoastatetakeoverwhenbanksrefusedtoprovideloansforimmediateexpenses;LosAngelesnearedinsolvencyinboth1991and1992.10OrangeCountyfiledforbankruptcyin1994(alsoconsistentlyunderpayingpensions,undertheveneeroflean,conservativegovernance,inrealitysupportedbydebt).Miami1996,afederalcorruptionproberevealedabudgetshortfall,astateoversightboardwassetup(Erie2011).11ForexceptionsseeBrashonNewYork,describingthesignificantcrisisinthatcity(Brash2003),andErie’sstudyofSanDiego’sfiscaltroublesin2003,afteryearsoftaxcutsandriskypensionstrategies(Erie2011).

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explanationsforfiscalcrisis:whatfactorscontributetocrisis,andwhydosomecitiesavoidit?Thethirdcategoryisevaluationsofcityresponsestofiscalstress,inparticularstudiesofretrenchment;IdiscussthisliteratureinChapter3.

Moststudiesofurbanfiscalcrisistakealimitedapproachtothecomplexpoliticsattheheartofcityfinances.Themost‐citedtextsfromthecrisesofthe1980sand1990sfocusprimarilyonthebudgetitself,oftenignoringthebroaderscopeofurbanfinances,suchasdebtissuancesandpublic‐privatepartnerships.Thedominationofthestudyoffiscalcrisisbypoliticalscientistshasalsoledtoanemphasisonquantitativemodelingapproaches,orexplorationsofpoliticalpreferences,relyingon“snapshot”viewsoffiscalpoliticsthatenablestaticanalysis,treating“fiscalcrisis”asadependentvariable,whoselikelihoodcanbedeterminedasamatterofstatistics,notpolitics.

Explanationsofcrisis

Anynarrativeofcrisisischaracterizedbydebatesoveritsprimarycauses;howthosecausesareframedinevitablylimitstherangeofpossiblesolutions.In1981,Marcusearguedthatthereisan“organicexplanation”ofurbanfiscalcrisisthatpaintsitasaninevitableconsequenceofmodernization(particularlyintransportation),changesinthelocationofeconomicactivityandpopulation,antiquatedcentralcityinfrastructure,governmentinefficiency(orcorruption),andtaxpayerresistance(Marcuse1981).By“organic,”Marcusemeansboththattheexplanationdescribescrisisasemergingnaturallyfromasetofphenomenathatarethemselvesinevitable(deindustrialization,politicalopiniontrends,technology,etc.),andthattheexplanationsituatesitselfastheonlyexplanation.Theorganicexplanationgoesasfollows:“naturaleconomicgrowthanddevelopmentleadtolocational,economicandpopulationchangeswhichimposecostsonlocalgovernments;taxpayersbeingunwillingtopayforthosecosts,thequalityofpublicsector‐financedactivitiessuffers,andthoseareinevitablyhurtmostwhodependonthepublicsectormost”(Marcuse1981,333).But,heargues,the“urbanfiscalcrisis,”atermcoinedandthendeployedtopushaspecificpolicyagenda,infactresultsfromgovernmentpolicy;itisnotaninevitableresultofthetrendsusedtoexplainit.

LikeMarcuse,Iarguethattheorganicexplanationofcrisismissestheroleofgovernment,andofpolicies,increatingcrisis,withsignificantimplicationsforpolicy.Whileitmayseemobvious,theroleofparticularpoliciesincreatingcrisis—taxpoliciesthatundercutthepublicsector,economicdevelopmentprogramsthatredirectpublicresourcestosupportingprivateprofitsandfueldecentralization,andthelackofanynationalfiscalcoordination—havenotbeenarticulatedassubjectsforrestructuring,despitethepoliticalopeningcreatedbypublicanimositytowardfinancialcapitalafterthe2008marketcollapse.Meanwhile,thepoliticalright(embodiedintheformofReaganasMarcusewaswriting)seeksto“manage”thecrisis,ratherthanresolveit,becausecrisisitselfservesasausefulmeansforachievingseveralideologicalgoals:passingthecostsofthecrisistothemostvulnerable,reducingthesizeofgovernment,holdingdownwages,usinggovernment

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fundsforprivatebusinessexpenses,anddiminishingthepoliticalpowerofcentralcities(Marcuse1981).

Understandingwhycertainexplanationscometoholdswayandremainintheforefrontofcrisisnarratives(andeventuallybecomingcommonsense),helpsusunderstandwhyalternativeexplanationshavenotemerged.Intoday’snarrativesofcrisis,manyofthesameideasthatcirculatedinthe1970sarementioned(andtreatedasagiven):theoverreachofgovernment,theinabilityofgovernmenttoachievethenecessaryefficiencyinatimeofresourcescarcity,theneedforpublicinnovationthatemulatestheprivatesector,economicrestructuring,andtheexcessivepowerofunions.Iturnnowtothoseexplanations,andwillthencomparethemtothemostsalientexplanationsbeingputforthduringtoday’scrises.

Over‐spending

Themostsimplisticexplanationforfiscalcrisisisover‐spending.Throughoutthecrisesofthe1960sand1970s,discussionsofcrisisusuallyfocusedonparticulartypesofspending:servicesthatcouldbedismissedasdiscretionary.In1975NewYork,thefocusonoverspendingwasontheso‐calledwelfarestate(seee.g.Auletta1979).Fuchs’examinationof1975NewYorkcontradictsthecommonargumentthatthecrisiswasdrivenbyover‐spendingonredistributivefunctions;sheshowsthatinfactspendingonwelfarewasprimarilydrivenbyfederalgrants,notthecity’sownmoney(Fuchs1992,143).ButshedoesshowthatNewYorkhadadisproportionateburdenoffunctionalresponsibilities:thewasspendingupto73%onnon‐commonfunctions,hernameforservicesthatnotallcitiesprovide(anythingbeyondpublicsafetyandutilities)(Fuchs1992,144).Shearguesthatthecitywasfiscallyburdenedbyan“extraordinarynumberofdeficit‐producingservices,”i.e.servicesthatdidnotpayforthemselvesthroughfees(Fuchs1992,7).Therightwasquicktoblamespendingonsocialprogramsforthecrisis,acknowledgingthatsocial‐economiccircumstancesplayedapart(nationalrecessioncombinedwiththeflightofmiddle‐classresidents),butalsousingtheopportunitytoarguethatcitiessimplycouldn’taffordsuchprograms(A.O’Connor2008;Peck2006).BahlandDuncombe,studyingwhyNewYorkstateanditscitiesreturnedtocrisisinthelate1980s,despiteeconomicgrowthforalmostadecade,arguedthatpublicemployeepayment,servicesforthepoor,andlackofexpenditurecontrol(especiallyforNortheasterncities)ledtocrisis(BahlandDuncombe1992).

Thesecondcomponentofblamingcrisisonover‐spendingisexaminationsoftheabilityofcitygovernments(i.e.thoseresponsibleforthebudget)tocutspendingintimesoffiscalstrainandloweredrevenues(whatisoftenreferredtoasmaking“toughdecisions”).Thesestudiesfocusonthepoliticaldynamicswithinacityandtesthypothesesaboutwhattypeofpoliticalsystemsarebestabletomakenecessarycuts.InFuchscomparisonofChicagoandNewYork,concludesthatChicagoavertedfiscalcrisisbecauseitspoliticalmachinewasbetterabletoresistdemandsforspendingbyconstituents(Fuchs1992).Otherauthorsemphasizepoliticians’effortstoavoidturmoil:Dunstanarguesthat

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deficitspendingbeganin1960sasthepowerofunionsandthethreatof“ghettoriots”preventedthecuttingofsocialexpenses(Dunstan1995).Shefter(1977)arguesthatpoliticalchanges(e.g.theneedtoshoreupsupportinminoritycommunities)inthe1960sledtodemandsonexpenditures,andtheinabilityofpoliticianstorefusetoincreasespendinginthefaceofcapitalflightanddemographicchange(Shefter1977).Shefteralsoproposesthattheabilityofgovernmentstocutspendinginordertoavoiddefaultconstitutethebasisofcreditors’willingnesstofinancemunicipaldebt(Shefter1992).

Cuttingspendingisnearlyalwaysanelementofthepolicyresponsetofiscalcrisis(seeChapter3),butthenatureofhowspendingisframedasaproblemshapeswhatgetscut.Someformsofspending—oftenthatgearedtowardattractingorsupportingprivatebusiness—israrelyframedasdiscretionaryorexcessive.(Indeed,manyformsofeconomicdevelopmentspendingare“off‐budget”,takingtheformoftaxbreaksandforgonerevenue,throughloweredtaxrates;theseformsofsubsidyaredifficulttoframepubliclyas“spending”).So‐called“discretionary”spendingusuallymeans(asFuchsdescribes)spendingthatothercitiesdon’tprovide,orthatmostcitiesdon’tprovide.Thiscontinualreferencetowhatcities“should”spendmoneyongeneratesintra‐urbanreferencesthatinturnfacilitatewidespreadchangesincityspending(itisoneoftheoriginalcirculatingpolicies,outlinedinpartbybothTieboutandbyworkontheentrepreneurialcity).Evenacitynotincrisiswillreferencetheabandonmentofpublichealthfundingbyothercitiesasitbecomesreframedas“discretionary”intheprocessofcrisis‐drivendebates.Whenauthorstalkaboutthepotentialforexpenditurecontrol,andthelimitsofspendingdiscretion,theyoftenfocusonthefixedcommitmentsofpensions,entitlements,butnoteconomicdevelopmentspending(BahlandDuncombe1992).SeeforexamplePecorellaandHill,emphasizingthatcityexpensestofacilitatecapitalaccumulationonbehalfoftheprivatesectorhadincreasedalongwiththecostsofredistribution,i.e.ofrespondingto“nonelite”claimsandmitigatingtheeffectsofcapitalism,particularlyafterdeindustrializationandthereductioninfederalaid(Hill1977;Pecorella1984).

Economicrestructuring

Fiscalcrisishasalsobeenattributedtotheconsequencesofnationalandglobaleconomicrestructuring.Themid‐1970sdiscoursearoundfiscalcrisiscenteredonthehollowingoutofcentralcitiesaroundtheU.S.—particularlythe“Rustbelt”oftheMidwestandNortheast—asjobsandworkersmovedtothesuburbs.Conservativearticulationsofthisexplanationfocusedontherapidinfluxofimmigrantsand“blacks”(Shefter1977,98),whodemandedsocialservices(orpublicjobs),butwereexcludedfromstablejobopportunities.Asthe1970snationalrecessionworeon,bringingwidespreadunemploymentandinflation,tensionmountedbetweenthedesiretoprovidebenefitsforunemployedandthedecreasedwillingnessorabilityofresidentstopayforsuchbenefits(Shefter1992).ClarkandWalterfoundthatfiscalstrainwascorrelatedwithfallingmedianfamilyincomeanddecliningaffluence(C.ClarkandWalter1991).Socio‐economicchangesthatbeganinthe1980swerefoundtobenotconducivetofiscalstability(seee.g.Bahland

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Duncombe1992).Deindustrializationanddecentralizationofeconomicactivitywereacentralpartoftheliteratureonurbanfiscalcrisisthroughoutthe1970sand1980s.

Ascitybudgettroublescreptintothe1980sand1990s,manyarguedthateconomicrestructuringhadmadeitdifficultforcitiestocapturerevenuesfromcertainsectors,especiallyservicesandgrowthincapitalincome,evenastheeconomyimproved.Stateandlocaltaxsystemsrelyonbricksandmortar—propertyandtraditionalsalestaxesongoods—whileonlinesalesandservices,whichfueleconomicgrowthinmanyareas,gountaxed.Today,thereturnofcapitalandpersonalwealthtocentralcities(withsomeexceptions)makesitunclearhowthe1980sversionofurbanfiscalcrisisappliestoday.Friedlandarguedin1977thatmoststudiesignorethevariedconditionsunderwhichurbanfiscalcrisishasbecomewidespread:“Americancitieshaveexperiencedfiscalstrainsatearlierhistoricaljunctures,atperiodswhencapitalwasconcentratinginthecities,notdesertingthem”(Friedland,Piven,andAlford1977,448).Buttheideathateconomicrestructuringnecessitatesanewapproachtomunicipalfinanceretainssignificantnarrativepower(R.L.Florida2009).Therepeatedimplicationthat“thereisnoalternative,”theinfamousechoofneoliberalism,hasalwaysreliedonanarrativeofeconomictransformationnecessitatingchange(Peck2010).

Analternativeviewarguesthatitisnotrestructuringthatcausescrisisbuttheinherentstructureofthecurrenteconomicsystem;thatthechangesdescribedabovearesuperficialones,andthatfiscalprecarityinheresinthecapitalistform.HillandO’Connorarguethatthe1960sand1970srepresentedintensifiedclassstruggle,generatedbythecontradictionswithincapitalism(Hill1977;J.O’Connor1973).Hillalsoarguesthatfiscalcrisiscontinuedthroughouttheprosperityofpost‐WorldWarII,despitetheabsenceofpublicattention,ascitiestookonmoredebtandbegantorundeficitsthatreflect“abasicstructuralcontradictionintheUSpoliticaleconomy”(Hill1977,77).Thiscontradictionderivesfromtheroleofurbanizationinstabilizingcapitalbyprovidingthemeansofaccumulation(seealsoCastells1977).Uneveneconomicdevelopmentisnotanunfortunatebyproductbutacentralfeatureofmarketcapitalism;thecitymustnotonlyfacilitatecapitalaccumulationbutalsomitigatethecontradictionsthatensuefromrelentlessprofit‐seeking(Hill1977,80).Asthepoormovetocentralcities,citiesareincreasinglypressuredtoprovideservicesorriskalegitimacycrisis(Hill1977,81).(Thissameideathatcityspendinggrewbecauseofdemandsforsocialwelfareisofcoursealsoadoptedbytheright(seee.g.Auletta1979).Thefederalsystemitselfhasfacilitatedlocalfiscalcrisisthroughlocalfragmentationandthe“imbalance”ofrevenueraisingpowerandexpendituredemandsatthecitylevel(Hill1977,82–83).Thissystemalsogeneratesunevenfiscaldevelopmentamongcities,ascertainservicesandexpendituresspilloverborderswhileothersdon’t.Theconstraintsoncityfinancesimposedbystategovernmentsfurtheraddtothecontractionsandpoliticalproblemsofcities.

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Unionpower

Athirdoften‐citedcauseoffiscalcrisisisthepurportedpowerofpublicemployeeunions,whicharefrequentlydescribedasbothanobstacletoretrenchmentandasdrivingexcessspendingbydemandinghighwages.Despitethenewspapers’andconservatives’focusonmunicipalunionsandtheirabilitytodemandhighwagesandbenefits,usingthethreatoflaborunresttopreventspendingcuts,severalstudiesconcludedthatunionstrengthneitherdeterminesfiscalstrain(T.N.ClarkandFerguson1983),nordoesitconstituteoneoftheprimarycausesofmostcities’fiscalproblems(Fuchs1992).Today’sfiscalcrisisisalsooftenblamedonunions,specificallytheirpensionplans.Unionsareaneveneasierpoliticaltargettodaythantheywereinthemid‐1970s,whenunionresistancetocutbacksinNewYork,alongwiththeirinvestmentassets,gaveunionleaderspowerandaccessintheensuingretrenchmentdecisions.

Inthe1975NewYorkcrisis,publicemployeeunionsplayedacentralroleinthecity’srecovery,bothbynegotiatingwagefreezesandlayoffs,andbyinvestingemployeepensionfundsinlargeamountsoftheNYC/MACbondsissuedbythecity.ShefterandWeikartbothdetailtherelationshipbetweenunionsandbanksthatenabledthedeepestconsequencesofretrenchmenttobefocusedonsocialservicesratherthanpublicemployees(Shefter1992;Weikart2009).Inhissummaryofthatera,Shefterarguesthatifacityincrisisdidnotneedsimilarsupportfromunions,itwouldbepoliticallypossibletoevisceratethem,particularlythe“non‐uniformed”workers(everyonebutpoliceofficersandfirefighters).12

Detroit’sroleinthisblame‐shiftingtounionshasaparticularsymbolicpower.Detroithaslongbeensynonymouswiththepoweroflaborunions,thebirthofthemilitantlabormovement,theroleofanti‐unionismindrivingindustryfromtheMidwesttotheSunbelt,andtheblameleviedatprivatesectorunionsforthedeclineofAmericanmanufacturing(Sugrue2005;Georgakas1998).Detroit’spublicsectorunionsarenow,likeallpublicsectorworkers,beingheapedwithblameforthecurrentfiscalcrisis(Allegretto,Jacobs,andLucia2011).ThesimmeringsentimentbywhiteMichigandersthatDetroit’stroublesarelinkedtoitshistoryofBlackgovernance(articulateddailybycommentatorsontheDetroitFreePresswebsite),andthelongroleofpublicemploymentasarefugeforBlackworkersdiscriminatedagainstbyprivateemployers,makesthecombinationofracialandlaborpoliticsavolatileone.AfterafailedNovember2012ballotinitiativethatwouldhaveeliminatedpublicunions,theMichiganlegislaturepassedarighttoworklaw,astunningblowtoMichiganworkers,andevidenceoftheGovernor’sconfidenceinhisabilitytosuccessfullyblameunions(andworkersingeneral)forthestate’seconomicproblems(TheEconomist2012).

12InthecaseofDetroit,thishasprovedtobeanastuteprediction.

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Financial“Gimmicks”

Finally,bothpublicandacademicexplanationsforurbanfiscalcrisisfocusonwhatarecolloquiallycalledfinancial“gimmicks.”Arecurringfixationonfinancialmismanagementthreadsthroughouttheliteratureonfiscalcrisis,oftencenteringonclaimsthatpoliticianssuppressthe“truth”aboutacity’sfiscalsituation,orthattheypushtheproblemdowntheroadbyusingtechniquesthatmaskbudgetdeficits.InNewYork’scrisis,politicianswereaccusedofoverestimatingrevenueforecastsandissuingrevenueanticipationnotestocovershort‐terminabilitytopay(Fuchs1992).NewYorkwasparticularlyexcoriatedforitsuseofshort‐termloanstocoverits“chronic”andgrowingdeficitsformorethantenyears(Shefter1992).TheideaoffiscalmismanagementdrovethecentralfeatureofNewYork’srecoveryprogram:theremovalofthecity’scontroloveritsownbudget,anannualbalancedbudgetrequirement,theemphasisonfiscalprofessionalism,andtheinstallationofstateandprivatesectoroversight.ThesamelanguageusedtocondemnNewYork’sfiscalmanagementin1975recursthroughoutthe40yearssince,13andhasbeenusedtoundergirdthegrowingnumberofstatepoliciesformonitoringandinterveninginmunicipalfinance(seeChapter5).

Accusationsofgimmickryandobfuscationbycityofficialstryingtomanagemountingdeficitspersistduringthecurrentrecession;thenarrativeofDetroit’scrisiscentersonthelackoftransparencyandreportingendemictothecity(seeChapter1).Whatconstitutesa“financialgimmick”remainsafloatingandmalleableconcept,andstrategiesregularlyusedbycities(andevenencouragedbyfinancialmarkets)maybereframedasirresponsibleinretrospect.Citiesrelyonshort‐termdebttoenabletheytopayoperatingexpenses,asrevenuescomeinlumps(propertytaxesarepaidonceayear,forexample).Citiesarealsounderpressuretoengageinentrepreneurialandsometimesinnovativefinancialarrangements(suchaslease‐backsofpublicinfrastructure)inordertofreeuprevenuestreams.Whenthesestrategiesprovetohavefiscalconsequences,citiesareblamed.KirkpatrickandSmitharguethatU.S.citiesarenowcharacterizedbystructuralfiscalcrisisandextremecapital‐marketvolatility,threateningmanyofthemwithashowdownbetween“municipalbondholdersandmunicipalemployees,”ashowdownthathasnowmaterializedinseveralCaliforniacities.Theylinkthisdevelopmenttoneoliberalism’srescaling,andtotheexplosionof“back‐door’debtinstrumentsandhybridmunicipalentities,”thatdivorcetheinterestsofbondholdersfromthecityitself(KirkpatrickandSmith2011).Thisframingofcitiesasfinancialactors,subjecttothesamestandardsofreporting,accounting,andriskasprivateactors,willshowupthroughoutthisdissertation.

ThedominantframingsofNewYork’s1975crisis,reflectedinthelanguageofstateandfederalpoliticiansaswellasthemainstreampress,blamedover‐spending,too‐powerfulunions,andanambitioussocialwelfareagenda,aswellasthestructuralforcesaffectingmanyEasternU.S.cities:nationalrecession,suburbanizationofpeopleandbusiness,unemployment,andinnercitypoverty.Thereisadifferentmixofinterestgroups

13Forexample,inJanuary1995S&PaccusedNYCofusing“one‐shotgimmicks”tocurefinancialproblemsandthreatenedtodowngradethecity’sdebt,mayortryingtobalancebudget.

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todaythantherewasinthe1970s.ThepublicemployeeunionsthatwereblamedsoheavilyforNewYorkCity’scrisishavelostsignificantpower,ineverycity,byanymeasure.Urbansocialwelfareprogramsthatwerestilltakenforgrantedinthe1970sarenowlargelydecimated.Financialactorshavegainedmorepowerandmorecomplexmechanismshaveemergedforleveragingthatpower.Citygovernmentshavelesspoliticalpowerrelativetobothstatesandthefederalgovernment,evenascapitalhasreturnedtothecentralcitytoadegreefewenvisionedinthe1980s.

1.3Contemporarycrisisnarratives

Ineachcitytherecomesamomentwhenofficialspubliclydescribethecityasfacingacrisis,andsuggestthatcrisiscanbeavertedonlyifspecificstepsaretaken.Thatframingisaccompaniedbyexplanationsandproposedresponsestoimpendingcrisis;thischapterdiscussesthoseframingsinfourcitiesfrom2007‐2014.AsIargueintheintroduction,bothcrisisandausteritymustbelocallyproduced,whichhappensinpartthroughreferencetocirculatingexplanationsandnarrativesofcrisisfromothercities.Thatlocalproductionandreferencingconstitutesthecommonsenseofurbanfiscalcrisisthatthisdissertationseekstounderstand.Inthischapter,Iaminterestedintheemergenceoffiscalcrisisasdescribedbylocalofficials.InChapters2and3Idiscussthedifferentmanifestationsofcrisisintermsofrevenueandspending,andhowofficialsframethepossiblepolicyresponsestoavertingcrisis.

AsIdescribeintheintroduction,fiscalcrisisisnotadiscreteeventwithclearboundariesandcharacteristics,butratheraconstructthatiscontinuallyarticulatedandredefined.Thischapterreviewstheemergenceoflocalcrisisbyasking:howdolocalpoliticalactorsdiscursivelyconstructcrisisinnarrativesabouttheircity?Howarethecausesofcrisisframed/whereistheresponsibilityforcrisislocated?

Iwanttoidentifythe“taken‐for‐grantedassumptions”shapingfiscalcrisisisunderstoodasaproblem,thusnarrowinguniverseofpossiblepolicysolutions(Wedeletal.2005,34).Thoseassumptionsandsolutionsrecurinverydifferentcities,asofficialslooktoothercitiestoreinforcetheirownnarratives.Thisdissertationusesacomparativemethodologybecause,Iargue,thenarrativesthatareusedbylocalofficialsinonecitycannotbetreatedasdistinctfromthenarrativesusedinothercity;norcantheysimplybetreatedaslocalvariationsofauniversalnarrative.

TheemergenceofurbanfiscalcrisisintheU.S.reflectsvariationsinlocaleconomies:differencesinrevenuestructure,localhousingmarkets,andcapacitytoweatherrevenuedownturns(bydrawingonreserves,issuingdebt,ormakingotheradjustments).Crisisemergedatdifferentmomentsindifferentplaces,butwithsimilarthemes,inparticulartheexplanationsforcrisisandthenecessarynatureoflocalresponsetocrisis.Thischapterdescribestheemergenceofcrisisinmyfourcasesandthendescribestwocommonthemesthatemerge:(1)referencestonationalandglobalcrisisandfutureuncertainty,and(2)the“structuralcosts”oflocalgovernments,inparticularpublicpensionobligations.Whilethe

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unevennessoftheimpactoftherecessionisofgreatimportance(andrevealsthingsaboutthedifferentrelationshipsbetweencitiesandfinancialmarkets,thefederalgovernment,andotherkeyelementsofurbanpolicies),forthisdissertationIamprimarilyinterestedinhowacommonstoryemergesdespitethatvariation;howexplanationsforcrisisthatemergefromwidelydifferingcircumstancesthentakeonexplanatorypowerreinforcedbyitsemergenceas“commonsense.”

Emergenceofanationalurbanfiscalcrisis

AlthoughtheU.S.recessionofficiallylastedonlyfrom2007to2009,Americancitiessawrevenuesdeclinerevenuesforsixstraightyears,withtheworsteffectsoftherecessionhittingonlyin2012(Pagano,Hoene,andMcFarland2012).Persistentunemployment,stagnantwages,andcollapsingpropertyvaluesfueledbudgetshortagesevenasstrugglingresidentsreliedongovernmentsupportingrowingnumbers(UrahnandPewAmericanCitiesProject2012).Whilefederalandstatebudgetshavealsobeenaffectedbyfallingtaxrevenues,manyhaveconvincinglyarguedthattheU.S.federalsystem,decadesofdevolution,andtheparticularconstraintsoncityfiscalpolicy,havemeantthatthepoliticsofpost‐2007austerityhavebeenmostdeeplyfeltbycitiesandurbanresidents(seee.g.GonzalezandOosterlynck2014;Peck2012).

Mostcitiesenteredthefiscalyearof2008‐09withlittleability—fiscalorpolitical—tomanagearecession,particularlyonecenteredonthehousingmarket.Formanycities,thisentirecenturyhasbeenaperiodofsignificantupheavalintheirfiscalsituation:afterprosperityinthelatterhalfofthe1990s(whichitselffollowedfiscalcrisisofthelate1980sandearly1990s),theearly2000sbroughtbothadownturnandinmanycitiestheculminationofsignificanttaxcutsmadeduringtheperiodofeconomicoptimismleadingupto2001.Inmanyplaces(butnotall),2005‐2006wasatimeofregainingsomeofthegroundlostintheearly2000s.Thatrecovery,howevertenuous,drovemanycitiestomakefiscalpolicydecisionsinanticipationofcontinuedgrowth.Thatexpectationofeconomicstability,aswenowknow,didnotcometopass.

TheconcentrationoftheGreatRecessionintheU.S.housingmarkethasbeenparticularlydevastatingforcities.ThelargestsourceoflocalgovernmentrevenuesintheU.S.ispropertytaxes(74%ofalllocaltaxes);96%ofallpropertytaxesin2009werecollectedbylocalgovernments(U.S.CensusBureau2012).U.S.housingpricesbegantofallin2006‐2007(withsignificantlocalvariation),eventuallydroppingasmuchas50%insomestates(FederalHousingFinanceAgency2014).Thisdropdidnotimmediatelyimpactpropertytaxrevenues(whicharelaggedtodifferentdegreesbecauseofdifferentassessmentprocesses)butby2009citieswerefeelingthehit(FitchRatings2012).Salesandincometaxrevenues—moreeconomicallysensitiverevenuesourcesthatprimarilyfundstategovernments—fellmorequicklyoncetherecessiontookhold,butalsoreboundedmorequickly.Thesecondlargestsourceofcityfunding,stateaid,fellby6percentfrom2008‐2012(U.S.CensusBureau2012).Citygovernmentreservesdeclinedby

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25%from2008‐2012,leavingcitieslessabletoweatherfutureshocksandmorevulnerabletoratingsdowngrades(Pagano,Hoene,andMcFarland2012).

Nationalunemploymentrosefrom5.8%in2008to9.3%in2009,reached9.6%in2010,andwasonlydownto7.4%in2013(seeFigure2.1).Stateandmetropolitanareaunemploymentratesuniformlypeakedin2009;by2012thehadbeguntofalleverywhere,althoughnotatthesamepaceordegree(seeFigure2.2).TherecessionofficiallyendedinJune2009,butrecoveryhasbeenweak.Nationalunemploymentisstillnearlydoublethepre‐2008rate.Decliningunemployment,particularlyduringandafterasignificantrecession,isoftencritiquedasameasureofrecovery,aspeopleeventuallydropfromtheunemploymentstatistics,orhavetotakepart‐timeworkand/orasignificantcutinincome.Underemploymentandincomestagnationhasbeenparticularlypronouncedduringthecurrentrecession(Leonhardt2014).Householdwealthandincomesaredowntothelevelsbeforethe1990sboom,whenadjustedforinflation.

Figure1.2.Stateandnationalunemploymentrates,2000‐2013

Source:BLSannualunemploymentrate,2000‐2013

Thereismarkedvariationinhowtherecessionaffectedstateandlocaleconomies.Stateunemploymentrates,whichhadnotvariedmuchintheearlypartofthecentury(Michiganbeganrisingby2003),divergedsignificantlyby2007,andcontinuedtovarysignificantlyfromstatetostatethrough2013.PennsylvaniaandTexashoverbelowthenationalaverage,CaliforniaandMichiganwellaboveit.Regionsandcitiesreflectevengreatervariationandvolatilitythanstates,particularlySanJoseandDetroitareas.

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STATE UNEMPLOYMENT RATESMichigan Texas Pennsylvania California UnitedStates

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Unemploymentandtheassociatedincomelossthreatentofederalandstaterevenuesmoredirectlythanlocalrevenues.Nearlyallfederaltaxrevenueisderivedfrompersonalorcorporateincomes(46%individualincometax;34%frompayrolltaxes)(CenteronBudgetandPolicyPriorities2015).Stateslevyamorediversemixoftaxes,butnearlyallrelyheavilyonincometaxesandsalestaxes.Fallingorstagnantincomesalsosuppressconsumption,causingsalestaxestodrop,andincreasetheneedsofresidents:duringtimesofhighunemployment,demandforcommunityservices(publichospitals,seniorservices,etc.)grows.Whilethepovertyratehasrisen,the“near‐poverty”ratehasstayedsteady,meaningthatalargerpercentageofpeoplearehoveringatorbelowthepovertyline(HokayemandHeggeness2014).

Theeffectsanddepthoftherecessionvarybothwithinandbetweenmetropolitanareas.Cityunemploymentinallfourcasesishigherthanthatofthewidermetroarea(seeFigure1.4).OnlyinSanJosedoesthecity’sunemploymentratefallbelowthestate’s,representingthedepthoftherecessioninCalifornia.Thus,whilecentralcitiesbearthecostsofinfrastructureandservicesassociatedwithcorecities,theyalsohaveadisproportionateshareofresidentsneedingpublicsupport,suchasfoodstamps,unemploymentassistance,andpublichealthcare.

Figure1.3Unemploymentratesinfourcities,2000‐2013

Source:BLSannualunemploymentrate,2000‐2013

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CITY UNEMPLOYMENT RATESDetroit Dallas Philadelphia SanJose UnitedStates

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Figures1.4a‐dUnemploymentdivergesbetweencity,MSA,andstate,2000‐2013

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DETROIT AREA UNEMPLOYMENT RATES

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DALLAS AREA UNEMPLOYMENT RATES

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Source:BLSannualunemploymentrate,2000‐2013

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PHILADELPHIA AREA UNEMPLOYMENT

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SAN JOSE AREA UNEMPLOYMENT RATES

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Detroit,Michigan

ThepredominantnarrativeofurbanfiscalcrisistodayisthestoryofDetroit’sdeclineandbankruptcy.ThecityhaslongbeenanationalsymbolofthecollapseofU.S.manufacturingandtheracialdynamicsofurbanabandonment(Binelli2012;Sugrue2005).Thecityhasexperiencedseverepopulationdecline;asof2010thecityhas700,000residents,fewerthanhalfofitspeakof1.8millioninthe1950s(U.S.CensusBureau2010).Thatdeclinehasleftthecitystrugglingtomaintainservicesandaginginfrastructureinaterritoryplaguedbyvacancyandpoverty.

Despitethesechallenges,theearlypartofthiscenturybroughtoptimismtothecity,reflectedinbudgetsthattoutedthepossibilitiesofcentercityresurgence,anaward‐winningfinancedealtomanagepensionobligations,andgrowingrevenuesfromthecity’sgamingindustry(Carvlin2005;Kilpatrick2006).Throughoutmuchofhisadministration,MayorKilpatrickpromisedthatthecitywouldeliminateitsstructuraldeficitbythe2008‐09fiscalyear.“NooneistalkingaboutreceivershipforDetroittoday.NooneistalkingaboutbankruptcyforDetroittoday”(Kilpatrick2008,9).Standard&Poor’shadevenupgradedthecity’sbondrating(Kilpatrick2008,1–2).Butin2007,asinmostcities,Detroit’srevenuesdroppedsharplyashousingpricesfell.Thestatemandatedaphase‐outofthecity’sincometaxlevy,andasteadyreductionofstaterevenuesharingfundsbegan(Rhodes2013).ThecollapseofinterestratessparkedbytheglobalfinancialcrisissaddledDetroitwithunsustainablyhighcostsforthe2005pensiondeal,andforcedthecitytosignoveritscasinorevenuestoitscreditors(BomeyandGallagher2013).

Inresponsetotheseevents,then‐MayorKilpatricktemperedhisoptimismwithemphasisonthe“toughdecisions”neededto“putthiscityinapositiontothriveinthe21stCentury”(Kilpatrick2007).WhenKilpatrickleftofficeinlate2008(chargedandeventuallyconvictedofcorruption),interimMayorKennethCockrel,followedbyelectedMayorDaveBing,raisedalarmsaboutDetroit’sfiscalsituation.OnApril30,2009,Chryslerfiledforbankruptcy;onJune1,GeneralMotorsdidthesame.Until2009,thecityhadmaintainedinvestment‐graderatingsbybothMoody’sandS&P;in2009thatthecityfellbelowinvestment‐gradeforthefirsttimesincethemid‐1990s.Thedowngradeswouldcontinuefrom2009untilthecity’sdefaultin2013(IdiscussDetroit’streatmentbyratingagenciesinChapter4).

Inresponsetotheseevents,MayorBingcreateda“CrisisTurnaroundTeam,”whichissuedareportonAugust26,2009sayingthatthecityhadreacheda“crisispoint”(CrisisTurnaroundTeam2009,6).Thereportestimatedthatthecityhada$280millioncashdeficit,andwouldneedtocutthebudgetby$250‐300millioninordertoeliminatethedeficitbeforereachingacrisis(CrisisTurnaroundTeam2009).In2010,MayorBingtriedtoimplementanambitiousplantorationalizeserviceprovision,andblamedhispredecessorsforignoringthegrowingcrisis(Bing2011a,1).

NothingismoreimportanttothefiscalfutureofourcitythanrestoringintegritytoCityHallandmakingDetroitattractiveforjobsandinvestment…

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It'stheonlywayoutwithoutstateinterventionorbankruptcyandasIhavesaidbefore,itisindeednowornever.(Bing2010,6)

InNovember2011,citingaleakedcity‐commissionedErnst&Youngaudit,theDetroitFreePressreportedthatthecitywouldrunoutofcashbyAprilunlessofficialsmadeimmediate,painfulreductionsthatwouldcutdeeplyintopublicservices(Neavling2011).Inresponsetothereport,theMayorwarnedofmassivelayoffsandtoldunionstheyhadnochoicebuttocomplywiththecity’sdemandsinordertopreservelocalautonomy:“Ifweareunableorunwillingtomakethesechanges,anemergencyfinancialmanagerwillbeappointedbythestatetomakethemforus”(Bing2011a,2).InMarch2013,aftermorethanayearofpolitical,judicial,andlegislativewranglingoverthecity’sfate,14GovernorSnyderappointedacorporateturnaroundexpert,KevynOrr,asemergencymanagerofDetroit(Davey2013b).Whenhefailedtoresolvenegotiationswiththecity’screditorsandemployeeunions,OrrfiledforbankruptcyinJuly2013,fromwhichthecityemergedinDecember2014.

Dallas,Texas

AlthoughTexas’economywasbuoyedbyoilandgasmoneythrough2009,Dallas’steadily‐growingpopulationofover1millionhasseenstagnantlocalrevenuessince2008(McNicholandJohnson2012).ThefirstmentionoffiscalstressbycityofficialscameinJuly2008,whenthecitymanagermentionedthepossibleneedforapropertytaxhikeintheFY2008‐09budget(R.Bush2008).Housingpriceshadn’tstartedfallingyet,butforeclosureswerebeginningtotakeatoll,andtheCityManagervoicedfearsthataflathousingmarketcoulddeepentheeconomicslowdown,alreadyaffectedbyaslowdowninhousingconstruction.

ByJanuary2009(halfwaythroughthe2008‐09fiscalyear),cityofficialsweremakingdourpredictions.Thecitymanagerdescribedthecity’soutlookas“gloomy”inabudgetpresentationtotheCityCouncil(Levinthal2009).“I’mlookingatwaystoreducecosts,butI’mnotintopanicmode…Wejustneedtobeverycarefulwiththepeople’smoney”saidtheCityManager(Levinthal2009).TheMayorrepeatedthismessageofcaution:“Whatwe’redoingistryingtobalancetherealityofthesituation…Whatwearetryingtodoismanagethesizeofgovernment”(R.Bush2009b).15TheDallasMorningNewsalsoechoedthisthemeofmanagingspending,sayingthatthecityfaced“theworstbudgetdeficitDallashasfacedingenerations,a$190milliongapthathasforcedthecity’smanagementtorethinkthewayCityHallwilloperateincomingmonthsandyears”(R.Bush2009a).

14Whichincludedanemergencyfinancialassessment,aconsentagreementwiththestate,therealofthestate’semergencymanagerlegislation,andtheadoptionofnewlegislation,describedinChapter5.15Dallas,unlikemostlargecitiesisaweakmayorformofgovernment;thecitymanagercontrolsallaspectsofbudgetingandthemayorservesprimarilyasavotingmemberofthecitycouncil.

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AstheDallaseconomyworsenedin2010,CityManager16Suhmdescribedthebudgetscenarioas“painful,painful,painful”(Merten2010).ShebeganpubliclywarningaboutthebudgetinMarch2010,whensheaskedallcitydepartmentstopreparebudgetreductionsof30%,publicsafetyby5%(R.Bush2010a).Justaweekafterherbriefing,Moody’splacedthecityonnegativeoutlook,citingtheweakeningeconomyandshrinkingreserves(Williamson2010).InMay,theMayorsaidthecitywouldhavetocontinuetoshrinkthecitygovernment:““Ithinkwewillhavetofindwhatservicesarenotcoretowhatwedo,”Leppertsaid(Panchuk2010).

Asof2013,annualpropertytaxrevenueswerestill8%belowthepeakof2009;totalrevenues,whichpeakedin2008,werestilldown10%in2013(CityofDallas2014).Foracitywhosepopulationhasgrownby6%sincetherecessionbegan,thisdeclineissignificant.AsthenarrativeofDallas’owncrisisabates,anarrativeofbroadnationalandinternationalfiscalprecariousnessmovedtotheforefront,asIdescribebelow.Thenormalizationoffiscalcautiondefinesthecity’spost‐recessionaryapproachtobudgeting,despitethecity’srelativelystrongeconomicandfinancialhealth(particularlyincomparisontoDetroit).

Philadelphia,Pennsylvania

LikeDetroit,Philadelphiahasbeenplaguedbysignificantpopulationlossanddeindustrialization;oncehometomorethantwomillionpeople,thecityisnowjustover1.5million.UnlikeDetroit,Philadelphiahasseensteadypopulationgrowthsince2008,buthasstruggledtofundservicesformanyreasons,includinganambitioustaxreductionstrategy,andacrisisinitsschoolsystemthathasrequiredinfusionsofcitymoney(LymanandWalsh2013).Throughouttheearly2000s,theMayoraffirmedthecity’scommitmentto“steadytaxreductions”inordertostimulateeconomicdevelopment(CityofPhiladelphia2005).Populationdeclinehadstemmed,andpropertyvalueshadincreasedsignificantly.Onlyinlate2008,whenitbecameclearthatrevenueswouldbewellbelowbudgetedamounts,weretaxreductionsputonhold.Inlate2008,MayorNutterissueda“rebalancingplan,”statingthatthecityneededto“adjusttoanewreality.Governmentisgoingtolookdifferentandmajorcitiesallacrossthecountryaremakingsignificantchangesinthewaythattheyoperate”(TheCityofPhiladelphia2008,4–5).

Thescaleofthechallengewefacedoesnotallowustotakeanythingoffthetableortopreserveanysacredcows.Thisisabudgetshortfallofenormousproportion,andbecausetheeconomymaynotrecoverquickly,wecannotaffordtolookforquick,one‐timechanges.(TheCityofPhiladelphia2008,3)

InFebruary2009,NutterpublishedaneditoriallettertothecityaboutthebudgetasnumberscameinevenbelowthedireestimatesofNovember2008.

16Unlikemostlargecities,DallashasaCityManagergovernment,whichmeanstheMayorhaslargelysymbolicpowers.

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Sadly,therecessionhasonlydeepenedandthecosttocitygovernmentisasecondbillion‐dollargapthatmustbeclosedinthenextbudgetandFive‐YearPlan.Tosecureourcity’sfuture,wemustmakesomeverytoughchoicesthatpreserveoursmartestinvestmentsofyourhard‐earnedtaxdollars.Andfrankly,thereisnoavoidingthatwefaceadepthofsacrificenotseensincethe1940s.(Nutter2009)

Nuttercalledonresidentstoparticipateinaseriesofpublicmeetingsaboutresolvingthedeficitandmakethenecessary“hardchoices:”

Aswestruggletogethertorebalancethecity’sincomeandexpenditures,Iwillberelyingonourcity’sgreatestasset–thepeopleofPhiladelphia.Inthecomingmonthsandyears,weallfacemajorsacrifices,butIalsobelievethisprocesswillbringusclosertogether….Inayearormaybetwo,wewillworkourwayoutofthisnationaleconomiccrisis.(Nutter2009)

By2010theMayorwasfocusingonthecity’spensioncostsasadriverofcrisisandaskeytosolvingit:

Theuniqueconvergenceofaprofoundfinancialcrisis,thecollapseofresidentialhousingmarkets,aglobalcontractionineconomicactivity,andsoaringunemploymenthasbesettheCitywithseverecontractionsintaxrevenues,atthesametimeastheCity’scontributionintoitsemployeepensionfundincreased,duetomarketlosses.(Nutter2010,i)

Despiteaslowlyimprovingeconomy,Philadelphia’sfinanceshadnotimprovedsignificantlyby2013,whenatemporarystatereprieveonpensionpaymentsexpiredandtaxratereductionsrestarted,generatingasecondmomentofcrisis.

Likemostmajorcities,Philadelphiacontinuestodealwithincreasinglaborandpensioncosts,delinquenttaxesandpublicsafety,allinthefaceofaslow‐to‐recovernationaleconomy.(TheCityofPhiladelphia2013,3)

Inanefforttoreassureinvestorsinadvanceofadebtissuance,Philadelphiaheldaclosedbondinvestorconferencein2013,whereitrevealedthatithasonly48%ofassetsneededtocoveritspensionliabilities,andthatithadbeenchronicallyunderpayingintoitsretirementfund(TheCityofPhiladelphia2013).Ofthefourcities,Philadelphia’sfiscalsituationremainsthemostinthepublicspotlight(asDetroitemergesfrombankruptcy).

SanJose,California

SanJose,thesecond‐largestcityinCalifornia,sitsinthecenterofthenation’shigh‐techeconomyandhasweatheredtherecessionbetterthanmostotherU.S.cities.Thecityhasdoubledinsizesince1970,currentlyjustat1millionpeople.ItrankedfirstontheBrookingsInstituteMetroMonitorevaluationofeconomicrecovery(FriedhoffandKulkami

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2013).ButrevenuedeclineshavebeenespeciallysteepthroughoutCalifornia,resultingfromacombinationofvolatilepropertyvalues,twodecadesofstatetaxcuts,andastatelawthatseverelylimitspropertyassessmentsandtheabilityoflocalgovernmentstoraisetaxes(People’sInitiativetoLimitPropertyTaxation1978).

SanJose’sMayor,ChuckReed,hassoundedthefiscalalarmsincehewaselectedin2006.Inhisfirststateofthecityaddress,heannounced:“thebudgetdeficitispublicenemynumberone,anenemythatwillstealourhopesandkillourdreamsofbecomingagreatcityifweignoreit”(Reed2007a).InMarch2007,SanJose’sMayorissuedhisfirst“budgetmessage”fortheFY2007‐08budgetprocess,highlightingtherisingcostsofemployeebenefitsonpage2,thefirstchart.Inlightoftheserisingbenefitcosts,theMayordescribedthecityas“inanextremelydifficultfinancialsituation,”facingastructuraldeficitthathadbuiltoverfiveyears.“Ourbudgetshavebeendevelopedwiththehopesthattheeconomywouldbouncebackandrevenueswouldonceagainboom,”but,hesaid,sucharecoverywouldnotbeenoughtoresolvethe“structuralgap”(Reed2007b,2)Thecommunity,throughaseriesof“PrioritySettingSessions,”mustdeterminewhichprogramsareconsideredlowpriorityandshouldbe“seriouslyquestioned”(Reed2007b,3).Inatimeofcontinuingeconomicuncertainty,theMayordescribedthecity’sgoalsas:“tomaintainourcoreservices,avoidlayoffs,andstimulateourlocaleconomyasmuchaspossible”(Reed2007b,19).TheMayorcreatedaGeneralFundStructuralDeficitTaskForce,spearheadedbyaconsultantfirm,whichculminatedina“structuraldeficiteliminationplan”inNovember2008(OfficeoftheCityManager2008).Meanwhile,inMarch2008,theMayoragainemphasizedthatthecityfacedastructuralfiscalcrisis,toadegreethat“willrequireustocutservicesthatarevitaltoourresidentsandbusinesses”(Reed2008,1).

InSanJose,theMayor’seffortstoframethecityasbeingindeep,structuralcrisisoccurredlargelybeforethebeginningofanynationalnarrativearoundcityfiscalcrisis.TheMayorhasfocusedhisspeechesaboutfiscaldistressonthecity’spensionplanandon“fiscalreform”fromthebeginning.Hisframingofthecity’sproblemshasbeenechoedbythebusinesscommunity:“Significantreformmustbeconsidered‐reforminthepensionsystem,inwaysofgoverning,inwaysofengagingthecitizenry”(SiliconValleyCommunityFoundation2012).Supportedbysuchmessages,in2012theMayorconvincedvoterstopassaballotinitiativethatreducespensionbenefitsforfutureemployeesandraisestheretirementage(Woolfolk2012).TheMayoralsoattemptedtodeclareafiscalemergency(whichwouldhavepermittedthecitytoproposeamendingcontracts,includingemployeeagreements),buttheeffortwaspostponedseveraltimesandeventuallyscrappedin2012(Koehn2012).

Interestingly,theMayorpairshisongoingmessageoffiscaldespairwithaclaimofeconomicprimacy:“SanJoseisabeaconofpeaceandprosperityfortheworld.Oureconomicoutlookisstrongandopportunitiesabound”(Reed2013).SanJose’sseeminglyparadoxicalnarrativeofasimultaneouslybrokeandprosperouscityperhapsepitomizesthenotionofanewnormal,inwhichevenaffluentcitiescannotaffordtoprovidemorethanthemostbasicservices,andmustshapecitygovernancearoundtheever‐presentpossibilityoffiscalcrisis.

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Explanationsofcrisis

Thesefourcitiesreflectthevariationinhow“fiscalcrisis”comestobeatopicoflocalofficialdiscourseandpolicy‐making.AsIdescribeabove,narrativesofearliercrisesfocusedonfourprimaryexplanations:over‐spending(particularlyonwelfareorredistributiveprograms),globaleconomicrestructuring(deindustrializationandglobalization),unionpower,andfinancial“gimmicks”thatenableddeficitstogrowunmonitored.Inthecurrentcrisis,localofficialnarrativeshavefocusedonadifferentsetoffactors:whilespendingcutshavebeensignificant,therehasnotbeenafocusonspecificaspectsofpublicspendingtoblameforcrisis.Discussionsoftheeconomyrefernottoanewmixofindustriesortradepatterns,buttoanoveralllevelofnationalandglobalscarcityandprecariousness.Finally,thefocusonpublicemployeeunionshastakentheformofanintenseattackonpublicemployeepensions,whichisthesubjectofChapter3.

Generalizingcrisis:blamingnationalandglobaltrends

Inthewakeofthe2007‐08crisis,somelocalofficialswerequicktoproclaimthattheircities’troubleswerefarfromunique,andtorelatethem(orattributethemto)abroadercrisisoftheeconomy.EvenDetroit’smayorsituatedhiscity’sbudgetwoesinthiscontext:

Detroitlikeallcities,issufferingtheeffectsoftheglobaleconomiccrisis.Thehousingmarketcontinuestosuffer,thefinancialmarketsarestillinlimboandourautoindustryisbeingreorganized.Asaresult,weasacityneedtomakecriticaldecisionsthathelpusintheshortterm,whileatthesametimepositionourcitybetterinthelongterm.Unfortunately,veryfewcitiesareimmunefromstaffreductions.Cuttingbackonservicesisnecessaryintoday’seconomicenvironment.ItisanissuethatcitiesfromNewYorktoSeattleandLosAngelestoWashington,D.C.aredealingwith.(Cockrel2009,6)

Ofallthefourcities,Detroit’scrisiswouldbetheeasiesttoviewasisolatedfromnationaltrends,asithadbeenrunningadeficitformanyyearsbeforetherecessionbegan.ButthetriggeringeventforDetroit’sdefault—nonpaymentofitsswapdeal—wasdirectlyprecipitatedbythecollapseoffinancialmarketsandinterestrates.TheMayorsofDetroitrepeatedlyconnectedthecity’scrisistobothofthesebroaderevents,andthestategovernment’swithdrawaloffunding.Detroitofcoursefacesotherchallenges,includingthelegacycostsofamuchlargercitynowsupportedbyapopulationofhalfitsmaximumsize,butitsconnectiontonationalcrisishasbeenanagendaofleadersandresidents.

Incontrasttothislocallanguageofstructuralandnationalcrisis,thestateofficialswhotookoverDetroithavesuggestedthatthecity’sfiscalproblemscouldbesolvedsimplyandrapidly,andmadelittlereferencetonationalcontext.BothSnyderandOrremphasizethelong‐termnatureofDetroit’stroubles:“ThefiscalrealitiesconfrontingDetroithavebeenignoredfortoolong.…Thisisadifficultstep,buttheonlyviableoptiontoaddressa

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problemthathasbeensixdecadesinthemaking”(GovernorSnyder’sOffice2013).Inhisfirststatementaboutthecity’sfinances,Orrsaidthat“factorsoverthepast45yearshavebroughtDetroittothebrinkoffinancialandoperationalruin”(WoodallandNeavling2013).Butdespitethisacknowledgmentoflong‐standingstructuralchallengesfacedbythecity,bothmenrepeatedlyemphasizethatthecitycanbeturnedaroundquickly,andthatthedecisionsfacingthecityaresimpleones.InaninterviewwithWallStreetJournal,Orrsaidthattheemergencymanagerjobwas“justjudgmentcalls,commonsense”(Finley2013).Referringtohisnegotiationswithunions,hesays“Thisisfifthgradestuff.”Thecity’saccumulateddebt(estimatedat$18billionin2013)isframednotasthelegacyofdecadesofdecline,butasamoralfailing.InOrr’swords,“Wehavetobreakouraddictiontodebt”(HelmsandGuillen2013).Bothstateandlocalofficialsalsousethelanguageofmodernization:bringingDetroitfromthe20thcenturyintothe21st;ofhisambitiousplanofoutsourcingandprivatization,Orrquipped:“someoftheseservicesareanachronistic…Whatbigcitystilldoessomeoftheseservices?”(Finley2013).Thestructuralfiscalchallengescreatedbydisinvestment,unevenrevenuecapacitybetweenDetroitanditssuburbs,andhighpovertyhaveneverbeenpartofthestate’sofficialnarrativeofDetroit’scrisisoritsfuture(BomeyandGallagher2013).

InDallas,officialshaverepeatedlyemphasizedtheprecariousnatureofthenationalandglobaleconomies,aspartofanarrativeofongoingfiscalcautionevenasthelocaleconomyrecovers:

ItisimperativethattheCity’sapproachiscautiousbecausedeteriorationintheworldfinancialsituationoraspikeinoilpricescouldtiptheU.S.andDallaseconomiesbackintorecession.(CityofDallas2011,10)

AsthelocalfocusonDallas’owncrisiswanes,anarrativeofbroadnationalandinternationalfiscalprecariousnessmovestotheforefrontasjustificationforcontinuedfiscalcaution.Thenormalizationoffiscalcautiondefinesthecity’spost‐recessionaryapproachtobudgeting:

Overthepastfiscalyear,theorganization[thecity]hasgonethroughsignificantchangesduetotheglobaleconomicrecession.Theupcomingfiscalyearwillpresentanewsetofchallenges.Theworkforceiscommittedtoprovidingsuperiorcustomerservice,andmaintainingtheconfidenceandtrustofourresidentsandbusinessownersduringadifficultperiodofeconomicuncertainty.(CityofDallas2010,12)

Withsomeindicationsofeconomicstabilizationappearing,itisimperativethattheorganizationmoveforwardprudentlyandcautiouslytoseizerecoveryopportunitiesinapacedmanner.Indeedtheuncertaintyregardingthedepthanddurationofthecurrenteconomicsituationwillhaveanimpactonrevenuesnextfiscalyearandperhapsintothefuture.(CityofDallas2011,16)

Andcontinuingin2012:

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ThepostrecessionapproachtomanagingCitygovernmentremainswatchfulandmeasured.ThereisstillcauseforsomecautionwiththeuncertaintyastothedepthanddurationoftheeconomicsituationinEurope.AfinancialcrisisoverseascouldleadtoshiftsinthedomesticeconomyduetotheintegratedrelationshipbetweentheEuropeanUnion(EU)andtheU.S.

Inaddition,thereispotentialuncertaintyinthefederalbudgetasseverallargetaxcutsaresettoexpireattheendoftheyearandbigspendingcutsarescheduledtokickin.

Accordingtoeconomicanalysts,withoutabalancedCongressionalresponse,theU.S.couldsufferanotherrecessionandtheglobaleconomycouldslowsharply.Continuingaconservativefinancialapproachiswise.(CityofDallas2012,10)

Dallasofficialsarebothexternalizingtheblameforlocalausterity,andjustifyinganapproachto“leanbudgeting”thatmaynotappearnecessaryasthecitymaintainsahighcreditratingandstronglocalreserves.Dallas’pensionplanwasrestructuredbeforetherecession,sothe“legacycosts”explanation(seebelow)thatothercitieshavefocusedonisnotavailableforDallasofficials.Ofthefourcities,Dallasofficialshavebeenthemostcautiousintheirframingofnationalandglobalfinancialrisk.

SanJose’sMayorhasbeenlesslikelytoemphasizenationalorglobalcauses,ashefocusesondrawingcomparisonswithothercitiesfacingfiscalcrisisbecauseofpublicpensionplans,thecausehehaschosentofocuson:

SanJoseishardlyaloneinhavingaproblemofexpendituresgrowingfasterthanrevenues.Othercitieshavetheseproblemsandworse.Inthepastfewweeks,theCityofVallejomadeheadlinesforhavingtoconsiderdeclaringbankruptcy.SanDiegoalsofacedbankruptcyasaresultoftheretirementsystemhavinga$1.4billiondeficit.(Reed2008,3)

Philadelphia’smayorhasrepeatedlyemphasizedthatthecity’sfinancesweredamagedbythenationalandglobalrecession:

The2008‐2009globalrecessionisstillwreakinghavoconPhiladelphia'seconomyandaffectingtheCity’sfundbalances.Theuniqueconvergenceofaprofoundfinancialcrisis,thecollapseofresidentialhousingmarkets,aglobalcontractionineconomicactivity,andsoaringunemploymenthasbesettheCitywithseverecontractionsintaxrevenues,atthesametimeastheCity'scontributionintoitsemployeepensionfundincreased,duetomarketlosses.(Nutter2010,i).

Philadelphia’smayorhasalsorepeatedlymentionedthecity’svulnerabilitytocutsinstateandfederalfunding,andadvocatedforfederalassistancetohiscityandthePhiladelphiaschooldistrict(CityofPhiladelphia2012,i).AsPhiladelphia’seconomicperformancehaslaggedbehindthenationalrecovery,hehasalsoemphasizedthecity’s

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vulnerabilitytofutureeconomicslowdowns,whicharelikelytodisproportionatelyaffectPhiladelphia’seconomymorethan,forexample,acitylikeDallas.

Officialsinthesefourcitiesallusethebroadernationalandglobaleconomydifferentlytoframetheirownnarrativeoflocalcrisis,shapedbytheformofausterity.Thisreferencingofexternalforcesincludeboththeactionsofstateandfederalpolicymakersand“theeconomy”asaforcethatactsuponcities.Thisexternalizationofthecausesofcrisiscontrastswiththeframingoflocalcrisisas“structural,”althoughbothexplanationscanoperateinconcertwitheachother.

“Structuralcosts”:blamingpensions

Leadersinallfourcitiesusetheword“structural”todescribethedeficitsandcoststhecityisgrapplingwithintimesofcrisis.“Structuralcosts”aregenerallyunderstoodtorefertocoststhatcannotbeeasilyreducedfromyeartoyear,butrepresentlong‐termobligationsthatareeitherdifficultorimpossibletoalter.Inthecurrentcrisis,theprimarystructuralcostsidentifiedbylocalofficialsarethecommitmentsmadetocityretireesthroughpublicpensionsandhealthcare.

Throughouthistenure,Kilpatrickarguedthatthecityfaced“structuralcosts”thatrevenuescouldn’tcover:intheDepartmentsofPublicWorks,Transportation,PublicLighting,ResourcesRecoveryAuthority,allpublicutilitiesthatweresubsidizedbythecity’sgeneralfund,and“ourbiggeststructuralproblems—pensionsandhealthinsurancecosts”(Kilpatrick2006,2).TheMayorsaidhewasworkingtonegotiateemployeeco‐pays“tolevelsthatreflecttherealitiesoftheworkplaceinthisnewcentury”(Kilpatrick2006,11).

I'msureyourememberthatjusttwoyearsagowefacedapotentialdeficitof$300million…Structuralcoststhatwehadinheritedwerekillingus.(Kilpatrick2007,1)

InMarch,2010,MayorBingblamedhispredecessorfornotdealingwiththesecosts,displacingblameforthecity’scrisis:

Thefinancialcrisisinheritedbythisadministrationisbynowfamiliartoallofyou.Anaccumulateddeficitof$330millionwithnoplantoreduceit…Financialdecisionsweretoooftendrivenbypolitics,notsoundfiscalpolicy.Budgetsweredevelopedusingsmokeandmirrors,ratherthandata.Anddifficultbutnecessarystructuralchangeswereignoredinsteadoffoughtfor,evenaswefelldeeperintofinancialcrisis.(Bing2011a,1emphasismine)

Afterhisfirstyearinoffice,MayorBingbegantoputthefocussquarelyonpensionandhealthcosts:

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Pensionandmedicalcostsarerisingatanuncontrollableandunsustainablerate.From2008through2011,theCityofDetroitcut$40millionfromservicedeliverytooffsettherisingcostofbenefits.Withoutaction,benefitcostswillconsumealargerandlargerportionofouroperatingfunds,potentiallygrowingto50%by2015.(Bing2011a,2)

Wecan’taffordbenefitpackagessorich,norcanwecontinuetoprotecttheinterestsof30,000peopleattheexpenseof700,000.(Bing2011a,3)

Detroit’spension“crisis”becamepartofthecentralnarrativeofthecity’swoes,againdespitetheuniquedemographicchallengesthatitfaced.

SanJose’smayoralsoreferstostructuralcosts:“TheCityofSanJoseisinanextremelydifficultfinancialsituation,”facingastructuraldeficitthathadbuiltoverfiveyears;evenarecoverywouldnotbeenoughtoresolvethe“structuralgap”(Reed2007b,2)In2012theMayorconvincedvoterstopassaballotinitiativethatreducespensionbenefitsforfutureemployeesandraisestheretirementage(Woolfolk2012).17

Despitehisdisavowalofthecommonnarrativeoflocalself‐reliance,18theMayorNutterofPhiladelphiahasalsobeenfirmlysupportiveofthenarrativethatframeslaborunionsasacentralobstacletofiscalstability.

Despitetheseachievements,however,thebasicstructuralfinancialchallengeremains:Aweaktaxbase,hightaxburden,escalatingcosts,highserviceresponsibilities,andlowfederalfinancialsupport.(CityofPhiladelphia2007,iemphasismine)

InSeptember2009thestatelegislaturepassedalawallowingthecitytoeffectivelydeferpartofitspensionpaymentsin2010and2011(ResolvingthePhiladelphiaPensionCrisis2009).By2010theMayorwasturninghisattentiontopensioncostsasadriverofcrisis:

Theuniqueconvergenceofaprofoundfinancialcrisis,thecollapseofresidentialhousingmarkets,aglobalcontractionineconomicactivity,andsoaringunemploymenthasbesettheCitywithseverecontractionsintaxrevenues,atthesametimeastheCity’scontributionintoitsemployeepensionfundincreased,duetomarketlosses.(Nutter2010,i)

InMarch2013,theMayordirectedhisbudgetaddresstothecity’semployees,emphasizingtotheneedforreformingapensionsystemthat“istakingmoreandmorepublicresourcesthatcouldbespentoncitizenservicesortaxrelief”(Nutter2013).Inanefforttoreassureinvestors,Philadelphiaheldaclosedbondinvestorconference,whereit17Hismessagewasechoedbysignificantvoicesinthecommunity:“Significantreformmustbeconsidered—reforminthepensionsystem,inwaysofgoverning,inwaysofengagingthecitizenry”(SiliconValleyCommunityFoundation2012).18MayorNutterofPhiladelphiahasbeenoutspokenaboutboththecity’sstrugglesandhisdemandsforstateandfederalassistance(Kerkstra2009).

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revealedthatithasonly48%ofassetsneededtocoveritspensionliabilities,andthatithadbeenchronicallyunderpayingintoitsretirementfund(TheCityofPhiladelphia2013).Thereporttoutedthecity’s“substantialexpenditurecuts,”a“deepbenchoffinancialmanagers,”andworkforcereductions,andassuredinvestorsthattheMayoris“committedtoachievingmaterialpensionreformwithlocalunions”(TheCityofPhiladelphia2013).

Whiletheexplanationsforcrisisinthe1970s‐1990scenteredontherestructuringoftheeconomy,particularlydeindustrializationandglobalization,theexplanationsduringtherecentrecessionhavecenteredonglobalandnationaleconomicinstabilityandtheproblemsposedbylong‐termobligationsorstructuralcostsofcities,ratherthanspecificspendingprogramsasweretargetedinearliercrises.Thisshifthasimportantimplications,andderivesfrom,thegrowingfinancializationofurbanpolicyandthedisplacementofblamefromthewelfarestatetopublicpensions,asIdescribeinPartThree.

Conclusion

Decadesago,Shefterproposedthatfiscalcrisesareinevitablemomentsofpoliticalcorrection,generatedbyrecurringtensionsinoursystemofgovernance.Fiscalcrises,heargues,areintegraltoAmericanurbanpolitics(Shefter1992,xiii).Ascrisesappeartoreachresolution,thereisoftentalkofa“newnormal,”echoingthisnormalizationofcrisis.Anarrativeofnormalizedscarcity,suchasthatusedbyDallas’officialsinordertobufferagainstglobaluncertainty,generateseverycityasthe“brokecity”Irefertoinmytitle.BrashdescribeshowthisnormalizationoperatesinNewYorkthiscentury:

[T]hepost–fiscalcrisisregimeisinfactoneofpermanentfiscaldifficulty,asitsfiscalandspendingpoliciesleadconstantlytobudgetshortfalls—accompaniedbythecrisisrhetoricthatassistsinthemaintenanceofthepost–fiscalcrisisconsensusduringthesetimesofincreasingausterity.(Brash2003,77)

Throughouttheliteratureonurbancrisis,whetherfocusedonmeasuringandpredictingcrisis,orevaluatingitsconsequences,thereisasharedpresumptionthatcrisisitselfisthefundamentalquestion,ratherthanaproducedoutcomeofpolicyorevenpolitics.Federaldevolution,statelimits,andeconomicrestructuringappearasexogenousforcestocities,takenforgrantedaspartofthelandscapeinwhichcitiesmustmanage.Thishasresultedinlimitedcallsbythoseinthepolicyworldforrethinkingthestructureofurbanfinance,movingfrom“managingcutbackstorethinkingtheworkofcities”(Brash2003,77).SomeofthisIrevisitlaterinthisdissertation,suchasPagano’sproposalforaddressing“thefairnessofrevenuesystems;thepro‐cyclicalnatureoflocalbudgetpractice;accumulatedlong‐termliabilities(pensionsandinfrastructure);definitionof‘coreservices:’pricinginfrastructureandservices;andpartnershipsinservicedelivery”(Barnes2011).

Theframingofcrisisasendemictocities,asresultingfromexternalandunavoidableforces,normalizesfiscalscarcityandprecarityandcreatestheneedfor

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ongoingretrenchmentandfiscaldiscipline.ThelanguageusedbyDallastypifiesthisframing:

Actionstakenintoughtimesshouldbemadewithafocusonfuturestability.AstheCitycontractstofitthecurrenteconomy,wearepoisedtocapitalizeontherecoveryopportunitiesthatwillallowustofulfillourcommitmenttogivefutureresidentsofDallasanevenbettercitythanweinherited.(CityofDallas2009,vii)

Thepurposeofthischapterwastodescribethe“commonsense”framingsofurbanfiscalcrisisfollowingthe2007‐08recessionandinpreviouseras.Therearelocalvariationsintheemergenceofcrisis,duetovariationsinlocaleconomies,differencesinrevenuestructure,thelocalhousingmarket(effectonpricesandforeclosures),andlocalcapacitytoweatherrevenuedownturns(bydrawingonreserves,issuingdebt,ormakingotheradjustments).Thesecasesembodythatvariationinthematerialimpactsontheirbudgets,butthenarrativesusedbyofficialstodescribecrisispresentamoreuniformpicture.Theframingofcrisisbylocalofficials,oftenwithreferencetoothercitiesandanationalcrisis,reflectssimilarassessmentsofthecausesoffiscalstress.

Leadersinallfourcitiesreferencedanational,evenglobalcrisis,thatleftthemnochoicebuttocutspendingsignificantly.Inallfourcities,thefiscalcrisisisdescribedas“structural,”atermwithnofixedmeaning,butonethathasbeeninterpreted,asIdiscussinPartThree,tomeanrequiringoutsideinterventionandthedisruptingofhistoricprivilegingofcitycontractualobligations.

Whileover‐spendingstillholdsgeneralexplanatorypower,ithaschangedsignificantlyasanarrativeforcefromearliercrisisepisodes.WhilemuchofthecriticismofNewYorkCityin1975byconservativeswasthatitcouldnolongeraffordthe“welfare”expensesthatcouldbecut,Detroit,alreadyreducedtoa“nightwatch”state,hasnotbeensubjecttothesamecritique.Thesolutionsforfiscalcrisistoday,giventhealready‐reducedscopeofwelfarestate,arelessapparent,althoughthereflexivelanguageofbelt‐tighteningandlivingwithinmeansisinvoked.Todaywithinflationatnearzeroandinterestratesheldnearzeroformorethanfiveyears,wagefreezesdon’thelpoverthelongterm,andthevalueofdebtdoesnotdecreaseovertime.Economicrecoveryhassubstantiallybenefitedthetoptierofincomeearners,andhasfailedtotranslateintosignificantrevenuegrowthforgovernments.

Theexplanationsforcrisisdescribedinthischapterhavehelpedproduceanational‐levelconsensusthatthebestresponsetorecessionwastoavoidrevenueincreasesandreducegovernmentspending.InPartTwoIdiscusshowthissharedcommonsenseoftheimplicationsandcausesofcrisisproducedacommonresponse:continuedrestrictionsonraisingrevenuesandcontinuedretrenchment.Chapters2and3willillustratetheproductionofausterity.

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PARTTWO:PRODUCINGAUSTERITY

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Introduction

PartTwopresentsamaterialperspectiveoftheremakingofcitiesinthemidstoffiscalcrisis.Specifically,IdrawonCensusBureauandcityfinancialdatatodevelopapictureofhowrevenues(Chapter2)andspending(Chapter3)contractintimesoffiscalcrisis.Inordertoshowboththecommonthemesandtheunevennessinrevenuesandspending,IusethebothnationaldataandfourcasestudiestoconstructacomplexpictureoftheemergenceoffiscalstrainandausterityinU.S.citiessince2007.

Theframeworkofneoliberalurbanismisfrequentlyusedtoexplaincities’recenthistoriesofausterity.Thecategoryofurbanneoliberalpolicyencompassesseveralphasesandarguments,butingeneralreferstothekindsofpoliciesadoptedbygovernmentsafterthe1970sthathaveledtothedismantlingofthewelfarestateandoftherelationshipofgovernmentlaborandprivateenterprisesonwhichitwasbased.The1970sfiscalcrisisandthewavesof1980sdeindustrialization(althoughtheyhadrootsevenearlier)fundamentallyreconfiguredtherelationshipbetweenthegovernmentandtheeconomy,throughthedissolutionoftheFordistsocialcompact,andtheriseofindividualresponsibilityasaputativelycentralsocialvalue(seee.g.FainsteinandFainstein1986).Keymomentsandcategoriesofchangeassociatedwithneoliberalurbanismincludetheretrenchmentofpublicfinance,therestructuringofthewelfarestate,therecalibrationofintergovernmentalrelations,reconfiguringtheinstitutionalinfrastructureofthelocalstate,andprivatizationofthemunicipalpublicsectorandcollectiveinfrastructure(BrennerandTheodore2002,369–370).Acorollarydevelopmentistheshifttothe“entrepreneurialcity,”inwhichcitiesmusttakerisksinordertoattracteconomicdevelopment,makingthemresponsiblefortheirowneconomicsuccessand,consequentially,theirfiscalhealth(Harvey1989).Thismodelpredictsthatcitieswillprioritizespendingtoattractandservicecapital,suchastaxbreaks,subsidizedinfrastructure,andothergoodsthataccruetotheprivatesectorandpromotedevelopment,attheexpenseofredistributivespending.

Inbroadterms,thischaracterizationofneoliberalurbanausterityisreflectedinmyfindings,buttheemergenceoffiscalcrisis,itsstructure,anditsconsequencesvaryfromcitytocity.Thischapterdrawsoutthesimilaritiesanddifferences.ThecommonthemesthatIdescribeincludelocalrevenueconstraintsandrelianceonavolatilemixofrevenues;theabilityofstategovernmentstopasstheirownbudgetshortfallsontolocalgovernments;significanttaxcutsmadebybothstateandlocalgovernmentsinthenameofeconomicdevelopment;andabudgetaryclimateofincrementallywhittlingawayattheremaininghavensofsocialspendingthatseekstoextractitsmostsignificantcutsbydismantlingbenefitsforpublicworkers.

Datasources

InthesetwochaptersIconstructapictureofrevenueandspendingchangesnationallyandinfourcasestudiesfrom2007‐2013,usingdatafrommultiplesources.

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Censuslocalgovernmentfinancedata

Chapters2and3drawfromanoriginaldatasetthatIbuiltusingtherawdatafilesfromtheAnnualSurveyofStateandLocalGovernmentFinances,towhichIwasgrantedaccessbytheCensusBureau.Thissurveycollectsdatafromstateandlocalgovernments(cities,townships,counties,schooldistricts,andauthorities)annuallyaboutrevenuesandexpenditures,includingintergovernmentalfundsanddebt.Allstates,andallmunicipalitieswith75,000ormoreresidents,aresurveyedeveryyear,alongwithasampleofsmallergovernments.Everyfiveyears(2012,2007,2002,1997,etc.),thesurveyisadministeredtoallgovernmentsofanysizearesurveyed;thisquinquennialadministrationiscalledthe“CensusofGovernments,”butitcontainsthesamesurveyquestionsastheAnnualSurvey.Asofthiswritingin2015,themostrecentlocalgovernmentfinancedataavailablecomesfromthe2012CensusofGovernments(whichrepresentsdatafromfiscalyear2011‐12).Datafromfiscalyear2012‐13willnotbeavailableuntilearly2016.AsIobserveinmycases,the2012‐13yearwasstilloneoftentativegrowthorcontinuedstagnation,sowedonotyethaveafullpictureofhowcitiesarefaringinthelongwakeofthisrecession.

TheAnnualSurveyhasahighresponserate,andsignificanteffortsaremadetoensurethateachcity’sresponseisthorough.AftereachmunicipalityfillsoutthesurveyandresponsesarealsoconfirmedandstandardizedbyCensusstaff.Censusstaffalsousecitydocuments—suchasauditsanddebtissuances—tofillinmissingresponsesandconfirmdetails.19Thisstandardization,whileimperfect,enablescomparisonbetweencities.

Myconstructionandanalysisofthisdatasetfillsagapthathasexistedsince2006,thelastyearforwhichtheCensusBureaucompiledandreleaseddatafromthesurveybycity(itnowpublishesdataaggregatedtothestate).Inordertocomparemycompiledcity‐leveldatafrom2007‐2012totheBureau’sreleasedcity‐leveldatafrom2006andearlier,IalsohadtoconstructabridgeusingtheCensusmethodologyforgeneratingsubtotalsfromindividualsurveyquestions.20

Iindexedallfinancialdatato2007dollarsusingtheconsumerpriceindex(CPI),andwhereapplicableIhavecalculatedpercapitadatausingfiguresfromtheCensuspopulationestimatesprogram.FormynationalanalysisIdefinedauniverseofthe425citiesandtownshipswithpopulationsof75,000orhigher21thathadresponsesforeveryyearfrom1992‐2007.Ichosethethresholdof75,000becauseitrepresentsthesizeofcitythatissurveyedannuallybytheCensus,andrepresentscitiesthatarelikelytobeprovidingtheirownpolice,fire,library,schools,andotherkeyservices.

19Withinthedataitself,Censusstaffcodeeachresponsetoindicatehowtheinformationwasobtained.20IusedtheUserGuidetoHistoricalDataBaseonIndividualGovernmentFinances(INDFIN),partofthefilepackageIwasgivenbytheCensusBureau,andtheMethodologyforSummaryTabulations,Chapter13inStateGovernmentFinancesontheCensuswebsitemethodologyfiles,availableathttps://www.census.gov/govs/www/ch_13.html.21Allcitiesof75,000andaboveareincludedintheannualCensussurvey(willhavemoredetailsontheCensusmethodologyintheappendix).Iincludedonlycitiesthathadcurrentyearresponsesfrom2008‐2012,andIusedpopulationdatafrom2010todeterminethesizecutoff.

50

Censusrevenuecategories

TheCensussurveycontainsdozensofquestionsonrevenues,andcompilesasetofrevenuecategoriesthatcorrespondcloselytomostcities’budgetstructures(seeTable2.1).Thefirstdistinctionisbetweengeneralrevenuesandnon‐generalrevenues:generalrevenuesincludeseverythingexceptutilities(primarilybillingforutilityservice),liquortaxes,andinsurancetrustrevenues(foremploymentinsurance,primarilyastatefunction).TheCensusalsodistinguishesbetween“ownsource”andintergovernmentalrevenuesthatcomefromfederal,state,andotherlocalgovernments.

Finally,theCensusdistinguishesbetweentaxes(leviedonspecificgoodsorservices,includingincomeandproperty),andcharges(sometimescalledfees)thataretiedtouseofaservice(likeatollbridgeorparkadmission).22Thisdefinitionisnotalwaysclear,althoughinmanycasesthesemanticsreflectdifferencesinlaw:taxesrequireahigherthresholdofvoterapprovalthanchargesorfees.

Citybudgetsgenerallyhewtosimilarrevenuecategoriesanddescriptions,butthereisonesignificantdifference:thetreatmentofrevenuesby“fund”andthemeaningoftheword“general.”TheCensususestheterm“general”tomeanallrevenuesthatarenottiedtoutility,liquor,orinsuranceactivitiesofgovernment.Manycitiesmakeafurtherdivisionbetween“generalfund”monies(thosenottiedtoanyparticularspendingprogram,andthereforeavailabletothegovernmenttouseonanything)andmoniesinotherfunds.Sometimestheseare“enterprisefunds”inwhichthefeesforaservice(hospital,park,utility,etc.)areusedtopayfortheserviceitself—thefundeffectivelyhasitsownbudgetandisoftenrequiredtobalanceouteachyear.Theuseofenterprisefundsisonemechanismforrestrictingthescopeofthegeneralfundbudget(andtherearestrictaccountingrulesprohibitingthemovementofmoneybetweenfunds),discussedmorebelow.TheCensusattemptstostandardizereportingforcitiesbyignoringthisdistinctionbetweengeneralfundsandenterprisefunds,andinsteadusingtheterm“general”tomeanallrevenuesexceptutilities,liquor,andinsurancetrust.

22Obviously,thereissomeblurrinessbetweenthesetwocategories(noteveryonepaysalltaxes,ifyoudon’tpurchasecertaingoodsforexample,andsomechargesmaybeleviedoneveryone,ormaybeproratedbyuseinthewaythatataxhasapercentagerate).Butthedivisionisfairlyuniversal.

51

Table2.1Censusrevenuecategories

Revenuecategories Explanation

Totalrevenues

Generalrevenue Totalrevenuewithoutliquor,utility,andinsurancetrust(includesintergovernmental)

Generalrevenueownsources Generalrevenuewithoutintergovernmentalrevenue

Totaltaxes Alltaxes(sumofproperty,sales&grossreceipts,income,licensing,andothertaxes)‐seebelowfordetails

Totalcharges Charges/feesforeducation,hospitals,highways,airports,parking,ports,naturalresources,parks,housing,sewerage,solidwaste,&other

Miscellaneousrevenues Interest,specialassessments,propertysale,statedividends,finds&forfeits,rents,royalties,donations,lottery,andother

Utilityrevenues Utilitychargesforwater,electric,gas,transit

Liquorrevenues (notinallstates)

TAXES

Propertytax Propertytaxes(asinglequestion)

Totalsalestax Includesbothgeneralsalesandselectivesalestaxes

Generalsalestax Generalsalestax(asinglequestion)

Totalselectivesalestax Sumofallselectivesalestaxes(alcohol,amusement,insurance,motorfuel,pari‐mutuel,publicutilities,tobacco,other)

Totallicensingtaxes Sumofalllicensetaxes(alcohol,amusement,corporation,hunting/fishing,motorvehicle,publicutility,occupation/business,other)

Incometax Individualincome&corporationnetincome

Othertaxes Deathandgift,documentary&stocktransfer,severance,other

Source:CensusAnnualSurveyofLocalGovernmentFinances;2006ClassificationManual,compiledbyauthor

52

Citybudgetdocuments

TosupplementtheCensusdata,IalsoanalyzetheadoptedbudgetsandComprehensiveAnnualFinancialReport(CAFRs)formyfourcases.Mycompilationofdataintomeasuresofoverallrevenueandspendingbehaviorthatcanbecomparedbetweencitiesalsorepresentsanimportantoriginalcontribution.Ilookatbothadoptedandactualspendingandrevenues(reportedinsubsequentyear’sbudgetsaswellasendofyearaudits).Citybudgetsarenotrequiredtofollowastandardformula,sothatbudgetcategoriesvarywidelyfromplacetoplace.InthespendingsectionbelowIprovidemoredetailonhowIsetuptheframeworkforcomparingcasestoeachotherandtonationaltrends.Formyfourcases,Ianalyzedbudgetdocumentsfromfiscalyear(FY)2006‐07toFY2012‐13.23

Intheintroductiontothisdissertation,Imakethecasefortheimportanceofcomparativeurbanresearch.Ishouldnotethatthewidevariationinfiscalstructure,governance,andallocationofserviceresponsibilitiesacrossU.S.citiesmakesitdifficulttostrictlycomparepolicyresponsesbetweencities.Indeed,thereareseveralempiricalchallengestoconstructingacomparativeanalysisofcitybudgetdata,particularlyofcityspending.TheU.S.federalsystemofgovernmentdefinescitiesascreaturesofstatelaw.Statelawandpolicythereforedeterminerevenuestructuresandspendingresponsibilities,andthoselawsvarywidelyacrossthecountry.Localfiscalcapacitythusdependsonbothlocalwealthandonthestatelawsgoverninghowcitiescanraisemoney.Thepoliticalrelationshipbetweencitiesandstategovernments,whichhasmanyimplicationsforhowcitiesmanageeconomicdownturns,variesformanyreasons:demographics,history,economics,andoverallpoliticalclimate(ItakeupthisissueinChapter5).

Thereisalsonouniformityinhowresponsibilityforserviceprovisionisallocatedamongcity,county,andstategovernments(nottomentionpublicorpublic‐relatedauthorities,agencies,etc.).Whilecertainactivities—suchaspublichousingandwelfare—originatedasfederalprograms(andwereonceprimarilyfundedthroughthefederalbudget),thehistoryofdevolutionofresponsibilityforthoseprograms(keyelementsoftheso‐called“welfarestate”)hasbeencomplexanduneven.Revenuedataiseasierthanspendingtocomparebetweencitiesasitfitsintostandardcategories,makingitrelativelysimpletomatchcities’budgetdatawiththebroaderuniverseofCensusdata(andthusenablingmorenationalcontext).Spendingdataaremoredifficulttocomparebecauseresponsibilityforspendingvariessubstantiallybetweencities,andthewaysthatcitiescategorizespendingprogramsintheirownbudgetsoftenchangesfromyeartoyear.Idiscussthismoreinthesectiononspendingbelow.Ionlypartiallysolvethisproblembystandardizingdataontaxrevenueandoverallspending,focusingonparticularprograms,anddescribingchangeswithineachcityratherthanattemptingadirectcomparisonbetweenspendingpatterns.

23Agovernment’sfiscalyeartypicallygoesfromJuly1‐June30ofthefollowingyear,orOctober1‐September30.Fiscalyear2013referstotheyearbeginningin2012andendingin2013.

53

CHAPTER2:ProducingScarcity

Thischapterdescribestherevenuechallengesfacedbycitiessince2007,highlightingseveralshiftsthatemergeascentralfeaturesofthisurbanfiscalcrisis.Theseincludeobstaclestoraisingtaxesduringtherecession,themovetowardmoreregressiveformsofrevenue‐raising,andtheretreatofstatefundingforlocalgovernments.Thischapteralsodocumentsthevolatilityofcityrevenues,inparticularthevolatilitygeneratedbyrelianceonpropertytaxesandabandonmentofincometaxes.Allfourcitiesinthisstudy,likemostotherU.S.cities,sawactualrevenuesfallbehindbudgetedrevenuesatsomepointduring2008and2009,precipitatingamid‐yearadjustmentand,dependingonthecity,aflurryoflocalnewscoverageandpublicdebate.Muchoftheinitial“crisis”experienceofcitiesoriginatesintheurgencyexperiencedduringthattime.

Citiesdonothaveunfetteredpowertogeneraterevenue;rather,thefederalandstategovernmentsgrantanddefinethepowerofcitiestolevytaxesoneconomicactivitywithintheirjurisdiction,suchassalestransactions,wageearnings,businessprofits,andproperty.Citiesmayalsolevyfeesorchargesforactivitiesrangingfromobtainingabusinesslicensetousingacitypark.Citypowerstolevytaxesandfees,andthepowertocontrolhowrevenuesarecollected,distributed,andspent,varysignificantlybystate.Allstatesputrestrictionsonwhenandhowlocalgovernmentscanchangetaxrates,andinsomecasesstateshaveimplementedincreasinglysevererestrictionssincethe1970s,bothinresponsetopopulartaxrevolts(liketheonethatinspiredProposition13inCalifornia)andasaresultofthe“racetothebottom”approachtoattractingeconomicactivitybyloweringtaxes(SwartzandBonello1993).

Nationally,revenuesforcitieshaveremainedstagnantordeclinedslightlysince2008,leavingcitiestomanagewiththesameamountofmoneyin2012thattheyhadin2008,afterfouryearsofpopulationgrowthanddeepeningneed.FromFY2007toFY2012,generalrevenueshavedeclinedby2%(SeeFigure2.1).

54

Figure2.1.Generalrevenue,citiesover75,000,FY2007‐12($000s)

Source:CensusAnnualSurveyofLocalGovernmentFinances,compiledbyauthor

Idiscussthecomponentsofthisrevenuefluctuationbelow;thereisalsosignificantvariationbetweencities,asmycasesdemonstrate.SanJose’sgeneralfundrevenuesincreasedafter2010;Detroit’sgeneralfundrevenuecontinuedtodeclinethrough2013,whileDallasandPhiladelphiastabilized(seeFigures2.2‐2.5).ThedivergencebetweenbudgetedandactualrevenuesissignificantinDetroit,butinallfourcitiesthegapappearsbiggestinFY2009.

Figure2.2Detroitgeneralfundrevenue,FY2007‐13

Source:Detroitbudgets&CAFRs,compiledbyauthor

$256,000,000

$258,000,000

$260,000,000

$262,000,000

$264,000,000

$266,000,000

$268,000,000

$270,000,000

$272,000,000

$274,000,000

$276,000,000

FY07 FY08 FY09 FY10 FY11 FY12

GENERAL REVENUE(2007 DOLLARS)

$800,000,000

$900,000,000

$1,000,000,000

$1,100,000,000

$1,200,000,000

$1,300,000,000

$1,400,000,000

$1,500,000,000

$1,600,000,000

$1,700,000,000

$1,800,000,000

FY07 FY08 FY09 FY10 FY11 FY12 FY13

DETROIT GENERAL FUND REVENUE(2007 DOLLARS)

Budgeted Actual

55

Figure2.3Dallasgeneralfundrevenue,FY2006‐13

Source:Dallasbudgets&CAFRs,compiledbyauthor

Figure2.4Philadelphiageneralfundrevenue,FY2006‐13

Source:Philadelphiabudgets&CAFRs,compiledbyauthor

$900,000,000

$1,000,000,000

$1,100,000,000

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

DALLAS GENERAL FUND REVENUE (2007 DOLLARS)

Budgeted Actual

$3,000,000,000

$3,200,000,000

$3,400,000,000

$3,600,000,000

$3,800,000,000

$4,000,000,000

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

PHILADELPHIA GENERAL FUND REVENUE(2007 DOLLARS)

Budgeted Actual

56

Figure2.5SanJosegeneralfundrevenue,FY2006‐13

Source:SanJosebudgets&CAFRs,compiledbyauthor

Generalfundrevenuespercapitainallfourcitiesstagnatedordeclined;SanJose’sgeneralrevenuerosebyinrealdollars,butactualrevenuesrosebyjust$4percapita;budgetedrevenuesfellfrom$740to$650percapita.Thevariationinthesefourcitiesisreflectiveofthegeneraltrajectoryofcityfinances:overallcontractionandstagnation,withcontractioncenteredinallcitiesfrom2008‐09anddivergingafterward.

Whileitisgenerallytruethatcitiesrelyonpropertytaxes,thereissomevariationinthemakeupofgeneralrevenuesourcesbetweencities,whichaccountsinpartforthevariationintotalrevenuesaftertherecession.Myfourcasesreflecttherangeofvariationamonglargecities.

In2007,theyearbeforetherecessionhit,propertytaxesmadeup21%ofallgeneralrevenueraised.24Theothercategoriesofgeneralrevenuesareintergovernmentalrevenues(fromfederal,stateandotherlocalgovernments)(28%),chargesandlicenses(20%),salestaxes(13%)(seeTable2.2).Ofalltaxescollectedbycities,nearlyhalfwerepropertytaxes(46%)in2007,risingtonearlyhalf(49%)in2012.

24AlldatainthissectionisfromtheCensusLocalGovernmentSurveycompiledinmyanalysiscovering425citiesof75,000peopleormore.

$550,000,000

$600,000,000

$650,000,000

$700,000,000

$750,000,000

$800,000,000

$850,000,000

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

SAN JOSE GENERAL FUND REVENUE (2007 DOLLARS)

Budgeted Actual

57

Figure2.6.Shareofmajorrevenuesources,citiesover75,000,FY2007‐12

Source:CensusAnnualSurveyofLocalGovernmentFinances,compiledbyauthor

Table2.2Sourcesofgeneralrevenue,citiesover75,000,FY2007andFY2012(in$000sof2007dollars)

FY2007 FY2012

FY2007‐12change

Intergovernmentalrevenue 28% 28% ($2,006,651)Propertytax 21% 23% $4,490,655Generalsalestax 8% 8% $370,324Selectivesalestax 5% 5% $190,861Individualincometax 5% 5% ($338,429)Corporateincometax 3% 2% ($1,415,091)Licensetaxes 5% 3% ($4,169,528)Charges 17% 19% $4,700,426Miscellaneousrevenue 9% 7% ($6,446,025)Totalgeneralrevenue 100% 100% ($4,589,030)Source:CensusAnnualSurveyofLocalGovernmentFinances,compiledbyauthor

Thedistributionofrevenuesourcesvarieswidelyovermyfourcases(seeTable2.3).DallasandSanJose,likeU.S.citiesoverall,areveryreliantonpropertytaxes.BothDetroitandPhiladelphiahavehistoricallyreliedonacityincometax.Igothrougheachofthesetypesofrevenuemorebelow.

$‐

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

$70,000,000

$80,000,000

$90,000,000

2007 2008 2009 2010 2011 2012

SOURCES OF GENERAL REVENUE (2007 DOLLARS)

Intergovernmentalrevenue Propertytax Generalsalestax

Selectivesalestax Individualincometax Corporateincomedax

Licensetaxes Charges Miscellaneousrevenue

58

Table2.3Sourcesofgeneralrevenue,casecities,FY2007

Detroit Dallas Philadelphia SanJoseIntergovernmentalrevenue 31% 7% 41% 9%Propertytax 13% 22% 6% 26%Generalsalestax 0% 9% 2% 7%Selectivesalestax 9% 6% 2% 9%Individualincometax 11% 0% 24% 0%Licensetaxes 1% 2% 11% 8%Charges 23% 41% 11% 29%Miscellaneousrevenue 11% 13% 4% 12%Source:CensusAnnualSurveyofLocalGovernmentFinances,compiledbyauthor

Comparingtheamountofgeneralrevenuesavailabletocitiesiscomplicatedbytheuseof“enterprisefunds.”Citiesincreasinglystructuretheirbudgetsusing“enterprisefunds,”inwhichservicesorfunctionsthatarepaidforbyfeesorcharges(orevenatax)aredesignatedasenterprisefunds,separatefromthegeneralfund.Bothincomeandspendingfromthatservice—abridge,utility,airport,etc.—isseparatedfromthecity’sgeneralfund.Theincomeandspendingarestillreportedinthecity’sbudget,butareheldapartfromthecity’sgeneralrevenues(andtheenterprise’sincomecannotbeusedtopayanyothercityspending).Theideaisthatthesefunctionsare“self‐funding”andshouldn’tbemixedupwiththehodgepodgeofcityrevenues(orsubjecttoamoneygrabbythecitywhengeneralrevenuesdecline).Citiesmayalsodesignatespecificgeographicareas(ordevelopmentprojects)forwhichpropertytaxrevenue(orsalestax)willbedivertedintoaspecificfund.Thoseproceedsmaybeusedtopayforspecific,ortopaythecostsoffinancing(forexampletaxincrementfinancing,oftenusedtosubsidizeprivatedevelopment).TheCensussurveyseekstoresolvethisproblembyrequiringcitiestoreportallrevenuesandexpenditures,whetherpartofthegeneralfundbudgetornot.Butthedistinctioncreatesproblemswhenattemptingtocomparedatafromcities’ownbudgetsandtheCensusdata.

2.1Propertytaxreliance

Apartfromschooldistricts,citiesrelymoreonpropertytaxesthandoesanyotherformofU.S.government.Localgovernments(includingbothcitiesandschooldistricts)collected96%ofallpropertytaxesin2009,makingup74%oflocalgovernmenttaxes);57%ofpropertytaxesgotoschooldistricts,43%tocitiesandtowns.ItisforthisreasonthattheconcentrationoftheGreatRecessioninthehousingmarketwassodevastatingforcities(andschooldistricts,althoughstateandfederalfundsmadeupsomeoftheschoolfundingdrop).Theunfoldingofpropertytaxdeclinesvariedwidelyfromcitytocity.From2009to2010,propertytaxrevenuesfellby2.5%(forallgovernments),thefirstdeclinesincethemid‐1990s(UrahnandPewAmericanCitiesProject2012).Forcitiesinmydataset,propertytaxrevenuescontinuedtogrowslowlythrough2010,andthenstagnatedanddeclined(2%)in2012(seeFigure2.7).Thecoincidenceofhighunemploymentandgeneraleconomicdeclinewithfallingpropertyvaluesisuniquetothisrecession,anddueinparttothehousingbubblethatimmediatelyprecededit,inflatingpropertyvalues

59

despitestagnantincomes.(Stateaidalsofellby2.6%from2009to2010,thefirsttimethatbothpropertytaxrevenuesandstateaidfellinthesameyear(UrahnandPewAmericanCitiesProject2012,1).)

Figure2.7Propertytaxrevenue,citiesover75,000,FY2007‐13($000s)

Source:CensusAnnualSurveyofLocalGovernmentFinances,compiledbyauthor

Nationally,housingpricesbegantofallin2006‐07,eventuallydroppingbyasmuchas50%insomemarkets(UrahnandPewAmericanCitiesProject2012).Thisdropinprices(andinsalestransactionvolume,whichsomecitiesalsotax)didnotimmediatelyimpactrevenuesinallcities,becausesalesandreassessmentsthatdrivedownacity’staxablevalueslagbehindchangesinmarketvalues(FitchRatings2012).Theeffectofthecollapseofthehousingmarketandtheensuingforeclosurecrisisonpropertytaxrevenuesvariessignificantlybycity,bothbecausepropertyvaluesbehaveddifferentlybetweenlocalurbanmarketsandbecausethelengthoftimebetweenmarketvaluechangesandassessedvaluesvaries,dependingonthestatestructureoftheratingandassessmentsystem.Insomestates,likeCalifornia,re‐assessmentsareonlytriggeredbysales,whichmeanstheylaganydownturninpropertyvaluesbyseveralmonthsorlonger.Inmydataset,propertytaxrevenuescontinuedtorisethroughFY2010,andthendeclinedthrough2012(Figure2.7)

Theeffectofhousingdeclinesonoverallcitybudgetsalsodependsontheoverallmixofrevenuesources.By2009,propertytaxesmadeup25%ofDallas’generalrevenueand31%ofSanJose’s,comparedto18%ofDetroit’s,only11%ofPhiladelphia’s.25Oftaxesoverall,propertytaxesare60%ofDallas’taxrevenue,37%ofDetroit’s,15%Philadelphia’s,and60%ofSanJose’s.Nationally,propertytaxesconstitute21%ofgeneralrevenuein2007,45%ofalltaxes;thatincreasedto23%ofgeneralrevenueand49%ofall

25FromcityCAFRsforfiscalyear2008‐09,compiledbyauthor.

$52,000,000

$53,000,000

$54,000,000

$55,000,000

$56,000,000

$57,000,000

$58,000,000

$59,000,000

$60,000,000

$61,000,000

$62,000,000

FY07 FY08 FY09 FY10 FY11 FY12

CITY PROPERTY TAX REVENUE(2007 DOLLARS)

60

taxes.26Thesepercentagesdidnotchangesubstantiallythroughthecrisisashousingpricesfluctuated.Detroit’ssalespriceandvolumedropssharplyhalfwaythrough2007,andhasstayedlow,withonlyaslightuptickin2013.Philadelphia’ssalesvolumehasbeenslightlydepressedsince2008,butsalespriceshavebeen,ifshaky,onanoverallupwardtrend.SanJose,likeCalifornia,hashadmorevolatileswingsinalleconomicindicators,sawadipinsalespricesin2007butnotasteepone,andanearrecoveryby2014,whilesalesvolumehasstagnated.

Cities’abilitytoraisepropertytaxesisconstrainedbystateenablinglaws;propertytaxesareleviedonresidentialproperties,personalproperty(muchlesscommon),andbusinessproperty(commercialandindustrial,whichmaybetreateddifferentlybystatelaw).

Table2.4Citypropertytaxpowers

Dallas Texasstatelawrestrictscitiesfromraisingmorepropertytaxrevenuethaninthepreviousyear.Thetaxrateisadjustedautomaticallytokeepthetotalamountthesame.Ifthecouncilwantstoraisetherateinordertogenerateadditionalrevenue,itmustholdpublichearings,andthepubliccandemandadirectvoteonanyincrease.Texasalsohasanenterprisezonepropertytaxabatementprogram,managedbytheTexasEconomicDevelopmentBank.

Detroit

Michiganlimitstaxationto15mills(oneachdollarofassessedvalue) or18withvoterinitiative.Michiganlimitstheincreaseinassessedvalueto5%peryearorCPI,whicheverislower.Severalbreaksforlow‐incomehomeowners,veterans,andothers,designedtobe“circuitbreakers.”Severalpropertytaxabatementprogramsaremanagedbythestate.

Philadelphia Philadelphiaraisesrelativelylittlerevenuethroughpropertytax(called“realestatetax”),insteadrelyingprimarilyonincometaxes.PennsylvaniadoesnotcaptheamountofpropertytaxthatPhiladelphiacouldlevy(althoughitdoeslimitallotherjurisdictions).Propertytaxesinthecityhavebeenrepressedprimarilybecauseofassessmentprocesses,whichwerecontroversiallyoverhauledin2010.Pennsylvaniahasa“Keystoneopportunityzone”thatprovidestaxabatementsforbusinesses.

SanJose California’sProposition13limits(1978)theincreaseinassessedvalueto2%peryearortheCPI,whicheverisless.Propertytaxesarelimitedto1%ofassessedvalue.Withfewexceptions,propertyisonlyreassessedatthetimeofsale,atwhichtimetheassessedvalueissetatthesaleprice.Californiacitiescanalsolevyrealestatetransfertaxesiftheircountiesdon’talready.

Source:CensusAnnualSurveyofLocalGovernmentFinances,compiledbyauthor

26FromcityCAFRsforfiscalyear2008‐09,compiledbyauthor.

61

Detroit

Detroithaslongbeenunabletomakepropertytaxesworkasastablesourceofrevenue;inFY2007propertytaxesmadeuponly25%ofalltaxescollectedbythecity,slightlylessthantherevenueraisedbycasinosandjustoverhalftheamountraisedbythecity’sincometax.By2012,propertytaxeshaddroppedby28%,toonly21%ofthetotaltaxescollectedbythecity.Detroit’shighresidentialvacancyrate(estimatedat28%in2010)hassteadilydrivendownpropertyvalues(themediansalespriceinDetroitwasjustover$30,000in2012,downfrom$80,000in2006)(Trulia.com2015).Propertytaxrevenuesrosethroughthelate1990sandearly2000s,asthevalueofbusinesspropertyandassessedvaluesincreased,butthecityhasahighdelinquencyrateinpropertytaxcollection,whichhasplaguedbudgetingaccuracy.In2005,thecitytransferredresponsibilityforcollectingdelinquenttaxestothecountyinexchangeforaportionofthevalue,andestimatedthatcollectionrateswouldapproach95%(afterdippingaround80%).Thatsolutionturnedouttobeshort‐lived(andputthecityintoanongoingbattlewiththecountythatthestatehasdeclinedtoresolve).Propertytaxrevenuesdeclinedbynearly20%from2008to2012,afunctionofbothpropertyvaluedecline(16%)andarisingdelinquencyrate.

Detroit’shighdelinquencyrateforpropertytaxesreflectsanagonismovertaxationincitieswhereresidentsperceivethatgovernmentservicesareinadequate.Italsohighlightstheeffectofdeeppovertyandeconomicdeclinewhenresidentshavetochoosebetweenpayingpropertytaxesandbasicconsumption.Detroit’songoingfocusonincreasingpropertytaxcollections(arepeatedthemeofMayoralspeeches;nearlyeverybudgetclaimsthatthiswillbetheyearthatthedelinquencyproblemissolved).In2007,MayorKilpatrickproposedaone‐timeamnestyprogramfordelinquentpropertyowners,tobefollowedbyanaggressivecampaignofenforcement(Kilpatrick2007,8).RaisingthepropertytaxratehasneverbeenonthetableinDetroitthroughoutthecrisis.DetroitalreadyleviesnearlythehighestpropertytaxratepermittedbyMichiganlaw;Detroit’spropertyownerspaynearlytwiceagainasmuchpropertytaxtoseveralotherentities,includingthestate,thecountyandtheschooldistrict.

Detroit’ssituationisareminderthatacity’staxcapacityisafunctionnotjustoftheassessedvaluesandtaxrate,butoftheeconomicresourcesofresidentsandtheirrelationshiptothatpropertyandtheirgovernment.Theseissueshavedrivenaneffortbythecity’semergencymanager,andnowMayorDugganasthecityleavesbankruptcy,toreduceassessmentsacrosstheboardin2014,andtoproposereassessingallcitypropertiesinresponsetocomplaintsaboutover‐assessments(Alberta2014).Inthelongterm,stabilizingthepropertytaxwillbeanimportantaspectofmakingDetroit’srevenuemixmoresimilartomostlargecities,butthestate‐drivenmovefromincometopropertytaxeshasbeenprolongedbythebankruptcy.

62

Figure2.8Detroitpropertytaxrevenue,FY2007‐13

Source:DetroitCAFRs,fiscalyears2007‐2013,compiledbyauthor

Dallas

PropertytaxrevenuesinDallas,whichmadeup42%ofitsgeneralrevenuesin2007,fellbymorethan10%in2009.DecliningpropertyvaluesandthefailureofthecitytomaximizeitspropertytaxincreaseshavekeptDallas’budgetedrevenuesatnearly10%belowtheirpeakin2008‐09.Dallas’conservativeapproachtobudgetingisinpartbecausethecity’spropertytaxratemustbeadjustedeverybudgetcycletoproducethesameamountofrevenueasthepreviousyear,regardlessofactualexpenditureneeds,inflation,orpopulationincreases(TexasLocalGovernmentCode2013).27Thislawmeansthatinyearswhenhomevaluesrise,thepropertytaxratewillautomaticallyfall,preventingthecityfromautomaticallycapturingthebenefitofincreasedhomevalues.Thecitycouncilcanvotetoincrease(ordecrease)thepropertytaxratetooverridethisrequirement,butitmustholdseparatepublichearingsonthetaxincreaseandvotersmaypetitiontoputanytaxincreaseontheballot.Thisprocessputsthepropertytaxrateinplayeveryyear,butitalsobringsaninherent,albeitincremental,volatilitytopropertytaxation,andcontributestothecity’sorientationtoincrementalandcautiousspending.Dallas’propertytaxratehas

27Gettingaroundthisrequirementtakesconsiderablepoliticalwill,andwasmademoredifficultbyrevisionstothecodein2013.

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

$300,000,000

FY07 FY08 FY09 FY10 FY11 FY12 FY13

DETROIT PROPERTY TAX REVENUE (2007 DOLLARS)

Budgeted Actual

63

increasedsteadilysince1990,albeitinfitsandjumps(andacoupleoftaxcutsalongtheway),reflectingbothpoliticalcircumstanceandfluctuationsinthepropertymarket.

Despiteseveralrecentrateincreases,thecityisstilllevyingwellbelowthemaximumallowedbystatelaw(whichis$2.50per$100valuation),anddespiteheateddebatesduringthecrisis,proposalstoraisethepropertytaxin2009failedtopassamajorityofthecouncil(R.Bush2009c).Evenasassessedvaluesfellandthecitymanagerproposedsignificantspendingcuts.TheCityManagersaidshewouldconsidertaxincreasesonly“ifIthinkit’stheendoftheworld”(Merten2010).Propertytaxincreasescontinuedtobeshunnedbymostofthecouncil,althoughthefallingpropertyvaluesmeantthatlegallythecitycouldraisethetaxratebyasmuchas13%.TheDallasMorningNewsreportedthat“AlmosteverycitycouncilmemberhasbeenadamantthatonethingSuhmcan’tproposeisraisingtaxes….Atatimeofrisingunemploymentanddroppinghomevalues,thechanceofconvincingresidentsoftheneedtoincreasethepropertytaxrateisslimtonone”(R.Bush2009a).InSeptemberof2009,CouncilmemberAtkinsinsistedonputtingapropertytaxincreasebeforethecouncilforavote;onlyfourofthe14councilmembersvotedforit(R.Bush2009c).TheDallasMorningNewseditorializedagainstapropertytaxincrease,arguingthatthebudgetcontainedaslewoffeeincreasesthatwouldbe“adoublewhammyformanyfamilies”(Editorial2009).Thepaperalsosuggestedthatthingswouldbeevenworsein2010:“Raisingtaxesshouldbereservedforaworst‐casescenario.Unfortunately,theworstmaystillbeahead”(Editorial2009).Alas,failingtoenactataxincreasein2009effectivelyreducedtheincreasethecouncilcouldapproveinfollowingyears,sincethelegalrateincreaseislimitedbytheamountofrevenuesraisedthepreviousyear.Overtheoppositionofthemayor,Dallascouncilmembersapproveda6.5%propertytaxrateincreasein2010,supportedbyrepresentativesofthepoorcitydistricts,whoseresidentshadlongcomplainedofinadequateservicesandinfrastructure(R.Bush2010b).Thatrateincreasewasnotenoughtooffsetthefallinpropertyvalues,thecity’propertytaxrevenuedidstabilizein2012‐13.

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Figure2.9.Dallaspropertytaxrevenue,FY2006‐13

Source:DallasCAFRs,fiscalyears2006‐2013,compiledbyauthor

Philadelphia

Philadelphiareliesverylittleonpropertytax(only6%ofgeneralrevenues),lessthananycityofitssize.Sincebeforetherecessionbegan,thecityhasbeenmovingtowardincreasedrelianceonpropertytaxesandawayfromincometaxes(whichwere24%ofitsrevenuein2007).Thecity’slowpropertytaxrevenueisafunctionofitsverylowvalueassessments,ratherthanitstaxrate.Thecityistryingtoexpanditscollectionofpropertytaxesthrougharevisedassessmentsystemcalled“ActualValueInitiative”orAVI)andbyreducingdelinquencies,butsofarthoseincreasesareequivalenttootherresidentialtaxreductions.Thepropertytaxratehasincreasedfrom3.305%in2008‐2010to4.462%in2013,afterwhichthecityswitchedtoadifferentsystemforassessingvalue,whichreducedtherateto.6018%,toincreaseto.6317%in2016;forallpropertyowners,thiswillrepresentanincreaseintheirpropertytaxbill.Whilethechangestothecity’staxsystemweretoutedasbeing“revenueneutral,”thelong‐termgoalasarticulatedbythestatehasbeentodecreasethecity’sbusinessandincometaxes(seebelow),therebyincreasingthecity’srelianceonpropertytaxesastheprimarylevyonallindividuals.

$350,000,000

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$475,000,000

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

DALLAS PROPERTY TAX REVENUE(2007 DOLLARS)

Budgeted Actual

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Figure2.10Philadelphiarealestatetaxrevenue,FY2006‐13

Source:PhiladelphiaCAFRs,fiscalyears2006‐2013,compiledbyauthor

SanJose

SanJosereliesonpropertytaxesfor30%ofitsgeneralfundrevenue,butisconstrainedbyCalifornia’sProposition13,whichsetstheratecapat$1per$100valuation,requires2/3voterapprovalofanytaxrateincrease,andfreezesassessmentincreasestotherateofinflationexceptwhenpropertiesaresold(People’sInitiativetoLimitPropertyTaxation1978).Thecitythusfailstocapturemostoftheincreaseinvaluation,particularlyforcommercialproperty,whichhasaverylowturnoverrate.Onthedownsideofapropertymarketbubble,isrequiredbylawtoreassesspropertiesunderthestate’sProposition8,whichallowsownerswhoowelessthantheirhome’spurchasepricetohavetheirpropertyreassessed.WhiletherehavebeenmurmuringsaboutrepealingProposition13atthestatelevel,citiesinCaliforniadonothavetheoptionofraisingtheirpropertytaxesforgeneralfunds(schooldistrictscanaskvoterstoapproveparceltaxes,anearmarkedpropertytaxincrement,butcitiesdonothavethispower).

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$700,000,000

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

PHILADELPHIA REAL ESTATE TAX REVENUE(2007 DOLLARS)Budgeted Actual

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Figure2.11SanJosepropertytaxrevenue,FY2006‐13

Source:SanJoseCAFRs,FY2006‐14,compiledbyauthor

Despitetheseverityofthehousingmarketcollapse,mostlargecitiescontinuetorelyonpropertytaxesasthelargestsourceoftaxrevenue.Thediversityofconstraintsfacingthesefourcitiesexemplifiestheprecarityandlimitationofpropertyvaluesasaprimarysourceofrevenue.

Thisrecessionprovidedastarkreminderthatpropertyvaluesplayapivotalandvolatileroleincityfinances.Theabsenceofanydiscussionbylocalofficialsabouttherelianceonpropertytaxes(andtheircontrolbylocal,ratherthanstate,governments)reflectsawidespreadpoliticalacceptanceofcities’relianceonpropertytaxes,althoughsomescholarshavenotedthatmorediversifiedrevenuebasecouldbemorestable(Chernick,Langley,andReschovsky2011a)(thereis,bycontrast,morecriticismofschooldistricts’relianceonthetax,whichhasbeendemonstratedtocontributetosignificanteducationalinequalities(KenyonandReschovsky2014)).Despitetheseverityofthehousingcrisis,anditscentralitytotheGreatRecession,therewaslittlelocaldebateinanyofmycitiesaboutthedangersofrelyingonpropertytaxes;infactcitieswithrelativelylowrelianceonpropertytaxes(suchasDetroitandPhiladelphia)areworkingtoincreasethatreliance.Propertyvaluesvarymoresignificantlybetweencitiesthandoincomes,propertytaxesrepresentamoreunequal,andlessprogressive,sourceofincomeforcities.

Statelimitationsandlocalpoliticaloppositiontopropertytaxesalsomakepropertytaxesoneoftheleastflexiblesourcesofrevenueforcities(Sokolow1998).Nationalcampaignstoreducelocaltaxationhavecenteredonpropertytaxes,inpartbecausetheirpaymentismoreconcreteforresidentsthansalestaxes,whicharepaidinincrementsovertheyear.Thepropertytaxhaslongbeenaparticulartargetofanti‐taxsentiment.Onereasonforitsunpopularityisthatpropertyvaluesfluctuateindependentoftheincomesofpropertyowners,atleastintheshort‐term.Manyanti‐taxrevoltswerepromptedbystoriesofpropertyownerswhocouldnolongeraffordthetaxesonfixedincomeswhenpropertyvaluesescalated.ThefirstwaveofpublicpressureforpropertytaxlimitationsbeganduringtheDepression,drivenbyhighdelinquencyratesandthefactthattaxassessmentsdidnotfallasquicklyorasfarashousingprices,apatternrepeatedin

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$225,000,000

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

SAN JOSE: PROPERTY TAX REVENUE(2007 DOLLARS)

Budgeted Actual

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significantpartduringtheGreatRecession(seeYuanetal.2009).Asecondwaveinthe1970sand1980swasencapsulatedbythepassageofProposition13inCaliforniain1978,whichcausedCaliforniapropertytaxrevenuetoplummetby57%withinayear(seeYuanetal.2009,153).Californialocalgovernmentswereimmediatelyrenderedmoredependentonstateaidandturnedtowardfeesandcharges(andeventuallysalestaxes)tocompensateforthelostrevenue.AccordingtoYuan,43statesadoptednewpropertytaxlimitations(orprovisionsforhomeownerrelief)between1978and1980followingthepassageofProposition13inCalifornia(seeYuanetal.2009,153)Theserestrictionsincreaseddependenceonstateaidandincreasedfiscalcentralization,aswellasincreasedrelianceonnon‐taxrevenuesources,includingfees/chargesandstateaid(Sokolow1998).

2.2Taxlimits

Stategovernments,inadditiontoprovidinglegalrestrictionsontaxincreases,alsoshapecities’revenueoptionsbypushingthereductionorphasingoutofspecifictypesoftaxes,inparticularcityincometaxesandbusinesstaxes.Therewereinstancesinwhichstatesenactedstrongerrestrictionsduringthecurrentrecession,buttheserestrictionswerepredominantlyadoptedinearlierwavesoftaxcuts(thephasingoutofbothDetroitandPhiladelphia’sincometaxesbeganseveralyearsbeforethecurrentrecession)(seeBowmanandKearney2012).Suchrestrictions,whichcenteronthepropertytax,severelyconstraincities’optionsforrespondingtoeconomicdownturns.

Stateshavealwaystinkeredwithlimitationsonthepowersofcitiestoraiserevenues.In1995,theAdvisoryCommissiononIntergovernmentalRelations(ACIR)reviewedstatelawslimitinglocalgovernmenttaxationandspending(AdvisoryCommissiononIntergovernmentalRelations(ACIR)andCenterforUrbanPolicyandtheEnvironmentIndianaUniversity1995).28Thereportraisedseveralconcernsstemmingfromthegrowingnumberofsuchlimitations:increasedrelianceonregressiverevenuesources(feesandcharges),andincreaseddependenceonstateaidandgrowthofstatespendingonspecificservices:educationandhighways.Mostlimitationstooktheformofrestrictionsonpropertytaxes,bothoverallratelimits,andanewformoflimitationatthattime,limitsongeneralrevenueorexpenditureincreases,andrestrictionsonassessmentincreases(whichtookmostrestrictiveforminCalifornia)(seeAnderson2012a).

Therewaslittleresearchorpoliticalattentiongiventotheimpactsofstatelawsonlocalgovernmentfiscalhealththroughthelate1990sandearly2000s,inlargepartbecauserelativelocalrevenuegrowth,particularlyintheformofpropertytaxes,broughtameasureoftemporarystability.Astherecessionbegan,therewassomerenewedattentiontotheprecarityoflocalrevenueinrelationtostatepolicyinparticular.In2007agroupofresearchersaffiliatedwiththeLincolnLandInstitutelookedattherelationshipbetweentaxandspendinglimitscities’abilitytoprovideservices,andfoundthattheencroachmentofstatecontroloverlocalrevenueshasleftcitieshighlydependentonpropertytax,a28Alas,theACIRwasslowlymarginalizedandeventuallyabolishedin1996byPresidentClinton,endinganeraoffederalfocusonintergovernmentalrelations(McDowell1997).

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politicallyunpopulartaxthatishighlyrestrictedbystategovernments(Yuanetal.2009).Theselimitationsgenerateaconflictbetweenadrivetowardlocalismanddecentralizationandtheinadequacy(intheviewoflocalofficials)oflocalrevenuestopayforneededgoodsandservices.Someofthesetaxlimitationsweresupportedbyvotersinthenameofstoppingout‐of‐controlgovernmentspending,butlegislatedatthestateleveltheyhaveproducedamorecentralizedformofrevenuedecision‐makingthatpreventsurbanresidentsfromdecidingthesizeoftheirowngovernments(Yuanetal.2009).

Attackoncityincometaxes

Withmoststatesalreadyseveralrestrictingpropertytaxes,stateshaveturnedtoeliminatingamoreprogressivebutrareformofcityrevenue,theincometax.Forthefederalgovernment,theprimarysourceoftaxrevenueistheindividualandcorporateincometax,andstates,too,relyheavilyonincometaxes.Bycontrast,onlyfourteenstatesallowlocalgovernments(includingcities,counties,andschooldistricts)tolevyincometaxes.29Severallargecitieslevytaxesonindividualearningsofpeoplelivingorworkingincityboundaries:Denver,Detroit,Cleveland,Columbus,NewYorkCity,Philadelphia,andBaltimore.SanFranciscoandPortland(Oregon)levyapayrolltaxonemployers.Philadelphiaalsoleviesacorporateincometax.InmyCensusdataset,30of425citieshavedataforindividualincometax;8forcorporateincome.Becausetheyareleviedbyasmallgroupofcities,incometaxesareeasypickingsforlistsof“highesttaxes”andthediscourseofcitiesincompetitionforresidentsandbusinessespinpointsanytaxdifferencefromothercities.Thusalthoughincometaxesarefarlessvolatilethanpropertytaxes,andaremoreprogressive,theyhavefallenoutoffavor.Overthepast20years,politicalpressuretoreduceincometaxrateshascomefromstategovernments.BothDetroitandPhiladelphiahavebeenunderpressuretoreducetheirincometaxesbypeoplearguingthatworkers(especiallythemostaffluent)simplymovetothesuburbstoescapethetax,andthatbusinessesmoveouttobemoreattractiveandclosertotheirworkers.(NeitherDallasnorSanJosecollectsacityincometax,sotheyarenotpartofthisdiscussion.)InbothDetroitandPhiladelphia,thereductioninincometaxhasbeenaleadingcontributortotheiroverallrevenuedecline,aspropertytaxeshaveyettobecomeaviablereplacementincomesource.Asthetwocities’incometaxesarefurtherphasedout,itisnotclearhoweithercitywillmakeupthedifference.

Detroit

Detroit’scollectionofincometaxissubjecttoseveralconstraintsbythestateofMichigan.AlthoughMichigan’sCityIncomeTaxAct(1964)allowsanycitytolevyanincometax(22citiesdo),itsetsahigherrateforcitiesover600,000,whichonlyincludesDetroit.PublicAct500of1998amendedtheCityIncomeTaxActtoreducetheincometaxratesinDetroit,andin2002,thelawsetpoliciesforittorollbackifacitynolongermeetscriteriaforfinancialdistress,withthegoalofphasingoutthetaxcompletely.From2003to29Stateswhereallormostcounties,citiesorschooldistrictslevyincometaxesareMaryland,Kansas,Kentucky,Ohio,Indiana,severalcitiesinMichigan,Pennsylvania

69

2012,therollbackwassuspended(from2004‐2007becauseDetroitmetthecriteriaoffiscaldistress,for2008and2009becausestatelegislatorspassedalawgivingthecityareprieve,andin2010and2011thecityagainmetthecriteriaforfreezingtherollback).Beginningin2012(while,ironically,thestatewaspushingforadeclarationofcrisisandtheimpositionofanemergencymanager),Detroitnolongermetthosecriteriaandtherollbacksbeganagain.

AnotherincometaxchallengethatDetroitfacesisthatthemoneyfromthetaxiscollectedbythestateandthenreturnedtothecity.Thisprocesscreatestwodifficulties:(1)thecityisdependentonthestateexercisingitsauthoritytopursueindividualswhofailtopaythetax,whichcityofficialsallegeithasbeennegligentindoing,and(2)thestate’stimelineforreturningthemoneytothecityisoftenquitelong,andhascontributedtothecity’sworseningcashflowproblems.Inlate2011,MayorBingexpressedhisfrustrationatthecity’sdifficultyincollectingincometaxes:

We’verequestedassistanceincollectionoftheCity’sincometax,aserviceLansingcouldprovidethatwouldhelpuscollectuptoapproximately$155millioninadditionalrevenueonanannualbasis.We’veaskedtheStatetoseewhattheycandoaboutthe$220millionowedtotheCityofDetroitthathelpedputusinafiscalcrisisinthefirstplace.Refusaltoconsiderthoseproposalswhileinitiatingthis[takeover]processsendsadisturbingsignaltoourcommunity.(Bing2011b)

In2010‐11,thecity’sincometaxwasbudgetedat$215million,a$30milliondecreasefrom2009‐10anddownfromahighof$378millioninFY2000.Throughout2011‐12,thecitytriedtonegotiateamodificationofthelawbyofferingtocreateanewprivatelightingauthoritytoappeasethestate’sdemandsforprivatization,butnegotiationsfellthroughinJuly2012.Thecutimposedin2012(2.5%to2.4%forresidentsand1.25%to1.2%fornonresidents)isestimatedtocostthecity$8.5millionayear.IntheplanOrrpresentedtocreditorsJune14,2013,intheprocessofpre‐bankruptcynegotiation,heproposedeliminatingitsincometax(K.Orr2013).Inthebankruptcyplanofadjustment,Detroit’sincometaxispreserved,butcollectionofthetaxhasbeenhandedovertotheState.Therollbackhasbeenhaltedatleasttemporarily,untilthepropertytaxcollectionrateandreassessmentprogramhasstabilizedthepropertytaxasasignificantsourceofDetroitrevenue.

70

Figure2.12Detroitincometaxrevenue,FY2007‐FY13

Source:DetroitCAFRsFY2007‐2013,compiledbyauthor

Philadelphia

Philadelphia’slargestsourceofrevenueisataxonearningsbypeoplelivingorworkinginPhiladelphia,makingupoverhalfofitstotaltaxrevenue,morethantwicetheamountraisedbyitspropertytax.In1939,theSterlingActauthorizedPhiladelphiatolevyataxonincomeearnedbypeopleworkinginthecity,atthetimeinresponsetofiscaldistressfueledbytheDepression.Today,Philadelphialeviesa4.0%taxonindividualsearningincomeinthecity,aswellasawagetaxpaidbyemployersinPhiladelphiaonthewagesearnedbytheiremployees.Sinceitsstatebailoutin1991,Philadelphiahasbeenunderstatepressuretoreducelocaltaxestospureconomicdevelopment;thewageandearningstaxhasbeencutsteadilysince1995.From1995to2007,understatepressuretocuttaxestospureconomicdevelopment,thecitycutatotalof$1.6billioninwageandbusinesstaxes.From2000to2007,thecitycut$1.1billioninwageandbusinesstaxes;beginninginFY14thosecutswillcost$230millionperyear.30In2007,theMayoraffirmedhiscommitmenttothetaxcuts,butnotedthatthecity’srevenuegrowthfrom2004‐2007wasonlyinthe“volatilerealtytransfertaxandbusinessprivilegetaxes,”whilewagetaxes,slatedforreduction,stillconstitutedhalfofalltaxcollections.ThereductionsweretemporarilysuspendedfromFY10‐FY14inresponsetothecity’sbudgetcrisis.Businessprivilegetaxcutswerealsoimplementedfrom1995to2008,partofthemandatebyPICAtofocusoneconomicdevelopmentbyshiftingemphasistothepropertytax.

30InformationcompiledfromPhiladelphiaCAFRsforFY2007‐2014.

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FY07 FY08 FY09 FY10 FY11 FY12 FY13

DETROIT INCOME TAX REVENUE(2007 DOLLARS)

Budgeted Actual

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Figure2.13Philadelphiawageandincometaxrevenue,FY2006‐FY13

Source:PhiladelphiaCAFRsFY2006‐2013,compiledbyauthor

Thetaxlimitseraofthe1970sand1980sproducedalandscapeinwhichcitieshave

fewrevenueoptionstoweathereconomicrecessions.Likealltaxes,propertytaxincreasesfacesignificantpoliticalobstaclesinthecurrentpoliticalclimate,compoundedbystatelimitationsontaxincreasesandgrowingstatecontroloverallrevenuedecisions.Theselimitationshaveproducedaprecarityincityfinancesandtheyraiseimportantquestionsabouthowlocalgovernments(whichareprohibitedfromdeficitspending)shouldbehaveinarecessionaryenvironment.

Despitethepoliticalobstaclestomakingrevenuechanges,itisnotthecasethatvotersdon’tsupportincreasesinlocaltaxes.Residentsoftentestifyatbudgetmeetingsinoppositiontotaxincreases,butpollingconsistentlydemonstratespublicwillingnesstopay,andcouncilmemberswhoknowtheirconstituentshavestoodupandadvocatedfortaxincreasesinallfourofmycases.Theissueoftaxcompetitiondoesmatterforcities,andMayorsorcitycouncilmemberssometimesrefertopropertytaxratesofneighboringjurisdictions,orothercitiesofcomparablesizeinthesamestates).Certainlycitiescomparetheirtaxstructuresandlevelstoothercities,oftenusinglistswidelycirculatedaboutlocaltaxburdens.Oneofthekeyelementsofthe“competitiveness”narrativehasbeencompetitionforlowtaxrates,particularlyonbusinesstaxesandtoalesserextentonincometaxes.Therearemanylistsof“good”taxstatesandcities,rankings,thattakeforgrantedthata“good”taxstructure(i.e.lowtaxes,particularlyonkeytaxpayerssuchasbusinessesandhigh‐incomeworkers)promoteseconomicgrowthandinfluencesbusiness’decisiontolocateorexpandinacity(seee.g.Kennedy2012).Ingeneral,thishasmeantamoveawayfrombusinesstaxesandprogressivetaxesonindividuals(i.e.incomeorwealthtaxes)andtowardmoreregressiveformsofrevenue,despitetheirinstabilityanddisproportionateburdenonlow‐incomeresidents(seee.g.Tomlinson2015).

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FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

PHILADELPHIA: WAGE, INCOME, PROFITS TAX

(2007 DOLLARS)

Budgeted Actual

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2.3Regressivetaxation

Therehasbeenameasurableshifttowardmoreregressiveformsoftaxation,inparticularsalestaxesandfeesandcharges.Thisshiftisinpartbecausecitieshavegreatercontroloversuchrevenuesources,soareabletopassincreasesintimesofneed,andalsoinpartbecausesuchregressivetaxestendtobemorepoliticallypalatable.

Growingsalestaxes

Salestaxesarethesecond‐largestsourceofcitytaxrevenue;manycitiesareallowedtolevyanadditionalgeneralsalestaxesontopofanysalestaxleviedbythestateorcounty,andcitiesalsolevyspecialsalestaxes.Particularlygiventhestrictstatelimitsonpropertytaxratechanges,salestaxleviesrepresentoneofthefewmechanismsbywhichcitiescanincreasetheirtaxesontheirown.Somecitiesmusttakesalestaxincreasestotheballot,otherscandoitthroughthelegislativeprocess.Salestaxesareoneofthemostregressivegeneraltaxesleviedbygovernments;thepoorpayamuchhigherpercentageoftheirincomeforgoodsandservicesthandothewealthy.Evenwithexemptionsforfood,generalsalestaxesareveryregressive.Theyalsoresponsemorerapidlytoswingsintheoveralleconomythandopropertytaxes;nationally,salestaxrevenuedippedmorerapidly(from2008‐09)thandidpropertytaxes,butrecoveredmuchmorequicklyasspendingrebounded(seeFigure2.14).Salestaxesaresensitivetochangesineconomicconfidenceandconsumerspending,andbecausetheyarecollectedatthemomentofspending,theytrackanychangesinthelocalandnationaleconomyveryclosely,withlittlelagtime.Salestaxesareappealingtolocalresidentsandpoliticiansbecausetheycanalsobeframedasawayforcitiestotaxnon‐residents(i.e.shoppersfromsurroundingcommunities),drivingafocusonretaildevelopmentasaneconomicdevelopmentstrategy.

Figure2.14Citysalestaxrevenue,citiesover75,000,FY2007‐FY12

Source:CensusAnnualSurveyofLocalGovernmentFinances,compiledbyauthor

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CITY SALES TAX REVENUE(2007 DOLLARS)

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Detroitleviesnosalestaxitself,althoughthestateleviesa6%salestaxthatituses

tofundrevenuesharingprograms,amongotherthings.Atnotimeduringthebankruptcywasacitysalestaxproposed(Long2013).Dallasleviesa2%salestax,themaximumitispermittedbystatelaw,ontopofthe6.25%salestaxleviedbythestate.Halfofthat2%goestothecity’sgeneralfund,theotherhalftoitsrapidtransitsystem.Texashasnostateincometax,sosalestaxesprovideamoresignificantsourceofstaterevenuethaninmoststates.

Figure2.15Dallassalestaxrevenue,FY2006‐FY13

Source:DallasCAFRs,FY06‐FY13,compiledbyauthorFigure2.16Philadelphiasalestaxrevenue,FY2006‐FY12

Source:PhiladelphiaCAFRs,FY06‐FY12,compiledbyauthor

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DALLAS SALES TAX REVENUE(2007 DOLLARS)

Budgeted Actual

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FY06 FY07 FY08 FY09 FY10 FY11 FY12

PHILADELPHIA SALES TAX REVENUE(2007 DOLLARS)

Budgeted Actual

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ThestateofPennsylvanialeviesa6%salestax,andPhiladelphialeviesanadditional2%tax,themaximumauthorizedbystatelaw,butsalestaxrevenuesmakeuponly10%ofthecity’sgeneralbudget.Thesalestaxwasraisedto2%infiscalyear2010;thestateoriginallygavethecitypermissiontotemporarilyincreaseitssalestaxfrom1%to2%,buttheincreasehasremainedinforce,despitefrequentremindersbystateofficialsthattheincreaseshouldnotbepermanent.

Figure2.17SanJosesalestaxrevenue,FY2006‐13

Source:SanJoseCAFRs,FY06‐13,compiledbyauthor

SanJose’ssalestaxrateis8.75%,aboutaverageforitscounty,higherthanCalifornia.Californialeviesa6.5%tax,plusa1%mandatorylocaltaxrate.

Whilemanycitieshavealreadymaximizedtheirsalestaxrates,manystatesareseekingtomovetowardgreaterrelianceonsalestaxes,awayfrompropertyandincometaxes(Stevenson2013).Untilsuchpoliciesareinstituted,thecitieshavethegreatestautonomyoverfeesandcharges,whichhavebeentheprimaryfocusofrevenueincreasesduringtherecession.

Growingrelianceonfeesandcharges

Assalestaxesandpropertytaxesaremaxedout,citieshaveturnedtoincreasesinfeesandchargestomanagerevenueproblems.Manycityservicesaresupportedbyfees,andtheideathatservicesshouldbe“self‐funding”ifpossiblegivesrisetothefocusonpay‐as‐you‐gofundingforeverythingfromsewersystemstoparks.Inallofmycases,thecreationofnewfeesandcharges,andincreasestoexistingfees,accountedforthemajorityofrevenueincreasesafter2008.Feesandchargesincreasedsteadilyinrealdollarsthroughtherecession,growingfrom17to19%ofcitygeneralrevenue.Theincreasedrelianceonfeesandchargescanbedifficulttocapturenationallyforafewreasons:first,thesheernumberoffeesandchargesmeansthattheCensusdatalumpsthemallintotwocategories:ChargesandMiscellaneousRevenue.Secondly,servicesthatcanbemonetizedareoftenmovedoutofthegeneralfund,oftenintoseparateenterprisefundsthatconsistsolelyofrevenuefromthatservice,whichmeansthatthoserevenuesnolongerappearinthe

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SAN JOSE SALES TAX REVENUE(2007 DOLLARS)

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primarygovernmentbudget.Despitethesechallenges,wecanobserveasignificantincreaseinfeesandchargesrevenuenationallyfrom2007‐2012(Figure2.18).

Figure2.18Growingrelianceonfeesandcharges,citiesover75,000,FY2007‐12(in$000s)

Source:CensusAnnualSurveyofLocalGovernmentFinances,compiledbyauthor

Feesandchargesareinherentlymoreregressivethanmosttaxes.Often(likeDetroit’sgarbagefee),theyareonaper‐parcelorper‐servicebasis,withnorelationshiptoanindividual’sabilitytopay.Theyarepoliticallyappealingfortworeasons.First,theyfeedintothenotionthatgovernmentservicesoughttopayforthemselves.It’seasytoseeonpaperwhetherthegarbagesystem,orbridge,paysforitselfifyoucantracktherevenuestheservicegenerates.Second,theyarelesslikelytostimulateoppositionbyvotersbecausetheyonlyapplytopeoplewhentheyactuallypayforthegoodorservice,andarepaidinsmallerlumpsthanpropertytaxes,whicharepaidonlyonceayear.Thesheervarietyoffeesbeingintroducedandincreaseddefieseasysummary:InDetroit,newfeeswereproposedonsmokelesstobacco,andchargesforgarbagepickupwereconvertedtoaper‐quarterfeesystem,insteadoffundingitfromthecity’sgeneralpropertytaxrevenues.InDallas,feeswereincreasedforvehicleregistration,healthcareservices,traffictickets,andgaragesalepermits(Findell2015).Citybudgetsarestuddedwithsuchfees—somepermanent,sometemporarystopgapsduringthecrisis—enablinglocalofficialstoproclaimtheirresistancetotaxincreases,whileincreasingthecostofeverythingfromcommunitycollegecreditstocourtfees.Overthepasttwoyears,thegrowingrelianceofcitiesonfinesandchargesassociatedwiththecriminaljusticesystemhasreceivednationalattention(seee.g.Stillman2013),perhapsoneofthemostominouslegaciesoftherecession.

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CITY FEES AND CHARGES REVENUE(2007 DOLLARS)

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2.4Retreatofthestate

Statesnotonlylimittherevenueoptionsavailabletolocalgovernments,buttheircontroloverasignificantpercentageofcityfunding(20%oflargecityrevenuescomeintheformofstateaid)addsanelementofvulnerabilitytocityrevenuesintimesofwidespreadeconomicdownturn.Asearlyas2009,therewasawidespreadpressnarrativeofstates“balancingtheirbudgets”bycuttingfundingtolocalgovernments(Cooper2011).In2009theCenteronBudgetandPolicyPrioritiesfoundthat44statesfacedbudgetdeficits(allbutthosestatesreliantonenergysources)(Applebome2009).ANationalAssociationofStateBudgetOfficers(NASBO)surveyofstateleadersfoundthatstateswerescramblingtoclosebudgetholes:cuttingaidtoschools,furloughingemployees,andclosingparks(Goodnough2009).Forty‐ninestateshavebalancedbudgetslawsthatrequirestatestoeitherraiserevenuesorcutspendinginordertoeliminateanyprojectedbudgetdeficit.By2011,stateswereenactingseverecutstoservicesprovidedbycities,suchaslibraries,education,healthcare,andtransportation(Cooper2011).Statesthatstillmaintainedgeneralaidsupport(oftenthroughcomplicatedrevenuesharingarrangementssuchasMichigan’s)weremakingsignificantcutstothoseprograms(NeumannandLevitz2013).Statelegislaturesbegantogoafterremaininggeneralstateaidprogramsformunicipalities,suchasinTennesseeandOhio(seee.g.Moody’sInvestorsService2014e).Statesalsodivertedfundsfromlocalprograms,suchasschooldistricts,toplugstatedeficits(asinPhiladelphia,forexample,wherethecityendedupissuingdebttohelptheschooldistrictopenafterstatecuts)(Seee.g.BowmanandKearney2012,530).

Thus,citiessuffertwofoldduringtimesofwidespreadrecession:firstfromthelimitationsplacedbystatesoncityrevenues,andsecondlyfromstatebudgetcuts,whichwerewidespreadinthisrecession.Citiesthathavebeenreceivingdirectstateaid(whetherintheformofrevenuesharingorotherprograms,suchasPhiladelphiaandDetroit)areaffectedmostdirectly,asstatesareabletoreducethataidquickly(andthelackofpoliticalsupportforcities,describedinChapter5,makessuchcutsmorepoliticallypalatablethancutstostatefundingforeducation,forexample).Buteveninstateswithoutsuchprograms,cutstostatefundingforsocialprograms,whichareoftenadministeredbylocalgovernments,servestoreducethescopeofurbangovernanceandtherebylimitcities’abilitytoservetheirresidents,particularlyintimesofneed.

Whilemuchoftheliteratureonretrenchmentinthe1980sfocusedoncutsinfederalaidtocities,acentralthemeofthecurrentcrisishasbeenthewithdrawalofstateaidforlocalgovernments;andtheideathatthatstategovernmentsbalancedtheirownbudgets“onthebacksof”cities(seee.g.Cooper2011).Theroleplayedbystatefundsincitygovernmentsvarieswidelybetweenandevenwithinstates,butnationally,citiesgotabout28%oftheirgeneralrevenuefromfederalorstategovernmentsin2007,20%fromstate,6%fromfederal,and2%fromotherlocalgovernments.31From2007to2012,thatdistributionshiftedonlyslightly,withthefederalsharerisingto7%andstatedroppingto19%;intergovernmentalrevenueremainedat28%ofgeneralrevenue,butdroppedby3%inrealdollars.

31CensusAnnualSurveyofLocalGovernmentFinances,compiledbyauthor.

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Figure2.19Totalintergovernmentalrevenue,citiesover75,000,FY2007‐FY12(in$000s)

Source:CensusAnnualSurveyofLocalGovernmentFinances,compiledbyauthor

Theroleofthefederalgovernmentinprovidingfiscalstabilityforlocalgovernments—andinredressingthevastinequalitiesinfiscalcapacity,particularlybetweencityandsuburbangovernments—hasbeendrasticallyreducedoverthepast40years.Federalrevenuesharingwasintroducedin1972motivatedbyconcernsabouturbanpoverty,centralcitydeterioration,andunevendevelopment(Liner1989).Bythemid‐1970sthepoliticalsupportforthiswasalreadywavering.In1986PresidentReaganembarkedonhisagendaofdevolutionandwithdrawalfromurbanpolicy,andreplacedfederalrevenuesharingwithblockgrants.Muchoftheliteratureaboutcity‐suburbinequalityfromthe1980sand1990semergedasthefiscalconsequencesofdevolutionforcentralcitieswerebecomingclear.Themuch‐toutedrevitalizationofcentralcitieshasnotfundamentallychangedmuchofthatreality,althoughinner‐ringsuburbanpovertyandbudgetproblemshavealsobecomesignificantchallenges(althoughmanysuburbssimplydon’tprovidemuchinthewayofservices,anddon’thavecomparablefixedinfrastructurecosts,sotheirfiscalsituationisdifferent)(T.N.ClarkandFerguson1983).Sincetheendoffederalgeneralrevenuesharinginthe1980s,virtuallyallofthemoneycitiesreceivefromthefederalgovernmentisintheformofgrantaid,tiedtospecificprogramspending(Liner1989).

Thestoryoffederaldevolutionnolongerdefineswhat’shappeningincities,whichnowgetmorerevenuefromstategovernmentsthanfederal.Federalintergovernmentalfundstocitieshavebeenrelativelystableoverthepastdecade.Federalintergovernmentalrevenueforcitiesstillmakesupasmallshareofgeneralrevenues—about6%ofallgeneralrevenueforcitiesover75,000in2007—butisdwarfedbystateintergovernmentalrevenue,whichmadeup20%ofallgeneralrevenuein2007.Thesefiguresdidnotchangefrom2007‐2012.Buttheabsenceofsignificantfederalurbanspendingcontinuestoplague

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FY07 FY08 FY09 FY10 FY11 FY12

CITY INTERGOVERNMENTAL REVENUE(2007 DOLLARS)

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cities;itwouldbeamistaketodismissthefederalbudgetandfederalpolicyasunrelatedtothefiscalsituationfacedbycitiesduringtheRecession.

Figure2.20Federalintergovernmentalrevenue,citiesover75,000,FY2007‐FY12(in$000s)

Source:CensusAnnualSurveyofLocalGovernmentFinances,compiledbyauthor

Inthewakeoffederaldevolutioninthe1980s,manystatesadoptedrevenuesharingpoliciestoallocatefundstolocalgovernmentsusingtaxesaggregatedbythestateorfromthestate’sgeneralfund.Suchpoliciesoftencontainrequirementsthatlocalgovernmentsmustmeetinordertoobtainfundsorcriteriafordeterminingtheamountoffundstheyreceive.ThemostcommonformsofrevenuesharingaresimilartoMichigan’sandCalifornia’s,inwhichtaxdollars(usuallyraisedthroughsalestaxes)arecollectedcentrallybythestateandredistributedaccordingtospecificformulas,butwithstipulationsthatpermitthestatetowithholdfundsinspecificcircumstances.Nationally,stateintergovernmentalrevenuefellfrom2008‐09,risingbrieflyasstatespassedonfederalstimulusmoneytocities,andthendroppingsharplyfrom2011to2012.Federalrevenuestocitiesmadeasimilardropafterthestimulusended,butnotassharply.

$15,000,000

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$18,000,000

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FY07 FY08 FY09 FY10 FY11 FY12

CITY INTERGOVERNMENTAL REVENUEFEDERAL ONLY (2007 DOLLARS)

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Figure2.21Stateintergovernmentalrevenue,citiesover75,000,FY2007‐FY12(in$000s)

Source:CensusAnnualSurveyofLocalGovernmentFinances,compiledbyauthor

Detroit

Thestarkestexampleoftheroleofstatefundinginacity’sfinancesisinthecaseofDetroit.ThesteepdeclineofstaterevenuesharingtoDetroitwasaclearcontributingfactortothecity’sgrowingdeficits,emphasizedbylocalofficialsandthebankruptcyjudge(althoughnotbystateofficials).TheStatehasrepeatedlywithheldstaterevenuesharingfundsuntilDetroitmetspecificconditions,particularlyduringnegotiationsoverthe2012consentagreement,promptingalawsuitbytheCityAttorneyoverthelegalityofwithholdingfundsthestatewasobligatedtogiveDetroit(Bell2012).Beforetheappointmentoftheemergencymanager,theMayorlambastedthestateforitswithdrawalofrevenuesharingfunds,whichheestimatedat$700millionoverthepast11years(Bing2013).

Thiswithdrawalwastheresultofrepeatedstatelegislativeattacksonrevenuesharing,oftenfocusedspecificallyonaidtoDetroit.PublicAct532of1998frozerevenuesharingpaymentstoDetroitat$333.9millionfor8yearsfromFY1998‐99throughFY2006‐07.ThisactalsostipulatedthatforfiscalyearsinwhichStatesalestaxcollectionsdecreasedfromthepreviousfiscalyear,theCity’spaymentswouldalsodecreaseinalikeamount(CityofDetroit2010).Therevenuesharinglawwasagainamendedin2002,leadingtoongoingdecreasesinrevenuesharingpaymentstothecity,totaling$99.2millionreductionby2011.InMarchof2011,Snyderproposedoverhaulingthestate’srevenuesharingprogram,replacingitwithaprograminwhichcitiesmusttryto“winback”stateaidbyadoptingasetofpolicyreforms,includingconsolidationandreducingemployeecompensation(Stanton2011).ThefederaljudgeoverseeingDetroit’sbankruptcycitedthelossofstaterevenuesasoneoftheprimaryfactorscontributingtoDetroit’scrisis.Cities’

$49,000,000

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$56,000,000

$57,000,000

FY07 FY08 FY09 FY10 FY11 FY12

CITY INTERGOVERNMENTAL REVENUESTATE ONLY (2007 DOLLARS)

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vulnerabilitytostatepoliticsisembodiedinthetaleofMichigan’sdismantlingofstaterevenuesharingasatoolforequalizingresourcesbetweencities,andreshapingitintoatoolfordiscipliningcities.

Figure2.22Detroit’slossofstaterevenuesharing,FY2007‐FY13

Source:DetroitCAFRs,FY2007‐FY2013

Allthreeoftheothercitiesfoundthemselvesaffectedbythewithdrawalorabsenceofstatefundingasacountercyclicalforceduringtherecession.InPhiladelphia,thecityfacedcutsintheaiditwasreceivingfromPICA,thestateagencychargedwithoverseeingPhiladelphia’sfinances(moneythatwasonlygoingtoPhiladelphia,aspartofitsoversightfunction).Somestatefundingwaspassedthroughthecitytotheschooldistrict,whichnearlyclosedin2012becauseitcouldn’taffordtoopentheschoolsinAugust.Asthecrisisworeon,thecitymadeupthatshortfallitself,byissuing$50millionindebtonthedistrict’sbehalf,tobepaidoutofthecity’sowngeneralrevenues.TemporarystatesupportintendedtohelpPhiladelphiasoftentheshockofreducingitsincometaxdeclinedthroughoutthecrisis,leavingthecityinmoredistressin2012‐2013thanatthebeginningoftherecession.

SanJosewashamperedbyCalifornia’seliminationofRedevelopmentAgencyfundingeffectiveFebruary1,2012,effectivelydivertingmillionsinpropertytaxrevenuesbacktothestate.Althoughthedirectbudgetimpactsarehardtoquantifybecauseredevelopmentagenciesspentmoneyonbehalfofthecitybutwerenotpartofthegeneralfundbudget,theMayorhighlightedthedamagedonebytheeliminationofRDAfundingafterin2011(Reed2012b).Becauseofsimultaneousstateeducationfundingcuts,mostofthosepropertytaxrevenueswillinsteadbespentonlocalschooldistricts,effectivelyallowingthestatetobalanceitsownbudgetandavoidcatastrophiceducationcutsbyremovingasignificantsourceofrevenuefromcities.Dallasreceivesminimalstatefunding,

$50,000,000

$100,000,000

$150,000,000

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$250,000,000

$300,000,000

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DETROIT STATE REVENUE SHARING (2007 DOLLARS)

Budgeted Actual

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butthestate’scontinuedemphasisoncuttingstate‐leveltaxeshasleftthecity’sinfrastructuresignificantlyunder‐maintained,athreattothecity’sfinancesmentionedrepeatedlyinratingsagenciesreports.

Atthesametime,citieswereoftenabletousefederalstimulusmoneytokeepopenprogramsinpublichealth,maintainpublicsafetystaffinglevels,andfundimportantinfrastructureprojects.Thisshiftingrelianceonstatefunds,andthevulnerabilitythatreliancerepresentsforcities,hascharacterizedthispost‐recessionaryperiod.InChapter5Iaddressthepoliticsbehindthislevelofstatepowerovercities,asubjectthathasbeenneglectedbytheliteratureonurbanausterity,whichprioritizesthenarrativeoffederalwithdrawal.

Conclusion

Thischapterhasdescribedtherevenuechallengesfacedbycitiessince2007,highlightingseveralshiftsthatemergeincontrasttopreviouserasofurbanfiscalcrisistoproducescarcity.Theseincludethecontinuedvulnerabilityofheavyrelianceonpropertytaxes,themovetowardmoreregressiveformsofrevenue‐raising,limitationsonraisingtaxes,andtheretreatofstatefundingforlocalgovernments.Thischapteralsodocumentsthevolatilityofcityrevenues,inparticularthevolatilitygeneratedbyrelianceonpropertytaxesandcities’limitedautonomyinraisingordiversifyingtheirtaxbase.

Inthisdissertation,oneofmygoalshasbeentodeconstructthetotalizingstoriesoffiscalcrisisthataretoldbothlocallyandnationally.Marcusearguesthatwhatisleftoutofcrisisnarrativesarethepoliticalrelationsthatproducefiscalcrises,andinparticularthosethatproducetheunevennessoffiscalcrisis.Therecentcrisis,groundedforcitiesinthecollapseofwhathadbeenfast‐growinghousingmarkets,hasaparticularappearanceofhavingbeenbothunpredictableandunavoidable.Thebyzantinestructureofcitybudgets(withtheirnumerousfundsandhundredsofpagesofbudgeting)makesitdifficulttoconstructclearcounter‐narratives.Yetsuchcounter‐narrativesareverymuchneededifwearetounderstandthenatureofcityprecarity.Revenuechangesaregenerallyincrementalandreactionary,asarespendingchanges,anditcanbedifficulttoseeanoverarchingideologyorvisionina300‐pagebudgetdocument.Thegrowingrelianceonregressiveandvolatileincomesources,andthelimitsplacedoncityrevenueoptions,providessomedemonstrationoftheproductionofurbanausteritythroughmechanismsofrevenuestructuringandcontrol.Inowturntothequestionofhowtheresultingscarcityismanagedthroughretrenchment.

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CHAPTER3:RestructuringThroughRetrenchment

Whatwe’vebeendoingislookingateachoperationincitygovernmentandaskingabasicquestion:Isthisabusinessthatmostcitiesarein?Isthisabusinessthatweshouldbein?Andifweshould,howcanweaffordtostayinit?(MayorKwameKilpatrick,inWilgoren2005).

WhereChapter2focusedonthematerialevidenceofcities’scarcerevenue,thischapterpresentsevidenceofanotherformofmaterialrestructuring,specificallyretrenchment:thespendingcutsthatcitieshavemadeinresponsetodwindlingrevenues.Thepurposeofthischapterisnotonlytodemonstratethedetailsofretrenchmentinmyfourcases,butalsotoshowhow,insofarasthefourcasesaresimilar,theyrepresentasignificantdeparturefromtheretrenchmentoccasionedbypreviousurbanfiscalcrises.Theprocessandpoliticsofhowretrenchmentdecisionsaremadehasbeenacentralpreoccupationofstudiesofurbanfiscalcrisis.Thisliteraturehasfocusedonthe“hows”ofretrenchment:Howarespendingcutsdistributedbetweencityfunctions?Whatroledopoliticsplayinsuchdecisions?Whattypesofprogramsaremorelikelytobecut?Thischapterlooksatthedataonspendingfrom2007‐2013tounderstandhowretrenchmentinthisperioddepartsfromthosedescriptionsofthe1980sand1990s.

Inhisdescriptionofthecutsmadeinthenameofurbancrisisinthe1970s,Marcusecitesabroadrange:eliminationofpublicjobs,cancelingconstructionprojects,cuttingservices,alldisproportionatelyaffectingminorities,women,cityresidents,children,theelderly,andtenants.Citieswereengagedin“closingmunicipalhospitals,lettingghettoneighborhoodsdeteriorate,enlargingschoolclassesandshorteningtheschoolday”(Marcuse1981,345).Thesecutswereachievedbyprivatizingpublicservices,promoting“self‐help”forthepoor,abandoningpublicservicesandpublicinvestmentinspecificneighborhoods(‘plannedshrinkage’),andderegulation.Manyobserverscharacterizethecurrenteraasasimilaroneofretrenchmentandausterity(seee.g.Peck2012).However,astheproceedinganalysiswillshow,thepresentageofausterityislessfocusedonreducingspendingonprograms,whichhavealreadybeenlargelydecimated;instead,recentretrenchmentfocusesonchippingawayatprogramssuchaslibrariesandswimmingpools,andpushingforsignificantconcessionsintheareaofhealthcareandpensionsforpublicworkers,so‐called“legacycosts”orstructuralobligations.

Studyingretrenchment

Thewidespreadretrenchmentofthe1980sgeneratedstudiesattemptingtodeterminethefactorsthatdrovedifferencesbetweencities’policyresponsestofiscalstressandcrisis.Howdidcitiesdecidewhethertoincreaserevenuesorcutexpenses?Howdotheydecidewhichprogramswouldbecut?Asmostofthisliteratureframesit,cities

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havealimitedrepertoireofresponsestorealfiscalcrisis:raiserevenues,cutspending,borrowmoney,oruseotherfinancialtechniquestobridgeabudgetdeficit.Inthewakeofthe1970sand1980s,whenwidespreadfiscalcrisischaracterizedAmericancities,particularlyintheMidwestandNortheast,thereweremanystudiestoexaminewhycitiesrespondeddifferentlytofiscalcrisis(Bahl,Martinez‐Vazquez,andSjoquist1992).Thechoicesavailabletocitiesdependonmanyfactors,includingtheimmediacyofthe“crisis”(i.e.towhatextentthecrisisisanurgentcashflowproblem,asinNewYork1975,versusanimpendingdeficitthatwilldrawonreserves),statelawsgoverningmunicipalfiscalpolicy,andthecity’srelationshiptocreditmarkets.Therearenumerousmodelsforevaluatinghowcitieschoosefromthebasicrangeofresponsestocrisis(Bahl,Martinez‐Vazquez,andSjoquist1992).

TheoriginpointofthisliteraturearestudiesoftheretrenchmentimposedonNewYorkCityafterits1975crisis,describingthepatternofspendingcutspursuedbythecity.Inadditiontodirectprogramcuts,thecityadoptedcertainpoliciestocutspendingbymovingitoutofthecity’sbudget:inparticularbysheddingserviceresponsibilitiestothestate,includingcourts,probation,publicassistance,andhighereducation(BrecherandHorton1985,271).SpendingcutswerenottheonlypoliciescreditedwithNewYork’srecovery:“Notablechangesincludetherationalizationofbudgetarypractices,theachievementofgreaterefficiencyinservicedelivery,themodificationofcollectivebargainingpoliciestoreducereallaborcosts,andtheestablishmentofalong‐rangeplanningprocessinvolvingmulti‐yearfinancialplansandcapitalneedsassessments”(BrecherandHorton1985,271).Muchoftheliteratureonretrenchmentfocusesontheseelementsofefficiency,costreductionthroughreorganization,andotherformsof“rationalization.”Othersarguethatbyandlarge,citiescontinuetomakedecisionstoincreaseordecreasefundingforprogramsinminorincrements,orimplementacrosstheboardcutstoavoidmakingdecisions(Wildavsky1984;Meltsner1971).Behn,however,contrastsretrenchmentbudgetingwithincrementalismandidentifiesthepoliticalconflictsthatensueintimesofcutbacks(Behn1985).BrecherandHortonalsosuggestthatretrenchmentisnotdecrementaltothesamedegreethatincreasesinspendingtendtobeincremental(seeBrecherandHorton1985,page269).

Whencutsarenotincrementaloracross‐the‐board,butaretargetedtospecificprograms,redistributiveprogramsand“discretionary”serviceshavesufferedmost.ClarkandWalter(1991)foundthatcitieswithlargeminoritypopulationstargetedthosegroupsforcutbacks,asthosegroupsarelessabletosuccessfullycampaignforredistributivepolicies(C.ClarkandWalter1991).Largerandpoorercitiesareforcedtoassumebroaderresponsibilityforpublicservices,whilecitiesthathavealreadyadoptedalow‐servicemodelarebothlesslikelytoexperiencefiscalstressandmoreabletoimplementbudgetcutswithoutsignificantresistance(C.ClarkandWalter1991).Citieswithwell‐establishedunionsandwithpoorpopulations,ontheotherhand,maybemorelikelytogetintofiscaltroubleandfacegreaterpoliticalobstaclestoimplementingausterity(C.ClarkandWalter1991).Clark(in1985)alsoarguedthatitwascitizens,morethananyotherfactor,thatdroveretrenchmentstrategiesinthe1970s,specificallya“middle‐classtaxpayerrevolt,”partofa“NewFiscalPopulist”movementassociatedwithPresidentCarterandothers(T.N.Clark1985,336).

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Thestudyofretrenchmenthasbeenlimited,Levineetalargue,byitsinherentdifficulty.Officialshidebudgetproblemsinordertoavoiddrawingnegativepoliticalattention,muchnotavailabletopublicview(orissoburiedinnumbersthatit’shardforthepublictodiscerntheforestforthetrees).Theyfindthatofficialstendtobehaveincrementally:“Underconditionsoffiscalstress,localofficialstendtotakeashort‐termviewoftheirproblems.Theirimperativeistosurviveeachfiscalyearbytrimmingcostsinareaswherecitizens,especiallyvoters,areunlikelytonoticeservicedeterioration”(Levine,Rubin,andWolohojian1981,14).Gottdienerarguesthateventhevisibleformsofretrenchmentoftenmasklargerchangesinthecity’sspending,whichproduceafundamentalredistributionofpublicresources(Gottdiener1987).Pecorellaalsoarguesthatperiodsofretrenchment,whenviewedhistoricallyandoverlongertimeperiods,havealsoproducedsignificantshiftsinpoliticalandinstitutionalarrangements(Pecorella1984).

Asthepost‐2008recessionhasunfolded,asimilarliteraturehasemergedexamininghowcitiesarerespondingtorevenueshortfalls.Forexample,Nelson(2012)examines16citiesandtheirapproachestomanagingfiscalstress,choosingfromtypesofspendingcutsorrevenueincreases(Nelson2012).Nelsonarguesthatpoliticalandeconomicenvironmentalfactorshavechangedsincetheretrenchmentstudiesofthe1980sand1990s,mandatinganewapproachtounderstandingcities’politicaldecisions.Thetwoprimarydifferences,sheargues,area“newenvironmentoflowerrevenues”andgreaterstaterestrictionsonnewrevenues.Shefindsthatafteraninitiallysimilarpatternofcuts,citiespursuedifferentstrategies,dependingonsupportforspecificservices(suchaspublicsafety),thesizeofrevenuedecline,andstatelimits,amongotherfactors.MaherandDellerarguedthatin2004localgovernmentswerealreadyexperiencingfiscalstress,asaResultofincreasedtaxresistanceand“weakeningfinancialsupport”fromstateandfederalgovernment(MaherandDeller2007).Theyfoundthatbothurbanandruralgovernmentswerealreadyreducingexpenditures(throughlayoffs,acrosstheboardcuts,increasingdebt,refinancingdebt,delayingmaintenanceorcapitalexpenditures,ortargetedbudgetcuts)andtryingtoincreaserevenues(raisingtaxes,drawingonreserves,adoptinguserfees,orrequestinggrants).

Therehavebeensomeeffortstoplacecities’recessionarybudgetinginthecontextofongoingneoliberalausterity.LobaoandAduainvestigatewhatpolitical‐economicfactorsinfluencecities’pursuitofneoliberalausteritypolicies(LobaoandAdua2011).Theydefineserviceretrenchmentasbothdirectcutbacksandfailuretoincreasesocialservices,bothfromsurveyresponsesaboutwhethertheyhadcutspending(LobaoandAdua2011,6).Theyclassifyausteritypoliciesintodifferenttypesof“limitedgovernmentpolicies,”includingprivatization,serviceretrenchment,spendingcuts,andlayoffs;theyalsoexaminetherelationshipbetweenpursuitofausteritypoliciesandpursuitofbusinessattractionpolicies.Inthischapter,Ifocusonspendingcutsandserviceretrenchmentasevidenceofausterity.Therearemanyotherelementstoretrenchment,andinparticulartohowretrenchmentcanrestructureurbangovernancebyreshapingtherelationshipofacitytoitsresidents,asthatrelationshipsrestsfundamentallyontheservicesacityprovides,andhowpeopleperceivethatprovision(ofteninrelationtothedegreetowhichtheyaretaxed)(seee.g.Pecorella1984).

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Forpurposesofthischapter,Ifocusontheaspectsofretrenchmentthatdrawoutsomeofthesethemes:incrementalversustargetedcuts,thetreatmentofsomespendingasmore“discretionary”thanothers,andthetargetingofpublicpensionbenefitsforthemostsignificantretrenchment.

Citybudgetspendingcategories

Inthisexaminationofcities’recentspendingcuts,twomodelsofcityspendingareparticularlyuseful:Fuchs’sdistinctionbetween“common”and“non‐common”expendituresandWeikart’ssixcategoriesofmunicipalspending.Thesemodelsenablemetocompareexpendituresacrosscitieswhosebudgetsarestructureddifferentlyfromoneanother.Fuchs’comparativestudyoffiscalpolicyinNewYorkandChicagoisoneofahandful(Fuchs1992,1).Shedistinguishesbetween“commonfunction”expendituresandnon‐commonfunctionexpenditures.Commonexpendituresincludethoseservicesmostoftenprovidedbythemunicipalgovernment:governmentalcontrol,generalgovernmentbuilding,finance,police,fire,sanitation,sewage,highwaysandrecreation.Non‐commonexpendituresincludeservicesthatmaybeprovidedbyotherjurisdictions,especiallycountiesorspecialdistricts.Theseincludelibraries,urbanrenewalandredevelopment,utilities(includingtransportation,masstransit,water),corrections,andeducation(seeFuchs1992,100).Sheconsiderspublicwelfareservices(includingwelfare,health,andhospitals)separately.Non‐commonservices,inFuchs’definition,alsoincludeservicesforthepoor,servicesthatshedescribesasbeingviewedasadrainoncity’sresources,usedprimarilybyresidentswhotendtobelesspowerful,lesspoliticallyactive,andlessinfluential(Fuchs1992,101).Fuchsgroupsunderpublicwelfareservicesthoseservicesthatdonotpayforthemselves,andareconsequentlyconsidered“redistributive”andasa“drain”onacity’sresources(Fuchs1992,101).Shealsodistinguishesthemasservicesthatareoftenavailableonlytoasubsetofresidents.

Table3.1Commonversusnon‐commonspendingfunctions

Commonfunctions Non‐commonfunctions

GovernmentcontrolGeneralgovernmentbuildingFinanceSafety(police&fire)SanitationandsewageHighwaysRecreation

Publicwelfareservices(welfare,health,hospitals)LibrariesUrbanrenewalUtilities(masstransit,water)CorrectionsEducation

Source:(Fuchs1992)

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Morerecently,Weikart’sstudyofNewYorkCity’sbudgetdividesspendingintosixcategories(2009):

1.EconomicDevelopment2.Maintenanceofpublicorder(police&fire,policeprotection,corrections)3.Qualityoflife(parks)4.Investmentinhumancapital(education,libraries)5.Redistributivefunctions(healthcare,hospitals,housing)(Weikart2009,21)

Analyzingeconomicdevelopmentiscentraltothequestionofhowurbanentrepreneurialism—theoneoncitiestofacilitateeconomicdevelopmentthroughpublicsubsidyandcapital—haschangedovertime.However,economicdevelopmentspendingisnottrackedasafunctionalcategorybytheCensus,soitcannotbetracedthroughCensusdata,onlybystudyingindividualcities’budgets.Somecitiestrackeconomicdevelopmentspendingasa“focusarea,”butthemoreelusivecategoryofeconomicdevelopmentspending—forgonebusinesstaxrevenue—ismoredifficulttocapture.

Table3.2organizesthespendingcategoriesthatIusetoanalyzespendingdatainthischapter.Iusesevencategories,withsubcategoriesthatmatchgeneralcategoriesoftenusedinbudgets.ThethirdcolumnidentifiesthespecificcensusvariablesthatIincludeineachofthosecategories.

Table3.2Functionalcategoriesofcityspending

Cityfunction Includes CensuscategoriesPublicsafety Police&fire,

sometimescorrections

PoliceProtectionFireCorrectionsJudicial

Generalgovernment GovernmentcontrolGeneralgovernmentbuildingFinance

CentralstaffEmploymentSAFinancialadministrationGeneralbuildingGeneralNECMiscellaneous

Publicwelfare WelfareHealthHospitalsLegalAidSocialServicesHomelessServices

PublicwelfareHealthHospitalsHousingandcommunitydevelopment

Humaninvestment LibrariesEducation

LibraryEducation(elementary,college,other)

Recreationandqualityoflife

Parks,arts,culture ParksandrecreationNaturalresources

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Utilities Sanitation&sewageHighways/streetsMasstransit,water(sometimescity)Lighting

AirportsHighwaysSanitationUtilities(water,electric,gas,transit)Parking

Source:CensusAnnualSurveyofLocalGovernmentFinances;2006ClassificationManual

Table3.3providesmorespecificityabouthoweachofmycasesorganizesspendingintheirbudgetandotherreports:thesecondcolumnbydepartment,thethirdcolumnby“focusarea,”aloosegroupingthateachcityusesintheirbudgets(andofteninthepublicfaceofthebudget,whichrarelyorganizesthenarrativearoundcitydepartments).

Table3.3Citybudgetspendingcategories

Function Bydepartment ByfocusareaEconomicdevelopmentDetroit Financedepartment,Detroit

WorkforceDevelopmentDepartment

Developeconomiccapacity

Dallas Officeofeconomicdevelopment;Conventionandeventservices

Economicvibrancy(includesfirst‐timehomebuyerloans;floodcontrol;someotherhousing/communityservicesdepartment;fireconstruction;FairPark(park&recreation);streetlighting;lotsofmiscellaneousthings,publicworks;watercapitalfunding(nearlyhalfofbudget)

Philadelphia Commercedepartment;ConventionCenterAuthority

Economicdevelopment&artsandculture(subtractoutthearts)

SanJose ConventionFacilitiesdepartment;OfficeofEconomicDevelopment(includessomeculturalaffairs)

onlypartofCommunityandEconomicdevelopment

PublicSafetyDetroit Fire&Police,DetroitOfficeof

HomelandSecurityProtectindividualsandproperty)

Dallas Fire&Police Publicsafety(includessomecourtservices)Philadelphia Police,Fire,Prisons,CourtsSanJose Fire,Police PublicsafetyPublicWelfareDetroit Departmentofhealthand

wellnesspromotion;HumanRightsDepartment

Maintainandimprovehealth

Dallas Housing/communityservices;Environmentalandhealthservices(butnotall,willneedtopullout)

Noclearfocusarea(cleanhealthyenvironment,butneedtoseparateoutthewaste/environmentstuff);someitemsinEducation(childcare,WIC)

Philadelphia Humanservices;Publichealthdepartment;Homeless&housingassistance

Health&opportunity(partial)

SanJose Housing(includescommunitydevelopment)

Communityandeconomicdevelopment(Housingonly)

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HumanInvestmentDetroit LibraryDallas Library,Education Education(includeslibrary)Philadelphia Library;[subsidiestoPhiladelphia

SchoolDistrict]Arts&cultureaspectsofeconomicdevelopmentandHealth&opportunity

SanJose Library NeighborhoodservicesRecreationandqualityoflifeDetroit Recreation(Departmentfor

culturalopportunities)Recreationandculture

Dallas Culture,arts&recreation(includesparkandrecreation

Philadelphia Parksandrecreation;Officeofartsandculture;museums

SanJose Parks,Recreation,NeighborhoodServices

NeighborhoodServices

Source:Citybudgetdocuments,compiledbyauthor;CensusAnnualSurveyofLocalGovernmentFinances;2006ClassificationManual

Unlikerevenues,thereisverylittlestandardizationinhowcitiesorganizetheirspendinginanannualbudget.Thatis,citiesdifferintheirbudgetspendingcategories.Howcitiesorganizetheirownbudgetsreflectseachcity’sconceptualizationofprioritiesaswellasthecomplexstructuresofhowspendingissupportedbyrevenues(forexample,“self‐liquidating”expenditures,orspendingthatispaidforbyaspecificearmarkedsource,mayappearonlyonapagethatdealswiththatspecificfund).

Therestofthischapterdiscussescities’spendingcutsingreaterdetail.Section3.1describesthreecategoriesofspendingthathaveexperiencedcuts:publicsafety,whichhasbeenleastaffected;publicwelfare,whichhasbeenconsiderablyaffected;andhumaninvestment/qualityoflife,whichhasbeenseverelyaffected.Section3.2thendetailsanespeciallyfraughtformofspending,publicpensions,andthebattlesoverwhetherorhowmuchtocutthesepreviouslyinviolableexpenditures.AllfourcitiesthatIstudyhavecutspendinginbothtargetedandacross‐the‐boardways,yettheyvaryintermsofthedetailsofthosecuts,andinhowtheywereimplemented.

3.1Overallspendingcuts

From2000to2012,citiesacrosstheUnitedStatesmademajorcutstoawiderangeofservicesthatpreviouslyhadbeenconsideredessential.Thewidespreadcutswereframedbylocalofficials—inbudgetpresentations,budgetdocuments,andthemedia—asnecessarybutpainfulcuts.Whilecertainserviceswereframedasmoreessentialthanothers,therewaslesseffortmadetoframecertainprogramsasover‐fundedordiscretionary,inmarkedcontrasttoearlierperiodsofcrisis,whenredistributiveandwelfarespendinginparticularwasroutinelyframedaselectivespending,andnotjustbyconservatives.From2007to2012,cities’spendinginrealdollarsdeclinedsignificantly,particularlyafter2009,whenfederalstimulusmoneyended.

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Figure3.1Totaldirectgeneralexpenditures,FY2007‐FY12($000s)

Source:CensusAnnualSurveyofLocalGovernmentFinances,compiledbyauthor

Table3.4Spendingbycityfunction,citiesover75,000,1997‐2012($000s)

Cityfunction 1997 2002 2007 2012Publicsafety $41,024,256 $47,633,951 $49,373,665 $49,864,973Generalgovernment $8,982,160 $10,546,170 $13,452,161 $11,859,782Publicwelfare $36,235,935 $34,022,662 $40,163,063 $41,963,215Humaninvestment $26,756,540 $37,256,134 $39,512,092 $41,229,205Recreation $9,008,168 $11,501,734 $12,637,201 $11,635,937Utilities $70,637,131 $85,123,153 $98,873,790 $103,824,091Interestondebt $13,360,960 $13,514,299 $14,524,698 $15,261,798Total $206,005,150 $239,598,104 $268,536,670 $275,639,001

Source:CensusAnnualSurveyofLocalGovernmentFinances;in2007dollars

Publicsafety:thepoliceandfirestate

Spendingonpublicsafety(whichincludespolice,firefighting,andthoseaspectsofcorrectionspaidforbycities)32hasbeenprotectedbetterthananyothergeneralfunctionoverthepastdecades,includingduringtherecentrecession.Therehavecertainlybeencutstopublicsafety,butthosecutsaresmallinrelationtootheroperationalreductionsandnearlyalwaysmadewithassurancesthattheyaretemporary.Nationally,spendingonpolicegrewby4%from2007‐2012,whileoverallgeneralspendinggrewbyonly1%;growthinpolicespendingaccountedfor17%oftheincreaseintotalspending.Publicsafetyspendingaccountedfor38%ofallgeneralspendingincreasewhenutilitiesand

32Cityjailsandsomecriminalprocessing.

$235,000,000

$240,000,000

$245,000,000

$250,000,000

$255,000,000

$260,000,000

$265,000,000

FY07 FY08 FY09 FY10 FY11 FY12

TOTAL GENERAL DIRECT EXPENDITURES(2007 DOLLARS)

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educationspendingwereexcluded.Therehasnotbeenadramaticshiftnationallyinthepercentageofgeneralspendinggoingtopublicsafety,butspendinghasbeenpreservedtoadegreenottrueofothercityservices.

Theprotectionsandassurancesgivento“uniformed”unionsinobtainingsecurityandbenefitsfortheirmembersisoftensharplydivergentfromother“civilian”unionsrepresentingcityemployees.Inallofmycases,uniformedworkersweregivenfewerfurloughdays,morepayraises,andbetterhealthbenefits.InDetroit,thepensioncutstopublicsafetyworkers(5%)weresignificantlylessthanthosegivennonuniformedpersonnel(18%)(CityofDetroit2014).FederalstimulusmoneythroughtheStateFiscalStabilizationFundwasusedpredominantlytofillgapsinfundingforpublicsafety:officers,equipment,andtraining.Indeed,settingasidethemostbasicinfrastructureoffinanceandpublicbuildings,thebudgetsandpublicnarrativesofallfourcitiesindicatesthattheircoremissionremainspoliceandfire.Asotherformsofspendingarecut,publicsafetycomprisesanever‐largerpercentageofcities’budgets.InDallas,forexample,nearlyhalf(46%)ofeverydollarofthecity’sbudgetisspentonpublicsafety;ofjustgeneralfundrevenues,over60%gotopoliceorfire.Beforetheonsetoftherecession,publicsafetyspendinghadbeenincreasingasapercentageofcitybudgets.

Thisemphasisreflectsanimportantshiftintherelationshipbetweenacitygovernmentanditsresidents(nottomentionitspoliceandfirefighters):as“uniformedemployees”makeupthevastmajorityofcitypublicworkers,therelationshipbetweenresidentsandtheirgovernmentismediatedthroughthecontextofemergency,protection,andprosecution.Despitethis,citiesalsomaderealcutstopublicsafetyforthefirsttimeindecades.Philadelphiaimplementedrollingbrownoutsofitsfirestations(AmmonsandFleck2010).SanJoselefthundredsofpolicejobsleftunfilled,reducedthenumberoffirefightersoneachtruck,andcutuniformedofficers’wagesbynearly4%(comparedto10%forallcityemployees)(Reed2010).Intheyearofitsmostsevereretrenchment,2010,Dallasimplementedfurloughs(effectivelywagecuts)andbenefitcutstoallemployees,includingpoliceandfireemployees(CityofDallas2010).Thesecutsarealwaysframedasthelastresort:“Iamaskingpoliceandfiretocuttheirsalaries.They'regrouchyaboutit,buteveryoneelsehastakenapaycut.Sowhereelsedoyougo?"(Merten2010).

Thepost‐welfarestate

Publicwelfareredistributivespending,hasseengreaterretrenchmentthanpublicsafety,butnotnearlyasdramaticaretrenchmentasitwouldhaveseenifithadnotalreadybeendecimatedbythedismantlingofthewelfarestatethatbeganinthe1980s.Theattackonthewelfarestatebeginninginthe1980sledtorestructuringtheprovisionofsocialservicesawayfromredistributiontopoliciespromotinglabormarketflexibility,penalizingpoverty,andprivatizingcollectiveconsumptiongoods(Mayer1999).So‐called“welfarestate”programs(incomesupport,housing,otherpartsofthesafetynet)areoftencutbylocalgovernmentsintimesoffiscalstress,notjustbecausetheyare“discretionary”but

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becausetheirconstituenciesarelesspoliticallypowerfulandthenarrativeof“wasted”welfarespendingstilldominant(LobaoandAdua2011).33

Atthesametime,responsibilityforsocialwelfareprogramshasbeendevolvedfromthefederalgovernment(whichwasonceresponsibleformanagingincomeandhousingsupportprograms,aswellascommunitydevelopment)tostateandlocalgovernments.Theretrenchmentofnationalandevenstatewelfaresystemshas“imposedpowerfulnewfiscalconstraintsuponcities,leadingtomajorbudgetarycutsduringaperiodinwhichlocalsocialproblemsandconflictshaveintensifiedinconjunctionwithrapideconomicrestructuring”(BrennerandTheodore2002,367).Thus,inthecontextoftherecentfiscalcrises,thesocialservicesthatremainareoftensubjectedtomarketprinciples:efficiencymeasures,theuseofincentives,privatization,andcontractingout.Attheendofthisroll‐back,a“postwelfaristurbanstate”would“doafew(essential)thingswell”(Peck2006,688),i.e.maintainingorderandfacilitatingeconomicgrowth,whichisindeedreflectedinthefocusonpublicsafetyandeconomicdevelopmentspending.Peck’sdescriptionechoesthedescriptionusedbymanymayorsandcitymanagersabouttheircitiesbytheendofthe2000’s.Indeed,animportantdifferencebetweentheretrenchmentofearliererasandthepost‐2000spendingcutshasbeenthatmuchofthisroll‐backwasaccomplishedinthe1990s,andmanycitiesareverymuchoutofthebusinessofcoreprogramsassociatedwithredistribution.

Weoftenthinkofthefederalgovernmentasthelargestproviderofredistribution,thesafetynet,thebiggestsourcesofmoneyforincomesupport,healthcareforthepoor,unemploymentinsurance,etcetera.Butoverthepastdecadescitieshaveincreasinglytakenoverthisrole,bothasaresultofthediscontinuationoffederalprograms(requiringcitiestotakeuptheslack)andthedevolutionoffederalandstateprograms(suchasMedicare,housing,whichcitiesnowmanagewithfederalfundspassedthroughstates)(Liner1989).Themostsignificantaspectof“retrenchment”inthisareaistheinabilityofcitiestomeetthegrowingneedsofresidentsduringtheGreatRecession.In2011,theU.S.ConferenceofMayorsissuedareportstatingthatcitieslackedtheresourcestoprovideadequatefoodandsheltertotheirneediestresidents.DallaseliminatedfundingforHIV/AIDSprogramsandpublichealthclinics,$5millioninfundingforhomelessoutreachandlow‐incomehousing,andmostofitsbudgetforimmunizationsandhomelessservices;Philadelphiaoutsourceditshumanservicesdepartment;Detroitprivatizeditshealthdepartment.Thesecutstosocialprogramsatatimeofdesperatesocialneedhavebeendeeplyfelt,andreflectedingrowingnumbersofpeopleseekingshelterandfoodfromthearrayofprivate,nonprofitservicesthathavebeenfillingthegapofthewelfarestateforseveraldecadesnow.

Intheshadowoftheeliminationofmostpublicwelfarespending,thecutsmadetohumaninvestmentandeducationhaveemergedasasignificantthreattotheremainingsetofurbanservicesforthepoor.thecategorythathasbeenmostgreatlyaffectedbytherecentfiscalcrises,isexpendituresonhumaninvestmentandqualityoflifeamenities,suchaslibrariesandparks.Theseresourcesareoftenconsideredmiddleclassamenities,but

33SeemydiscussionofNewYorkinChapter1.

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theyalsorepresentimportantlocalspendinginsupportofsocialmobilityandanti‐poverty.Suchspendingservesthepoor,unemployed,orhomelessinwaysthatarenotalwaysobvious.Mosturbanlibraryprogramsoffershelter,aplacetogetclean,freeinternetandcomputeraccess,andotherimportantservices.Children’shomeworkprogramsandchildcareprograms,inadditiontofreeaccesstobooks,constituteanimportantpublicserviceincities.Parksandrecreationdepartmentsserveasimilarfunction,withmanycitiesofferingfreeorverylow‐costsummerandafterschoolprogramsforlow‐incomechildren,almostalwaysadministeredbycityagencies.Thereareotherfunctionsthat,whencut,disproportionatelyaffectthepoor:cutstothecourtsystemleavepublicdefender’sofficesstrapped,leavepeopleindetentionforlongerawaitingtrial,andcausebacklogsinfamilycourt(seee.g.Karmasek2012).Cutstoculturalamenitieslikezoosandthearts(bothDallasandDetroitprivatizedtheirzoos;Dallaseliminateditsseparateculturaldepartment(R.Bush2009b))makesuchserviceslessaffordableanddiminishtheculturalopportunitiesforthosewhocan’tpayincreasedfeesortraveltomoredistantprograms.Allfourcitiesraisedfaresforpublictransportation;Detroit’sbusserviceeliminateditsprogramoffreeridesfordisabledresidents(Kilpatrick2007,10).Inmanycities,cutstotransportationtaketheformofincreasedbusfaresortheeliminationoffaresubsidyprogramsforseniors,students,andthedisabled.Hoursandservicesofswimmingpoolsandrecreationcenterswerecutinallfourcities,eliminatingoneoftheprimarysourcesofrecreationalactivityforthepoor.

Itisnotdifficulttounderstandwhyhumaninvestmentspendinghasbeenhardesthitbythecurrentrecession:thisareaofspendingrepresentsthelargestsegmentof“discretionaryspending”afterearlierreductionstothepublicwelfarespendingdescribedabove.Whereaspublicsafetyspendinghasbeenrelativelywellpreserved,andpublicwelfarespendingrepresentsanalreadysmallshareofcityspending,spendingonhumaninvestmentandqualityoflifehasbeenprotectedbythedemandforculturalandsocialamenities.Ifoundthatinmycasescutstotheseformsofspending—particularlylibraries,pools,andparks—werethemostlikelytosparkneighborhood‐basedresistance,althoughthatwasmostoftendirectedintocampaignstoraiseprivatefunds,leavingintactthemovetowardprivatization,whichremovesthepublicmandateofaccessibilitytoallDetroitresidents.TheprivatizationofDetroit’smuseumsandparksgarneredsignificantpublicoutcry,butthelureofprivatefunding,andthepresumptionofgreaterefficiency,provedoverwhelmingtotheopposition;bothwereprivatized.

Retrenchmentofcityspendinghastakendifferentformthaninpreviousrecessions.Cutstopublicsafetyhavebeendeeperthanpreviousrecessions,whilepublicwelfarehasnotbeenthemostsignificanttarget.Spendingonhumaninvestmentandqualityoflifeprogramshavebeenmoresignificantlycut,butingeneraltheideologically‐drivenprogramcutsobservedinthe1970sand1980shavebeennotablyabsent.TheeliminationofpublichealthprogramsinbothDetroitandDallasgarneredsignificantpublicdebateandofficialhand‐wringing.Theeliminationofthelastvestigesofcitysupportforthepoorwasimplementedinalanguageofscarcity,notofrestraininggovernmentexcess.

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Thatlanguage—ofcitygovernmentneedingtobeputincheck,andofblamingapowerfulconstituencyforexcessivespending—insteadappearedinthedebatesoverpublicpensions.

3.2Publicpensions

Whilethecutsdescribedabovearesignificantbothfiscallyandintheirimpactoncityresidents,theyhavenotbeenacentralfocusofdebatesoverhowcitiesneedtorespondtocrisis.Thatfocushasrestedsquarelyontheperceivedthreatposedbypublicpensionplanstocities’fiscalsustainability.Attheextreme,financialanalystshavedescribedthestructuralthreatposedbypensionandhealthcarecostsas“unsustainable”and“ridiculous”(Chappatta2012).ThebankruptciesofDetroitandStockton(California)havefueledreportsofawidespreadpublicpensioncrisis,andpromptedmuchnationalhandwringingandcallsforreform(NormaCohen2013).

ManylargeU.S.citieshavetheirownpensionplanstoprovideforpublicemployeesuponretirement:publicly‐managed,withdefinedbenefitsnegotiatedthroughbylaborcontracts.34Inthecurrentcrisis,publicpensionfundshavebeendescribedas“chronicallyunderfunded,”threateningtohobblecitiesandstatesifmeasuresarenottakentocutbenefits;suchcutsarebeingimplementedthroughbankruptcyandtheballotbox(Carlson2012;Raphael2012).

BothDetroitandSanJosehavebecomepivotalnationalsitesfortestingthepossibilitiesofrestructuringpensioncommitmentstobothretireesandtocurrentworkers.Inadditiontopoliticians,ratingsagenciesandfinancialwatchdoggroupshavealsozeroedinontheideaofapensioncrisis,pushingruleregulationsthatmoretightlyintegrateacity’sfiscalevaluationwiththehealthofitspensionplans(andchanginghowthathealthismeasured)(IdiscussthisinChapter5).Framingthepensioncrisisasdrivingloomingfinancialchaosthusbecomesajustificationforexertinggreatercontroloverthecity’sfiscalautonomy—andmakingunprecedentedcutstopublicpensions.

Toillustratetheunprecedentednatureofthecuts,itisworthpointingoutthatoneoftheprimarycontrastsbetweentherecentrecessionandthediscourseofcrisisinthe1970sand1980sisthatthefocuson“over‐spending”hascenteredonpublicpensionsratherthanonthewelfarestate.Thisshiftfromfocusingoncuttingprogramstocuttingpensionsrepresentsalargerattemptbygovernmentstoredefinetheirobligationstotheirpeopleandmakethemselvesmorenimbleintheprocess.However,thisnarrativeofanationalpublicpensioncrisisissimplisticontwocounts.

First:thecomplexrelationshipbetweeneconomiccyclesandthedynamicsofpensionhealthissimplifiedintoastoryinwhichpensionplansareinherentlyunsustainablebecauseofexcesspromisesortheneweconomicnormal.Intruth,the

34Formanypublicworkers,whoareineligibleforfederalsocialsecurity,thisistheironlysourceofretirementincome.

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financialrecessionprovokedseveralpiecesofthepublicpensionpuzzleintocrisis.In2008,thevalueofpensionplans’assets,onlypartiallyrecoveredfromthestockmarketdeclinesintheearly2000s,againfellsharplyasinvestmentvaluesplummetedacrosstheworld.Thesemarketdeclineswidenedthegapbetweenassetsandliabilities,boostingakeymeasureofpensionplandistress:unfundedaccruedaccountingliability(UAAL).Ratesofreturnthatseemedreasonablein2007(andwhichwerewidelyusedbytheprivatesector)weresuddenlyflippedupsidedown,sharplyincreasingthecontributionscitieswouldhavetomakethefollowingyeartokeeptheirplansontrack.InPhiladelphia,forexample,pensionplanassetsfellby3.7%duringFY08,afterrisingby17%overthepreviousyear(TheCityofPhiladelphia2008).SincethebudgetedcontributionsforplansinFY08estimatedpositivereturns,andbecausetheannualcontributionisbasedinpartonestimationsoffuturereturns,citiesabruptlyfacedasignificantcostincrease.Theirplansalsolookedworseonpaperthantheyhadthepreviousyear,drawingscrutinyfromratingsagencies(Moody’sInvestorsService2010a).

Thesecondoversimplificationinthestandardpensioncrisisnarrativeisthatitignoreshowacity’spensionplanfitsintoanoverallfinancialmanagementstrategy,especiallyattimesoffiscalstress.Boththeformulaforcalculatingthecity’sannualrequiredcontribution(ARC)andthedegreetowhichitmustcomplywiththatcalculationaresubjecttolocalandstatepolicies(Munnelletal.2013).Insomecases,cities’discretionoverhowmuchoftherecommendedARCtopayrepresentsasignificantshareofthediscretionavailableinthebudget.Ingoodtimes,citieshavedeferredthosecontributionsinordertopayforeconomicdevelopmentprojects,ortocuttaxes,gamblingthattheassetswouldgrowfastenoughtocoverthegap.Inbadtimes,citiespaidlessthantheARCinordertoweathereconomicdownturns;Philadelphiaobtainedstatelegislativeauthorizationin2009todeferpartofitspensioncontributionsforseveralyears.

Notwithstandingthefierceargumentsmadeagainstpensions,theso‐called“pensioncrisis”actuallyrepresentsthedownstreamofurbanfiscalcrisis,notitsproximatecause.Cities’managementoftheirpensionobligationsreflectsthestructuralweaknessesinU.S.municipalfinanceandgovernance:theabsorptionofgreaterriskbythepublicsector,thesustainedimpactoftherecession,decadesofstateandfederalprogramcuts,andthestructuralimpossibilityofreconcilingbalancedbudgetrequirementswithvolatilerevenuesources(andanincreasinglyvolatileeconomy).Deferringpensionpaymentsandissuingpensionobligationbondshasbeenatooloflastresortforcitiesthathavecutspendingtotheboneandarelookingforcreativewaystofinancetheirwayoutofloominginsolvency.Insomecases,includingDetroit,Philadelphia(andStockton),citiesborrowedtocovertheresultinggapinskippedpayments,withcontributionstoresumeinfullasrevenuesrebounded.Someoftheseshort‐termsolutionsflounderedwhentherecessiondraggedonlongerthanprojected;otherscollapsedbecauseoffactorsrelatingtothefinancialcollapseitself(aswhenfailedinsurerstriggeredthecancellationofswapagreements).

Publicpensionshavebecomeaneasytarget—andaconvenientdistraction—intheU.S.eventhoughrestructuringpensionobligationsdoesnotaddressthestructuralfinancialissuesattherootofAmericancities’widespreadfiscalstress.Anti‐governmentpoliticalsentimenthasbeenstokedbyanti‐public‐employeemovementsinseveralstates(e.g.

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Michigan,Wisconsin,bothofwhichhaveenactedlawsdismantlingpublicunions).Whilepensionobligationshavehistoricallybeenconsidereduntouchableinmunicipalbankruptcies,inCaliforniaandDetroitbanksarearguingthatjudgesshouldprioritizebondholdersoverretireesandsetaprecedentforallowingcitiestodischargepublicemployeeobligationsthroughbankruptcy.InDetroit’scase,publicemployeesandretireesconsentedtoreductionsintheirpaymentsafterafederaljudgeruledthattheycouldbeforciblyreduced(Bomeyetal.2014).Thishasradicallyshiftedtheperceptionofpossibilityofdismantlingpensionobligations.Severalmayorshavesuccessfullytakenpensionreformtothelocalvoters:SanJoseandSanDiegoresidentsapprovedmeasurestosignificantlyrestructurepublicpensionsforcityworkersandretirees(Saillant2012).

Thisfocusonchallengingpensionshasconsequences,asothercontributingfactorsareignored,andalternativesolutions—suchasrevenue‐raisingoptions,supplementalcontributionsbystatefunds,orbroadernationalsolutionstothefragmentedhealthcareandretirementfundingsystemthatputstheriskofsupportingretireesfullyontolocalgovernments—areabsentfromdiscussion.Puttingthepublic’sfocuson“greedy”publicemployeesremovespressuretoaddressotherelementsofthecrisiswhileexpandingleverageforfinancialinstitutionsoverurbanpolicy.35

Thecombinationofunderfundingandthefinancialcollapsedealtthepensionsystemsaone‐twopunch,butnotnecessarilyafatalone;manyobservershavenotedthatthesystemislikelytorecoverwiththeeconomy,thatthepensioncrisisisinpartcyclical.MorningstaraffirmedshortlyafterDetroit’sbankruptcyfilingthatthepensionfundwasfundedat90%,theindustrystandard(GallagherandSpangler2013).Inshort,thisnarrativethatpensionsaretoblameforthefiscalcrises,whichisperpetuatedindozensofreportsonproblemswithU.S.localandstategovernmentpensions,isproblematicbecauseittendstoobscureotherfiscalissuesfacinggovernments.

Detroitishelduptotherestofthenationasanillustrationofboththepensionproblemanditssolution,andyettherealityofDetroit’spensionsituationisextreme.Thecity’schallengeisdemographic;ithassimplylosttoomanypeopletobeabletosupportasystemthatrequirescontributionsbycurrentemployeestofunction.In1960,Detroithadmorethantwiceasmanyemployees(over26,000)aspensioners(over10,000);by1991therewereroughly18,000ofeach,andby2012thereweretwiceasmanypensioners(over20,000)asemployees(justover10,000)(BomeyandGallagher2013).Othercitiesandstatesdonotfaceasimilardemographicchallenge,buttheperceivedstructuralfailingsofDetroit’ssystemhavebeenusedtojustifyanarrativethatframesallpublicpensionprogramsasunsustainable.

Dallashasalreadyrestructureditspensionplantwice,in2003andagainin2011whenlargeshortfallsledofficialsandvoterstoapprovesignificantassistancetoshoreupthefunds.Aspartofthe2003resolution,thecityraisedemployees’contributionsfrom6.5%to9.27%,andthecity’scontributionfrom11%to15.78%(Cook2008).Despitethese

35Fixatingonpensionsalsogivesconservativestheopportunitytoattackunionsbyjeopardizingoneofthekeybenefitstheyoffertheirmembers.

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measures,thecity’sfundhasagainbeendeclaredunderfundedin2015inthewakeofrealestateinvestmentlosses;inNovemberof2014,Moody’swarnedthatthecity’spensionliabilitiesneededtobeimproved,ortheratingwouldrisk“downwardpressure”(Moody’sInvestorsService2014j).

WhilePhiladelphia’spensionplanhasbeenundersomescrutinysince2009,anarrangementmadewiththestatetopermitthecitytodeferpensionpaymentskepttheissueonthebackburnerfortheyearsimmediatelyaftertherecession.Oncethatarrangementexpired,Philadelphia’spensionplanemergedasoneofthemosttroubled,thesubjectofintensestatepoliticaldebate.InMarch2013,theMayordirectedhisbudgetaddresstothecity’semployees,emphasizingtheneedforreformingapensionsystemthat“istakingmoreandmorepublicresourcesthatcouldbespentoncitizenservicesortaxrelief”(Nutter2013).Inanefforttoreassureinvestorsinadvanceofalargebondissuance,Philadelphiaheldaclosedbondinvestorconference,whereitrevealedthatithasonly48%ofassetsneededtocoveritspensionliabilities,andthatithasbeenchronicallyunderpayingintoitsretirementfund.Thereporttoutsthecity’s“substantialexpenditurecuts,”a“deepbenchoffinancialmanagers,”andworkforcereductions,andassuredinvestorsthattheMayoris“committedtoachievingmaterialpensionreformwithlocalunions”(TheCityofPhiladelphia2013).Aftertheconference,Moody’saffirmedthecity’sA2rating,commendingPennsylvania’sstateoversightandthecity’s“enhancedbudgetarydiscipline,”butcautioningthat“weakdemographics”and“heavyburdenoftax‐supporteddebtandunfundedpensionliabilities”constrainitsfinancialprospects(Moody’sInvestorsService2013d).ThePennsylvaniagovernmenthasnowtakenuptheissueofstatewidepensionreform,andtheMayorhastakenupthecampaignofshiftingthecity’sworkerstoa401(k)plan.

SanJose’sMayorReedhasaggressivelypursuedpensionrestructuringduringhisentiretenureasmayor.TheMayorattemptedtodeclareafiscalemergency(whichwouldhavepermittedthecitytoproposeamendingcontracts,includingemployeeagreements),buttheeffortwaspostponedseveraltimesandeventuallyscrappedin2012whenthedrasticspendingcutsproduceda$10millionsurpluswasdiscoveredandtheunfundedpensionliabilityamountwasreviseddownwardby$50million(Koehn2012),buttheideaofemergencyhadtakenhold.TheMayor’scontinuedhammeringontheideaofcrisisbolstershisargumentforpensionreformasthecentralstrategyforincreasingthecity’sfiscalstability.“Significantreformmustbeconsidered‐reforminthepensionsystem,inwaysofgoverning,inwaysofengagingthecitizenry”(SiliconValleyCommunityFoundation2012).Supportedbysuchmessages,in2012theMayorconvincedvoterstopassaballotinitiativethatreducespensionbenefitsforfutureemployeesandraisedtheretirementage(Woolfolk2012).MeasureB,whichwasapprovedby60%ofthecity’svotersin2012,requiredemployeestocontributeanadditional16%oftheirsalaryorbemovedtoareducedbenefitprogram.

Mostcitieshavepursuedvariousmeansofreducingthebenefitsoffutureworkersormovingthemtoindividually‐managedretirementoptions,suchasPhiladelphia’sefforttomoveemployeestoa401(k)plan.Theunresolvedquestioninallfourcitiesistowhatdegreepensionbenefitsalreadyaccruedtoacity’sworkerscanbereducedorrestructured.

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Detroit’spensionholdershavehadtheirbenefitsreducedthroughfederalbankruptcy,afterthejudgedeterminedthathehadthelegalabilitytoimpaircontracts,includingpensionobligations(Rhodes2013,74).Sofar,theabilityofSanJose’sballotmeasuretosimilarlyreducebenefitsforexistingretireesremainsunclear.SanJose’smayorhassupportedastatelawthatwouldrestructureexistingpensionobligations,butsofarthathasnotgainedmomentum.Meanwhile,aplethoraofpolicyreportshasframedtheneedforaddressingbothcityandpensionshortfalls(ThePewCharitableTrusts2013;seee.g.Munnell,Aubry,andMedenica2013).AsIdescribeinChapter5,thisnarrativeofpensioncrisis,andthelackofclaritysurroundingthepolicyoptionsforaddressingit,hasbeentakenupbyfinancialratingsagencies,whohavereframedpensionersascreditorsinanongoingefforttoreframepensionobligationsasaformofdebt.

Conclusion

Themotivationforattackingpublicpensionsiscertainlyideologicalinpart,butalsostrategic.Retrenchmentaccomplishedbygoingafterworkers—andparticularlybydivorcingpublicworkersfromtheservicestheyprovide—makestheissueoneoffairnessbetweenpublicandprivateworkers(orpublicworkersand“taxpayers,”asiftheyaretwodistinctcategories),ratherthanaboutwhatcitiesactuallydofortheirresidents.Reedhasexplicitlyframedthechoiceasbetweenpensionsandresidents:“Everydollarthecitypaysforretirementcostsisadollarwecan’tspendonservicesforourresidents”(Reed2012a).Thecityasasiteofcollectiveconsumptionbecomesreframedasasiteofpoliticalconflictbetweenthe“haves”(publicworkerswiththeirpensionsandjobsecurity)andthe“havenots”(privatesectorworkerswiththeirinsecurejobsanddwindlingrealincomes).Thisisnothardtoaccomplishinacountryinwhichmainstreampoliticalfigureshaveproposeprivatizingsocialsecurity,andanynon‐privatehealthcaresystemfacesfiercepoliticalresistance.Theattackonpublicpensionshasbeenaccompaniedbyawaveoflegislationseekingtodismantlepublicemployeeunions,whonowrepresentabouthalfofallunionmembersintheU.S.;40%oflocalgovernmentworkersareunionized,comparedtojustover6%ofprivateworkers(U.S.BureauofLaborStatistics).Particularlyaftertherecession,publicemployeeunionshavebeenoneofthefewconstituencygroups(andthebest‐resourced)toarticulateastrongargumentforthepublicgood,forpublicfundingofservices,government’sroleinstimulusspending,andotherstrategies.Thepoliticalimplicationsofremovingoneofpublicemployeeunions’centralmemberbenefits,andoferodingpopularsupportforpublicunionsbyblamingthemforservicedeclines,coulddosignificantlong‐termdamagetoapro‐public,anti‐neoliberalpolicyagenda.

Asthischaptershows,cities’fiscalcriseshaveprofoundly—andmeasurably—affectedtheirspending.Cutstospending,orretrenchment,inrecentyearshavedifferedinimportantwaysfromretrenchmentinearlyfiscalcrisesofthe20thcentury.Thegrowingfocusonrestructuringpensionssignalsandreflectsthenarrativethatgovernmentsmustavoidfixedcommitmentswhereverpossible,inordertominimize“legacycosts”and“fixedobligations,”thatpreventthemfromweatheringanincreasinglyvolatileeconomy.PartTwoalsodemonstratedtheimportanceofstatepolicyinproducingrevenuescarcity.

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InPartThree,IexaminehowtherecessionhasnormalizednotjustausteritybutwhatIcall“crisisgovernance,”ashiftofurbanpoliticsinwhichtheroleoffinancialinstitutionsandstategovernmentsindefiningcities’policyoptionshasbecomecommonsense.

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PARTTHREE:NORMALIZINGCRISISGOVERNANCE

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Introduction

Localgovernmentfinanceandbudgetarybehaviourareacrucialsiteforpoliticalstruggleandthevariedwaysinwhichlocalauthorityprofessionalsandpoliticiansnegotiatethisprocess,withinthecontextofvariedlocalcircumstances,mustremainakeyagendaforthoseinterestedinthechangingformsoflocalgovernance.(Pinch1995,966)

Existingpoliticalarrangementsarelikelytobeinadequateinacrisis.36(Rohatyn1981,31)

HavingdescribedthedominantnarrativesofurbanfiscalcrisisinPartOne,andthemechanismsofscarcityandretrenchmentinPartTwo,InowturninPartThreetothesubjectofhowmunicipalgovernanceitselfisremadeinandthroughfiscalcrisis.Ilookatshiftsinurbangovernancethatareenabledbyandsolidifiedintimesofcrisis,specificallyasenabledthroughthemechanismsoffinancializationassociatedwiththegrowingcomplexityofmunicipaldebtandexpandedstatepowerovercities.

Theideathatnewformsofgovernanceemergeinthewakeofcrisisisnotanoriginalorevenaradicalproposition(seee.g.Klein2008).Crisisopensupnewspacesofuncertaintyanddemandforpolicychange,allowingcertainideastodeepentheirholdonpolicy.Inrecentdecades,proponentsofneoliberalismhavebeenparticularlyadeptatusingmomentsofcrisistoincreasetheirgriponpolicy(seePeck2006).Someofthisrestructuringisaconsequenceofmaterialretrenchment:whenspendingandservicesarereducedorrestructured,theconstituencyforthoseservicesdisappears,andtheformerrecipients’demandsonthecityoftenevaporate(seeShefter1992).Proclamationsofcrisisareintheirnaturecallsforchange:politiciansassertthatwhatevergotthemintothecrisiswon’tgetthemout.Therelationshipbetweencrisisandrestructuringmakesdebatesoverwhatcausesurbanfiscalcrisisespeciallysalient.Someofthosereformsoriginateincitieswherecrisishastakenthedeepesthold,andthenfiltermorebroadlyastechniquesforpreventingothercitiesfromsufferingthesamefate(alleviatingfiscaldistress,

Ihaveproposedinthisdissertationthatcrisisgovernanceisbecomingnormalizedforallcities,regardlessofthenatureoflocalizedfiscalcrisisanditsdivergencefromthenationalpattern.Thisnormalizationisaccomplishedthroughspecifictechnologiesoffiscalmanagement,whicharepromulgated,managed,andpromotedbytwocentralactors:bondratingsagenciesandstategovernments.Thatisnottosaythatthesamepoliciesareultimatelyadoptedeverywhere,butthatcitycouncils,politiciansandresidentsareforcedtorespondtothissetoftechnologiesastheycometobeseenas“commonsense”approachestofiscalgovernance,vitaltopreservingcityfiscalhealthinatimeofongoingscarcity.

InChapters4and5,Iexploretwoavenuesthroughwhichgovernanceisrestructured:

36FelixRohatynwasthemastermindofNewYorkCity'sfiscalrecoveryin1975,andcontinuestospeakpubliclyaboutfiscalcrises.

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1.Thetechnologyofmunicipalfinance:thegrowingregulatoryapparatusandshapingofcrisisnarrativesbyfinancialagencies,andthemodificationoffiscalhealthindicatorsandratingsmethodologiestoincreasetheweightgiventofutureobligations(pensionsanddebt).Theroleofcreditratingsagenciesandtheapparatusofmunicipalbankruptcyhasbeenparticularlyinstrumentalinthecurrentrecessioninreframingpensionsasdebt,withsignificantimplicationsforbothworkersandresidents.ThisdiscussionisinChapter4.

2.Thegrowthofstatepower:theexpansionofstates’legalabilitytooverseeandinterveneincityfiscalpolicy.Thisincludesstatemonitoringandintervention(fromreceivershiptogatekeepingmunicipalbankruptcy),andtaxandspendinglimits(whichwerediscussedinPartTwo).Thepoliticalrelationshipbetweenstatesandcitieshasshapedthisdynamicwithsignificantconsequencesforurbanfiscalautonomy.ThisdiscussionisinChapter5.

Together,thesechaptersillustratehowthecrisishasbuiltonhistoriesoffinancializationthathavereduceddemocraticcontroloverthebudget.Theseincludetheshiftingofmanyfundingsourcesandprogramsofftheprimarybudget,bysettinguppublicauthoritiesandenterprisefundstomanagenongeneral‐fundrevenues,andpursuingdiversemethodsofprivatization.Italsoincludesthegrowingroleoftechnicalfinancialexpertise(includingappointedfinancialmanagers)inshapingurbanpolicy(seeMerrifield2014).Ifindagrowingroleofbanks,ratingsagencies,andfinancialpolicy‐makinginstitutionsinshapingurbanpolicy,facilitatedbythegrowingcomplexityofmunicipaldebtandanationalmedianarrativeofimpendingmunicipalcollapse.

Ialsoillustratethecomplexpoliticalrelationshipsbetweenstatesandcitiesinthecurrentrecession,drawingonbothnationalandlocalhistoriesofdecentralizationanddevolutionthathavefacilitatedthegrowingdependenceofcitiesonstatepoliticalwhims.Idescribeseveralstrategiesusedbystatestoexertpoweroverthepoliciesofcitiesinfiscalstress,andhowthosepolicieshaveexpandedtoencompassstateoversightintimesofnormalcy.Thesetechniquesareenablednotjustbycrisisbutbytheshrinkingfiscalpolicyspaceanderosionofcollectiveurbandemocracyleadinguptothecrisis.Thiserosionispartofasteadymovementtowardthetechnicalizationofnotjustfiscalpolicybutallurbanpolicy,whatMerrifieldcalls“accountancygovernance”(Merrifield2014).

Thesestrategiesfunctionnotjustasdefactolimitsoncityautonomy,althoughtheycertainlydothat.Perhapsmoreimportant—andinsidious—theyservetodepoliticizequestionsofrevenue,spending,budget‐making,andthescopeofcitygovernmentbyframingthemaspurelytechnical—accounting—questions.Fiscaldisciplinethusservesbothasameansforachievingspecificpolicygoals—suchasrestructuringunioncontractsandprivatizingcityfunctions—andasatechniqueforlimitingtheexpansionofurbanprograms.Ultimately,Iargue,thepublicconceptionofwhatcitiescandoandhowtheyshouldbelimitedarecontinuallyreshapedbythesefiscalprocesses.Thepoliciesdiscussedhere,Iargue,reflectanarrowinginthedebateoverwhatcausesandconstitutesfiscalcrisis,andarepushingthelimitsofstateinterventionandmunicipalautonomy.

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Andersoninvokestheterm“shrinkinggovernance”todescribethecontemporaryprocessesofreducingthegoverningscopeofcitiesthroughfiscalpolicy(Anderson2012a).Shetracesthisshrinkinggovernancetoseveralcasesthatemergefromthecurrentfiscalcrisis,inparticularlegalactionsandpoliciesthatrestrainthescopeofcitygovernancebystrictlylimitingrevenueincreases,adoptingspendingcaps,ormandatingthatcitiesprovideonlybasicservices(Anderson2012a).Theseresponses,sheargues,areconstraininglocalgovernmentandinsomecasesamountingto“defactodissolution,”wherelocalgovernmentsfindthemselvesstrippedofarangeofvitalpowers,includingtheabilitytosetfiscalpolicyandapprovebudgets.Byshrinkinggovernanceshemeans:a“systemofreformsthatactuallyretractlocalgovernment”inaneraofeconomiccutbacks(Anderson2010).Shecitesfiveexamplesillustratinghowcitygovernanceisbeingreducedinthewakeofcrisis:

extremeprivatization(suchasSandySprings,Georgia)(seeSegal2012);

expansionofstatereceivershiplaws(suchasthemunicipalinsolvencylawspassedbyMichiganandRhodeIsland);

initiativestopreventexpandinglocalservicesorreducelocalgovernmentsize(suchasOhio’srepealoftheestatetax,aprimarysourceoflocalgovernmentrevenue);

downsizingmovements(suchasRahmEmanuel’sattempttocutthenumberofChicagoaldermen);and

dissolutionandmergingwithotherjurisdictions.

Inallofthesecases,avisionoflocalgovernmentaslimitedtourbancontainmentandbasicpublicsafetyhasbeenbolsteredbytheopenrhetoricofdefundinglocalgovernmentasawayofsolvingstatefiscalcrisis,producesasetofpolicyapproachestoreducingthescopeofurbangovernance(seeAnderson2012b).Fiscalcrisishasprovidedadditionalfuelforexperimentingwithnewtechnologies,butmanyofthesetrendsareevidentbeginninginthe1970s.

Therearemanytrendstowhichwecanattributechangesinlocalgovernanceovertime,beginningwiththenarrativesemergingfromtheurbancrisesofthe1960sthatfixatedoncities’highpoverty,socialconflict,crime,andrioting.Thefalloutfrom1960ssocialmovements,anddeeppoliticaldividesintheUSaboutthecausesandsolutionstourbancrises,fueledaconservativebacklashagainstcitygovernmentsthattookfirmholdinthe1970s.The“DropDead”responsebyfederalofficialstoNewYork’spotentialinsolvencyin1975embodiedthisattitude(VanRiper1975).Highinflationinthe1970sfueledtaxrevoltsandemboldened“fiscalpopulists”suchasthosebehindProposition13inCalifornia(manytaxandexpenditurelimitsdatefromthisera)(T.N.ClarkandFerguson1983).Starvinggovernmentofrevenue,ofcourse,isacentralcomponentoftoday’santi‐governmentideologueslikeGroverNorquist,whofamouslysaidhewantedtoshrinkgovernmenttothesizewherehecould“drownitinthebathtub”(Liasson2001).Mostpublicofficialsdonotholdviewsthisextreme,butarenonethelesssusceptibletoa

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narrativethatgovernmentmustbecontinuallypreventedfromgrowingtoobig,thatitnaturallyseekstoexpandanddevourifnotconstrained(Baker2012).Thisnarrativecanbeespeciallypopularintimesofcollectiveandindividualeconomichardship,whengovernmentssuddenlycannotfindcashtopayforbudgetedexpenses.

Butausterity—theretrenchmentofspendingandrevenuerestrictionsoutlinedinPartTwo—doesnotnecessarilyrequireorimplypermanentchangesingovernance.AsIshowedinChapter3,someprogramcutsaredeliberatelyframedastemporary(e.g.publicsafety),whileothersareimplementedbyrestructuringserviceprovisioninsuchawaythatrestoringservicesbecomesdifficultevenwhentheeconomyrecovers.Inordertodrawaconnectionbetweentemporaryrevenuedeclines(drivenbysevereeconomicdownturnandfinancialsectorcollapse)andcallstorestructureurbangovernance,asupportivenarrativemustbeaccepted.Thatnarrativeisofcentralimportancetothischapter.

Theliteratureonneoliberalismtendstotreatthecurrentwaveofausteritypoliticsasacontinuingwithdrawalofacertainformofthestateandpredominanceofmarketlogics(seee.g.LobaoandAdua2011;OosterlynckandGonzalez2013).PeckandTickellarguethat“roll‐backneoliberalism”producedamarketizationanddenudingoflocalgovernmentthroughthe1980sthatcontinuestoday(PeckandTickell2002).Thisroll‐backisaccomplishedbytransformingthecitydiscursivelyfromanarenaofpolicy‐making,“progressivereformandpolicyinnovation”toanungovernablearenainneedofreform,particularlyintimesof“crisis”(Peck2006,683).Hackwortharguesthatthe“boundariesofurbangovernancehaveshifteddramaticallyinthepastthirtyyears”(Hackworth2007,10).Federaldecentralizationanddevolutioncoincidedwiththeemergenceof“splinteredurbanism:”theproliferationofprivateserviceproviders(utilities,protectiveservices,schools,etc.),resultinginthecitynolongerbeingthecentralproviderofresidents’experiencewithservicesassociatedwithurbanliving:schools,housing,utilities,transportation,andevenprotection(GrahamandMarvin2001).

Pincharguedthattheeconomicrecessionin1980sGreatBritainwascharacterizedbyaco‐constitutiverelationshipbetweenausteritycutsandgovernancechangesthatdifferedfromearlierrecessions(Pinch1995).Pinchobservedthatoverthe1980sinGreatBritain,inadditiontotheoutsourcingoflocalserviceprovision,theprivatesectorwasincreasinglyinvolvedindecision‐making,parallelingobservationsinliteraturesontherestructuringoflocalgovernmentintolocalgovernance(Pinch1995,966).Hearguedthattheinstitutionalpracticesofbudgetingandspending,whichwereleftintactinearlierphasesofbudgetarybargaining,werethesiteofrenewedconflictsandchangesinthe1990s.IbelievethisprovidesaframeworkforlookingathowthecrisisisbeingnarratedintheU.S.today.

TherehavebeensomeeffortstodocumentthisshiftingovernancethroughcasestudiesofU.S.cities.InRestructuringPhiladelphia,AdamsetalexaminedchangesineconomicandgovernancestructureinthePhiladelphiaregion,andfoundthat:“Incaseaftercase,weobservethatlocalgovernmentsarerelinquishingauthority,eithertostategovernmentagenciesortoorganizationsoperatinginthe‘thirdsector’oftheregion’sinstitutionallandscape”(Adams2008,9).ThecentralargumentofthischapterandChapter

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5isthatthisrelinquishingofauthorityalsotakestheformofincreaseddeferencetofinancialactorsandfinancialmarkets,asbothdebtandtheinstitutionsthatpolicemunicipaldebtplayacentralroleinnarratingcrisisanddefiningtheuniverseofpolicysolutions.

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CHAPTER4:FinancializingGovernance

Therearethreewaysthatdebthasfeaturedintheproductionoffiscalcrisisandthecommonsensenarrativesofcrisis:(1)thegrowthofcomplexor“risky”debt,and(2)characterizingfixedobligations(suchaspensionsorhealthbenefits)asdebt,and(3)framingdebtasamoralquestion,particularlyforindividualsandgovernments.Together,thesereframingsofdebtandstructuralobligationshavebeenusedtojustifyexternalinterventionintocityfinances,shrinkingthescopeofurbangovernance.

4.1Financializationofurbanpolicy

Thedegreeoffinancialmarketpenetrationisreflectedintheincreaseinmunicipaldebt,theprivatizationandsecuritizationofpublicassets,thesizeandscopeofthefinancialservicesavailabletocitygovernments,andtheinvestor‐orientationofcriticalcollectiveconsumptiondecisions.Localgovernmentshavecometorelyheavilyonfinancialmarkets,andnotjustthroughtraditionalformsofmunicipalindebtedness,fortheprovisionofstandardpublicservices.(Weber2010,252)

Financializationcanbeunderstoodmostbroadlyasthe“growingpowerofmoneyandfinanceincontemporaryprocessesofeconomic,politicalandsocialchange”(French,Leyshon,andWainwright2011,814).Financializationencompassesthegrowingcontrolbyfinancialactorsandmarketprocessesoverurbanpolicyandbudgeting.Oneofthemostimportantshiftsinurbangovernancesincethe1970shasbeenthefinancializationofmanyaspectsofcitygovernment:development,budgeting,housing,andborrowing.Forcitiesincreasinglyengagedwithanddependentoncomplexfinancingarrangements,theseshiftshavedeepenedthedepoliticizationofthefiscalaspectsofcitygovernancebyhandingthemovertofinancialexperts,asmanycitieslacktheinternalexpertisetomanagecomplexfinancialarrangements(Weber2010).Theseincreasinglycomplexfinancingstructurescombinewiththepressureoncitiestobeentrepreneurialandcompetitive,hasincreasedthepoweroffinancialexpertstoshapepolicy.Thepredominanceof“commonsense”notionsofeconomicnecessitynormalizestheprioritizationofefficiency,competitionandtheneedformarket‐basedreformsintherealmofpublicfinances.Keyelementsofgovernancebecomeviewedasthelogicaldomainoffinancialmanagers,accountants,andtheprivatesector(seeMerrifield2014).Themarketmechanismisheldupastheidealformofdistributinggoodsandservicesofallkinds;government’sroleshouldbelimitedtoactivitiesthatcannotbeadequatelyprovidedbythemarket.Privatizationcantakemanyforms,notjustthecompletehandingoverofagoodorservicetotheprivatesector,butthecompartmentalizationofaspectsofgovernancetopublic‐privateinstitutionsandoversight,usingmarketlogicstoevaluateperformance,andacceptingareducedlevelofpublicoversightandcontroloverhowactivitiesarecarriedout.

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Financializationexplainsseveralkeyelementsofthecontextofurbanfiscalcrisis:thegrowthandcomplexityofmunicipaldebt,thepoweroffinancialactorsandfinancialexpertiseinurbanpolicy‐making,theshiftingofriskfromtheprivatetopublicsector,andtheincreasingimportanceoffinancialcapitaltothefunctioningofcities(Coq‐Huelva2013;Weber2010).Thefinancializationoftheeconomythatbeganinthe1970shasalsoproducedagrowingflowofcapitallookingforinvestmentoutlets,increasinglyvolatileassetpricesandinterestrates,andanincreasingdemandforliquidityvehiclestocapitalizemunicipalassets(seeKrippner2005).Thisshifthasproducedgrowingpressureoncitiestomonetizetheincomestreamsofpublicassets,suchasparkingspaces,sewersystems,streetlights,andland.AsWeberargues,differentcitieshavedifferentabilitiestosuccessfullycapitalizeonpublicgoods,butallcitieshaveinternalizedtherisksinherentinsuchschemes;acombinationofexpertiseandstatepoliciesproducesdifferentiatedaccesstothesecomplexcapitalmarkets,whiledispersingriskbroadlyacrossthemunicipalsector.Financializationofthebroadereconomyhascoincidedwiththeincreasedvolatilityofthegeneraleconomy,whichinturnincreasesthevolatilityofmunicipalrevenues,asdescribedinChapter2.

Financializationisalsoassociatedwiththegrowingdominanceofamodeofcorporategovernanceandeconomicrationality,withafixationon“shareholdervalue”(Rutland2010).Themassificationoffinancialassetsthatreframesindividualsaseconomicsubjects(SarahHall2011)hasalsoreframedcitizenswhousecityservicesintoinvestorsinmunicipalassets.AsreflectedinthenarrativesdescribedinChapter5,maintainingthestabilityofthemunicipalbondmarketisheldupasanimportantsocialvalue,moreimportantthanthefateofindividualcities.Investorsbecomemorallyandpoliticallyequivalenttocityresidents—theirstaketoclaimsonthecityisequal,ifnotgreater.Ofparticularsalienceinthecurrentrecessionhasbeenthereframingofpublicemployeesandretireesascreditors,andofemployeeobligationsasdebt,positioningclaimsbyinvestorsasmorallyequivalenttothelivelihoodsofretirees.

Thereisasmallbutgrowingbodyofresearchonthelocaleffectsoffinancializationanditsimplicationsforurbangovernanceinparticular(seeFrench,Leyshon,andWainwright2011;Coq‐Huelva2013).Weberandothershavebeguntodocumenttheincreasinguseofcomplexfinancialinstruments,technologies,andconsultanciesthatcitiesusefordevelopmentprojectsandasinvestmentandrevenue‐generatingtools.Pacewiczarguesthattaxincrementfinancing,apopularstrategyforgeneratingrevenuetosupportprivatedevelopment,hasgiveneconomicdevelopmentprofessionalspower“toexercisejurisdictionovermunicipalbudgets”(Pacewicz2013).Butlittleofthisliteraturehastreatedcitybudgetsthemselvesassitesoffinancialization.

Financializationisenabledbytheconstructionof“theeconomic”asanarenaofknowledgeandexpertise,intheprocessdepoliticizingquestionsthatcanbeframedaseconomic.Bourdieuproposedthat“[e]verythingconspirestomakeusforgetthesociallyconstructed,andhencearbitraryandartificial,characterofinvestmentintheeconomicgameanditsstakes”(Bourdieu2005,10).Thateconomicgame,inmunicipalfinance,includesthebanks,ratingsagencies,andfinancialexpertswhoparticipateinconstructinga

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narrativeaboutcitiesandfinancethatisdivorcedfromthepoliticalandsocialconstructionsofurbanfiscalpolicy.

Thisconstructionofaneconomic“field”facilitatestherationalizationofhandingoveracity’sfinancialdecisionstoanunaccountablegroupoffinancialactors(suchasstate‐appointedemergencymanagers,consultantshiredbycitiestonegotiatecomplexfinancialdeals),removingthemfromdemocratic(“political”)control.Thecalculationsperformedbyratingsagenciesandbuyersofmunicipalbondsareframedbythoseactorsasrationalcalculations,incorporatingpoliticalandsocialfactorsbutnotco‐constitutedbysuchfactors.Bourdieuarguesthataparticularsetofpoliciesfollowsfromtheconstructionoftheeconomicasaseparatedomainfromthestate:thecommercializationofpublicgoods,privatizationandcontractingout,theavowalbythestateofitsinabilitytocontroleconomicmattersorinterveneinmarketoutcomes(suchasinequality)(seeBourdieu2005,11–12).Maintainingpoliticalcalminthefaceofencroachingpersonaleconomiccrisisrequiresthattheeconomybemaintainedasaseparateterrain,andthatanyperceivedshocksbenaturalized. Thisnaturalizationisaccomplishedthroughthenarrativescirculatingaboutthecrisis:“theideas,publicnarratives,andexplanatorysystemsbywhichstates,societies,andpoliticalculturesconstruct,transform,explain,andnormalizemarketprocesses”(SomersandBlock2005,264).Whentheeconomycanbeframedasanaturalforcethatiscontinuallyandinexorablychanging,itbecomessomethingactinguponcities,divorcedfromitssocialandpoliticalcontext,andframedasanaturalphenomenontowhichcitiesmustrespondinordertosurvive.Theeconomybecomesanirresistible,exogenousforce—impactingrevenuesandshapingpolicyapproaches.

Underlyingthesepolicyframingsisthepresumptionthatthemarketisthebestsystemfororganizingeconomicactivity,thatgovernment’sroleisonlytomanagespheresthemarketcan’tadequatelymanage,andthatgovernmentmustbeattentivetotheeffectofpolicyonthebehaviorofbusiness.Thussystemsofgovernancearecontinuallyrevisedinordertominimizetheir“distortion”orinterferenceinmarkets.Theactionsofbanksarepresumedtobe“rational”andinformed,andcitiesmustbehaveinwaysthatwillelicitinvestorapproval.Similarly,banks’decisionsaboutlendingarepresumedtobebasedsolelyoneconomicrationales,notpoliticalinterests;theactionsofbanksarethusunavoidableoutcomesofnaturalizedeconomicforces.Thispresumptionmustbecontinuallyreinforcedandreproducedinavarietyofshiftingpoliticalterrains.ThenarrativesIdiscussinthischapterarepartofthatreproduction.

Banksandcrisis

Thegrowingpoweroffinancialactorsinmunicipalfinancecanbetracedtopreviousepisodesofurbanfiscalcrisis.Weikartarguesthatthe1975NewYorkCityfiscalcrisisreflectedaturningpointintheexpansionofcities’useofcreditandthecontrolthatthisrelianceonmunicipalcreditgavetoratingsagenciesandfinancialinstitutions(Weikart2009;Hackworth2007).Theroleofdebtincities’everydayfinances(whichIdescribemorebelow)meansthatbankshavealwaysplayedapivotalroleinmomentsofcrisis,

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throughtheirdecisionstocutofffunding,orsellthedebttheyholdforacity.Inthesemoments,suchasduringtheGreatDepression,bankshaveaprominentplatformforshapingurbanpolicy(andanationalplatformforairingtheiropinions)(Fuchs1992,72–86).

NewYork’s1975crisiswasessentiallya“capitalstrike.”Somescholarsgosofarastoblamebanksforcreatingthecrisisinordertoshapepolicy(Tabb1982).BankshadalsosoldoffNewYorksecuritiesstartingin1974,sincetheyhadaccesstoinformationaboutthecity’sfinancialcondition,whichcreatedapanicthatlaterjustifiedtheirmovetocutoffcredit(Brash2003,65).(Thebankswouldofcourseloanmoneytothecityshortlyafterwards,throughthefinancialentitiessetuptogovernthecity,athigherinterestrates.)In1975,arguingthatthecity“didn’trespondadequatelytoreassuremarkets,”thebanksstartedtosellofftheirholdingsofNYCbonds,causingthecostofNYCdebttoriseevenhigher(Dunstan1995).ByMarch1975,underwritersbecamehesitanttoissuemoredebt,concernedthatcitywasnotdoingenoughtomanagedeficits,andthatbondholderswouldnotbeprotectedintheeventofbankruptcy(Dunstan1995).Thelegislatureactedtoprotectcontractors,butnotbondholders,raisingbanks’fearsthattheywouldenduplosingmoney.InApril1975,thecitytookoutathreedayloantocoveritsimmediateexpenses.Thebankswantedtorefuseanymoreissuances,buttheyheldalotofthecity’sdebt,sotheywereinaprecariouspositionrelatedtotheirowncustomers,towhomtheyhadbeensellingNewYorkCitymunicipalbonds.Thestateadvancedrevenuesharingfundstogetthecitypasttheimmediatecrisis,butwhenthebanksfinallydecidedtocloseNewYork’saccesstocapitalmarkets(themarketsthecityhadbeenusingtoaccesstheshort‐termloanstocoveritsshortfalls),thestageforcrisiswasset.Withindays,thecitywouldbeunabletopayitsbillstoemployeesandsuppliers,andwouldceasetofunction.Arecoveryplanwasnegotiatedbythebanks,stategovernment,thecityanditsunions,onethatimplementedseverespendingretrenchmentbutalsoanelaboratestructureoffiscalgovernancethatwouldoverlaythecity’sexistinggovernment,andwhichcontinuestothisday.IdescribethisstructureinChapter5.

WeikartarguesthatNewYork’srecoveryplanrepresentedthefirsttimethatbanksdemandedcontroloveracity’sfinancialpolicyastheirconditionforfuturecredit,ratherthanfeesorcommissions.DramaticpowershiftstracebacktotheNewYorkcrisis,asbalancedbudgetsbecameakeypriorityforlocalgovernmentsandtheabilityofbankstocontrolmunicipalcreditgavethemconsiderablepoliticalinfluenceoncitybudgets(seee.g.Glasberg1989).Weikartarguesthat“thestructuralchangesmadetoourpublicinstitutionsduringfiscalcrisessoalteredthepoliticallandscapeinfavorofmarketinterestsasarticulatedbyfinancialelites”thattheoriesofurbanpoliticsandpoliticalcoalitionsnolongerexplainurbanpolicy(Weikart2009,14).37Inowturntotherelationshipbetweenbanksandcitiesinthecurrentcrisis.

37Otherobserversofurbanpolitics(andthebanksthemselves)havearguedthatthisinfluenceismuchmoreneutral.Shefter(1992)arguesthatcreditorsdon’tcarehowthecityspendsitsmoney,justthattheexpendituresarelessthantherevenues.Itismunicipalofficials,heargues,whodecidehowtomanagespendingtoforestallpoliticalconsequences,e.g.todecidehowtomanage“thoseelementsofthecity’spopulationthataremostlikelytodisruptpublicorder,”anddistributethe“rewardsofcitypolitics”

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4.2Creditorsanddebtors

ThehistoryoftheUnitedStates…isalsoahistoryofthepowerofcreditorsoverdebtorsasrecessionafterrecessiondemonstratedthestrugglebetweenthetwo.(Weikart2009,7)

ThoughnearlyeveryoneagreesthatDetroitisinparticularlybadshape,manyofitsunderlyingissues—crushingdebtandunfundedandunsustainableretireebenefits—arenotunique.Andthoselegacycostsareattheheartofwhatmanyexpertsbelieveisacomingmunicipal‐financecrisisintheU.S.(Foroohar2013)

Wehavetobreaktheaddictiontodebt.Becausethat’swhatwe’vebeendoingforalongtime.(DetroitEmergencyManagerKevynOrr,quotedinHelmsandGuillen2013)

Oneofthecentralcomponentsofthefinancializationofurbanpolicyisthegrowingcomplexityofmunicipaldebt.Municipaldebtplaysanincreasinglyimportantroleinurbanpolitics,andisofteninvokedasacoredriverofurbanfiscalcrisis.Americancitieshavelimitedoptionsforweatheringeconomicdownturns:citiesareprohibitedfromdeficitspending,andrelyonshort‐termdebttocovertimegapsintaxreceiptsandexpenditures(seeMonkkonen1995).Withlimitedabilitytoraiserevenues,andfewexpenditureslefttocut,citieshaveincreasinglyturnedtodebtfinancingtoeffectivelycoverfundinggapsandevenshorter‐termexpenditures.Acity’sabilitytoissuebondsplaysapivotalroleinitseverydayfinancialmanagementaswellasitslong‐termneedstoprovideinfrastructureandservicestoitsresidents.Themunicipalbondmarketisalsothecentralleveragepointforfinancialinstitutionsoverurbanpolicy.Overthepast25years,inthefaceoflimitedrevenue‐raisingoptions,andunderpressuretobefinanciallyinnovative,citieshavebeenincreasinglydriventotakecreativeapproachestofinancingurbandevelopmentandoperationsthroughborrowingandleveragedrevenuestreams(French,Leyshon,andWainwright2011).

Debtalsoplaysacentralroleinthenarrativesaboutcausesandsolutionstofiscalcrisis.Thisisinpartbecauseoftheroledebtplaysintriggeringinsolvency.Althoughcities

accordingly(Shefter1992,p.234).WallStreetJournaleditorialsatthetimearguedthatthebanksdidn’tgetenoughconcessions—thatwagesandotherspendingwerestilltoohigh(seeShefter1992,157).Sheftergoesontosuggestthatthebanks’cooperationwithunionstoformapowerfulalliancemeantthatmoreradicaldemandsfrombusiness—forprivatizationandradicalcuts—couldberesisted:“themonitoringagenciesenablethemarkettomakeconcessionstolocalpoliticalforces”(seeShefter1992,191).ShefterdescribesFCBasmediatingdemandsofbusiness,suggeststhatbanksareamorebenignforce,andthat“Contrarytotheclaimsofmanyobservers,however,thecrisishasnotplacedeffectivecontroloverthecity’sfinancesinthehandsofNewYork’sbusinesselite”(seeShefter1992,223).ShefterarguesthattheFinancialControlBoard(FCB)givesinvestorsconfidence,sothecitydoesn’thavetomakeasmanycuts,especiallytopublicemployeeunions,makeconcessionsto“localforcescapableofprovokingconflictsthatcoulddelaythecity’sregainingfullaccesstothepubliccapitalmarkets”(seeShefter1992,223).

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canadjusttheirbudgetsinfutureyears,theonsetofafiscalcrisisoriginateswithacityhavingtroublepayingitsexpensesasrevenuesfallshortofexpectationsforthecurrentyear.Ratingsagencieswillthendowngradeacity’sdebt,raisingthecostsofshort‐andlong‐termdebt,furtherexacerbatingtheexpense‐revenueimbalance,andmakingitharderforcitiestotakeouttheshort‐termloans(taxanticipationnotes)neededtopaybills.Thesystemofmunicipaldebtthusexacerbatesafiscalcrisisasitunfolds.Inaddition,ascitiesnearseverefiscalcrisis,thequestionofhowacity’sdebtobligationswillberenegotiatedorsettledundersomeformofadjustment(bankruptcy,receivership,etc.)isaquestionthebankingindustryisveryinterestedin.Ratingsagenciesmaydowngradeacityifanythinginthecity’sbehaviorindicatesthefutureprobabilityofnotmeetingafulldebtobligation(evenoneofarelatedauthority,ratherthanthecityitself).Theissueofprecedentkeepsthefinancialcommunityvigilantforanysignthatmunicipaldebtwillbetreatedotherthananonnegotiable,fullyhonoredcommitment.

Thegrowthofcomplexmunicipaldebthasgivenrisetoaninfrastructureofactorsandrulesthatshapeurbanpolicy.Thoserulesandthespacesinwhichthoseactorsoperateprovidesanarenaforpromulgatingnarrativesabouthowcitiesshouldperform.Thischapterdescribethewaythattheseactorsusedebttoframecity’sobligationstobanksinmoralterms,whilelegitimatingthedissolutionofotherobligations,toemployeesandcitizens.

Datasources

TheCensuslocalgovernmentsurveytracksinterestonallotherdebt(i.e.allnon‐utilitydebt).Italsocalculatesdebtoutstanding,whichincludeslong‐termdebtoutstandingatthebeginningofthefiscalyear(dividedintopublicdebtforprivatepurpose&publicpurpose),long‐termdebtissuedorretiredduringtheyear,andshort‐termdebtatthebeginningandendofeachfiscalyear.Until2005,theCensustrackedmanymorecategoriesofdebt,includingfull‐faithandcreditv.non‐guaranteeddebt,debtforeducation,andallgeneralpurposedebt.Unfortunately,therestructuringoftheCensussurveyondebtmakesitdifficulttoconstructexactcomparisonsacrossthetwosurveys,andalsoreducestherichnessofmunicipaldebtinformationafter2005.InadditiontotheCensusdata,IrelyonCAFRsforeachofmycasestomeasurecommonindicatorsofdebtburden.

Typesofmunicipaldebt

Citiesborrowmoneybysellingbonds,forwhichtheymakeinterestandprincipalpaymentstobondholdersuntiltheoriginaldebtispaidoff.Thethreebasictypesofdebtcitiescanissueare(1)secureddebt(i.e.bondsthataresecuredbyarevenueseparatefromthegeneralrevenues,andsecuredbyalienonthoserevenuesbuiltintothebond),(2)unsecureddebt,and(3)generalobligation(GO)debt,whichisguaranteedby“fullfaithandcredit”ofthegovernmententity,i.e.byitsabilitytolevytaxesandfeestopaythedebt.Moststatesrequirevoterapprovalviaballotreferendumonallgeneralobligationdebt.Itisconsideredthemostsecure,sincecitiesrarelydefaultandwill(presumably)existinperpetuity(unlikeaprivatecorporation,whichcanliquidateandlimititsliability).General

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obligationdebtistax‐exemptunderfederallaw38andmoststatelaws,whichappealstoinvestorsandenablescitiestopaylowerinterestrates.

Revenuebonds—themostcommontypeofsecureddebt—arebackedbyaspecificrevenuestream,suchasutilitypaymentsorbridgetolls,ortheincrementofpropertytaxesasinTIFbonds.Theydonotrequirevoterapproval.Thedebtisconsideredsecuritized(i.e.backedbycollateral)fromaspecificrevenuestream.Somerevenuebondsaretax‐exempt,dependingonthepurposeofthedebt.Insomestates,citiesalsoissue“limitedtax”debt,securedbyaspecificrevenuesource(suchasDetroit,whichissuedbondssecuredbyspecificgeneralrevenuesources).Ifdebtisnotunsecured—i.e.notguaranteedbyaspecificrevenuestream—thenintheeventofdefaultthebondholdershavenolegalclaimtoanycityrevenues.

Citiesissuedebttocovershort‐termcashflow(someofwhichisnormalbusiness—taxrevenueslumpybutpayingemployeesisnot—andsomeofwhichcanbeasignoffiscalstress),aswellastofinancelargeinvestments,suchasasewageplants,transportationproject,andothermulti‐yearexpenses.Citiesmayalsoissuedebtonbehalfofprivateentities,usuallyforeconomicdevelopmentprojects.

Regulatingdebt

Stateconstitutionsdefinethelegalenvironmentforbothstateandlocalpublicfinance;citychartersmaysetadditionallimitsontheamountsandusesofdebt.Moststateslimittheamountofdebtthatcitiescanissue,typicallybasedonassessedvalueoftaxablepropertyinthecity;statelawsalsodefinewhatkindsofdebtmustbeapprovedbyvotersorthecitylegislativeprocess(FeldsteinandFabozzi2011).Cities’abilitytoborrowbyissuingbondshasbeenshapedprimarilythroughlegislationinthewakeofcrisesorscandals,particularlyafterwidespreadmunicipaldefaultsduringthe1930s(Sbragia1996).

Thedebtlimitsplacedoncitiesbystatelaw,however,onlyapplytosomeofthedebtforwhichcitiesareresponsible.Allfourcitieshavealimitongeneralobligationtiedtothepercentageoftheirtotalassessedvalue(10%inDetroitandDallas,3915%inSanJose,13.5%inPhiladelphia).40Thislimitdoesnotapplytorevenuebondsorso‐called“self‐supportingor“self‐liquidating”debt.Itmirrorstheguidancepromulgatedbyallthreeratingsagenciesfordebtserviceasapercentageofexpenditures:5‐15%(Moody’s),8‐15%(S&P),and10%(Fitch)(CityofPhiladelphia2009,5).

38FederaltaxregulationsoutlinetheacceptablepurposesoftheGObonds,whichmustusuallybespentoninfrastructureorafewotherlimitedoptions(in1986thefederalgovernmentremovedthetax‐exemptstatusforGObondsusedforprivateactivity).39Dallashasanadditionallowerlimit,4%ofthetruemarketvalueofproperties.40ThislimitissomewhatmeaninglessforPhiladelphia,asitdoesnotrelyprimarilyonpropertytaxesforrevenue.

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Beginninginthe1970s,non‐GOdebtbegantoconsumeanincreasinglylargeshareofthegrowingmunicipaldebtmarket(seee.g.CaliforniaDebt&InvestmentAdvisoryCommission,Fisher,andWassmer2011;Gillespie2010).Afterfiscalcrisesinthe1930sand1970s,debtlimitationsweretightenedbymanystates,buttheselimitsprimarilyaffectedGObonds,andthuscouldbecircumventedbytherapidgrowthofnewdebtinstruments,createdandmarketedbybanks(Weikart2009).Inadditiontoallowingmunicipalitiestoborrowmoneyinexcessofstatelimits,non‐GOissuanceswereoftennotsubjecttovoterapproval,makingthemappealingtolocalofficials.Complexdebtinstrumentssuchasassetlease‐backagreementsorrevenuebonds(backedbyrevenuestreamsthatcreditorscouldseizeintheeventofdefault)becamemorepopular,andthosewerenotsubjecttostateorfederallimitationsontheamountofdebtacitycouldtakeon(Weikart2009).

Overthepast25years,citieshaveexperimentedwithamuchbroaderarrayoffinancinginstruments,especiallyinthewakeofhighinflation,reductionsinfederalaid,taxandexpenditurelimitations,andaslowingeconomy.Thisispartlytogetaroundstatelimitationsondebt,butalsotocapitalizeonincomestreamsfrompublicassetsinthepost‐1980senvironmentofentrepreneurialurbanism(Harvey1989).Citieshavealsoturnedtomorecomplexusesofborrowingandassetliquidationtofinancedevelopmenttocovershort‐termoperatingcosts,raisemoneytocoverliabilitiessuchaspensionfunds,andfundprivateeconomicdevelopmentprojects(Weber2010).

Themoststraightforwardformofmunicipaldebt,generalobligationbonds,nowmakesuponly30%ofthenation’smunicipaldebtissuances(seee.g.Hackworth2007).Revenuebondsinparticular—bondsbackedbyspecificrevenuestreams,suchasfeesforasportsarena,oftenforprivatedevelopmentprojects—haveoutpacedgrowthinGOdebt.From1970‐1980,revenuebondsgrewfrom30percentofalldebtissuedto72percent(T.N.ClarkandFerguson1983);in1981privateactivitybondsaccountedfor48%ofthemarket(HildrethandZorn2005).Someoftheseissuances,suchascertificatesofparticipation,arenotactualbondsbutareconsidered“unconditionalcontractualobligations”ofthecity,whichmeansthatintheeventofamissedpayment,acontractadministratorcansuetoforcethecitytopayfromitsgeneralfund,orraisetaxestomakethepayment.Sometypesofrevenuebondsareinfactdrawingonabstractrevenuestreams,ratherthanasimpletaxorfee,addingagreaterlayerofriskforbothcitiesandinvestors,anduncertaintyoverhowthatriskwillbeallocatedintheeventoffiscalcrisis.

Overthelastfourdecades,themunicipalsecuritiesmarkethasballooned,ashasthelevelofdebttakenonbyU.S.cities.In1975,therewas$235billioninmunicipaldebtoutstanding;by2012thisfiguretotaledroughly$3.7trillion(U.S.SecuritiesandExchangeCommission2012).Municipaldebtportfoliosalsocontainmorehigh‐riskformsofdebt:suchasvariableinterestrates,interestrateswaps,auctionbonds,andotherderivativeinstruments(seeWeber2010).Insteadofoneortwocreditratings,thethreeratingsagencies(Fitch,S&P,Moody’s)nowissueratingsforacomplexportfolioofdebt,oftenincludingbondsissuedtopaypreviousbonds,allbackedbydifferentandsometimesunclearrevenuestreams.Justasnewinstruments—publicauthorities,specialassessmentdistricts,andrevenuebonds—devolutionfueledthegrowthofmunicipaldebtinthe1970s

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and1980s,sohavenewinstrumentssuchasinterestrateswaps,combinedwithnearlyadecadeofrevenuedeclines,fueledmunicipaldebtsince2000.Inthepastfiveyears,thecombinationofincreasingpublicrisk,tightenedfiscalmargins,andmarketcollapsehasbeentoxicforplaceslikeDetroitandPhiladelphia.

Asagrowingarrayofincreasinglycomplexinstrumentshastransformedtherelationshipbetweencitiesandcreditmarkets,thenatureofthosemarketsanditsactorshasalsobeentransformed.ThecreationoftheMunicipalSecuritiesRulemakingBoard(MSRB)in1975greatlystandardizedthemarket,openingituptomoreinvestorsandincreasingprofitrates,makingthemunicipalbondmarketacomplexandfertileterrainforlargeinvestors.Asthederegulationofthebankingsectorbeganinthe1970s,andacceleratedthroughthe1980sand1990s,majorbuyersofmunicipalbondswentfrombeingcommercialbankstorepresentingawiderrangeoffinancialinstitutions.Before1975,themajorbuyersofmunicipalbondswerecommercialbanks;banksoftenheadquarteredinthecitiestheyinvestedin(thebanksinvolvedinnegotiatingNewYork’srecoveryhadastateasbothinvestorsandsitedcorporationsinthecity).After1975,asthefinancialindustrybeganitslongpathofderegulation,bondswereheldbyamuchlargersetofinvestors,ratherthanlarge,localbankswithastakeinthecity’sfuture(Weikart2009).Particularlyafter1986,mutualfundsandotherindividualinvestorsaccountedforagrowingshareofbondholders;by2004,commercialbanksheldlessthan10%ofmunicipalbonds,comparedto50%in1975(HildrethandZorn2005).

Thisgrowingcomplexityofthemunicipaldebtmarkethashadtwoimportantconsequences.First,ithasexposedcitiestosignificantriskthroughtheirincreasedtoexposurevolatilefinancialmarkets.Second,ithascreatedavastinfrastructureofmunicipalfinanceandexpertisethatinturnshapesurbanpolicyovermuchmorethandebtitself.

Twoformsofcomplexdebtthathaveattractedattentioninthecurrentrecessionareinterestrateswapsandpensionobligationbonds.OneofthecentralpiecesofDetroit’sdebtisintheformofCertificatesofParticipation(COPs)foritsPensionObligationBonds.41Thecertificateswereissuedin2005inanefforttoreducethecity’spensionliabilities.In2005,theMayorfoughtahard‐wonbattletogettheCounciltoapproveacomplexdealinwhichthecityissued$800millioninpensionobligationbondstodirectfundsintoitsretirementsystems,andnegotiateda30‐yearrepaymentandinterestrateswapagreementtohedgethecityagainstfluctuatinginterestrates.TheCOPswereissuedatvariableinterestrates,andthecityenteredintoswapagreementstostabilizetheinterestrates.ThedealwonMayorKilpatrickanawardfor“DealoftheYear”fromBondBuyer,andwasintendedtoremovethepensionliabilitiesfromthelistofstructuraldeficitissuesfacingthecity(Carvlin2005;BomeyandGallagher2013).In2005,thecityalsoissued$250millioninbondsintendedtograduallyrepayitsoperatingdeficit.Thedealcovered$1.8billionindebt.Afterinterestratescollapsedin2008,makingthedealanegativeburdentothecityeveryyear,andpossiblelong‐termlossesof$500millionormore.41PensionObligationBonds(POBs)arebondsissuedtogeneratecashtopaypensionobligations,withtheexpectationthatthereturnsfromthepensionfundwillexceedtheinterestrateonthebonds.Theyareintendedasawayofpayingdownpensionliability.

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In2009,interestratesfelldramatically,makingthe2005swapdealattachedtoDetroit’spensionobligationbondsarapidly‐growingliability,estimatedat$1.14billionby2013(Rhodes2013).InJanuary2009,thecitywasdowngradedbyS&P,triggeringa“terminationevent”thatgavebankstherighttodemandthatthecityimmediatelypaytheterminationcostsandnetvalueoftheswapagreement,about$400millionatthetime(BomeyandGallagher2013).UnderinterimMayorKenCockrel,thecitynegotiatedadealinwhichthebankssecuredthedebtwithrevenuefromthecity’scasinos(approximately$170millionperyear).Ifthecityhadnotnegotiatedthedeal,itwouldhavebeenforcedtodefaultonitsdebtandfileforbankruptcy.

Thisdealhasbecomepivotalissueinthebankruptcy,asseveraltriggeringeventshavepromptedrenegotiationandraisedthespecteroftermination(inwhichcasethecitywouldhavetopaythecurrentmarketvalueoftheswap,whichthebanksdemanded$250‐350million,andstillowetheoriginaldebt).In2009,toavoidterminationwhentheswapinsurerwasdowngraded,thecitynegotiatedtocommitallcasinorevenuestothebankcounterparties.AfterOrr’sappointmentin2013,thebanksagainhadtherighttotermination,butdidnotpursueit.Instead,theytookahardlinewithOrrincreditnegotiations,ultimatelyfailingtoagreetodealandpromptingthecity’sbankruptcyfiling.Thebanksandinsurancecompanyinvolvedinthatdealcontinuetolitigatethetermsofsettlement,afterbeingforcedbythebankruptcyjudgetoaccept$85milliontoterminatetheswaps.

Detroit’spensiondebtdealmayappeardisastrousinretrospect,butitishardlyexceptional.Dallashasalsoissuedpensionobligationbonds(seeTable4.2).InNovember2004,votersadoptedaproposaltoclosetheunfundedliabilityoftheDallasEmployeesRetirementFundplanbyraisingemployeecontributions,thecity’scontributions,andrequiringemployeestopay37%ofthecosttoissuebondstofundthepensionsystem.UnlikeDetroitandStockton,thecity’spensionobligationbondshavenotbroughtnegativeattentiontoDallas,butitdoeshavenearly$300millioninoutstandingpensionobligationbondbalancesasoffiscalyear2014(althoughtheturnaroundofthestockmarkethasboostedreturns,increasingthehealthofthebonds).Dallashasnooutstandingswapagreements,althoughTexasgovernmentshavebeenoneofthebiggestusersnationallyofinterestrateswapssincethestatelegislatureauthorizedthemin2007(Fulbright&Jaworski,LLP2007).

Philadelphiaalsohasasignificantdebttiedtopensionpayments—aPensionServiceAgreementhad$1.4billionoutstandinginfiscalyear2012,representingnearly20%ofthecity’stotaldebtburden.LikeDetroit,Philadelphiahasbeenentangledinthederivativesmarketanddowngradedforitshighliabilities.Philadelphiaalsoenteredintoswapagreementsdesignedtosmoothoutpaymentsonvariableratebonds,butwhichbackfiredafterthe2008crashandhasresultedincitiespayingwindfallstobanks,sometimeslongaftertheoriginaldebtispaidoff(S.Ward2012).ForstrugglingcitieslikeDetroit,Philadelphia,Pittsburgh,andNewOrleans,thesedealsareoftenpairedwithotherriskyfinancialtechniques,suchaspensionfundsorotherassetstoguaranteecomplexdebtarrangements,alwayswiththeencouragementofbanksthatstoodtomakemoneyonthedeals(Taibbi2010).

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Philadelphia’suseofswapshasbroughtattemptsbythestatetopreventthecity’suseofsuchinstruments.Pennsylvania’sstateauditorpublishedareportexposingtherisksoftheseswapstocitiesandschooldistricts,andurgedthestatelegislaturetoprohibitmunicipalitiesfromusingthem.Asof2012,thecityandschooldistricthadalreadylost$331millioninnetinterestpaymentsandcancellationfees($109.6bythecity),alltobanksthathadreceivedfederalbailoutfunds(S.Ward2012).Morethan13%ofPhiladelphia’sdebtisstillboundbyswapagreements,andithasalreadypaid$109.6milliontoterminatesuchagreements;ifinterestratesremainatrecordlows,thecitystandstopayanadditional$240millioninadditionalnetinterestpayments.Butattemptsbystatelegislatorstoprohibitsuchinstrumentshavebeenunsuccessfulsofar,andalthoughPhiladelphiarecentlyjoinedalawsuitagainstseveralbanksoversuchagreements,themayorandcouncilhavebeensilentabouttheconsequencesofthesedealsforthecity’sbudget.Philadelphiahasalsobeenusingitsabilitytoissuedebtinordertobridgeaseriousfundinggapinitsschoolsystem.In2013,thecityissued$50millioninbondsinordertohirebackthe1,000laid‐offschoolemployeesthatareneededtoopenPhiladelphia’sschoolsontimethatfall(LymanandWalsh2013).

Debt:fourcities

Allfourcitieshaveseentheirpercapitadebtburdensincreasesignificantlysince2000:by45%(Philadelphia)toasmuchas285%(SanJose);wellabovethepaceofinflation(33%)forthesameperiod.42Detroit’sdebtburdenishigh,butasignificantpercentageofitisself‐supporting(waterandsewerdebt),orcomprisestheestimatedvalueofpensionliabilities(Rhodes2013).Generalobligationdebtforallfourcities,however,hasremainedfairlystableinallfourcitiessince2000,reflectingthedecreasingrelianceofcitiesongeneralobligationdebt(andalsoreflectingthestrictlimitationsonmunicipalgeneralobligationdebt)(seeFigure4.2).

42InformationcompiledfromcityCAFRsbyauthor.

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Figure4.1Totalgeneralobligationdebt,casecities,FY2000‐13(in$000s)

Source:CityCAFRsFY2006‐07andFY2012‐13,compiledbyauthor

Table4.1.Outstandingdebt,casecities,FY2012‐13(in$000s)

Detroit Dallas Philadelphia SanJose

TotalGOdebt $1,009,395 $1,452,292 $1,777,896 $441,025

Totalbondeddebt $2,157,764 $2,043,260 $4,279,800 $1,198,485

Totalbondeddebtpercapita $3,023 $1,701 $2,497 $1,220

Totalbondeddebtas%ofassessedvalue

25.54% 2.44% 4.58% 0.98%

Assessedvalue $8,447,370 $83,681,722 $11,212,655 $121,793,350

Pensionobligationbonds $1,180,285 $407,301 $1,171,300 $0

Source:CityCAFRsFY2012‐13,compiledbyauthor

$‐

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

2000 2004 2008 2012

TOTAL GENERAL OBLIGATION DEBT(2007 DOLLARS)

Detroit Dallas Philadelphia SanJose

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Figure4.2Primarygovernmentdebtpercapita,casecities,FY2000‐13(in2007dollars)

Source:CityCAFRsFY2006‐07andFY2012‐13,compiledbyauthor

Detroit

ThroughoutDetroit’sdebateovertheemergencymanagerandbankruptcy,itwasthecity’sdebtthatfiguredmostprominentlyindiscussions:anestimated$15billionindebt2010,afigurethathadrisento$18billionbythetimethecityfiledforbankruptcy.UnlikeNewYorkin1975,Detroitactuallydefaultedonlong‐termdebtpaymentsafternegotiationswithcreditorsbrokedown.Intheweeksbuildinguptothebankruptcyfiling,KevynOrrandhisstaffmetseveraltimes,inDetroitandinNewYork,withtheinsurersofDetroit’scomplexpension‐relatedswapagreements,thebankpartiestotheswaps,andrepresentativesofthepensionplans(Rhodes2013,pp34–35).OnJune14,2013,theemergencymanagerannouncedthatDetroitwouldstopmakingpaymentsonitsswapCOPs,sparkingimmediatedowngrades.Thecityfiledforbankruptcyjustafewdayslater.

ManyofthereportsofDetroit’sfiscalcrisis,emergencytakeover,andeventualbankruptcycenterontheamountofthecity’sdebtproblem.Localandnationalpressemphasizedthatthecityhadbeen“buryingitself”indebtandallowingbudgetdeficitstoaccumulate,unabletoreininspending(NeavlingandEgan2012).In2014,thebankruptcyjudgelistedthefollowingliabilitiesforDetroit:

$18billiontotaldebt:$11.9billionunsecured,$6.4billionsecured(ofwhich$5.2billionwasforthewaterandseweragesystem)

$5.7billionforOPEB(health&lifeinsurance)

$‐

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2000 2002 2004 2006 2008 2010 2012 2014

PRIMARY GOVERNMENT DEBT PER CAPITA (2007 DOLLARS)

Detroit Dallas Philadelphia SanJose

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$3.5billionforunfundedpensionliabilities(afiguredebatedbytheplansthemselves,whopresentedafigurecloserto$1billion)

$651millionGObonds

$1.43billionfortheCOPstiedtopensionobligationbonds

$346.6tiedtotheswapsattachedtotheCOPs;and

$300millioninotherliabilities(sickleave,workerscomp).

Thebankruptcyjudgealsoaffirmedthecity’sestimatethatthecostofdebtservicein2013was38%oftaxrevenue($247million),increasingto65%infiveyearsifnothingchangedbecauseofanestimated$150‐200millionoperatingdeficitperyear(Rhodes2013,17).Bycomparison,inNewYork1975outstandingdebtwasestimatedat$14billion,including$6billioninshort‐termbonds,withanoperatingdeficitofatleast$600million,andapopulationof7.9millionpeople(Dunstan1995).Detroitcanalsobecomparedtoothercitiestoday.Aconventionalmeasureofacity’sdebtburdenistheamountofdebtrelativetotheassessedvalueofitsproperties,ortototalrevenuesorexpenditures.Asecondmeasureisdebtservicepaymentsasapercentageofgeneralfundrevenuesorexpenditures(GovernmentFinanceOfficersAssociation(GFOA)2003).

Throughoutthe2000s,Detroit’sgeneralobligationdebtwaswithinitsstatedebtlimitof10%oftheassessedvalueofcityproperty.Buttheother$6.4billionofbondeddebtwasnotsubjecttothatlimit,includingdebtissuedforwaterandsewerage.AlthoughDetroitisoftenportrayedashookedondebt,itsborrowingstrategyhasnotbeenunusualamongcities,whooftenissuebondswith10‐20‐and30‐yearmaturityrates,fixedobligationsthatwillinevitablyseemoutsizedduringarecession.

Dallas’highdebtburdenisinpartbecauseofitsneedtoborrowtofundthehighcostsofbasicinfrastructureandmaintenance.Thecity’sinabilitytoraiserevenues,andthestate’slackofanincometax,putstheburdenforroadmaintenanceandfloodcontrol,inadditiontootherpublicfacilities,entirelyonthecity.TheCityManager,inproposinga$500millionbondissuancein2012,statedthatthecityhad$10billionofbackloggedprojects(Watts2012).Thecityhasalsoissuedbondsonbehalfofeconomicdevelopmentprojects,includingtheDallasConventionCenter,asportsarena,andasurface‐streetpark.

AlargeportionofDetroit’sdebtcostsincludethefeesandissuancecostsassociatedwithborrowing—underwritingexpenses,bond‐insurancepremiums,feesforswaps,Bloombergestimatedat$474millionfortheseindirectcostsofborrowing(D.ChristoffandPreston2013).Someofthesefeesaretriggeredbydowngrades,asagreementssuchasswapsincludeprovisionsforrequiringimmediaterepaymentintheeventofanissuerorinsurerdowngrade.TherealstoryofDetroit’sdebtcrisisis(1)theexposuretofinancialmarketscreatedbytheswapdealexecutedin2005and(2)theincorporationofpensionobligationsintothecalculusofDetroit’sdebtburden.

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Debtasamoralquestion

Inthecurrentcrisis,discussionsofmunicipaldebthavetakenonaparticularmoraltone,withcitiesdescribedas“addictedtodebt,”irresponsiblyborrowingtheirwayoutofcrisis(seee.g.Zakaria2012).OnenarrativeisthatU.S.citieshaveaccruedunsustainablelevelsofdebtbecausetheyhavebeenirresponsiblyborrowingtocoverstructuraldeficitsandtherebyavoidhardpoliticaldecisions.Thismoralisticrhetoricaroundgovernmentborrowingalsofeaturedpredominantlyinnationaldebatesoverthefederaldebtceiling.Fourcadearguesthateconomicquestionsareoftenframedasmoralarguments,thatmarketsareexplicitlymoralprojects,saturatedwithandproducingnormativeprescriptions(FourcadeandHealy2007).(BestfindsasimilarmoralframingofgovernmentdebtindiscoursesofrestructuringundertheInternationalMonetaryFund(Best2005).)Thislanguageofmoralityappearsfrequentlyinassessmentsofcityfinancesandparticularlyinrelationtodebt.Theframingofdebtasamoralquestioniscentraltothewaynarrativesoffiscalcrisisfocustheblameoncitiesfortheirownfiscaltroublesanddefinethefateofbondholdersasamoralquestion,aheadoftheconcernsofcityresidents.

Thisnarrativeusesthelanguagethatcitiesintimesofcrisis“choose”toavoidtheirmoralobligationstobondholders,bypursuingstrategiesthatjeopardizetheabilityofbondholderstocollecttheirdebt.Ratingsagenciesandbanksunderstandthatcitiescannotfunctionwithoutissuingdebt(andthatmunicipalborrowersareamongthemostresponsibleintheworld;withdefaultratesfarbelowcorporateissuers).Nonetheless,anyideathatcitiesmaywanttonegotiateexistingdebtincertaineventualities,ordefaultonanypartoftheirdebtportfolio,ismetwiththislanguageof“willingness”andobligationthatframesthemanagementofpublicdebtnotasstrategicorrationalbutasimmoralandcareless.

In2012,inresponsetoaclusterofCaliforniabankruptcies,Moody’sissuedseveralstatementsaboutitsintentionofreviewingthedebtofCaliforniacities,includingaspecialcomment:“RecentLocalGovernmentDefaultsandBankruptciesMayIndicateaShiftinWillingnesstoPayDebt”(Moody’sInvestorsService2012e).ThestatementsaysthatthebankruptciesoftwoCaliforniacitiessuggeststhatthe“willingnesstopaydebtobligationsmaybeerodingintheUSmunicipalmarket”(Moody’sInvestorsService2012e,1).Moody’srepeatedlyusedthelanguageof“willingness”and“walkingaway”(atermoftenusedtodescribe“irresponsible”individualswhowalkedawayfromunderwaterhomes)(McCormack2014).Thereportsuggeststhatthetwocitiesdidnottryhardenoughtocutspending,andquestions“whetherdistressedmunicipalitieswillbegintoviewdebtserviceasadiscretionaryitemintheirbudgets…eventsofthelastfewyearspromptustoreviewourlong‐heldassumptionsaboutmunicipalbehaviorsandattitudestowarddebtrepayment”(Moody’sInvestorsService2012e,1emphasismine).Thecoverageoftheseissuesinthefinancialpressemphasizesthislanguageofcitiesavoidingtheirobligations:“investorsarestartingtowonderifcitiesareusingbankruptciesasawaytoshirktheirdebts”(BusinessInsider2012).

Thenarrativesofexcessivedebt,andthemorallanguageusedtodescribecities’willingnesstopaydebts,framecitiesasfinancialactorscapableoftakingonriskasa

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calculatedandmoralobligation,ratherthanaskeepersofthepublicgood,withmultipleobligationstotheirresidentsandemployees.Moralisticnarrativespromulgatedbyfinancialactorsmustalsoaccomplishthecomplextaskofavoidinganynotionofthefinancialcommunity’sresponsibilityforballooningdebtscauseddirectlybythebankcrisisin2007‐08,andsimultaneouslyemphasizingcities’responsibilitytothecollectivetopaythosedebts,orriskthestabilityofthemarket.Oneconsequenceofthissimplisticnarrativeofcitiesanddebtisthatitomitsthecomplexityofcities’relationshiptofinancialmarkets,particularlysecondarymarketssuchasformunicipalbondinsurance.Manybondscarryaninsuredandanuninsuredrating.Before2007,manybondswereinsuredandabout50%carriedaAAAratingandwereinsured(FeldsteinandFabozzi2011,xxxv).Thecollapseofthefinancialmarkets—anditsconcentrationinmortgage‐backedsecurities—severelydamagedthereputationofthefinancialinsurancesector,andmanyweredowngradedorfolded,triggeringdowngradesinthebondstheyinsured.Thebondinsuranceindustrycollapsedafter2008andwentfrominsuring57%ofmunicipalbondsin2007to3.5%in2012(RenickandBonello2014);theincreasedriskfacedbymunicipalbondholdersreflectsmanyaspectsofthefinancialcrisis,notjustthevulnerabilityofcities’owncredit.

Centraltounderstandinghowthesenarrativesofcitiesanddebttakeholdistheroleplayedbyratingsagenciesinproducingandreinforcingthosenarratives.Iturnnowtothatdiscussion.

4.3Ratingsagencies

Justasthepowerofbanksovercitieshasgrowniniterationsofcrisis,theroleplayedbyratingsagencieshasbecomeincreasinglycomprehensiveandpivotal.Thereportsissuedbycreditagenciesplayasignificantroleinshapingdiscoursesoffiscalcrisis,financialresponsibility,andultimately,howcitiesmustrespondtocrisis(Hackworth2007).Thefrequencyandtechnicalnatureofthosereports,andtheincreasinglycomplexrelationsbetweencitiesandfinancialinstitutions,hasalsoincreasedthepoweroffinancialexpertswhocraftbothpolicystatementsthatcityofficialstaketoheart,andpublicnarrativesthatcirculatethroughthefinancialpress(seee.g.Chernick,Langley,andReschovsky2011b).Theperceivedneutralityandobjectivityoftheseformsofnarrativeproductionhelpthembecomeseenas“commonsense,”ratherthanasconstructswithspecificmotivesandpolitics.

Asthemarketformunicipaldebtgrewtoinvolvemorecomplexinstruments,theimportanceofstandardizingtheassessmentofdebtissuancesalsogrew,andagroupofratingsagenciesaroseinresponse(Sinclair2005).Ahostofotherfinancialactors—includingbondholders,bondinsurers,andregulatinginstitutionsincreasinglyweighinoncityfiscalpolicythroughtheirarticulationsofriskandvalueinthemunicipalbondmarket(LeyshonandThrift1999).Thisinfluenceputsindirectlimitsoncitypolicychoices,shrinkingthescopeofpossibleresponsestofiscalcrisis(Hackworth2007).Ascities’fiscalchoicesaresubjecttothescrutinyofratingsagenciesinthepress,cityleadersframepolicychoicesinthecontextoftheirbondratingsandtheirappraisalbythefinancialcommunity.

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Sinclairhasstudiedthepowerofratingagenciesinallaspectsofcapitalmarkets,includingthemarketforlocalandstategovernmentdebt(Sinclair2005).Heoutlineshowratingagenciesshapepolicy:

Theagencies’viewsonwhatisacceptableshapetheactionsofthoseseekingtheirpositiveresponse.Thisanticipationeffectorstructuralpowerisreflectedincapitalmarketparticipants’understandingoftheagencies’viewsandexpectations.Inturn,thisunderstandingactsasabasepointfromwhichbusinessandpolicyinitiativesaredeveloped.Thecoordinationeffectofratingagenciesthereforenarrowstheexpectationsofcreditorsanddebtorstoawell‐understoodortransparentsetofnorms,sharedamongallparties.(Sinclair2005,15)

Hackwortharguesthat“[B]ond‐ratingagenciesarearguablythemostdirectlyinfluential‘policeofficers’ofneoliberalurbangovernanceforcitiesinwealthycountriesliketheU.S.(Hackworth2007,18).Ratingsdowngradeshaveclearfinancialconsequencesforcities;lower‐rateddebtissuersmustpayhigherinterestcosts,soadowngraderaisesthecostofdebtforcities.Publicratingsandratingsagenciesarestill,asUnionBanksays,“embeddedinbankdocuments,loanandcreditagreements”(Sakai2013).Butitisinthenarratives,nottheratingsthemselves,thatagenciesexertthegreatestpower,andthatisthefocusofthisdiscussion.

IobtainedaccesstoMoody’sInvestorsServicecommentsrelatingtoU.S.publicfinanceandnewscoverageofthosecommentsusingavarietyoftechniques.SomereportsbyMoody’sarepubliclyavailable;othershavebeenrepublishedonlineintheiroriginalformat.Icataloguedallrelevantreportsandsystematicallysearchedfororiginalcopies.IobtainedanacademicresearchaccountwithMoody’stoobtainreportsthatwerebehindthepaywall.ThereareafewrelevantreportsforwhichIwasunabletoobtaintheoriginals;forthoseIreliedonpressreleasesbyMoody’sandnewscoveragebyfinancialoutletsforthegeneralcontentandtoneofthereports.

Therearethreemunicipalratingsagencies:Moody’sandStandard&Poor’s(thetwoprimaryratersofmunicipalbonds),andFitchRatings(lessimportantinpublicfinancebutgrowing).Abondissuedbyacitymayberatedbyanyorallthreeoftheagencies.Forlargecities,allgeneralobligationbonds(theratingthatmostdirectlyreflectstheevaluatedfiscalhealthoftheentirecity)willberatedbybothMoody’sandStandard&Poor’s.Citiestouttheirratingsontheirwebsitesandintheirbudgets,andissuepressreleasesintheeventofanymajorratingaction.Acity’sgeneralratingisheldupasapublic,valid,andvitalmeasureofitsfiscalresponsibility.Budgetarypolicy(suchasdebtmanagementlaws)followsthemethodologiesoutlinedbytheratingsagencies(seee.g.CityofPhiladelphia2009).

Ratingsagenciesalsoperformongoingsurveillanceofcityfinances.Everyissuanceisassignedaratingwhenitisfirst“sold”orputonthemarket,andthencontinuallyevaluatedforpossibleupgradeordowngrade.Thoseratingsareallpublicinformation(andinfactisbeingcentralizedthroughEMMA(ElectronicMunicipalMarketAccess),the

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federalclearinghouseformunicipalfinancecreatedinthewakeofDoddFrank).Ratingsareimportantthroughoutthelifeofabond:municipalbondsarepriceddaily,whichmeanstheyhavegreatpricesensitivitytodailyevents.Theyarealsopurchasedbyawiderangeofinvestors,includingspeculatorsandhedgefunds,whobuyandsellrapidly.Thesymbioticrelationshipbetweenratingsagenciesandthecommoditizationofmunicipalbondsenablesthisrapidly‐tradingmarketformunicipaldebt.

Whenassigningaratingtoanissuerornewbondissuance,orchangingtherating(“downgrading”or“upgrading”)onanoutstandingissuance,theagencywillissueapressreleasewithashortexplanationaswellasadetailedcommentary.Thefulltextofcommentsisavailableonlytothepaidsubscribersoftheservice,butportionsofitmaybereleasedbytheagencyitselforbythefinancialmediasuchasBondBuyer.

Theagencies’informationandpublicfacearehighlymanaged,andrelyheavilyontheirpositionalityas“impartial”observers.Theirissuanceratingsarepromptedbyissuersthemselves,buttheirsectorcommentsandratingsactions(upgradesanddowngrades)areinternallydriven,discretionaryactions,oftenmadeinresponsetoeventsinthenewsorbroadertrends,andintendedtointerveneinthosedebates.43Thereputationofratingsagenciestookahitafterthecollapseoffinancialmarketsin2008,astheirevaluations(andimpartiality)werequestioned(particularthosewhohadratedderivativescontainingmortgageproducts).44ThelossofAAAbondinsurers,however,haschangedthemarketmoreasissuers(cities)cannolonger“buy”aAAArating,asmanyinsurerswerethefirsttocollapseintheinitialcrisis.

43Theratingsagencieshavetwitteraccounts:@FitchRatings,@MoodysRatings,@MoodysAnalytics,@standardpoors,throughwhichtheycommentonongoingfiscalpolicyissues.44S&Phasrecentlysettledalawsuitwiththefederalgovernmentoverinflatedratingsofinstrumentsrelatedtomortgage‐backedsecurities(Protess2015).

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Table4.2Municipalbondratingsscales

Moody’s S&P Fitch

Long‐term

Short‐term

Municipalobligations

Long‐term

Short‐term

Long‐term

Short‐term

Prime Aaa P‐1 VMIG1/MIG1

AAA A‐1+ AAA F1+

Highgrade Aa1 AA+ AA+ Aa2 AA AA Aa3 AA‐ AA‐

Uppermediumgrade

A1 MIG2/VMIG2

A+ A‐1 A+ F1

A2 A A A3 P‐2 A‐ A‐2 A‐ F2

Lowermediumgrade

Baa1 MIG3/VMIG3

BBB+ BBB+

Baa2 P‐3 BBB BBB F3 Baa3 BBB‐ A‐3 BBB‐

Non‐investmentgrade

speculative

Ba1 SG BB+ B BB+ B

Ba2 BB BB Ba3 BB‐ BB‐

Highlyspeculative

B1 B+ B+

B2 B B B3 B‐ B‐

Substantialrisks Caa1 CCC+ C CCC C

Extremelyspeculative Caa2 CCC

Caa3 CCC‐ Defaultimminent Ca CC

  C Default C D D DDD,DD,D Source:Agencyratingsmethodologies,compiledbyauthor

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Table4.3Moody’srating,largestU.S.Cities,2006and2014

2006 2014 Outlook(2014)NewYork,NY A1 Aa2 stableLosAngeles Aa2 Aa2 stableChicago Aa3 Baa1 negativeHouston Aa3 Aa2 stablePhiladelphia Baa1 A2 stablePhoenix Aa1 Aa1 stableSanDiego A3 Aaa stableDallas Aa1 Aa1 stableSanAntonio Aa2 Aaa negativeDetroit Baa2 B3 stableSanJose Aa1 Aa1 stableSanFrancisco Aa3 Aa3 stableSource:Moody’sInvestorsService,compiledbyauthorfromonlinedata

AsofJuly2014,SanAntonioandSanDiegoaretheonlycitiesover1millionpeoplewithaAaarating(Dallaswasdowngradedin2003,beforethatitwasthelargestAaa‐ratedcity).

Ratingsmethodology

Ratingsagenciesmakepublic,andoftenrevise,theirformulasforcalculatingratings.Theratingformulaforgeneralobligationbonds—thosebondsinsuredbythe“fullfaithandcredit”ofacity—istheareainwhichagenciescommentonthefullrangeofpolicies,sinceintheoryanypolicycanaffectthelikelihoodthatacitywillpayonitsbonds(orbeableto).Theratinghastoevaluate(inMoody’slanguage)theabilityofthecitytoraiserevenuestocoverdebtcosts,andtoexercise“governance”“management”thatmaybenecessarytoimplementpoliticallyunpopularsolutions(spendingcutsandrevenueincreases)inhardtimes.Moody’susesfourrating“factors”andseveralsubfactors:

Table4.4Moody’sratingfactors(2014)

Broadratingfactors

Factorweighting

Ratingsubfactors Subfactorweighting

Othersubfactorsfromagencies

Economy/taxbase 30% TaxBaseSize(fullvalue) 10% Assessedvaluationgrowth FullValuePerCapita 10% Wealth(medianfamily

income)10% Unemploymentrates/

depthanddiversityofemploymentbase

Finances 30% FundBalance(%ofrevenues)

10% Diversityofrevenuestreamsandfinancialflexibilitytocontainexpenditures

FundBalanceTrend(5‐yearchange)

5% Historyofbalancedbudgets,operatingsurplusesorlosses

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Cashbalance(%ofrevenues)

10% Prudentuseofreservesandmaintenanceofliquiditylevels

Cashbalancetrend(5‐yearchange)

5% %ofexpendituresusedfordebtservices,pension/OPEB

Management 20% Institutionalframework 10% On‐timebudgetingandreporting;multi‐yearbudgetsandcapitalplansManagementstaffstabilityandexperience

OperatingHistory 10% Easyaccesstomanagementandtimelyresponsestoquestions/concerns

Debt/Pensions 20% DebttoFullValue 5% Debtpercapita,debtservicecoverage(revenuesecuredorenterprisedebt)

DebttoRevenue 5% Capitalplansandfuturedebtissuances

Moody’s‐adjusted NetPensionLiability(3‐year‐average)toFullValue

5% Pension/OPEBfundinglevelsandUAAL

Moody’s‐adjustedNetPensionLiability(3‐year‐average)toRevenue

5% Accesstocapitalmarketsandpublicdebt/creditratings

Source:Moody’sInvestorsService

Whiletheseguidespresenttheagencies’methodologiesassimple,transparent,andtechnical,theyalsoreservearoleforqualitativeanddiscretionaryelements.Standard&Poor’ssaysthatits“IssuerCreditRatingDefinitions”areintendedtoencompassboththe“obligor’soverallcapacity(itscreditworthiness)andwillingnesstopayitsfinancialcommitments”(FeldsteinandFabozzi2011).It’sthroughthisnotionofwillingnessthatratersbringissuesofgovernance,andpolitics,intoadeterminationofhowmuchdebtwillcostthecity.Governmentisalwaysreferredtoas“management,”andthemethodologiesandcommentsrefercontinuallyaboutmanagement’s“willingness”todothings.ApresentationgivenbyFitchRatingstoCaliforniaofficialscomparedtwohypotheticalCaliforniacities(A.Ward2013,28).Under“Management”itcontrastedtwoscenarios:

“Political/laborenvironmentiscomplex,butcityhaslongrecordofmanagingpressureswell”

(Versus)

“Political/laborenvironmentisdifficult,andmanagementhasstruggledtoimplementdesiredfinancialchanges”

Under“Management‘RedFlags’”Fitchmentions“misalignmentbetweenmanagementandelectedofficials”and“Inabilityofpolicymakerstomakenecessarydecisions”(A.Ward2013,30).

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Theagencies,ofcourse,describetheirratingsasimpartialanddisclaimanyrelationshiptopolicy.FromFitchRatingspresentationtoinvestors(FitchRatings2013):

ARatingisNOT…

Judgmentorstatementregardinganyaspectofpublicpolicy

Politicalstatementinfavoroforagainstaparticularperson,partyorpublicpolicy

A‘reportcard’ongovernmentormanagementperformance.

Theseformulas,despitetheagencies’effortstoframethemastechnicalevaluations,arenotwithoutcontroversy.Inthewakeofseveralmunicipaldowngradesin2008,stateofficialsprotestedtherelativelylowerratingofmunicipalbondstocorporatebonds,despitethesignificantlylowerdefaultrateofgovernments(Mysak2008).Publicofficialshavealsoattimesrespondedtospecificratingsagenciesactions,suchasStockton’sCityManager(Smith2013),andCalifornia’streasurerhassquabbledpubliclywithS&Poverseveralcomments(Grimm2013).

Since2008,allthreeagencieshaverevisedseveralaspectsofmethodologiesforlocalgovernmentratings.Themostsignificantrevisionshaveaddressedtheroleplayedbydebtandpensionliabilitiesintheoverallcreditrating,whichIdiscussbelow.Themomentsofmethodologyrevisionarepublicandconstructivemoments,inwhichthepoweroftheagenciesisexertedandreaffirmed,astheirrevisionprocessesarecirculatedthroughthefinancialpress,withrequestsforcommentcirculatedtofinanceofficialsandnationalorganizationsoffinanceprofessionals.Thisefforttoframetheirmethodologyandrevisionsastransparentprocesses,subjecttopublicscrutinyandfeedback,isanimportantaspectofframingtheagenciesasprovidingaformofimpartialpublicservice.

Inadditiontoratinggovernmententitiesandspecificissuances,ratingsagenciesalsoproduceregularreportsonthe“sectors”theyrate,includingU.S.publicfinance(states,cities,andthefederalgovernment).Thesecommentsareamixofcommentaryonlocalpolicies(alwayswithaneyetothepotentialreplicationorcirculationofthosepoliciestoothergovernments)andtheeconomichealthofthesectoringeneral(eachagencyalsohasa“separate”departmentthatissueseconomicanalysisreports).Since2007,allthreeratingsagencieshaveissueddozensofcommentsonthestateoflocalgovernmentfinance(SeeTable4.6).Therehavebeenaflurryofdowngradessince2008(FitchRatings2012),andthespecterofmunicipalbankruptcyhasroiledthenormallystaidgovernmentbondmarketseveraltimesinthepastfiveyears(NgandCorkery2012).In2008,thefallofthestockmarketpromptedseveralcommentsabouttheoutlookforlocalgovernmentfinance(Standard&Poors2008;Moody’sInvestorsService2008b).InApril2009,Moody’splacedtheentirelocalgovernmentsectoronwatch:“Thisnegativeoutlookreflectsthesignificantfiscalchallengeslocalgovernmentsfaceasaresultofthehousingmarketcollapse,dislocationsinthefinancialmarkets,andarecessionthatisbroaderanddeeperthananyrecentdownturn”(Moody’sInvestorsService2009b,1).Withincreasingfrequency,

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Moody’sissuedgeneralcommentsonthestatusofcityfinancesregularlythrough2014(seeTable4.6).In2013,Moody’sdescribedthe“newstable”asan“eraofconstrainedresources”(Moody’sInvestorsService2013m)]Itsmostrecentreport,“AnatomyofSuccessfulU.S.Cities”highlightstheactionstakenbythe34largecitieswhomaintainedorimprovedtheircreditratingsduringtherecession:“aggressiveandtimely”spendingcuts,(property)taxbasegrowth,and“politicallydifficult”revenueincreases,specificallyonsalestaxes(theagencyparticulartoutsPhoenix,Arizona’sincreasedtaxonfoodforhomeconsumption)(Moody’sInvestorsService2014i,4).

Table4.5SelectedMoody’scommentsonfiscalcrisis,2008‐2014

22‐Jan‐08 HousingMarketDownturnCreatesFiscalChallengesForStateAndLocalGovernments

23‐Dec‐08 ImpactoftheCreditCrisisandRecessiononLocalGovernments

2‐Apr‐09 Moody'sAssignsNegativeOutlooktoU.S.LocalGovernmentSector

27‐May‐09 CompilationofU.S.PublicFinanceRatingRoadmaps

7‐Sep‐09 FreetoFurlough?

22‐Feb‐10 U.S.StateandLocalGovernmentsRemainInherentlyResilient,DespiteGrowingPressures

12‐May‐10 ManagementStrategiesofU.S.LocalGovernmentsRespondingtotheEconomicDownturn

13‐Jul‐10 Roadmap2010:LocalGovernments

24‐Feb‐11 U.S.PublicFinanceRatingRevisionsforQ4andFullYear2010:TheStressContinues

17‐Mar‐11 2011SectorOutlookforU.S.LocalGovernments – ToughestYearYet

16‐May‐11 RisingPropertyTaxAppealsAreCreditNegativeforUSLocalGovernments

6‐Jun‐11 FurtherHome‐PriceDeclinesWillPressureLocalGovernmentsDifferently

19‐Sep‐11 SectorOutlookforU.S.LocalGovernmentsRemainsNegative

21‐Sep‐11 WeakEconomyWillProlongMunicipalCreditPressure

14‐Nov‐11 TheImpactofUSFederalFiscalandEconomicStrainonMunicipalCredits

7‐Mar‐12 USmunicipalbonddefaults&recoveries,1970‐2011

5‐Oct‐12 OutlookforUSLocalGovernmentsRemainsNegative

7‐May‐13 USMunicipalBondDefaultsandRecoveries,1970‐2012

20‐Aug‐13 OutlookUpdate:WhyUSLocalGovernmentsStillHaveaNegativeOutlookDespiteOurRevisedOutlookforStates

3‐Dec‐13 USMunicipalSpeculative‐GradeandDistressedIssuers

4‐Dec‐13 2014Outlook–USLocalGovernments

7‐May‐14 USMunicipalBondDefaultsandRecoveries,1970‐2013

27‐Aug‐14 HighPoverty,HighRatings– 27LargeCitiesHaveBoth

11‐Nov‐14 AnatomyofSuccessfulUSCities

Source:Moody’sInvestorsServicesectorcomments,compiledbyauthor

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Detroit

Detroithasreceivedsignificantattentionoverthepastdecadefrommunicipalratingsagencies,withcommentsfocusedonthreecategories:Detroit’sfinancialindicators;Michigan’semergencymanagerlaw;andtheimplicationsofDetroit’sbankruptcy,particularlywithregardtopensions.Detroit’sdownwardratingsspiral,hasactuallybeenrelativelyrecent,reflectingtheimpactoftherecentrecessiononDetroit’sfinances.ThecitymaintainedaBaa1rating(alowbutstillinvestment‐graderating)from1998to2005,whenitwasdowngradedbyMoody’stoBaa2onNovember29,2005(Moody’sInvestorsService2005).Thisdowngradecamejustbeforethecitycompletedadealissuingdebttocoveritspensionobligations,resolvingathreattoinsolvencyfeaturedinthedowngrade(Carvlin2005).Thecity’sratingremainedthereuntilMay29,2008,whenMoody’sdowngradedthecitycitingrepeatedlatenessinfilingaudits,“chroniceconomicchallenges”and“weak”demographicandeconomicprofile(Devitt2008).Throughouthisadministration,MayorKirkpatrickreferredtoratingsagenciesasthegatekeepersofthecity’sfate.Forexample,hisofficerespondedtotheMay2008downgrade:

WearedisappointedbyMoody'sdecisiontodowngradeourbondrating…WehavereceivedpositiveratingsfromtwootherratingagenciesbecauseoftheboldstepstheKilpatrickadministrationhastakentoregainstructuralbalancebynegotiatinghistorichealthcareconcessions,reducingovertimespending,andincreasingrevenues.Ouradministrationwillcontinuetoworkwiththemtochangetheirviewofthecityanditsfinances.Oureffortswillbedirectedatcontinuingthetremendousprogresswehavemadeinrestructuringthecity'sfinances.(Devitt2008)

DuringMayorBing’sfirstyearinoffice,thecitywasdowngradedtwice;Moody’scited“thecity’sfailuretolimitexpendituregrowth”asproducing“aseriesofsizableoperatingdeficits”(Moody’sInvestorsService2009a).Moody’sattributedthosedeficitstoreductionsinthecity’stwolargestrevenuesources:incometaxesandstateaid,andnotedthecity’sincreasinguseofshort‐termdebttocoverdeficits.“[T]hecity’seconomicanddemographicprofileremainsoneoftheweakestinthenation”concludedthecomment(Moody’sInvestorsService2009a).ThecommentalsocitedtheriskthatDetroit’sswapagreements(tiedtothepensionbondsissuedin2005)mightbesubjecttotermination,asaresultofcircumstancesassociatedwiththerecession.Sevenmonthslater,ina“highprofileratingupdate,”Moody’sdowngradedthecitytoBa3/B1,so‐called“junk”status(Moody’sInvestorsService2009c).

Table4.6Detroitratingsactionsandkeyfinancialevents,2005‐2014

2005‐2010 November29,2005 Downgrade(Baa2)(firstsince1998)May29,2008 Downgrade(Baa3/Ba1)January13,2009 Downgrade(Ba2/Ba3)August21,2009 Downgrade(Ba3/B1)(andhighprofileupdate)October1,2010 Updateandnegativeoutlook

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2011 December2 Snyderinitiatesfiscalemergency reviewDecember7 Onreview(Ba3) 2012 March20 Downgrade(B2/B3)June14 Downgrade(B3/Caa1)August4 PublicAct4suspendedOctober15 UnderreviewpendingresolutionofPublicAct4November6 PublicAct4repealedNovember28 Downgrade(Caa1/Caa2) 2013 March14 EmergencymanagerappointedMay12 Emergencymanager45‐dayplanissuedJune13 Downgrade(Caa2/Caa3)June14 DetroitdefaultsonsomedebtJune17 Downgrade(Caa3/Ca)July18 BankruptcyfilingJuly18 UnderreviewNovember19 NegativeoutlookDecember3 JudgefindsDetroiteligibleforbankruptcy 2014 December10 DetroitbankruptcyendsDecember18 Upgrade(B3)andstableSources:Moody’sratingswebsite,andMoody’sHighProfileRatingsUpdate,September30,2010(Moody’sInvestorsService2010b)

OnSeptember30,2010,Moody’sreleasedanother“highprofileratingupdate”forDetroit,againhighlightingtherisksposedbythecity’sswapagreements,thecity’sfailuretocutexpenditures“sufficiently”tooffsetrevenuedeclines(particularlyinstateaidandincometaxes),thecity’songoingoperatingdeficits,anditsheavyrelianceonshort‐termborrowingforcashflow(Moody’sInvestorsService2010b,1).Moody’salsocastigatedthecityforcontinueddelaysinreportinganddisclosure,andforcontinuallypostponingitstimeframeforeliminatingitsdeficit.Butthecommentalsopraisedcity“management”(theagency’sstandardtermforreferringtocitygovernment)foreliminatingstaffpositionsandreducingwages,andforitseffortstosettleunioncontracts(Moody’sInvestorsService2010b,5).Theupdatealsonotesthecity’stemporarypreventionofaswapterminationeventin2009byputtingupitswageringtaxrevenuesascollateral,butnotesitscontinuingconcernabouttherisksposedbythatdeal(Moody’sInvestorsService2010b,9).

InMarch2011,theCensusBureaureleasednumbersfromthe2010censusshowingthattheCityofDetroithadlost25%ofitspopulationsince2000,potentiallycostingthecitysignificantrevenuesfromfederalandstateprograms(aswellasadecliningtaxbase)(Moody’sInvestorsService2011d).InDecember2011,thecitywasplacedonwatchforfurtherdowngradeafterthestateannouncedareviewofthecity’sfinances,possiblytriggeringtheappointmentofanemergencymanager:“Theriskofabankruptcyfilingbythecityisinourviewalowriskevent,butnonethelesshasarisingprobability”(Moody’s

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InvestorsService2011f).Acentralconcern(echoedbyFitch’swatchnoticeofthecitythesamemonth)wasnotthatanemergencymanagerwouldbebadforthecity(severalothercommentspositivelyframethepossibilityofstateintervention),butthattheappointmentofanemergencymanagerwasaterminationeventundertheswapagreement(whichwouldrequirethecitytopayterminationandcancellationfeesimmediately)(Kaffer2011).

InMarchof2012,Moody’sdowngradedthecitywhenajudgeapprovedaballotmeasuretoallowvoterstorepealtheemergencymanagerlaw(Moody’sInvestorsService2012b).Moody’sspokesmanstated:“There’sbeenapersistentinabilitytoachievestructuralbalancedespiteallthebigspendingcuts”(FlemingandNichols2012).Thearticlequotesafinancialexpertsayingthattheratingsreflectsthemarket’suncertaintyoverwhetherthecityandstatewouldbeabletoreachanagreementto“restructure”thecity;thedowngradecameasthecityandstateweredeepinnegotiationsoveraconsentagreementtoavoidanemergencymanager.

Moody’shascontinuedtocommentonthepoliticalconflictsoverDetroit’sfinancialrestructuring.OnJune14,2012itfurtherdowngradedDetroitbasedonthe“lackofaclearpoliticalconsensustosuccessfullyimplementthecity’sFinancialStabilityAgreement(FSA)”(Moody’sInvestorsService2012d).WhiletheFSAwasinplace,Moody’sleftthecity’sratinguntouched,butinAugustthestate’semergencymanagerlawwassuspendedpendingavoterreferenduminNovember,promptingMoody’stoputthecity’srating“underreview”pendingresolutionofPublicAct4(Moody’sInvestorsService2012h).

WhenMichigan’semergencymanagerlawwasultimatelyrepealedbyvoters,Moody’sdowngradedDetroittoCaa1,reflecting“substantialrisk,”citing“aweakenedstateoversightframework”and“thecity'songoinginabilitytoimplementreformsnecessarytoregainfinancialstability”(Moody’sInvestorsService2012i).Thereportalsocitesthecity’s“ongoingpoliticalinstability,”despitethe“strongworkingrelationship”betweentheexecutivemanagementandtheGovernor’soffice(Moody’sInvestorsService2012i).TheappointmentofanemergencymanageronMarch14,2013ledtoaratingsupgradebyStandard&Poor’s,andcautiousoptimismbyFitchandMoody’s;allthreeagenciescitedthepossibilityofbankruptcyasthecaution,whileexpressingoptimismoverthestate’stakeover(Standard&Poor’s2013).

Overthenextcoupleofmonths,asDetroit’semergencymanagerproposedseveralrecoveryplans,Moody’scommentedonthelikelihoodthatbondholdersmightbeaskedtoacceptlessthanfullvalueoftheirdebt(seee.g.Moody’sInvestorsService2013c,16).OnJune13,2013,Moody’sdowngradedDetroitonnewsthattheemergencymanagerplannedtomeetwithinvestorsthefollowingday,statingthat:

[T]heEM’srecentpronouncementthatDetroit'scurrentliabilitiesrequiresignificantrestructuringtoensurethecity'slong‐termfinancialhealth.Shoulddefaultorbankruptcyoccur,therecoverylevelsforbondholderscouldpotentiallybequitelowbasedonrecentmunicipalrecoveryratesforotherdistressedlocalgovernments.TheEMandhisstaffarereportedlyplanningtomeetwithcreditorsandstakeholderstocommencenegotiations

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forrestructuringthecity’sliabilitiesthisweek.(Moody’sInvestorsService2013e)

Thefollowingday,June14,Detroitannouncedthatitwoulddefaultonsomeofitsdebt,firstinaclosedconferencetoinvestorsinwhichOrrhopedtogetcreditorstoaccept10centsonthedollar.S&PandFitchimmediatelydowngradedthecity(WoodallandNeavling2013).Moody’sdowngradedthecityonJune17(Moody’sInvestorsService2013g),andissuedalongerdiscussionaboutthedowngrade,citingthe“unconventionalandprecedent‐setting”natureoftheemergencymanager’srestructuringplan,inparticularthetreatmentofcertainformsofdebtasunsecured(reiteratedinaseparatereportabouttheimpactonbondinsurers)(Moody’sInvestorsService2013f).ThereportonbondinsurersimpliesthattheDetroitrestructuringplan—specificallyitstreatmentofpensionandhealthbenefitdebt—presentsanaddedriskforbondholders(Moody’sInvestorsService2013f,3).

OnJuly18,thedayDetroitfiledforbankruptcy,Moody’sissuedacomprehensivereviewofthecity,warningthatbankruptcywouldlikelybea“protracted”processofdeterminingbondholderrecovery(Moody’sInvestorsService2013i,2).TherewerenomoreratingsactionsonDetroituntilNovember19,whenMoody’saffirmedthecity’sratings,clarifyingthattheratingsreflected“ourassessmentofexpectedrecoveryforbondholdersfollowingthecity'sdefaultontheseclassesofdebt”(Moody’sInvestorsService2013l).OnDecember18,2014,thecitywasupgradedafterexitingbankruptcy(Moody’sInvestorsService2014k).

Dallasisthehighest‐ratedcityamongthefourcities.Thecitywasdowngradedin2003fromAAA,afterhavingbeenupgradedin1996.Ithadbeenthecountry’slargestAAAcity,untilitwasdowngradedamonthaftervotersapproveda$579millionbondprogram,thelargestinthecity’shistory,primarilyforstreetrepair(Williamson2003).

“We’reverydisappointed,”saidDavidK.Cook,Dallas'chieffinancialofficer.“Weprideourselvesonourphilosophyandourprudence,andwe’llcontinuetokeepourpracticesonsoundfinancialfooting.Wejustcouldn’tovercometheeconomy.”(Williamson2003)

Cityofficials,whohavetoutedtheAAArating,saidtheywere‘surprisedanddiscouraged’bythenews.…Theratings,whichassessthecity'sabilitytomeetfinancialcommitments,aremorethanabadgeofhonorforDallas,though.Thelowerratingcouldcostthecitymoneywhenitissuesbonds.(McCainNelson2003)

AlthoughDallas’ratinghasnotbeenincreasedsince2003,thecityhasnotbeendowngradedorreceivedmuchattentionfromratingsagenciesinthecurrentrecession;thecity’shomepricesheldoutlongerthanmostcities,althoughMoody’splacedthecityonnegativeoutlookMarch9,2010,itmaintainedthecity’sratingonbondsissuedthatyear,toutingthefollowingpositives:thecity’srestructuringofpensionbenefits,relativelyhighpercapitaincome,unemploymentbelowthenationalaverage,andpensionobligation

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bonds.Moody’srepeatedlypraisesthecityforits“conservativebudgeting”(Moody’sInvestorsService2013h).TruetoMoody’sgrowingfocusonpensionissuesinitsmunicipalratings,initsmostrecentreportonDallas,onNovember13,2014,Moody’sreaffirmeditscautionthatthecityhasn’tbeenmeetingitsannualrequiredcontributionin2013,andwarnsofthepensionissue’spossible“downwardpressure”onthecity’srating(Moody’sInvestorsService2014j).

Despiteitsfiscaltroubles,Philadelphiawasdowngradedonlytwiceduringtherecession:June2009andNovember2010(Moody’sInvestorsService2010c),andMoody’scommentedonpossibleimprovementsinthecity’sfiscalsituationin2014(tiedtothecityprivatizingitsgasutility)(Moody’sInvestorsService2014c).Since2010,Philadelphia’sunderlyingratinghasremainedatA2,amoderateratingreflectingMoody’sconcernsaboutthecity’seconomy,anditstemporarydeferralofpensionpaymentsperanagreementwiththestate.TheagencyhasrepeatedlyemphasizedthattheroleofPennsylvaniaIntergovernmentalCooperationAuthority(PICA)inoverseeingthecity’sfinancesmitigatesothernegativefactors.

SanJosehasalsobeenprimarilyleftalonebytheratingsagencies,despitethefocusonCaliforniacities.InMarch2012,Moody’sdowngradedSanJose’sgeneralobligationbondsfromthetopratingofAaatoAa1,citingthecity’sdifficultyinmanagingretirementcosts,and“arduousbarrierstoreducetheimpactofthoseobligations”(Moody’sInvestorsService2012c).Theagencycitesunderstrengthsthecity’s“aggressivepursuitofopportunitiestoeffectivelymanageretirementcosts,”reflectingtheMayor’spursuitofpensionrestructuringthroughmanyavenues,includingpassingalocalballotmeasuretocutthepensionsofcurrentandfutureemployees.

Thesefourcitiesexemplifythecommonthemesthatratingsagencieshaveemphasizedinthewakeoftherecession:ratingpensions,concernsaboutbankruptcy,andacclamationforstateinterventionpolicies.Idiscusstheseinturn.

Ratingpensions

No...lawimpairingtheobligationofcontractshallbeenacted.ArticleI,Section10,MichiganConstitutionTheaccruedfinancialbenefitsofeachpensionplanandretirementsystemofthestateanditspoliticalsubdivisionsshallbeacontractualobligationthereofwhichshallnotbediminishedorimpairedthereby.ArticleIX,Section24,MichiganConstitution(TitlepageofDetroit’sbankruptcyeligibilityruling(Rhodes2013))Impairingcontractsiswhatthebankruptcyprocessdoes(Rhodes2013,74).

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ThebankruptciesofStocktonandSanBernardino(California)thatfollowedafter2010werecloselyassociatedwithpensionliabilities,andthenationalfinancialpressandratingsagenciesbeganspeculatingaboutthefateofsuchliabilitiesinbankruptcyproceedings,andhowbondholderswouldfareinlargemunicipalbankruptcies(Editorial2012;Reid2012).Thealarmaboutthehealthofpensionswasfirstsoundedattheonsetofthefinancialcrisisin2008,commentingonthepossibledamageafallingstockmarketwouldcausevalueofpensioninvestmentholdings.45InNovember2008,Moody’sreportedthatretirementsystems’stockinvestmentshadfallen35%,andwereexposedtohighriskbecauseof“hedgefundsandotheralternativeinvestments”(Moody’sInvestorsService2008a).Afallinplanassetvalues,Moody’sreported,wouldrequireadditionalfundingpreciselyascityrevenuesfell,possiblydrivinggovernmentstoissuepensionobligationbondstoimprovefundedratiosintheshort‐term.46By2014,instarkcontrast,Moody’swaspaintingpensionplansasunsustainable,averydifferentvisionthanthesanguinecommentof2008.Asbankruptcieshaveunfolded,puttingcitycommitmentstopensionplansinquestion,Moody’shasbeenattheforefrontofvoicesframingthesecasesasprecedent‐settingconflictsbetweenretireesandbondholders,withpotentiallysevereimplicationsforcities’accesstofinancialmarkets.

InNovember2009,Moody’scommentedthatpensioncostswere“pressuring”stateandlocalgovernments,andcouldaffectmunicipalratings.Thefundingtroubleforpensionplans,Moody’ssays,isacombinationofdemographicpressure(detailedintheir2006report),investmentlosses,and“decisionsbyselectgovernmentstodeferpensioncontributionsduringperiodsofbudgetarystress”(Moody’sInvestorsService2009d,1).Governmentsthatface“inflexibleregulatoryorlegalpensionfundingrequirements”areatspecialriskofdowngrade(Moody’sInvestorsService2009d,1).The2009reportfocuseson“managementdecisions”ontheviabilityofplansandtheirconsequentratings.Beginstodividecitiesintothosethatmadeconservative,“credit‐positiveproactivemanagementapproaches”tofulfillingpensionobligations,andthosethatarestrugglingwiththeirpensionobligationsandunder“negativeratingpressure”(Moody’sInvestorsService2009d,2).

Moody’sitselfhintsatthecyclicalanduncertainnatureofevaluatingpensionliabilities;theirmethodologysuggeststhataquantifiablelevelof“underfunding”exists,buttheyalsonotethat“thequantifiablelevelofunder‐fundingisafluidconversationwithmanynuances”(Moody’sInvestorsService2009d,6).Moody’sannouncedthatitwouldconductareviewofalllargecities’pensionliabilitiesandwillalsorefinetheirmethodforincorporatingpensioninformationintoacity’srating(Moody’sInvestorsService2009d,7).

InJuly2010,Moody’srespondedtotheproposedrevisedGovernmentAccountingStandardsBoard(GASB)rulesforpensionaccounting,whichincorporatedunfundedliabilitiesintocities’requiredfinancialstatementsforthefirsttime(Moody’sInvestorsService2010a).

45Ironically,S&PhadjustratedtheCalPERSsystemin2007,givingittheagency’shighestshorttermrating,matchingMoody’sAAArating,andpraisingitsliquidity(Saskal2007).46BondswhichwouldthenberatedbyagencieslikeMoody’s.

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Webelievethatthenewruleswillmorecloselyalignpublicpensions’reportedexpenseandobligationwitheconomicreality.Withnewinsightintothetruecostandfundedpositionsofstateandlocalpensionplanselectedofficialsmightchoosetoincreaseemployeroremployeecontributionstoboostfundinglevels.Atthesametime,itwillimprovetransparencyandcomparability.(Moody’sInvestorsService2010a,1).

TherevisedGASBrequirementsshould,Moody’ssuggested,provideimpetusforcitygovernmentsto“increasecontributionsorreducebenefitsgranted”inordertogetinbalance(Moody’sInvestorsService2010a,3).Theseadjustmentsmaycause“somepain”butwouldinthelongtermreducethefiscalandcreditrisktomunicipalbondholders(Moody’sInvestorsService2010a,3).In2011,Moody’s(andtheotheragencies)proposedrevisingitscalculationsofdebttoincludeunfundedpensionliabilities,followingGASB’smodel.

In2013,Moody’sannouncedthatitwouldberevisingitsmethodologyforlocalgovernmentGObonds,andaskedforpubliccomment.InApril2013,Moody’shadannouncedthatitwasadjustingstateandlocalgovernmentreportedpensiondataandreleasedarevisedmethodology(Moody’sInvestorsService2013b).Therevisionswereintendedtoprovide“greatertransparencyandcomparability”andtocreatea“balancesheetliability”similartotheprivatesectorinwhichpensionliabilitiesaretreatedas“debtoutstandingasofaspecificpointintime”(Moody’sInvestorsService2013b,2).Therevisionwasbeguninresponsetotheroleplayedby“pensionstress”intheirownratingdowngrades(abitofself‐reinforcingcircularlogic).Thechangesincludedrevisingthediscountrateandassessmentofassets,resultinginincreasingtheliabilities:

[T]hisleadsMoody’sadjustednetpensionliabilitiestobemuchgreaterthanactuarialunfundedliabilities.Theapproachalsointroducesgreatervolatilityintothemeasurementoftheadjustednetpensionliability.(Moody’sInvestorsService2013b,4)

InJune2013Moody’sreleasedarevisedassessmentofstatepensionliabilities,claimingthatUSstatesneededalmost$1trillion($980billion)tobridgethegap(NormaCohen2013).Thisfigurecirculatedquicklyaroundthefinancialpressandintostatehouses.TwomonthslaterMoody’spublishedrevisedpensionliabilitiesforthe50largestlocalgovernments(Moody’sInvestorsService2013k).Thegroundwaslaidforaflurryofpressattentiontothe“pensioncrisis.”LikethisquotefromtheWallStreetJournal:

Nationwide,pensioncostsareeatingupmoreofcitygeneralfunds,leavinglessmoneytospendonday‐to‐dayneeds,suchasgarbagepickuporparksmaintenance.Themedianspendingonpensionsamongthecountry's250largestcitiesroseto10%ofgeneralbudgetsin2012,upfrom7.75%in2007.(WallStreetJournal,October30,2013)

Onlyafewmonthslater,Moody’sdoubled,from10%to20%,theweightgiventodebtandpensions,reducedtheweightgiventoeconomicfactors(from40%to30%)and

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introducedascorecardtoincrease“transparency”(DePaul2013).Theagencyhascontinuedthedrumbeatofmountingpensioncrisis(Moody’sInvestorsService2014a;Moody’sInvestorsService2014g).

Theratingsagenciesthemselveslendlegitimacyandeventuallyrealconsequencetothenarrativethatcitiesareburiedbypensionobligation;withinafewshortyearsthepensioncrisishasbecomeamatteroffact,notopinionorpolitics.Thisdespitethecomplexityofevaluatingpensionliabilitiesinavolatilefinancialclimate.Themovementofpensionliabilityfromoffthebalancesheet(andratingsmethodology)intothecenterofdebatesovercityfiscalsolvencyisaprimeexampleofhowfinancializeddiscoursesdefineproblemsandrendertheminneedofsolutions.Anissuethatisnottechnicallyconnectedtotheabilityofcitiestomanagetheirnon‐pensiondebt(asMoody’sitselfacknowledged(Moody’sInvestorsService2013n))leadsintoabroadercommentaryontheexistenceofpublicpensions,toadiscussionoftherightsofpensionholdersoverbondholders,andfinallytoadiscussionofwhethergovernmentsarejustanotheremployer,andpensionersjustanothercreditor.

Ofcourse,theseareagencieschargedwithevaluatingthefinancialriskofpurchasingdebtissuedbylocalgovernments.Theyareusedbyinvestorstodecidewhatbondstobuy,anactionseeminglydistantfromurbanpolitics.Butthisseeminglysimplerelationshipisplayedoutinmeetingsbetweenratingsagencies,banks,andgovernmentofficials,whoactivelycampaignforratingssincethoseratingsultimatelydeterminethecostofborrowing.In“normal”timestheremaynotbemuchtoshape,butsince2007thevolatilityoflocalfinance,reflectedinmanydowngradesandupgradesbytheagencies,hascreatedalargerspaceofpoliticaldecision‐makingandacorrespondingincreaseintheinfluenceoftheseagencies’descriptionsofthecrisisandnarrativesaboutspecificcrisis‐responsepolicies.Theyhavealsobeenrightinstepwiththeshiftingnationalfocus(especiallysince2012)topublicpensionsasacriticalthreattomunicipalfiscalstability(despitetherelativelackofattentiontoitbefore2008,andonlyacoupleofmemosin2008aboutthepossiblethreatofthestockmarketfallonpensionassets).

Treatingpensionliabilitiesasaformofdebt,andcombiningtheunfundedamountwithoutstandingindebtedness,improvestransparencybyprovidingamorecompletecomparisonofstatesbasedontheirtotallong‐termobligationsasaportionofavailablerevenueandtaxingcapacity.(Moody’sInvestorsService2011a,2)

AlthoughMoody’sreferstostateandcitychoicesnottofundthefullannualrecommendedcontribution(ARC),itavoidsanycharacterizationoftheseasanythingotherthan“management”choices.Thepoliticsbehindsuchdecisionsareneutralizedorleftunquestioned;theroleofanti‐taxsentimentandtaxrestrictionsoncitiesdoesfeatureinratingscomments,butwhencitiesdoraisetaxes,Moody’softenequivocatesbydescribingincreasesaspotentialthreatstoeconomicdevelopment.Thus,theagencyredirectsfocustotheexpendituresideasthebestpossiblesolution.Duringthecurrentcrisis,thatfocushaslandedsquarelyonpensionplans.

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Table4.7SelectedMoody’scommentsonpensions,2006‐2014

Date Title29‐Dec‐06 ReviewofFinancialAuditsShowRiseinMajorCities'PensionLiabilities

29‐Dec‐06 Moody'sSurveyofOtherPost‐EmploymentBenefits(OPEB)forLargestU.S.Cities

11‐Nov‐08 PensionFundingMaySufferFrom2008StockMarketDeclines;Near‐TermCreditEffectsForU.S.PublicFinanceGovernmentalIssuersWillBeLimited

3‐Nov‐09 EmployeePensionCostsPressureStateandLocalGovernments

6‐Jul‐10 GovernmentalPensionContributionsMayIncreaseDuetoNewGuidance

26‐Jan‐11 Combiningdebt&pensionliabilitiesofUSstatesenhancescomparability

14‐Feb‐11 ProposedPensionLegislationWouldImproveStateandLocalPensionTransparency

11‐Oct‐11 GASB'sProposedAccountingChangesWouldImproveTransparencyandComparabilityforPublic‐SectorPensionPlans

13‐Feb‐12 PublicSectorPensionPlans'ReducedInvestmentReturnAssumptionsAreCreditPositive

17‐Aug‐12 Adjustmentstolocalgovernmentpensiondata:FAQ

12‐Oct‐12 AdjustmentstoUSStateandLocalGovernment ReportedPensionData:StatusReport

11‐Dec‐12 USStateandLocalGovernmentsFaceRiskswithPensionFundingBonds

18‐Mar‐13 UpdateonStatusofUSStateandLocalGovernmentPensionDataAdjustments

17‐Apr‐13 AdjustmentstoUSStateandLocalGovernmentReportedPensionData

9‐Sep‐13 TheUSPublicPensionLandscape:PatternsofFunding,Correlation,andRisk

19‐Sep‐13 PensionRisksforUSLocalGovernmentsRangefromMinimaltoSevere

26‐Sep‐13 AdjustedPensionLiabilityMeasuresfor50LargestUSLocalGovernments

10‐Jan‐14 CourtsOfferContrastingOutcomesforCaliforniaCitiesSeekingRetirementBenefitCuts

5‐Feb‐14 LowerLiabilities,HigherCosts:PensionsStillWeighonUSLocalGovernmentsin2014

10‐Apr‐14 DivergentPensionRisks:USCorporatesWillRemaininFarBetterPositionthanStateandLocalGovernments

30‐Jun‐14 Moody'sUSPublicPensionAnalysisLargelyUnchangedByNewGASB67/68Standards

17‐Sep‐14 Moody'sPublicPensionLandscapeSeries:ReformFlexibilityinOhioLessensPensionStress

24‐Sep‐14 GASB'sProposedAccountingChangesForRetireeHealthBenefitsWillImproveTransparencyandComparability

25‐Sep‐14 USStateandLocalGovernmentPensionsLoseGroundDespiteMeetingReturnTargets

27‐Oct‐14 Moody'sPublicPension LandscapeSeries:Wisconsin PensionsareWellFundedandStable

14‐Nov‐14 RecoveriesInDistress:HoldersofMunicipalBondsCompetewithRetireesandEmployees

Source:Moody’sInvestorsService,compiledbyauthor

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Bankruptcy

Theprioritizationofcreditorsintheeventofmunicipalbankruptcyisacentralandunresolvedquestion.Oneofthebankruptcyjudge’sprimaryresponsibilitiesistodeterminetheorderinwhichcreditorsshouldhaverecoursetoanyassetsavailabletopaydebts,andtonegotiateapercentageofthedebtthatwillultimatelyberepaidasthecityemergesfrombankruptcy.Duringthisrecession,asawaveofbankruptciesculminatedinthelargest‐evermunicipalbankruptcyfilingbyDetroit,ratingsagencieshavebeenfixatedontheabilityoffederalbankruptcyjudgestorestructurepensions.Thepossibilitythatpensionobligationsmightbetreatedlikeotherformsofdebt—orabridgedinsomeway—raisesthequestionofwherepensionerswouldfallinthelineofcreditorsintheeventthattheyaretreatedascreditors,ratherthanasaseparatetypeofobligation.Thislegaluncertaintyhascometobedescribedbyratingsagencies,andrepeatedinnationalmedia,asachoicebetweenbondholdersandpensioners.

ThroughoutDetroit’sbankruptcy,Moody’shasrepeatedlycommentedonthefateofbondholdersinthebankruptcy.WhenitappearedthatevenGOdebt,themostsecureformofmunicipaldebt,mightbeabridgedgivenDetroit’ssignificantdebtobligations,thefinancialpressrushedtodescribethepossibleimplicationsforthemunicipalbondmarket.Moody’susedthewords“unprecedented”and“unconventional”todescribeDetroit’sbankruptcyandthetreatmentofgeneralobligationbonds.Onlyaweekafterthebankruptcyfiling,Moody’sissuedalengthycommentonDetroit’slikelyroleasprecedent‐setterforothercities,titled“DetroitBankruptcyMayChangeHowOtherDistressedCitiesApproachTheirPensionandDebtObligations”(Moody’sInvestorsService2013j).Inparticular,Moody’ssuggestedthatDetroit’sbankruptcymayleadothercitiestochoosebankruptcyinorderto“reduceliabilities,”andspecificallytoweakenthestandingofgeneralobligationdebtcomparedtopensionliabilities,ofparticularimportancewhenthereisn’tenoughmoneytopayboth.Michigan’sexplicitprotectionofaccruedpensionbenefits,aswellasthevaluationofpensionbenefits(whichthecitysoughttoincrease)becamepivotalissuesinDetroit’sbankruptcy(Moody’sInvestorsService2013j,3).

FitchRatingsaccusedthecityofadoptingan“usversusthem”narrative,withbanksbeingaskedtosufferadisproportionateloss(Walsh2014).Thecity’sinitialproposaltocreditors,whichOrrhopedwouldstaveoffbankruptcy,gavesomebondholderstencentsonthedollar,whileprotectingpensionsignificantly,promptingaflurryofoutragedcommentariesbyratingsagenciesandthefinancialpress(WalshandYaccino2013).InFebruary,2014thecityfileditsPlanofAdjustment,proposingthatpensionersgethigherratesofrecoverythanGOholders,whowouldget“significanthaircuts”(Moody’sInvestorsService2014b,23)InJune2014,apackagepassedbytheMichiganlegislaturetohelpfundDetroit’spensionplans(inadealthatalsorestrictedfuturebenefitsandcreatedafinancialoversightpositionforthecity)wascritiquedbyMoody’sforprovoking“tension”betweenpensions,services,andbondholdersinthecity(Moody’sInvestorsService2014d).AcommentfromJuly,2014—titled“Detroit’sProposalFavorsPensionersoverBondholders”—saystheplan“providessubstantialevidencethatpensionobligationsareasubstantialsourceofcompetitionforbondholderandothercreditorsinChapter9bankruptcy”(Moody’sInvestorsService2014f,1).

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Inadditiontoreiteratingthehigherrecoveryratefor“pensioners,”Moody’sfocusesonfour“additionalrecoveryboosts”availabletopensionersbutnotothercreditors.Theseinclude“specialoutsidefunding”fromthestate(tobaccotaxrevenue)andprivatelydonatedfunds(intendedtokeepthecity’sartcollectionbydonatingfundsforpensions),alongwiththepossibilityofincreasingpensionpaymentsiftheassetsbounceback(Moody’sInvestorsService2014f).Pensionholdersultimatelyvotedtoapproveabankruptcyplanthatgavethem52centsonthedollarofunfundedpensionliabilities;Moody’sestimatesthatpensionerswillgetabout82%oftheirbenefits(CityofDetroit2014;Moody’sInvestorsService2014h).

Thisreductioninpensionbenefitsisonlythesecondtime(afterCentralFalls,RhodeIsland)thatpensionshavebeenimpairedinbankruptcy.Moody’scontinuestoemphasizethatpensionersfaredbetterthanbondholders(“Whileimpaired,pensionersfaredmuchbetterthanotherunsecuredcreditors”(Moody’sInvestorsService2014h,2),inpartbecausepensionersbenefitedfromoutsidesources“noneofwhichweremadeavailabletoanyothercreditors”(Moody’sInvestorsService2014h,2).Thismarksthethirdtime,alongwithStocktonandVallejo,thatpensionersweredescribedas“faringbetter”thanotherunsecuredcreditors.“Thesediscrepanciesleaveinvestorswithmorequestionsthananswers,buttheemergingpictureisoneinwhichpensionshavebetterrecoveryprobabilitiesthandebtinaChapter9case,andmunicipalitiesexitingfrombankruptcylikelyretainresponsibilityforpayingdownlargeunfundedpensionliabilities”(Moody’sInvestorsService2014h,3).Moody’salsosuggeststhatthelossesbyinvestorsinDetroitdebtwillmakebondholdersmorelikelytonegotiatewithcitiesinthefutureratherthanriskbankruptcy(Moody’sInvestorsService2014h).

There’sasortofschizophreniainthepressandratingscommentsabouttheimportanceofDetroit’sbankruptcy—severalarticlesseemintendedtoreassureinvestors(includingthepublic,whomayhaveretirementfundsinvestinginsuchbonds)thatDetroit’ssituationisunique,andshouldn’timpactyieldsorriskasawhole(seee.g.Moody’sMarch10,2014comment).ButothercommentsarguethatDetroit’ssituationdoeshaveimportantpotentialnegativeramificationsforinvestors,andthatanydecisionsaboutwhathappenstoDetroit’sdebtobligationswillreverberatethroughoutmunicipalfinance.Afinalsetofreports(from2013‐2014)commentsontheimplicationsofDetroit’sbankruptcyresolutiononthemunicipalmarket,inparticulartheimplicationsfortheallocationofbankruptcyconsequencestobondholdersandpensioners.AkeyfindinginDetroit’sbankruptcywasthatfederalbankruptcycourtcanimpairpensionagreements,whilethestatecannot(Rhodes2013,74).Thisputsfinancialactorsinaquandary:bankruptcyexposesthemtogreaterriskthanstate‐managedoversight,butalsoofferstheoptionofpensionrestructuring,whichhasnotyetbeenaccomplishedoutsideofmunicipalbankruptcy.

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Promotingstateintervention

Inresponsetotheriskinherentinmunicipalbankruptcy,Moody’sandotherratingsagencieshaveunequivocallysupportedpoliciesthatpermitstateinterventionintourbanfiscalpolicy,particularlyasapreferredstrategytobankruptcy,whichleavescreditorsmorevulnerabletolosses.NearlyalloftheDetroitratingscommentsfrom2011toJune2013addressthedesirabilityofMichigan’semergencymanagerlaw.Whenitwaspassed,March21,2011,Moody’sissuedacomment“MichiganLawAllowsforGreaterStateControloverFinanciallyStressedMunicipalities,aCreditPositive”(Moody’sInvestorsService2011b).Thereportsays“evenhistoricallywell‐managedmunicipalitiesinMichiganarefacingfinancialpressures,someofwhichwillbenefitfromtechnicalassistance,guidance,andexpertisetobalancetheirbudgetsandregainfiscalsolvency”(Moody’sInvestorsService2011c,41).Initspreamble,itdescribesthestructuralchallengestoMichigananditscities,butthenpresentsthelawasbeingabletorestorefiscalhealth.

Moody’slikesthatthelawoffersMichigancities“broadtechnicalassistancesooner,andpermitssweepingorganizationalandfinancialchanges”(Moody’sInvestorsService2011b,41).Economicdeclineandthelossofstaterevenue‐sharinghasleftcitiesindirefiscalstraits,andthereforeableto“benefitfromtechnicalassistance,guidance,andexpertise”(p.41).Moody’semphasizedakeyexpandedstatepowerinthenewlaw:theabilityoftheemergencymanagertomodifyorterminateemployeecontracts,andsuspendcollectivebargainingforuptofiveyears.Thesepowersarea“positivedevelopmentforbondholders”(Moody’sInvestorsService2011b,41).

Sixmonthslater,astheGovernorbeganhisfinancialreviewofDetroit,Moody’swarnedthatthiswas“creditnegative”forthecity,asanemergencymanagerwouldbea“terminationevent”fortheswapagreement,whichcouldtriggeruptoa$400millionpayment,whichDetroitcannotpay(Moody’sInvestorsService2011e).

InMarch2012,aftersupportersofrepealingPublicAct4successfullysubmittedenoughsignaturestoputarepealontheNovemberballot,Moody’sweighedinonthepotentialdamageofsucharepeal(andthesuspensionofthelawuntiltheelection)inacomment:“SuspendingMichigan’sEmergencyManagerLawWouldBeCreditNegativeforDistressedLocalGovernments.”Whenthelawwasthreatenedbyrepealin2012,Moody’sweighedinagain,statingthatrepealwouldjeopardizethecreditofMichigancities(Moody’sInvestorsService2012a).Theuncertaintyaroundthelawwouldbe“creditnegative”bothforlocalgovernmentscurrentlyunderemergencymanagersandforalllocalgovernmentsunderreviewinMichigan(Moody’sInvestorsService2012a,33).Immediatelyafterthelawwas,repealed,Moody’sandotheragenciesdowngradedDetroit’sdebt(Helms2012).Bloomberg’scoverageoftherepealquotedbothbondholdersandbankruptcyexperts:“ThebenefitofAct4wasthatithadtheefficiencyofadictatorship…Theyhavetomakesurewhateverisdevelopedhastheefficiencyofafinancialmanager,nottheinefficiencyofacommittee”(ChappattaandChristoff2012).

Whentherevisedlaw,PublicAct436,waspassed,Moody’spraisedthelawforrestoring“someofthekeycreditpositivestateoversightprovisions”ofthepreviouslaw,

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butnotestheincreasedriskofbankruptcy(Moody’sInvestorsService2013a).ThepassageofPublicAct436wasacclaimedbyratingsagencies,butthepossibilityofbankruptcyaddedtothelawmadethemnervous:“NewEmergencyManagerLawtoSupportMichigan'sDistressedMunicipalities,butCreatesNewRisksforBondholders”(Moody’sInvestorsService2013a).

Ratingsagencieshaveclearlyarticulatedtheirbeliefthatstateinterventionisthemoststabilizingresponsetofiscalstress,whileitsimultaneouslyminimizingorignoringtheroleofstategovernmentsinlimitingcities’optionsforraisingorstabilizingrevenues.Anexampleofhowrevenuescarcityisnormalized,andthatnormalizationinturnmakestheideathatlocalgovernmentscan’tmanagetheirownfinancesintoakindof“commonsense”,whilestategovernmentsareframedassensible,expertactors.Infact,apartfromabrogatingpensions(whichit’sstillunprovenasalegalpossibilityoutsidebankruptcy)andcancelingunioncontracts,itisunclearwhatstateinterventionoffers.Thedifficultyinraisinglocalrevenuesdoesnotcomefromcitypoliticsbutfromstatelimitations;statescouldliftthoselimitationsinthelegislature,ratherthangivinganemergencymanagerthepowertoraiserevenues.Thathaslefttheagenciestofocusonthefateofpensionsandbondholdersinbankruptcy.

Conclusion

Ratingsagenciesandfinancialinstitutionsareinthecomplexpositionofhavingtoreassureinvestorsthatthemunicipalbondmarketisstable,thatcityissuers(butnotfinancialintermediaries)needregulation,andthatifcitiesarenotfiscallydisciplined(bystategovernmentsormarkets),theconsequenceswillbedireandfar‐reaching.Theinfluenceofratingsagenciesinreframingpensionandotheremployeeobligationsasaformofdebt,whichshouldbesubjecttothelimitationsandevaluationsthathavehistoricallyappliedonlytomunicipalborrowing,demonstratesthepoweroffinancialactorstoremakekeyavenuesformanagingurbangovernance.Ratingsagencieshavealsosuccessfullyframedstateinterventionincityfinancesasanecessarysafeguardagainstadestabilizedbondmarket(orbankruptcy),inwhichbondholdersmightbepittedagainstpensioners.

Thegrowinginvolvementofcitiesincircuitsofcapitalandstructuresoffinancialrule‐makinghasproducedmanyeffectsonurbanpolicy(Hackworth2007).Ratingsagencieshavebeencentraltothesemechanicsofrule‐making.Oneofthemostimportantnarrativeframingsembedinsuchrulesistheequatingofgovernmentswithprivateactors,equatingpublicriskwithprivaterisk.Thediscussionsoverpensionsrepeatedlymentionthattheprivatesectorhasmovedawayfromdefinedbenefitplans,implyingthatgovernmentsshoulddothesame(seee.g.Moody’sInvestorsService2009d,2).PublicsectoremploymentisoneoftheremainingarenasoftheU.S.economyinwhichcollectivebargainingdominatesandsetsexpectationsforworkrules,wages,andbenefits.CityleadershavealsocomplainedthatMoody’sappliesaprivatesectoraccountingapproachtothediscountrateitusestoevaluatepublicpensionplans(whichgreatlyaffectsthe

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calculationofliability),ratherthanmaintainingamethodspecificallytailoredtothepublicsector(andmatchingthepublicsector’sownapproachtovaluingpensionliabilities).Moody’sapproachignoresthemanyimportantwaysinwhichpublicandprivatepensionsplansdiffer,includingtherelativelegalautonomyofpublicpensionsandthelong‐termhorizonofpublicentities,whichalmostneverdissolveandhavesignificantlylowerdefaultratesthanprivatecompanies.Ratingsmethodologiesareoneexampleoftheimportantfinancialconsequencesatstakeintheequatingofpublicandprivateentities.

Thelanguageusedbyratingsagenciescontinuallyaffirmsthenatureofmunicipaldebtnotjustasarelationshipbetweencitiesandbondholdersbutasamarket:anentitythatcanbecomeunbalancedorunstable,whichconnectscitiesnotthroughmoneybutthrough“marketconfidence,”permittingcrisistobeakindofcontagion(BerndtandBoeckler2009).Manyoftheinstitutionsdevotedtomunicipalfinanceandmarketanticipationusethisterminologyofcontagionandengageindebatesaboutwhetherthiswillbewidespread(Moody’sInvestorsService2012f;ChappattaandHays2012).Thesenarrativesofinterventionandtheneedformarketstabilitycombinetoproduceapowerfulargumentforrestructuringgovernance.Theyalsoaffirmthattheperceptionbymarketactors(investors,financialadvisors,andothers)ofacity’spotentialdistressisasimportantasitsactualdistress.Thesenotionsofcontagionandtheimportanceofperceptionareakeyvehiclethroughwhichcrisisgovernanceisnormalizedforallcities(Lewis2011).

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CHAPTER5:GrowingStatePower

Thischapterdiscussestheemphasisonstateinterventionastheprimarystrategyformanagingurbanfiscalcrises,inparticularthenarrativesusedtojustifysuchintervention,themodelsonwhichpoliciesarebased,andtheimplicationsforcityautonomy.Ascitiesandstatesdivergepolitically,andthefederalgovernmentcontinuesitsretreatfromurbanpolicy,thepoliticalcontrolstatesexertovercitieshassignificantimplicationsforthepoliciescitiescanpursue,particularlyfiscalpolicy.Becausecitiesarecreaturesofstatelaw,thepoliticalrelationshipsbetweencitiesandtheirstategovernmentsformoneofthemostimportantinfluencesonthescopeofurbangovernance.Statesexertparticularcontrolovercityfinances:theyregulatecities’accesstomunicipalcredit,theirabilitytoraiserevenuesandspendmoney,andtheoptionsavailabletomanagefiscaldistress.InthischapterIarguethatstatepowerovercitieshasbeenadefiningfeatureofthisrecession,andonewithimportantimplicationsforunderstandingtheconstructionsandnarrativesofcrisisemergingfromcities.

Intimesoffiscalcrisisandnationaleconomicrecession,intergovernmentalrelationshipsalwaystakeongreaterimportance.SbragiaarguesthatfiscalcrisesintheU.S.constitutehistoriesofnegotiationbetweencityandstatepower,withstatesclaimingadditionaloversightpowersofcitygovernanceduringeachcrisis(Sbragia1996).Thedepthandlengthofthisrecession,combinedwiththeparticularfederalpoliticsofthiscentury,havemadethisperiodakeymomentofcontestingandsolidifyingtherelationshipsbetweenstates,cities,andthefederalgovernment.

Statepowerovercities’fiscalautonomytakestwoprimaryforms.First,stateshavetheabilitytoshapethefiscaloptionsavailabletocities:throughtaxandexpenditurelimits(TELs),debtlimits,stateaidandrevenuesharing,andotherconstraintsoncities’fiscalautonomyandsolvency.Thisincludestheabilityofstategovernmentstopasstheirownbudgetshortfallsdowntocities,whichIdiscussedinChapter2.Thischapterdealswithasecondformofstatecontrolofcities’finances,namelythevariousformsofstateinterventionincitygovernance,includingfiscalmonitoringandreporting,receivership,andlawsgoverningcities’accesstomunicipalbankruptcy.

Bothofthesecategoriesofpowermustbeevaluatedinthecontextofthenationalandlocalcontrastbetweencityandstatepolitics.Broadlyspeaking,stateofficialsandlegislatorsaremoreconservativethantheresidentsandpoliticiansinlargecities,atrendthathasbeenexacerbatedbythenationalgrowthinpoliticaldivisiveness.Thereisalsotheongoingcomplexpoliticsbetweencentralcitiesandtheirsuburbsinregionalpolitics,andthechangingdynamicsofresourceallocationwithinandbetweencities(seePastor,Benner,andMatsuoka2011).ThischapterisintendedtodemonstratetheimportanceoftheU.S.federalsysteminshapingthesestate‐cityrelationships,andinturnshapingthelocalexperienceofrecession.

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Finally,theseissuesraiseimportantquestionsabouthowdifferentconceptionsofcityautonomyshapenarrativesaboutpublicfinance,governance,andcrisis.Thereisacontradictorynarrativeatworkthatbothindividualizescityfailureandjustifiesstateinterventionasthebestsolutionforfiscalcrisis.Thischapterdescribesthatnarrativeatworkindiscussionsofstateinterventionpolicies.

Devolution

Oneimmediatecauseofincreasedstatepoweristhehistoricaldevolutionoffederalspendingandurbanprograms,whichhasincreasedtheroleplayedbystatefundingingovernmentgenerallyandhasalsoremovedabroadernationalsupportsystemforurban‐focusedpolicy.Devolutionofresponsibilityandfundingforserviceshasleftcitiesfinanciallyvulnerableandcreatedapatchworkofresponsibilityforserviceprovision.(Seee.g.Desan2014).

Fordecades,bothfederalandstatepolicieshavedevolvedresponsibilityformajorsocialprogramstocitygovernments(Liner1989).Particularlyforsocialservices,responsibility(andrisk,asthatresponsibilityoftencomeswithoutadequatefunding)havebeendevolvedincreasinglytolocalgovernments,withresourcesoftenreclaimedbystatesasthefederalgovernmentplaysasmallerroleinfundingandmanagingprograms(seee.g.thediscussionofwelfaredevolutioninByersandPirog2003).Thishasresultedinsignificantdevolutionofsocialreproductionontolocalgovernments,particularlyintheareasofpublichealth,housing,andeducation(Addie2008,2677).Themostsignificantdiscretionaryfederalfundingthatgoesprimarilytocities,CommunityDevelopmentBlockGrantFunding,hasbeencutby26%justsince2010(Holeywell2012).Sincethelate1990s,localgovernmentshavebeentheprimaryprovidersofservicessuchashousingsupports,generalincomeassistance(excludingTANF),andpublichealthcare.Communityserviceprovidersthatnowprovidethebulkofservicestosupporthomeless,addicted,andelderlyresidentsareincreasinglysupportedbylocallycontrolledfunds.

Devolutionanddiffusionofbothriskandresponsibilityareseenaskeyelementsofneoliberalismandcontemporaryausterity,andascorestrategiesusedtodismantlethewelfarestate(Hackworth2007;e.g.Peck2014).Althoughothergovernmentfunctionshavealsobeendecentralized(Liner1989),thedecentralizationofresponsibilityforsocialprogramshasleftthemparticularlyvulnerabletofurthercuts,asthelackofanationalmandateandfederalequalizingfundingmakesitlikelythatonlyafewcommunitieswillsustainthepoliticalwillandfiscalabilitytosustainsuchprograms.Whileevensomewelfareadvocatesarguethatprogramsarebestadministeredatthelocallevel,decentralizationofsuchprogramsisstronglyassociatedwiththeerosionofanationalmandatetowardprovidingabasicsafetynet,aslocalgovernmentshavegreaterpoliticaldifficultyfundingsocialservices(Peterson1981;LobaoandAdua2011).Thistensionbetweenlocalandnationalscaleofservicesisacentralpoliticalquestion.

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Thepolicymechanismsbywhichsocialprogramshavebeendecentralizedhavealsoaccomplishedotherpolicychanges,inadditiontospendingreductions.Forexample,federalpoliciesthatencourageprivatizationalsosetrequirementsforcuttingaidwhencitiesfailtoprivatize;thusalthoughresponsibilityforprogramdeliveryhasbeendevolved,localgovernmentsareconstrainedinhowtheyprovideservices(Fuchs1992,281).Thisdisplacesservicesandprogramsformerlyprovideddirectlybythegovernmentontoprivateorganizations,whichfurthererodescities’controloverhowservicesareprovidedtotheircitizens.Muchoftherecentliteratureonausterity(describedinearlierchapters)cites“rescaling”asanimportantcomponentofneoliberalausterity(LobaoandAdua2011).

Formanyprograms,devolutionhasmeantgivingstatesbroaddiscretioninhowservicesaredeliveredthroughlocalgovernments(citiesandcounties),whichshiftsthepoliticaldynamicsbetweenstatesandlocalities.Duringthe1960sandearly1970s,whenthefederalWaronPovertyanditsassociatedurbanprogramswerestillintact,stategovernmentsplayedsecondfiddletothefederalgovernmentinurbanspendingandpolicy.Intheearly1970s,therewasagreatdealofattentionpaidtorelationshipsbetweencites,states,andfederalgovernment,andanactivenationalconversationabouthowbesttosustainandequalizecityfinances(AdvisoryCommissiononIntergovernmentalRelations(ACIR)1974).Inthemid‐1970stheexpansionofthefederalroleintourbanaffairswasdrawingattentionandraisingconcernsaboutcentralization:

Ourlocalitiesareincreasinglydependentuponlargergovernmentsformoney,forresolutionofbasicpolicyissues,forreallocationofresources,andevenforthedeliveryofmanypublicgoodsandservices.(Stephens1974,68)

Butbytheearly1980sadramaticshiftwasalreadyunderway,reversingthismovetowardgreaterfederalpowerandconcentratingpowerinsteadinstategovernments.In1982,DeGrovearguedthattheU.S.wasmovingtowardanewsysteminwhich“thelegalfactoflocalgovernmentsasthechildrenofstateswillbecomemuchmoreapolicyandpoliticalreality,andthelongpredictedemergenceofstatesasthecentralcoginthesystemwillbecomeanaccomplishedfact”(Carr1984,350).This“newfederalism”wasmakingstates,notthefederalgovernment,theprimarysourceofaidtolocalgovernments.

Thebeginningsofthat“newfederalism”arerootedintheanti‐urbanpoliticsofthe1980s,withareductiononfederalurbanspending,anationalbacklashtotheWaronPoverty.DevolutionwasalsohastenedbythefalloutfromNewYork’sfiscalcrisis,theendofanerainwhichcityleaderswerepowerfulnationalfigures(Fuchs1992,210).Federaldevolutionacceleratedinthe1980swithReagan’seliminationoffederalrevenuesharing,andcutstofederalprograms,ahistorywelldocumentedbyLiner(Liner1989).TherestructuringoffederalwelfarebyClintoninthemid‐1990sledtofurtherdevolutionofcontrolforwelfareprogramstostategovernments.Despitethewidespreadprosperityofthe1990s,thedevolutionofresponsibilityforsocialprograms,acontinuedoverallreductioninU.S.moneyspentonsocialprograms,thesteadywithdrawalofanyfederalmoneyforurbanprograms(e.g.CDBG,publichousing),andanagendaoftaxcutscontinuedapace.

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Asfiscalandprogramresponsibilityhasbeendecentralizedfromthefederalgovernment,citieshavebecomemoredependentonstategovernmentsforbothresourcesandprogrammandates.Bytheearly1990s,althoughcitiesremainedtheprimarytargetofpeople’sdemandsforserviceimprovements,citieshadaccesstofewerresourcesthanthestateorfederalgovernments(Fuchs1992,283).Therewassignificantattentiontothegrowingpowerofstatesovercityfinances,andtotheimplicationsofstateaidcutstocities,especiallyinlargerstates,reflectingthissteadytrendofpolicyandrevenuedecentralization(GoldandRitchie1991).Linerdocumentstherisingimportanceofthestate‐localrelationshipasfederalaidhasbeenreduced(Liner1989).Andalthoughstategovernmentsraisemoremoney,inmanyprogramareaslocalgovernmentsperformthemajorityofservices,usingstatemoney,andemploymorepeople.

Atthesametimeasurbanspendingwasbeingmovedfromfederaltostategovernments,thepoliticaldynamicbetweencitiesandstateswasalsoshifting.In1996,Weirfoundthatlargecitieshadlostsignificantpoliticalpowerintheirownstates,coincidingwiththesharpreductionoffederalaidtocities,anddriveninpartbya“pullingapart”ofstateandlocalpolitics(Weir1996).Thislossofpowercamefromdemographicshifts,populationgrowthoutsidecentralcities,andtheriseof“interest‐based”politicsinstatelegislatures,andresultedinthelossofa“metropolitanagenda”atthestatelevel,justasfederalsupportforcitieswasvirtuallydisappearing(Weir1996).Morerecently,BowmanandKearneyfoundthatcitieshadexperiencedan“erosionofauthorityatthehandoftheirstategovernments”sincetheturnofthecentury(BowmanandKearney2012,528).Thereisampleevidencethatstatepolicyrestrictscityautonomyinmanyareas,particularlyevidentinareaswherecitiesseektoimplementprogressivesocialpoliciesnotsupportedbytheirstates(e.g.same‐sexmarriageandguncontrol),andincludingareasoffinance(seeFrugandBarron2008).

Thisreconfiguringofpowerhasimplicationsforhowstatesrespondtofiscalcrisisparticularlyinlargecities,implicationsthathavenotbeenrevisitedmuchsincethe1990sbutarestarklyevidentintoday’scrisis,asIshowbelow.Bythetimeofthe2008crisis,therewaslittlesystematicsocialwelfarespendinglefttocut(asIdescribeinChapter3).Althoughtherewasabriefspikeinfederalaidin2009‐10throughtheObamaAdministration’sfederalstimulusprogram(AmericanRecoveryandReinvestmentActorARRA),stategovernmentsacrossthecountrycutspendingquickly,immediatelyimpactingcitybudgets.Federalandstateprogramscutsleavecitiesasthelastresortforpopulationsfacinglong‐termunemployment,stagnantincomes,andshrinkingfederalsupports.Thesecutsarereflectedindataonintergovernmentalprogramsbutarealsoembeddedinthelossofsocialservicesformerlyfundedbystatesorthefederalgovernment.RelativelywealthyandpoliticallyprogressivecitieslikeSanFranciscoandNewYorkmayfillsomeofthegapforthoseservices;citieslikeDallasandevenSanJoselackthepoliticalmandatetodoso;DetroitandPhiladelphiasimplycannotaffordto.This“rescaling”ofthestatereproducesandreinforcestheinequalitybetweencitiesthatfederalprogramsinthe1960swereintendedtoredress(seeSawers1979).Detroit’sbankruptcy,andwidespreadurbanfiscalcrisis,havereneweddiscussionoftheconsequencesofsuchfiscaldecentralization(seee.g.Steinmetz2009).

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Thedynamics,intents,andimplicationsofdevolutionaremulti‐facetedandbeyondthescopeofthisdissertation.Ilaythemoutherebecauseitisinthisclimatethatrecessionbeganin2007,andinwhichstatesandcitiesnegotiatedthepoliticalterrainoffiscalcrisis.

5.1Statecrisisintervention

Acommonnarrativeinthecurrentrecessionhasbeentheneedforstateinterventiontoprevent“irresponsible”citiesfromgettingintotrouble,particularfiscaltroublethatcouldaffectthecreditratingsofneighboringcitiesorthestateitself.Whilesomecornerswerecallingforareturntointergovernmentalpolicyandgeneralsupportforcities,moreconservativefiguresarguedforstatestointerveneincityfinancestosolvecrisesnotthroughtheprovisionofaidorpolicystability,butbyforcingthemtorestructureservicesandobligationstomatchthedeclineinrevenues(J.BushandGingrich2011).Asthesestrategiesareimplementedandrefined,acommonnarrativeemergesoftheneedforstateintervention,justifiedbyclaimsofcities’mismanagement,lackoffiscalexpertise,andpoliticalcooptation.Thenarrativealsorestsonclaimsthatstateshaveastakeincities’quickfiscalrecovery,whilesimultaneouslymakingclearthatstateshavenofiscalobligationtohelpstrugglingcities.Thiscontradictionisimportant.

Fiscalmonitoringisasortofgatewayintostrongerstateinterventionincitygovernance,justifiedbythediscourseofexpertiseandgoodgovernment.Acommonrefrainindiscussionsaboutthepossibilityofwidespreadurbanfinalcrisiswashowstatescouldascertainwhichcitieswereintroublebeforetheyenteredacrisis,usingasetofindicatorsasdescribedintheintroduction.Severalmodelsof“earlywarning”systemsweretoutedbyratingsagenciesintheircommentariesonlocalfinance,andbystatelegislatorsproposingnewmodelsduringthecrisis.Inthewakeofthecrisis,therehasemergednewattentiontotheroleofstatesinmonitoringlocalfinancesand,incasesofcrisis,interveningsomehow.Thenarrativesaroundmonitoringoftenframefiscalcrisisasaproblemofinattention,insufficientexpertise,orlackoftransparency.AsKloha(2005)notes,statesystemsaremorelikelytoframecrisisinwaysthatpresumemanagerialfailures,ratherthanbroadereconomicorsocialcausesofdistress(Kloha,Weissert,andKleine2005).Reportsfromthepublicfinancecommunitycalledforstateintervention,anincreaseinattentiontothestaterolein“managing”urbanfiscalcrisis(seee.g.Honadle2003).

Municipalbankruptcy

Themostradicaloptionavailableto(some)citiesfacinginsolvencyismunicipalbankruptcy,whichisgovernedbyacombinationoffederalandstatelaw.Bankruptcypolicyatthestatelevelhasfollowedbothfiscalcyclesandpoliticaltrends,andreformsareoftenpassedinresponsetospecificcitysituations.Therehasbeena“wave”ofmunicipalbankruptcyfilings,with28since2010,eventhoughonlyabouthalfofallstatespermitit.

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Thosecases,alongwiththewidernarrativeofacontagionoffiscalcrisis,hasproducedaflurryofstatebankruptcypolicyamendments.

Federalprovisionformunicipalbankruptcywasfirstenactedinthe1930sinresponsetowidespreadmunicipaldistressduringtheGreatDepression.47Municipalbankruptcypermitscitiestoreducetheirindebtednessandbindallcreditorstoaplanapprovedbyafederalbankruptcyjudge;itisintendedtoallowcitiestoresolvetheirdebtproblemswhilecontinuingtoprovidebasicpublicservices.48MunicipalbankruptcyisgovernedbyChapter9ofthefederalbankruptcycode,whichpermitsbankruptcyformunicipalitiesonlyinstatesthatexplicitlyauthorizesitbylaw.49Somestatelawsexplicitlycreateprovisionsforstate‐appointedentitiestofileforbankruptcyonbehalfofacity(e.g.NewYorkandMichigan),ratherthanpermittingcitiestofiledirectly.AmunicipalitymustmeetseveralcriteriainordertofileforChapter9bankruptcy:itmustbeinsolvent,andmustdemonstratethateitheritscreditorsagreetothebankruptcyornegotiationswithcreditorshavefaileddespitebestefforts(BankruptcyCode1934).

Asinpersonalorcorporatebankruptcy,thedrivingquestioniswhogetspaidfirstandwhowillgetwhat:bondholders,vendors,pensioners,orcurrentemployeesallhaveclaimsonacity’sassetsandrevenues,andthoseclaimswillberesolvedbythejudge’sbankruptcydetermination.TheoutcomesoflargebankruptcycaseslikeDetroit’ssignificantlyreshapeexpectationsabouttheorderinwhichcreditorsarepaidbecausetheyconstituteguidingfederalcaselawthatjudgesmayapplyinfuturebankruptcies.Acentralquestioninthecurrentcrisishasbeenthefateofspecifictypesofcitycontracts,inparticularcollectivebargainingagreementsandpensionplans(bothofwhicharealsosubjecttostateandfederallaws).ThesequestionshavemadethebankruptciesinCaliforniaandthebankruptcyofDetroitpivotalcasesfordefiningthescopeofpossibilityforrestructuringcitygovernanceininstancesofcrisis.

Proponentsofmunicipalbankruptcyemphasizetheleveragebankruptcyoffersfordealingwithemployeeunions,assistancewithrestructuringpensionsandotheremployeeobligations(seee.g.NationalAssociationofStateBudgetOfficers2012).Opponentsofmunicipalbankruptcyemphasizethatitscarescreditorsandmakesmunicipalborrowingexpensiveforallcities,becauseinvestorsbecomewaryofthepossibilityoftheirbondsgoingleftunpaid.Publicemployeeunionsopposebankruptcybecauseitoftenresultsinsignificantjobandwagecuts,insomecasessignificantlyjeopardizingpublicsafety(seee.g.thecaseofVallejoinMorris2012).Manypoliticalscientistsandpublicfinanceexpertsseemunicipalbankruptcyasfavoringcities,echoingsomeoftherhetoricofratingsagenciesdescribedinChapter4.Forexample,Kimhi(2008)suggeststhatbankruptcyisan“easy”47Beforethepassageoffederalbankruptcylaw,creditorscouldsueacitytocompelittoraisetaxes,subjectingacitytopotentiallyhundredsofseparatelawsuitsandjudgments,andgivingcreditorsnopredictableresolution.48Unlikepersonalorcorporatebankruptcy,municipalbankruptcydoesnotpermittheliquidationofassetsordissolutionoftheentity,butmaypermitactivemanagement(bythejudgeoranappointee)ofaspectsofgovernance,especiallyifthelocalgovernmentitselfrequestssuchmanagement.49Stateshaveseveraloptions:theycanpassnolaw(inwhichcasebankruptcyisnotpermitted),passalawpermittingbankruptcyandleavingChapter9asthesolegoverninglaw,orprescriberequirementstorunconcurrentlywiththosesetforthinfederallaw.

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solutionformunicipalities,becauseunsecuredcreditorsmaynotgetpaidback,andcourtscan’tforcecitiestoincreasetaxes,hecallsit“relativelyeasydebtrelief”(Kimhi2008,653).Butbankruptcyisprimarilyviewedasfavorableonlywhenframedasanoptionforcuttingtheprimaryexpenseonwhichcrisesareblamed:employeepensionsandunionobligations.ThedescriptionofbankruptcyonCNN.comisillustrative:

Anindependentjudgebringsallpartiestoatablewhereanagreementhastobereached–nomatterhowpainful.And,weneedsomeofthosepainfuldecisions–notjustatthefederallevel,butatlocalandstatelevelsaswell.Atitsheart,thebankruptciesyoukeephearingaboutthesedaysaren’tabouttaxesbeingtooloworspendingoncityservicesbeingtoohigh–they'reaboutpensions…

I’mnotsayingbankruptciesareagoodthing.Buttheyareamechanismthatallowsustoadmitanemergencyandrenegotiatethedealsthatare,well,bankruptingthecountry.(Zakaria2012,emphasismine)

ThisexcerptfromFareedZakaria’spopularblogonCNN.com/TIMEmagazinesuccinctlysummarizestheprevailingviewaboutmunicipalbankruptcy:asanecessaryeviltorelievetheintractableburdenofpensionsandretireebenefits.Inconferencesonmunicipalbankruptcy,blogsbybankruptcylawfirms,andinvestmentshowsonCNBC,thisnarrativeisrepeatedascommonsense.Theideathatmunicipalbankruptciesarethenextfinancialmeltdownhasbeenrepeatedthroughouttherecentrecession,beginningwithabriefrunonthemunicipalbondmarketin2010(Alden2010)andmorerecentlywithWarrenBuffet’sdivestmentofasignificantshareofhismunicipalbondportfolio(NgandCorkery2012).

Alongsidethepanickedvoicesofinstitutionalbondholders,thereisanothernarrativethatpaintsbankruptcyasavitaltoolinrestructuringcityfinances.Therearecomplexnarrativesabouturbanruinandrebirthembeddedinthenationalnarrativearoundbankruptcy.In2011,severalarticlesaboutVallejointheNewYorkTimes,ABCNews,andothersourceshighlightedrampantcrime,prostitution,abandonedhomes,anddecimatedpublicservices(e.g.Farnham2011).Butby2012,afterVallejoemergedfrombankruptcy,theWashingtonPosttouteditasa“modelofausterity”(Morris2012).Republicanpoliticianshaveevenpushedforstatebankruptcyunderfederallaw,to“allowstatesindefaultorindangerofdefaulttoreorganizetheirfinancesfreefromtheirunioncontractualobligations”(J.BushandGingrich2011).Laborunionsandcommunitygroupshavesoughttoshiftthenarrativefrompensionsandbankruptcytotaxesandquestionabledevelopmentdeals,withlittlesuccess.

Stategovernmentsgenerallyseethemselvesashavinganinterestinpreventingmunicipalbankruptcyinordertoprotectthecreditratingsofothermunicipalitiesinthestateorthestate’sowncreditrating,particularlyifalargecityfacesbankruptcy.Statebankruptcystatutesoftenevolveduringspecificmunicipalfiscalcrises,sothepresenceanddetailsofstatelawsreflectbothstatepolicyinclinationsandtheirlocalhistories.In2012,threeCaliforniacitiesfiledforbankruptcyinquicksuccession:Stockton(June2012),

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MammothLakes(July2012),andSanBernardino(August2012).InOctoberof2012Moody’sdeclaredthatitwouldreviewforpossibledowngradethebondratingsfor32Californiacities(Moody’sInvestorsService2012g).ThemediaplayedupnationalconcernsaboutbankruptcyinCaliforniabeing“contagious,”andfinancialinstitutionshavemadeincreasinglyferventcallsforpensionreform(ChappattaandHays2012).

Inthisspirit,severalcitieshavescrambledtotightenthelimitsonmunicipalbankruptcysince2010.Californiaamendeditslawin2011tolimitcities’accesstoChapter9inanticipationofawaveofcityfilings(LocalGovernment:Bankruptcy2011),andPennsylvaniascrambled(ultimatelyunsuccessfully)tocloseoffthebankruptcyoptionforHarrisburg,itscapitol(NatalieCohen2013).Currently,twelvestatesauthorizemunicipalbankruptciesunderthetermsofChapter9(i.e.withoutconditions):Alabama,Arizona,Arkansas,Idaho,Minnesota,Missouri,Montana,Nebraska,Oklahoma,SouthCarolina,TexasandWashington.Twelveothersconditionallyauthorizemunicipalbankruptcies:California,Connecticut,Florida,Kentucky,Louisiana,Michigan,NewJersey,NorthCarolina,NewYork,Ohio,Pennsylvania,andRhodeIsland.Thislattergroupoftwelvestatesaccountsforadisproportionatepercentageofallmunicipalbankruptcies,andalsoincludesstateswithstrongreceivershiplaws.50

ThediscussionsaroundlimitingaccesstobankruptcyforcitiesinCaliforniaandPennsylvania,andtheemergencymanager/bankruptcyprocessinDetroit,demonstratethatitisaparticularformofinterventionbeingpromotedtoresolvecityfiscalcrisis.Onethatprotectscreditors,andpermitsthedissolvingofpensionandotheragreements.Otherwisebankruptcywouldbeequallyeffectiveatsolvingmunicipalcrisis,becauseitallowsfornegotiationofdebt,anoutsideexperttomakedecisions,thereplacementoflocalofficialdecision‐making,andso‐called“toughdecisions.”Theseformsofmonitoring,oversight,andinterventioninthecurrentcrisisarenotintendedorabletocounterrevenuescarcitydescribedinChapter2.Nor,Iwouldargue,istheausteritydescribedinChapter3theprimaryfocus.Rather,bothstateandfinancialactorsarelookingformeanstoerodingtheexpectationofpublicbargaining,notjustwithpensionsbutwiththeveryideaof“fixedobligations.”

Restrictingaccesstobankruptcyisanotherwaythatstateslimitthepowersofcities:Detroitpushedfortheabilitytopursuebankruptcy,butwithouttheGovernor’spermissionitcouldnotfileforbankruptcy.Thecityfirsthadtorelinquishitssovereigntytothestategovernmentinordertoputitsfateinthehandsofafederaljudge.51

50Threestatesprovidelimitedauthorization:COandORpermitonlyirrigation/drainagedistrictstofile,ILpermitsbankruptcyfortheIllinoisPowerAgencyandforacityifaFinancialPlanningBoardjudgesthatbankruptcyisinthemunicipality'sinterest.BothGeorgiaandIowaexplicitlyprohibitbankruptcy,withIowapermittingaverynarrowexemption.Theremaining21stateshavenoclearprovisionformunicipalbankruptcy:AK,DE,HI,IN,KS,ME,MD,MA,MS,NE,NH,NM,ND,SD,TN,UT,VA,VT,WV,WI,WY.51 Asitturnedout,thatjudgestruckamuchharderbargainonbehalfofDetroit’sresidentsandworkersthanthestateappointedemergencymanagerhadbeenwillingtoaccept(CityofDetroit2014).

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Statetakeover

Themostconcreteexerciseofstatepowerovercities,seenaspreferabletomunicipalbankruptcybybothstategovernmentsandbanks,istakeoverorreceivership.Receivership(whichgoesbymanydifferentnames)referstoastate’sorstate‐runentity’sassumptionofsomeleveloffiscalandpoliticalcontrolfromthecity.Thestatemaytakeoverfullscopeofcitygovernance,ormaycreateentitiesthatareempoweredtorevieworvetoacity’sfinancialdecisions(asinPhiladelphia),orcreateentitiesthatcanengageinborrowing,revenue‐raisingorspendingonthecity’sbehalf(asinNewYorkCity).InthissectionIdescribesomeofthenarrativesusedtojustifyanddefinesuchinterventions,particularlyinthecaseofDetroitduringthecurrentrecession.

Thereisalongandstoriedhistoryofstatecontrolboardsgoverningcityfinances:Washington,DC(1995‐2001);Miami(1996‐2001);Harrisburg(Pennsylvania’scapital,2011‐present),Camden(2001‐2010);AtlanticCity(2010);Philadelphia(1991‐present);Cleveland(1980‐1987)(Kobes2009).Over100boardshavebeenappointedin13statesandWashington,D.C.since1975,morethanhalfofthosesince2000(Kobes2009).Atleast28urbancitiesdeclaredbankruptcyorenteredstatereceivershipbetween2007and2013(Anderson2014).Thistendencytousestatecontrolovercitygovernanceinresponsetofiscalstresshasbecomemoreprevalentsince2000,andcallsforincreasedstatepowerhavecharacterizedthisrecession(Gillette2012).Inadditiontoaproliferationofsuchpolicies,andanexpansionofthepowersgrantedtostate‐appointedreceivers,severalstateshaveamendedtheirpoliciestoremoveprovisionsforstatefinancialaidintheeventoftakeover,makingthesepoliciesincreasinglyastickwithnocarrot(Anderson2012a).

Suchlawsareusuallycreatedonlyinresponsetoaspecificcrisisthestatelegislaturewantstomanage,orinordertoavertacityfilingforbankruptcy.Forexample,RhodeIslandexpandeditsreceivershiplawin2010,totakeoverthecityofCentralFallswhichhadattemptedtofileforbankruptcy(Goodnough2011).52ThestateofNewYorkhasuseditsreceivershippowerstotakethereinsofseveralcountiesduringthecurrentrecession(Braun2012).Indianapassedanemergencylawin2012withsimilarpowerstoMichigan’s(EmergencyManagerBill2012).Othercitiesandstatestriedtoexpandtheapplicationoflawsdesignedforemergencies.TheCityofNorthLasVegasusedaNevadastatutewrittenfornaturaldisasterstodeclareafinancialemergencyandvoidallofitsunioncontracts(Lake2012).

Theideaofreceivershipasasolutiontofiscalcrisisispremisedontheideathatthecurrentgovernmentlacksthepoliticalwillorabilitytomakethedecisionsnecessarytobringacityoutoffiscalcrisis;that(asmentionedabove)thecrisisisamatterofmismanagementand/orpoliticalimpasse.Receivershipmechanismsaretoutedasbringinginvestor(andemployer)confidencebacktothecity,thuspavingthewayforcheapercredit(throughhigherratings)andeconomicdevelopmentthatcanimprovethecity’sfiscalhealth.Forstategovernments,andthefinancialcommunity,controlboardsare

52SpeculationthatWisconsin’sgovernorScottWalkerwouldproposealawmodeledonMichigan’snevermaterialized(SeeUngar2011).

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framedasabetteroptionthanbankruptcy,inwhichthefateofbondholderswillbeleftuptoafederaljudge(seee.g.Kimhi2008).

AsDetroit’scrisisworeon,withthestatetryingtowrestcontrolusingemergencymanagerlegislation,therewasalotofpressandpoliticaldiscourseaboutthevalueofstatereceivershipasthebestsolutionforthecity.AnthonyWilliams,theformerMayorofWashington,D.C.,visitedMayorBingduringDetroit’snegotiationswiththestateoveraconsentagreement,totoutWashington’srecoveryundertheumbrellaoffederaloversight(Hackney2012).Thelawsthatpermitreceivershipalsotypicallyprovideforstate‐appointedactorstoexercisepowersthatelectedcitygovernmentsdon’thave,suchastheabilitytodissolvecontractsandcollectivebargainingagreements.Andthelanguagedefiningwhocanbeappointedtoreceivershippositionsemphasizestheimportanceoffinancialexpertiseand“non‐political”administrators.Forexample,underMichigan’slaw,suchindividualsarerequiredtobeaccountantsorotherexpertsinfiscalmatters,andmaynotbeformerelectedofficials(PublicAct4362012).Thelanguageofexpertiseandpoliticalindependenceissimilarlythreadedthroughoutotherstates’receivershiplaws.

NewYorkCity

TheNewYorkCityrecoverystrategyimplementedthroughthe1970sand1980sstillstandsasthemodelforoversightofcityfinances.Whenthebanks’refusaltoissuemoreshort‐termdebtputthecityonanimmediatepathtoinsolvency,themayor’sfirstactionwastoaskthefederalgovernmentforhelp,andthecitywasfamouslytoldto“dropdead”(VanRiper1975).Whatfollowedwasaprolongednegotiationofrecoverypackagesinvolvingthestate,thefederalgovernment,andthebanksholdingNewYork’sdebt.Someoversightofthecitycontinuestoday,andtheinstitutionsandmechanismscreatedarestillheldupasmodels.

SeveralinstitutionswerecreatedinordertomanageNewYork’srecoveryfromcrisis,manyauthorizedbythestate’sFinancialEmergencyActof1975andmadepermanentbysubsequentlegislation.Brashcallsthisthe“extrademocraticinfrastructure”(Brash2003,66).ATemporaryCommissiononCityFinances(TCCF)wascreatedtoadviseontaxationandexpenditurepolicies,aswellastheMayor’sManagementAdvisoryBoard(staffedbybusinessrepresentatives),theSettingMunicipalPriorities(SMP)projectatColumbia&NewSchool,andSpecialTaskForceonTaxation(Shefter1992,160;Freeman2000).TheDeputyMayor,DeputyMayorforFinance,andbudgetdirectorwereallforcedtoresigntopavethewayfortheappointmentof“trustworthy”staff(Dunstan1995).

TheGovernorthenappointedanadvisorycommitteetomonitorthecity,andthecommitteerecommendedthecreationoftheMunicipalAssistanceCorporation(MAC),anindependentcorporationthatwasauthorizedtosellbonds.MACwasacreationandentityofthestate,formedatthehomeofthepresidentofMetLife,andtheGovernorappointedthemajorityofMAC’sboardmembers(Tabb1982).Thestatepassedalawconvertingthecity’ssalesandstocktransfertaxesintostatetaxes,whichwerethenusedassecurityfor

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MACbonds(Dunstan1995).MACinitiallyhaddifficultysellingthesecurities,thendemandedsignificantretrenchment.53Ultimately,thecity’semployeepensionfundsinvested40percentoftheirassetsinMAC.Inexchangeforthesemanylayersofconcessions,thecity’screditorsrestructuredtheirdebtholdings,loweredinterestrates,lengthenedmaturities,orswappedtheirholdingsforten‐yearMACsecurities(Dunstan1995).

ThestatealsocreatedtheOfficeofSpecialDeputyComptrollerforNewYorkCity(OSDC),housedinthestatecomptroller’sofficeandchargedwithauditingthecity’sbooks(madepermanentin1986).Finally,ThestatecreatedtheEmergencyFinancialControlBoard(EFCB),laterrenamedtheFinancialControlBoard(FCB)whenitwasextendedthrough2000asaconditionofadditionalfederalassistancein1978.In2003theFCBwasmadepermanent;MAConlyvoteditselfoutofexistencein2008(Lisberg2008).

TheFEAalsorequiredthatthecitybalanceitsbudgetwithinthreeyears,changeitsaccountingmethods,andcreateathree‐yearfinancialplan.TheFCBhadtheauthoritytoreviewandrejecttheplan,aswellasthecity’soperatingbudget,capitalbudget,unioncontracts,andallmunicipalborrowing.Thecityalsooverhauleditsaccountingandinformationsystems,collectingandpublishingadditionaldataonfiscalcondition,increasinggovernmenttechnicalanddataknowledge,whichprovidedpotentialammunitionforfiscalmonitorsandpoliticallypowerfulactorscommittedto“balancingthebudget”(Shefter1992,200).TheMACandFCBheldvetopoweroverthecity’sbudgetandspendingdecisions.MayorKochoncedescribedthecityasthe“indenturedservant”oftheFCB(CitizensResearchCouncilofMichigan2012,3).

TheFCBstillreviewsandoverseesfinancialmanagementofNYCanditsrelatedpublicauthorities(NewYorkStateFinancialEmergencyActofTheCityofNewYork1975).TheBoarddetermineswhethercertaintriggereventsarelikelytooccur,andcanreimposea“controlperiod”ifcertainconditionsaremet:failuretopaydebtservice,anoperatingdeficitofmorethan$100million,issuesnotesinviolationoftheFinancialEmergencyAct,orthestateandcitycomptrollersrefusetojointlycertifythecity’scompliancewiththeFEA.In2003theFinancialEmergencyActwasextendeduntil2033(atthesametimeoutstandingMACbondswererefundedwithstateassistance).In2005thecity’scharterwasrevisedtoincorporatemanyoftheFEAprovisions,includingabalancedbudgetrequirement,afour‐yearfinancialplan,annualaudit,andrestrictionsonshort‐termdebt.

Theimplementationofanintricatestateinfrastructureofoversightbothfragmentsurbangovernance,byseparatingfiscalpolicy‐makingfromotherformsofurbanpolicy,andremoveselementsofitfromdemocraticoversight.Brasharguesthatinordertoshiftmoneytosubsidiesforrealestatedevelopmentbusiness(theso‐called“headquarterscity”approachtourbanpolicy),andawayfromservicesforthepoorandwagesformunicipal

53Thecityhadtoraisefeesforservices,subwayandtheuniversity,cutotherservices,reducetheworkforceandrescindawageincrease(meaningwagesdidnotkeepupwithinflation).Twentypercentofcityjobswereeliminated.Thestateassumedthefullcostsoffinancingthecityuniversityandpartofthewelfareandcourtsystems.

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workers,thecity’selitehadtousethecrisistomove“outsidetherealmofdemocraticgovernance”(Brash2003,67).

By2007,NewYork’srecovery—andthereforethemechanismsassociatedwithit—becameseeninretrospectasamodel.Stateoversightwasframedascentraltothecity’sturnaroundinthe1990s,whilealternativeexplanationsrecededintothebackground,suchasthehighratesofinflationthroughthe1970sthatincreasedcityrevenuesandeffectivelyreducedthesizeofthedebt(Hackworth2007).ThepraiselavishedonNewYork’sfiscalmanagementinfrastructuretodayomitsakeyfact:thatNewYork’srecoveryafter1975wascomplexanduneventhroughoutthe1980s.Notuntilthenationaleconomyandthefinancialindustry(concentratedinNewYork)boomedthroughthe1990sdidthecityregainaninvestor‐gradecreditratingandbecomeviewedasasuccessfulrecovery.Rapidinflationthroughthe1970sand1980salsohelped,bydeflatingtherealvalueofthecity’sdebt;freezingthewagesofcityemployeesinarapidlyinflatingeconomymadeitafiscallyeffective,ifpersonallycruel,strategy.AndtheamountofstateandfederalaidthateventuallypouredintoNewYorkwasvast,whencomparedtotheneartotalabsenceoffederalsupportforbankruptcitiestoday,includingDetroit.

Historyhasshownthattheinfrastructureofstateinterventionlastslongaftercrisesareresolved,perhapspermanently.PhiladelphiaisoverseenbythePennsylvaniaIntergovernmentalCooperationAuthority(PICA),putinplaceaspartofthestate’sreceivershipofthecityintheearly1990s.Since1991,PhiladelphiahashadtoobtainPICA’sapprovalofitsfive‐yearbudgetplan;in2011,forthefirsttimesinceitsinception,PICAstaffurgedtheboardtorejectthecity’sfive‐yearplanin2011,urgingtheboardtorequire“amorerationalandcompetitivetaxsystem,asustainablepensionsystem,anefficientsystemofemployeehealthbenefits,competitive[i.e.lower]wagesforworkers,morerobusteconomicgrowth,wellmaintainedinfrastructure,andimprovedservices.”Philadelphia’smonitoringbyPICAisregularlymentionedinratingsagencycommentsaboutthecity,ascreditpositive.Butthepresenceofstateoversightclearlyaffectsthecity’sstrategiesformanagingfiscalstress.Asthe2008fiscalcrisisdeepened,thatstateinfrastructurewasrepeatedlyinvoked.Whilesuchlawsaredescribedandjustifiedastemporaryinterventionstoresolvecyclicalorextremecrises,inrealitythesemodelsholdtheprospectofpermanentstateinterventionincityfinances.

Detroit

[Residents’]presentationsdemonstratedanextraordinarydepthofconcernfortheCityofDetroit,fortheinadequatelevelofservicesthattheircitygovernmentprovidesandthepersonalhardshipsthatcreates,and,mostclearly,forthepensionsofCityretireesandemployees.Theseindividualsexpressedanotherdeeplyheldconcern,andevenanger,thatbecameamajorthemeofthehearing—theconcernandangerthattheState’sappointmentofanemergencymanagerovertheCityofDetroitviolatedtheirfundamentaldemocraticrighttoself‐governance.(Rhodes2013,37)

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ThiseloquentdescriptionbythefederalbankruptcyjudgeinrulingonDetroit’seligibilityforbankruptcyreflectsthepoliticalstakesofDetroit’sfate.Detroit’stakeoverbyMichiganandsubsequentbankruptcyfilingnowrepresentsthestrongestexampleofstateinterferenceinlocalgovernancebasedonfiscalemergency.Michigan’slegaleffortstoexpandthepowersofemergencymanagersgarnerednationalattentionbeginningin2010,butthestatehasactuallyhadthreeversionsofanemergencymanagerlawinplaysince2008.In1990thestateenactedPublicAct72,the“localgovernmentfiscalresponsibilityact,”whichauthorizedthestatetointerveneinlocalgovernmentunits(includingschooldistricts)thatexperience“financialemergencies.”PublicAct72wasusedtoappointemergencymanagersonlytentimesin20years(Snyder2011).

In2010,RepublicanGovernorRickSnyder(electedaftereightyearsofDemocraticleadership)campaignedimmediatelyupontakingofficeforadramaticrevisionofPublicAct72;hesignedtheLocalGovernmentandSchoolDistrictFiscalAccountabilityActinMay2011(PublicAct42011).Thelawgreatlyexpandedthepowersthatstate‐appointedemergencymanagerscanexercise,mostsignificantlyitcreatedthepowertodissolvegovernmentcontracts,includingcollectivebargainingagreements(PublicAct42011).54Thelawpermittedthecitytoavoidanemergencymanagerbyreachingaconsentagreementbetweenthecity’sgoverningbodyandstateofficialsthatpreservessomelocalautonomywhilecreatingpowersforareviewentity.

ShortlyafterthepassageofPublicAct4,opponentsbegantoorganizetorepealit.StandUpforDemocracywasorganizedresidentsandjoinedinlawsuitsagainstspecificemergencymanagerappointments,elementsofthelaw’simplementation,andtheconstitutionalityofthelawitself(Davey2011).ResidentssuccessfullysuedovertheprivatemeetingsheldbythefinancialemergencyreviewteaminDetroitinlate2011andearly2012,andinFebruary2012ajudgeruledthatthereviewteammuststartoverandmeetinpublic55(Nichols2012).ProtestorsdisruptedStateTreasurerDillon’sattemptstospeakatameetingofthefinancialreviewteam(Meloni2012).

Afterayearofsuchorganizing,opponentssuccessfullysuedtoplaceareferendumontheemergencymanagerlawontheNovember2012ballot,resultinginthesuspensionofthelawpendingtheNovembervote(Scott2012).Duringthecampaignforrepeal,theGovernorandseveralbanksominouslywarnedoftheriskstoMichigancitiesandtheircreditratingsiftherepealsucceeded(ProposalOne‐Michigan’sEmergencyManagerLaw2012).Thelawhadbeenwidelypraisedbyratingsagenciesandbusinesspressasamodelforotherstates(C.Christoff2012;Raphael2012).DespiteheavycampaigningbyGovernor

54From2008to2013,thelawwasusedtoinstitutestate‐appointedemergencymanagersinfivecitiesandthreeschooldistricts:Flint(November2011),BentonHarbor(April2011),Pontiac(March2009),MuskegonHeightsPublicSchools(April2012),Ecorse(October2009),AllenPark(October2012),SchoolDistrictofHighlandPark(January2012),DetroitPublicSchools(March2009).Threecitiesareunderconsentagreementsthatweresignedunderthreatofanemergencymanager:RiverRouge(October2009),Inkster(February2012),andDetroit(April2012).55Thereviewteam’sresponsewastocreateasubcommitteethatmetinprivate,andthedecisionwasultimatelyreversedonappeal.

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Snyder,inNovember2012Michiganresidentsvotedtorepealthelaw,throwingthefateofappointedemergencymanagers,andofDetroit,intoquestion.

PublicAct436

LessthantwomonthsafterPublicAct4wasrepealed,anewemergencymanagerlawwaswrittenandpassedbytheMichiganlegislature(Michigan§§141.1541‐141.1575:“localfinancialstabilityandchoiceact,”hereafterPA436).56PA436permitscitiestochooseamongfouroptions:aconsentagreement,mediation,emergencymanager,orbankruptcy.Itcontainsthesametriggersforafinancialreview,includingtheblanketstatement:“Theexistenceofotherfactsorcircumstancesthat,inthestatetreasurer’ssolediscretionforamunicipalgovernment,areindicativeofprobablefinancialstress”(PublicAct4362012).

TheprimarydifferencebetweenPublicAct4andPublicAct436isthatratherthanfacingtwochoices(anemergencymanagerorastate‐approvedconsentagreement),localgovernmentsfoundtobeinafinancialemergencynowhavefourchoicesintheeventthatafinancialemergencyisdeclared:

(1)Aconsentagreement,inwhichlocalleadersremaininchargebutmustmeetcertainconditionsinanagreementnegotiatedwiththestate.TheprovisionsarealmostidenticaltoPublicAct4,includingthecontroversialprovisionthatalocalgovernmentinaconsentagreementunderthisactisnotsubjecttopubliccollectivebargaininglaw.

(2)Astate‐appointedemergencymanager:anofficialwhoreplacesthelocalgovernmentstructure,andhasbroadauthoritytoaddresslocalfinances.TheprovisionsarealmostidenticaltoPublicAct4,althoughthestatenowpaysthecompensationoftheemergencymanager,insteadofthelocalgovernment.57

(3)Chapter9bankruptcy(whichmustbeapprovedbytheGovernor,andcanberequestedbyanemergencymanager)

(4)Neutralevaluation:amediationprocessinwhichthelocalgovernmentandinterestedpartiesmeetwithaneutralpartytoresolvefinancialissues,

56AfterthepassageofP.A.436,therewasstillconsiderablelegaluncertaintyaboutthelaw’simplementation.TheStateAttorneyGeneralhasheldthatPublicAct72remainsineffectwiththerepealofPublicAct4,andthatconsentagreements(suchastheoneimplementedinDetroit)andemergencymanagersappointedunderPublicAct4remaininfulleffect.WiththerepealofPublicAct4,alloftheseareconsideredgovernedbyPublicAct72untilPublicAct436takeseffectinMarch,atwhichpointPublicAct436willbethesolegoverninglaw.57(Andthestatemaydirect“privatefunds”towardthatcompensation,pavingthewayforfoundationstopaythesalaryoftheemergencymanager,astheycurrentlydoforthemanagerofDetroitPublicSchools)

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includingemployeecontracts.(Thisissimilartothekindofmediationprocessesrequiredinmanymunicipalbankruptcyproceedings.)

Thelawmaintainsthepowersofemergencymanagerstochangeorterminatecollectivebargainingagreements,changepensionboards,andselloffpublicassets(withstateapproval).Thenewlawalsoincludesa$780,000appropriationthatmakesitreferendum‐proofbyvotersundertheMichiganConstitution.58Thenewlawalsocreatesanoptionforlocalgovernmentstoremoveanemergencymanagerafter18months,byapprovingtheremovalbya2/3majority(theonlystateconcessiontothepublic’sconcernoverpermanenttakeover).

PublicAct4receivedattentionforthebroadpowersitgrantstoappointedemergencymanagers,andPublicAct436preservesvirtuallyallofthosepowers.Theemergencymanagerservesatthepleasureofthegovernor,andacts“forandintheplaceandsteadofthegoverningbodyandtheofficeofchiefadministrativeofficerofthelocalgovernment.Theemergencymanagershallhavebroadpowersinreceivershiptorectifythefinancialemergency(PublicAct42011,Sect.9(2)).59Theemergencymanagerservesuntilremovedbythegovernororlegislaturebyimpeachment,untilthe“financialemergencyisrectified”(PublicAct42011,Sect.9(6)).60Theemergencymanagerisresponsibleforcreatinga“financialandoperatingplan”thatlimitsoperationsofthelocalgovernmenttotheamountofresourcesintheemergencymanager’srevenueestimate;fullpaymentofallscheduleddebtservice,andpaymentstothepensionfund.Themanagerisempoweredtosigncontracts,negotiatewithcreditors,vendors,unions,orothergovernments,andtocontrolfundsfromothergovernmentsources(suchasfederalgrants)(PublicAct42011,Sect.10).TheStateTreasurermaintainstotalapprovaloverthefinancialplan,andtheplanmayonlybemodifiedwithapprovalbytheTreasurer;itdoesnotrequireanypublicapproval(PublicAct42011,Sect.11(4)).

Thefinancialplanmustprovideforthemodification,rejection,termination,andrenegotiationofcollectivebargainingcontracts.Thelawmakesclearhowbroadlythisistobeinterpreted:

[A]ftermeetingandconferringwiththeappropriatebargainingrepresentative…ifintheemergencymanager’ssolediscretionandjudgment,apromptandsatisfactoryresolutionisunlikelytobeobtained,[hemay]reject,modify,orterminate1ormoretermsandconditionsofanexistingcollectivebargainingagreement.(PublicAct42011,12(1)(k))

58Opponentsofthelawarenowproposingaconstitutionalamendmenttopermitreferendumrepealofsuchlaws(Egan2013).59Thegoverningbodyandchiefadministrativeofficerofthelocalgovernmentshallnotexerciseanyofthepowersofthoseoffices”(emphasismine).60Oriftwo‐thirdsofthegoverningbodyofthelocalgovernmentvotestoremovethemanager(inwhichcasethecityhas10daystosignaconsentagreementwiththestatetreasurerormoveintotheneutralevaluationprocess),whichcanonlyhappenafterthemanagerhasservedforatleast18months

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Aswithmanyreceivershiplaws,thebreadthofpowersgrantedtotheemergencymanagerexceeds,inmanycases,thepowersofthegovernmentthatheorshedisplaces.

Likeitspredecessor,PublicAct436outlinesabroadrangeofcircumstancesunderwhichafinancialreviewcanbeinstigated.Ilistthemalltogiveasenseofthehugenumberofcircumstancesunderwhichacitymightfacereview:

Ifitisrequestedbythelocalgovernmentitself,acreditor,ataxingjurisdictionthathasn’treceivedrequiredtaxrevenues,orapetitionbyelectors.

Ifthegovernmentfailstomeetcertainobligations:failstomakeaminimumobligationpaymenttolocalgovernmentpensionfund,failstopaywages,salaries,otherexpenses,orretireebenefits,ordefaultsonbondornotepayment.

Ifthegovernmentcommitsaviolationofbondornotecovenants,therevenuebondact,themunicipalfinanceact,anorderissuedbylocalemergencyfinancialassistanceloanboard(partoftheemergencymunicipalloanact),ortheuniformbudgetingandaccountingact.

Ifitisinbreachofadeficiteliminationplan(plansthataretriggeredbythestate’srevenuesharinglaw).

ByresolutionoftheStateHouseorSenate.

Ifitfailstotimelyfileanannualfinancialreportoraudit(thatconformswithstatefinancialauthority&uniformbudgetingact)

Ifacourthasorderedanadditionaltaxlevywithoutapprovalofgoverningbody.

Ifthegovernmentisinadeficitcondition.

Thegovernmenthasbeengivenalong‐termdebtratingofBBBoritsequivalent[junkratings]orlowerbyoneratingsagency.

Inadditiontothesemanyfactors,areviewteammaybecalledforbytheTreasurerin“theexistenceofotherfactsorcircumstancesthatinthestatetreasurer'ssolediscretionforamunicipalgovernmentareindicativeofmunicipalfinancialstress”(PublicAct4362012,sectionr,emphasismine).

Ifthereviewfinds“probablefinancialstress,”theGovernorappointsareviewteamconsistingtheStateTreasurer,DepartmentofTechnology,Management,andBudget,nomineeofSenatemajorityleader,andanomineeofSpeakeroftheHouse.Thatreviewteamundertakesa“municipalfinancialmanagementreview”(PublicAct436)todeterminewhetherafinancialemergencyexists,basedonthefollowingconditions:

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Failuretomakepaymentsondebt,pensioncontributions,wages,orotherbills;

Measuresofdeficit,including:theamountofaccountspayableismorethan10%oftotalFYexpenditures,thereisa“failuretoeliminateanexistingdeficitinanyfundofthelocalgovernmentwithinthe2‐yearperiod”precedingtheendofcurrentfiscalyear,thereisprojectedageneralfunddeficitinexcessof5%ofbudgetedrevenues,orthecityhasa“structuraloperatingdeficit;”

Temporarydeficitsolutions,suchas“borrowing”fromfundstothegeneralfund;or

Anyotherfactsandcircumstancesindicativeofafinancialemergency.(PublicAct4362012,emphasismine)

Thebreadthofthislaw,anditsrelianceondiscretionbystateofficialsandthereviewteam(whichconsistsprimarilyofstateappointees)createsalandscapeinwhich“financialemergency”isadiscretionaryconstruct,withamixtureofbothmeasurableindicatorsandtheideathatofficialswillknowitwhentheyseeit.

Justifyingintervention

UnionmembersandalliesprotestedthepassageofPublicAct4(BellandChristoff2011).Thelawwasreferredtoas“martiallaw”byopponentswhenitwaspassed.DuringtherunuptotheappointmentofareviewteamforDetroit,SnyderrepeatedlywentonrecordsayingthathewantedtoavoidatakeoverofDetroit:“MygoalistobeasupportingresourceandbetheretohelpDetroitsucceedbyitself”(C.Christoff2011).InJanuary2012,whenareviewteamwasappointed,thestate’sTreasurerpubliclystatedthatDetroitcouldonlyavoidtakeoverbygettingconcessionsfromunions(NeavlingandBell2012).JustasthecourtwasrulingwhethertoplaceareferendumonPublicAct4ontheNovember2012ballot,SnyderissuedastatementonhiswebsiteMichigan.gov(accompaniedbyavideo):

AppointinganemergencymanageristhelastthingIeverwanttodo.That'swhythislawprovidesawaytopreventafinancialcrisisfromevergettingthisfar.Butifworsecomestoworse,thestatehasaresponsibilitytoprotectthehealth,welfareandsafetyofitscitizens.Wecan'tstandbyandwatchschoolsfail,watershutoff,orpoliceprotectiondisappear.Withouttheemergencymanagerlaw,thereispreciouslittlethatcanbedonetopreventthosekindsofnightmarescenarios.Butwithit,wecantakepositiveactiononbehalfofthepeopletoquicklyavertacrisis.

Asgovernor,IwilldoeverythingIcantoworkwithlocalgovernmentstopreventproblemsbeforetheyreachatippingpoint.Butwhenfinancialdisasterisuponus,Iwillnothesitatetotakeactionunderthelawonbehalf

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ofthepeopleofMichigan.(ProposalOne‐Michigan’sEmergencyManagerLaw2012)

Afterthereferendumwasplacedontheballot,theGovernor’sofficelaunchedacampaigntodefendPublicAct4aftertheAugustdecision,aidedbyfundsandactivismfromCitizensforFiscalResponsibility.AndafterPublicAct436wasquicklypassed,theGovernorlaunchedapubliccampaigntotoutthe“improvements”tothelaw.Ashesignedthelaw,GovernorSnydersaid:“Thislegislationdemonstratesthatweclearlyheard,recognizedandrespectedthewillofthevoters.Itbuildsinlocalcontrolandoptionswhilealsoensuringthetoolstoprotectcommunitiesandschooldistricts'residents,studentsandtaxpayers”(Oosting2012).Snyder’swebsitequicklypostedadescriptionofthenewlaw,referencingtheappeal:

WHATIT'SALLABOUT:EmergencyPowersintheHandsofthePeople

InNovember,Lansingheardthevoiceofthepeople,andtheirmessagewasloudandclear.Theyweren'thappywithMichigan’semergencymanagerlaw—a.k.a.,PublicAct4—andtheywantedachange.

Sowestartedoverfromscratch,toretheengineapart,andbuiltanewemergencymanagerlawinlinewithwhatthepeoplewant.Thebasisofthenewlawisjustthat—it'sallaboutputtingpowerinthehandsoflocalcommunities,givingthemthetoolstheyneedtostepoutsideoftheboxandtakeactiontosolvetheirfinancialemergencies.

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Figure5.1.EmergencyPowersIntheHandsofthePeople

Source:StateofMichigan,Governor’swebsite:http://www.michigan.gov/snyder/0,4668,7‐277‐57577_60279‐290993‐‐,00.html

Michigan’semergencymanagerlawhasbeenheldupasamodel,toutedasperhapsthebestinthenationbythefinancialpress(Bloomberg),ratingsagencies(Fitch),andlegislators(Wisconsin)(Raphael2012;C.Christoff2012).Here’sanexampleofthekindofpraiseissuedbyFitchRatingsofMichigan’slaw:

MichiganrecentlyinstitutedPublicAct4,whichFitchviewsasperhapsthestrongestprograminthenation,asitallowsastate‐appointedemergencymanagerto"reject,modify,orterminatetermsandconditionsofanexistingcontract."

Akeyconsiderationinamechanism’seffectivenessisitsabilitytoaddressthelegalandpoliticalissuesaswellasthefinancialconditionsthatnecessitateit.Inthemosteconomicallyandfiscallydistressedsituations,wherelayoffsandservicereductionshavebeenexhaustedandrevenueraisingisseverelylimited,achievingsavingsbyreducingthecostofdeliveringservicesmaybecrucial.Yetagovernment'sflexibilitytoreducespending,evenunderastate‐imposedcontrolmechanism,willbeaffectedbythestrengthoflawsgoverninglaborcontracts,benefits(includingpension

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obligations),andserviceprovisions.Theselawscanblunttheimpactofallbutthemostpowerfulcontrolmechanisms.(Raphael2012).

Michigan’sapproachtoDetroit’sfinancialcrisishasemergedasabroadermodelforstate‐urbangovernancethatencompassesatleasttwootherimportantpolicytrends:radicalprivatizationofpubliceducationandtheeliminationofcollectivebargaining.UnionsandcommunitygroupsinDetroitandotherMichigancitieshavevoicedsignificantoppositiontothesemodels,buthavebeenunsuccessfulsofar.In2013,Michigan,thebirthplaceoftheU.A.W.,becamearight‐to‐workstate,oneofthebiggestpoliticallossestoU.S.laborinhistory(TheEconomist2012).

Detroit’stakeoverandbankruptcy

InMarch2013,Detroit’sgovernmentwasreplacedbyastate‐appointedemergencymanager(acorporateturnaroundexpert,KevynOrr).OnMay12,OrrissuedhisfinancialandoperatingplanforDetroit,consistingofapredictableapproach:privatizingthecity’slighting,water,andevenhealthservices;securingprivatefundingforbasicequipmentandservices(suchasemergencyvehiclesandparkmaintenance);increasingtaxsubsidiesfordevelopment;sellingoffpublicassets(includingthecity’sartcollection);andloweringwageandbusinesstaxestospurgrowth(K.D.Orr2013a).Indiscussingtheproposedcontractingoutofstreetlightingandgarbagecollection,Orrsaid“Iprefertothinkofitas‘upgrading’becausesomeoftheseservicesareanachronistic…Whatbigcitystilldoessomeoftheseservices?”(Finley2013).Thesecuts,however,wouldonlymakeasmalldentinDetroit’sdeficitanddebt.ThecornerstoneofOrr’sapproachwasnegotiatingwiththebanksholdingDetroit’sdebt(particularlytheswapdebt)andthecity’sunions,overthetermsofpensionbenefitstocurrentemployeesandretirees.InJuly2013,Orrsaidthatnegotiationswithbothunionsandcreditorshadbrokendownandfiledforbankruptcy,whichoffersthepossibilityofrenegotiatingpensionobligationsandunioncontracts,aswellasnon‐secureddebt.HerequestedandobtainedpermissionfromGovernorSnydertofileforbankruptcyonbehalfofDetroit,thelargestmunicipalbankruptcyinU.S.history(K.D.Orr2013b;Snyder2013).

BothSnyderandOrremphasizethelong‐termnatureofDetroit’stroubles:“ThefiscalrealitiesconfrontingDetroithavebeenignoredfortoolong.…Thisisadifficultstep,buttheonlyviableoptiontoaddressaproblemthathasbeensixdecadesinthemaking”(GovernorSnyder’sOffice2013).Inhisfirstpublicstatementaboutthecity’sfinances,Orrsaid:“Financialmismanagement,ashrinkingpopulation,adwindlingtaxbaseandotherfactorsoverthepast45yearshavebroughtDetroittothebrinkoffinancialandoperationalruin”(Helms,Guillen,andPriddle2013).Despitetheiracknowledgmentoflong‐standingstructuralchallengesfacedbythecity,bothSnyderandOrremphasizethatthecitycanbeturnedaroundquickly,andthatthedecisionsfacingthecityaresimpleones.InaninterviewwithWallStreetJournal,Orrsaidthattheemergencymanagerjobwas“justjudgmentcalls,commonsense”(Finley2013).Referringtohisnegotiationswithunions,Orrsays“Thisisfifthgradestuff.”Thecity’saccumulateddebt(estimatedat$18billionin

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2013)isframedasamoralchoice,ratherthanahistoricalproduct:“Wehavetobreakouraddictiontodebt”(HelmsandGuillen2013).

ThequestionaboutDetroitisnotwhetherorwhenothercitieswillendupinasimilarcrisis,buthowthesolutionsdefiningDetroit’sfiscalrecovery—pensionreformandstateintervention—havebecomenationalmodelsdespiteDetroit’sexceptionalcircumstances.Thestructuralfiscalchallengescreatedbydisinvestment,unevenrevenuecapacitybetweenDetroitanditssuburbs,andhighpovertyhavenotbeenaddressed.Thedeclineofstaterevenuesharingandthedebtaccumulatedprimarilythroughlargeeconomicdevelopmentprojectshavebeenlargelyabsentfromdiscussionsaboutthecity’sfuture(BomeyandGallagher2013).InsteaditistheobligationstopublicworkersthatareturningDetroitintoadiscursivesymbolofcrisisloomingproblemforeveryAmericancity.Thecity’simmediatefinancialcrisis—theinsolvencycreatedbymountingdebt,agrowingdeficit—mayberesolvedthroughbankruptcy(albeitonthebacksofpublicworkers),butthefiscalimbalancecreatedbytheotherfactorsremains.

Whataretheimplicationsofnormalizingstateinterventionincitycrisis:thatcertainaspectsofgovernanceshouldbesubjecttooutside,unaccountablereview?Thatcitiescannotresolvefiscalproblemsontheirown?Iarguethatsuchboards(includingDetroit’semergencymanagerandconsentagreementstructure)arenotexceptionsto“normal”budgetprocessesbutareintegralaspectstohowcityfinancesandpolicyarebeingdisciplined.Anarrativeofthe“rights”ofbondholdersandtaxpayersisusedtojustifystateintervention,whiletherightsassociatedwithurbandemocracyandcollectiveconsumptionarerenderedinvisible.WhileresidentsinDetroit,subjecttothemostextremeformofstateintervention,engagedinvibrantprotests(allthewaytobankruptcycourt),othercitieshavebeensubsumedunderamoresubtlemodeofinterventionandtakeover,withlittlefanfare.

ThesepolicyresponsestourbanfiscalcrisisreflecttheideologyunderlyingabroadsetofotherstrategiesthatdominatethereshapingofU.S.citiestoday:austerity,privatization,“righttowork,”andmarket‐basedgovernancethatisactiveinterferenceindemocracytoprotectmarkets.Thenarrativesusedtodescribeandjustifythesepoliciesreflectanembeddedbeliefthatcitiesneeddrastic,butone‐time,solutionsinordertoregainsolvency,thatelectedcityofficialshavetroublemakingtoughdecisions,andarebeholdentolocalpoliticalinterests.Thestructuralproblemsleadingtourbanfiscalcrisisareoftenleftunaddressedbystateintervention,inpartbecausestatepolicieslimittheremediesavailable(suchasrevenueincreases,stateaid,ortherestructuringofgeneralobligationdebt).Thesenarrativesarenotlimitedinapplicationtocitiesfacingfiscalcrisis;elementsofthepoliciesdiscussedinthischapterarecloselywatchedandadoptedbypoliticiansinstateandlocalgovernmentsoutsidethecontextofcrisis.Thisisproducedinpartbytheparticularpoliticalrelationshipsandpowerstrugglesbetweencitiesandstates.

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Redstate,bluecity

Thespecificpoliticaldynamicsofstatecontrolovercitygovernmentsdiffersbystate,butnationally,U.S.politicshasincreasinglybeencharacterizedbyRepublican‐dominatedstatelegislaturesbattlingwithpredominantlyDemocraticcitiesandmetropolitanareas(Baker2012).Thismeanscitiesareincreasinglysubjecttofiscaldisciplinebystateswhoseelectedrepresentativesliepoliticallytotherightofcityresidentsandtheirelectedofficials.Thedynamicsofstatecontrolovercitygovernmentsdiffersbyplace,butU.S.politicshasincreasinglybeencharacterizedbyRepublican‐dominatedstatelegislaturesbattlingwithpredominantlyDemocraticcitiesandmetropolitanareas(Baker2012).NearlyallU.S.Citiesover100,000electpredominantlyDemocraticofficials,eveninstatesthatareruledbyRepublicans(Kron2012).Forexample,everymajorTexascity,includingDallas,hasvotedDemocraticinthepasttwopresidentialelections,defyingTexas’overallshifttotheright(Kron2012).DetroitwasoneofthefewplacesinMichigantosupportObama.WhilethenumberofRepublicanGovernorshasbeengrowing,moststrikinglyin2014(Jacobson2014),thenumberofRepublicanMayorsoflargecitieshasbeenshrinking(Niquette2013;Burns2013).

Theconsequencesofthesedividescanbesignificantforcityfinances.Republicanstateofficialsaremorelikelytosupportregressivetaxes(salestaxesandfees)thanmoreprogressiverevenuesorotherrevenueincreases(seee.g.Stevenson2013).ThepushfortaxcuttinggenerallyassociatedwithRepublicangovernorshashaddireeffectsonstatefinances,whichthenaffectscitybudgets.Partydifferencesbetweencityandstateleadershipalsocreatesanatmosphereinwhichbigcityautonomy(anditsleadership)arenotvaluedbystatepolicymakersorGovernorsforpoliticalreasons,inadditiontothefiscalmotivestheyclaimpublicly(R.Florida2013;GammandKousser2013).

Oneoftheprimarydriversofthisstate‐citydivideistheoftendramaticdemographicandpoliticaldifferencesinthepopulationsofstatesandtheirlargestcities.InMichigan,thestatelegislatureissignificantlymorepoliticallyconservativethanDetroit’sresidentsortheirrepresentatives;thestateisonly14%Black(2010Census),whileDetroitisnowestimatedtobe83%.Thisracialdividehascharacterizedthecity’spoliticalrelationshipwiththestatefordecades(Desan2014).ThestruggleforstateversuslocalcontrolinDetroitandotherMichigancitieshasalonghistory,andthedebatesoverwhenthestatecansuspendlocalgovernmentsbuildsonthathistory,includingthepoliticsoflaborandraceinDetroit’sdevelopmentandtherelationshipbetweenDetroitandthestate(Sugrue2005).ForcitieslikeDetroit,thishashadsignificantimpactonthestateresponsetourbanfiscaldistress.Intimesofrevenuescarcity,statesexercisepowersthattheyhavealwayshadbutnotexercised:todivertrevenues;cappingpropertytaxes;andkeepingsalestaxesratherthanreturnportiontolocalgovernments(BowmanandKearney2012).

LikeDetroit,Dallaslieswelltotheleftpoliticallyofitsstategovernmentorresidentsasawhole,butitspoliticsalsoreflectthefiscalindependenceandlackofrevenuesupportbyTexas,andtheindirecteffectsofalegacyofleangovernmentthatsetsexpectationsforlocalandstategovernmentservicesmuchlowerthaninotherstates(Graff2008).Thestate’sbudgetcrisis(whichsurpassedCalifornia’sonceoilrevenuesbeganto

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declineandaggressivetaxcutstookeffect)affectedthecitymoreindirectly,asthecityalreadyreceivedlittlesupportfromthestate.TheMayorandCityManagerofDallasmadenoclaimsforstateassistance,althoughfrom2008onwards,protestsofTexas’draconiancutstoK‐12publiceducationdominatedlocalpoliticaldebates(Mckinley2011;Fernandez2012).

Philadelphia’srelationshipwiththestatehasbeendefinedprimarilythroughitsgovernancebyPICA;thestatehasbeenactiveinthecity’spensionandK‐12educationfundingchallenges,authorizingatemporarysuspensionofitspensioncontributions.Philadelphiais37%Black,Pennsylvaniaonly10.9%(2010Census).AdamsusedPhiladelphiatoillustrateherargumentthatlocalgovernmentsweresteadilyrelinquishingpowertostategovernments,andtherebyreducingthepoweroflocalpublicemployeeunions(Adams2008).ShealsousesPhiladelphiaasanexampleofthedramaticinequalitiesbetweencentralcitiesandtheirsuburbs.

SanJoselacksthedemographicdivideoftheotherthreecities,andalsohewsmoretoitsstateoverallpoliticalclimate;theMayor’sownpushforpensionrestructuringhasbeenpickedupbystatelegislators.ThecitysuffersfromCalifornia’svoter‐imposedrestrictiononrevenues,whichaffectsbothcityandstaterevenueoptions(statutoryconstraintsonthestatebudget—somepassedinballotinitiativesbyvoters—meanthat.

Peckdescribesthefederalpolicyofdevolutionas“urbanabandonment”(Peck2006,306),apolicythathascontinuedevenintimesofgravecrisis.Thelimitationsofthefederalstimulusprogram,andtherefusalofthefederalgovernmenttoofferDetroitanysignificantaid,representsuchabandonment(Bender2013).TheWhiteHousepresssecretary,whenaskedwhetherthefederalgovernmentwouldhelpDetroit,saidsimply:“Ithink,again,IwouldpointyoutowhatwehavesaidandwhatleadersinMichiganandDetroithavesaid,whichisthatonthematteroftheirinsolvency,that’ssomethingforthecityandthecreditorstoresolve”(Carney2013).In2011,H.R.344,theFiscalResponsibilityEffectiveEnforcementAct,sponsoredbyaRepresentativefromTexas,wouldhaveprohibitedtheFederalReserveBoardfrombuyingshort‐termmunicipalsecurities,thusreducingtheabilityofthefederalgovernmentcould“bail‐out”stateandlocalgovernments(Maguire2011).ThelackoffederalbailoutforDetroitstandsincontrasttothearrayofstateandfederalassistancethatflowedtoNewYorkonceithadagreedtothetermsofrecovery.NosuchbargainwasavailabletoDetroit.61Federalindifferencetocitiescouldbearesultofthedisproportionatepowerofrurallegislatorsinfederalpolitics,oftheideathatwelfareandurbanprogramswerelargelyfailures,orsimplythatintergovernmentaldependenceandresponsibilityhavebeencasualtiesoftheneoliberalturn.

Ahandfulofpublicfinanceexpertshavecalledforrenewedattentiontointergovernmentalresponsibilitiesandfederalrevenuesharing.PaulPosner’scallforfederalrevenuesharingasastimulusprograminGoverningwasfeaturedbytheNationalLeagueofCitiesweeklypublication(Posner2009).RobertShillercalledforareturntothe61GrantedthereisastrategicdifferenceinNewYork’snationalimportanceversusDetroit’s,butgiventhatmuchofDetroit’stroublesrestonlegacycoststhatamountinthe$10billionrange,thenotionofaone‐timefederalfixisnotunbelievableonitsface,particularlygiventhebailoutgiventoDetroit’sautoindustry.

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ideaofrevenuesharingintheNewYorkTimes(Shiller2010).RepresentativesofcityassociationsinMassachusettscalledforanintergovernmentalpolicycouncilandstaterevenuesharing(Beckwith2012).ButnostateGovernorhastakenupthatmantle,andfewstatelegislatorshavepubliclysupportedthecall.Philadelphia’smayorhasbeenoneofthefewvoicesrequestingstateandfederalaidforhiscity(Kerkstra2009).Thesignificantpoliticalandracialdividesbetweencitiesandtheirstateslimitthepoliticalpossibilitiesofsuchintergovernmentalcooperation,andillustratetheimportanceofbeingattentivetothestateasapivotaldeterminantofurbanpoliticalpossibility,ratherthanjustthefederalgovernment.

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CONCLUSION:WhoGovernstheBrokeCity?

Whetherthefiscalcrisishasonlytemporarilyreducedthepriorityofsocialchangeorwhetherithasremoveditfromthepublicagendaforalongtimeisnotclear.Norisitclearwhatthefuturescopeofresponsibilityoflocalgovernmentwillbeaslocalitieswrestlewiththecausesandconsequencesoffiscalstress.Fornow,onethingiscertain:Theabilityofurbanpolicymakerstogoverntheircitieswhilemaintainingfiscalsolvencyisamatterofnationalconcern,withlong‐termimplicationsforthephysicalconditionofcitiesandtheabilityofcitygovernmentstodeliverservicesatlevelsnecessarytosustainacivilsociety.(Levine,Rubin,andWolohojian1981,11)

ThequestionsLevineraisedin1981areequallyrelevanttoday,althoughthetermsinwhich“nationalconcern”overurbanfiscalcrisishasbeenframedhasforeclosedsignificantdebateaboutthoseimplications.Instead,thenarrativesandpolicysolutionsemergingfromthediverseexperienceoflocalfiscalcrisishasproducedthreesignificantshiftsinurbanpolicy:alossofcitypowerrelativetostategovernments,theframingofcitiesasfinancialactorswhoserisksandliabilitiesshouldbetreatedasanycorporateactor’s,andanationwidepushtodismantlepublicemployeebenefits.

Thepredominantnarrativeofurbanfiscalcrisisattributestheeventtooneoftwocauses:governancefailure(corruption,incompetence,lackofpoliticalwill)orstructuraldeficits(resultingfromdemographicchanges,aginginfrastructure,oreconomicrestructuring).Accordingtothisnarrative,citiesareeitherunabletoaddressstructuraleconomicproblems(decliningpopulation,fleeingindustry,etc.)orunabletomaketoughdecisions.Ineithercase,thesolution,withinthelogicofthisnarrative,issomeformofoutsideintervention.Somethingmustbewrongwithhowcitiesarefiscallystructured,thereasoninggoes,andtheonlywaytosolveintractablefiscalproblemsisthroughsomeformofa“greatreset”(seeFlorida2009),remakinghowgovernment“doesbusiness,”forcinghardchoicesbyinvokingstateorexpertinterventionandrestructuringpublicobligationslongheldinviolable.

Thefactthatcitiesaregreatlydependentonstategovernmentsfortheabilitytogovernisignoredbythenarrativesaboutcityfailurethatemphasizecitiesasisolatedunits,responsiblefortheirownfates,divorcedfromtheirrelationstootherlevelsofgovernmentorcities.Thesenarrativesechotheneoliberalfocusonindividualresponsibilitythathavenormalizedthedisplacementofriskontoindividuals,awayfromcollectiveorcorporateresponsibility(Hacker2006).Devolutionhasbecomeameansoffosteringcompetitionbetweencitiesandforcinganausteritylocalism,whilenormalizingthelackofstateorfederalassistanceforcities.Despitetheabsenceofregionalsolutionstofiscalimbalances(orpolicystrategiestopromotefiscalinterdependence),theideathatcitiesshouldbefiscallyself‐sufficientisarelativelynewone,alongwiththerhetoricofindividual

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responsibilitythatcharacterizesdiscussionsofDetroitandotherstrugglingmunicipalities.It’simportanttorememberthatasrecentlyasthe1970s,thereexisted,howeverincompletely,anethosofnationalresponsibilitytoaddressinequalitiesbetweenandwithincitiesshapednationalpolicy.

FuchsarguesthatNewYork’s1975crisiswasapivotalmomentinshiftingpoliticalattentionfromthequestionofcities’fiscalsustainabilitytoapresumptionofcityautonomy.Afterthecrisesofthe1980s,manyarguedthatcitiescouldnotsurvivewithoutfederalassistance,butoncecitieshaddoneso,itbecamehardertoreasserttheneedforfederalsupport(Fuchs1992,282).Herdescriptionofthechangingpoliticsofcityautonomyisworthquotingatlength:

NewYorkCity’sneardefaultin1975instilledthefearoffiscalcrisisintovirtuallyeverycityacrossthecountry.Mayorsbecameobsessedwithfiscalmanagementissues,andiftheydidnotshowthattheycouldbalancetheirbudgetsandkeeptheircities’creditratingshigh,thentheirpoliticalopponentswouldsurelymakethisanissueinthenextelection.Mayorshadnochoicebuttoacceptresponsibilityforthefiscalhealthoftheircities,buttheyfailedtorealizethatindoingsotheylostthebattleoverfederalassistance.Oncetheirbudgetswerebalanceditbecamemuchmoredifficulttoarguethatcities“needed”federalfunds.

Thus,byacceptingthetermsofthepoliticaldebateasithasbeenposedbytheReaganRepublicans,thenation’smayorshaveunintentionallyallowedthethreatoffiscalcrisisandfiscalinstabilitytoobscurethebasiceconomicrealitydiscoveredduringtheDepression:thatcitiesarenoteconomicallyself‐sufficientgovernmentunitsandneedfederalassistancetoprovideadequateservicesfortheirresidents,businesses,workforceandvisitors.(Fuchs1992,282)

Today,thenarrativesofurbanfiscalcrisisemergingfromDetroitandothercitiestakeforgrantedthefiscalisolationofcities,whilesimultaneouslysubvertingtheirpoliticalautonomy.Thisparadoxicaltreatmentofcityautonomyusestheidealofdemocraticself‐determinationasasmokescreenforurbanabandonment,justifyingthedevolutionofriskwithoutalsodecentralizingpoliticalpower.Thewithdrawaloffederalsupporthasalsocoincidedwiththerelentlessexpansionofurbanentrepreneurialismandrisktaking,asfirstdescribedbyHarvey(Harvey1989).Thecomplexfinancialnetworksandinstrumentsinwhichcitieshavebecomeembedded(oftenwithcatastrophicconsequences)isanoutgrowthofthisentrepreneurialism.Thistransformationwas(andis)oftenjustifiedusingthelanguageoflocalcontrol,democracy,andself‐determination(Frug1993).Itsoutcome,however,hasbeenincreasedfiscalinstabilityforcities,fewerservicesforresidents,andapoliticalimbalancebetweencitiesandtheirstategovernments.

Inthisdissertation,Ihavedemonstratedthat“urbanfiscalcrisis”isaconstructedpoliticalnarrative,onecomposedofspecificclaimsandevidencethatoperatestoproduceasetofpolicyresponses.Thepoliticalstakesduringtimesofurbancrisisarehigh;whoever

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candefineanddeclarecrisisinawaythatcapturesthenationalimaginationisabletoshapethetermsofremakingthatcrisisdemands(nomorebusinessasusual).Therecenturbanfiscalcrisishasimpactedcities’revenuesandspendinginprofoundandmeasurableways,asdemonstratedempiricallyinPartTwo.Chapter2illuminatedhowcitiesareconstrainedintheireffortstogeneraterevenue,whileChapter3showedthatcutstospending,orretrenchment,inrecentyearsevinceanewwillingnesstocutpensions,signalingagrowingsensethatgovernmentsmustminimize“legacycosts”and“fixedobligations,”inordertostaynimble.InPartThree,Itookupthesubjectofhowmunicipalgovernanceisremadebyfiscalcrisis,presentingevidencethatthechangesmadeintimesofcrisishavelong‐lastingeffectsforcities.Chapter4examinedhowthecrisishasincreasedtheroleoftechnicalfinancialexpertiseinsettingurbanpolicy.Iexaminedhowthepowerofratingsagenciesinparticulartoshapeanarrativeofimpendingmunicipalcollapsehasbeenfacilitatedbythegrowingcomplexityofmunicipaldebtandrelianceofpolicy‐makerson“technical”assessmentsofcityfiscalhealth.Chapter5describedthegrowingroleofstatepowerandinterventionincityfinancesasadefiningfeatureofthecurrentcrisis,onenotfullycapturedbytheliteraturesondevolutionorurbanpolitics.Asstatehousesbecomekeysitesfordebatingurbanpolicyquestions,thepoliticalanddemographiccontrastsbetweenlargecitiesandtheirstategovernmentsbecomesespeciallysalient.

Byviewingthesetrendsthroughtheexperienceoffourcities,Iconstructedamorecomplicatedpictureofhowthedominantresponsetofiscalcrisiswasconstitutedandexperiencedlocally,movingawayfromthetendencyinresearchoncontemporaryfiscalcrisistodescribenationaltrendsorfocusonsinglecases.Idemonstratedthat,putinrelationwithotherU.S.cities,Detroitappearsnotasananomalyorevenasanunequivocalmodel,butasasitewherespecificideasabouturbanfiscalcrisisarereproduced,shapedintopolicyarguments,andrepositionedasnationalstories.

Ihopethatmyresearchdemonstratestheneedfordeeperinvestigationsintocitytaxing,borrowing,andspendingasavitalpoliticalquestion.Suchinvestigationsmustgobeyondthenumbersanddelveintothequestionsthatausterityraisesaboutthemeaningofthecity.Thereislittleempiricalwork,forexample,onanticipatoryor“preventive”austerity—politicalandpolicybehaviorsthatcitiesimplementinordertoavoidcrisis,tokeepadeficitproblemfrombecomingafiscalcrisis.Policiessuchasstatefiscalmonitoringareframedexplicitlyastoolsforavoidingthenextcrisis.Theliterature,however,oftendrawsasharpdividebetweencitiesthatentercrisisandthosewhoavoidit—adialecticofsuccessandfailurethatobscuresthepowerofdefinitionsofcrisistoshapepolicymaking.Thereareafewexamplesofliteraturethatcounterthenotionthatcrisisorfiscalimbalanceistheprimarymeasureofacity’shealth.AilingCitiesisoneoffewtextsthatexplicitlyarguesthatbudgetdeficitsreflectprimarilywhethercitieshavechosentotrytospend,ratherthanwhetherthey’readequatelyusingtheresourcestheyhave(LaddandYinger1989).Fuchs’arguesthatbond‐ratingagencieshavetoostrongaroleoverdeterminingcityspendingpriorities(Fuchs1992,289),somethingthatcanonlychangeifthedefinitionoffiscalresponsibilityisalteredtoincorporateothermeasuresofgovernmentalpurpose.Whatwouldanalternativedefinitionoffiscalresponsibilityentail?

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ManyarguethatNewYork’scrisisin1975wasapivotalmomentinsettingreducedexpectationsforthepublicsector:normalizingtheideathatcitygovernmentprimarilyexiststoattracteconomicinvestment(sothatlargeprivateprojectsnexttodecrepithospitalsdon’tseemtooincongruous),andusheringina“neweraofausterity”thatshrunkboththestateandpeople’simaginationofthecity’spossibilities.Phillips‐Feinclaimsthat“economicausterityhelpedgenerateanewpoliticaldisengagement:”howdoresidentsmakeclaimsagainstagovernmentthathasnomoney?(Phillips‐Fein2013)?Cutstocertainprogramsinparticulardirectlyreducedthepublic’sinvolvementincitypolitics,astheconstituencyforthoseprogramsnolongerhadaformalclaimonthecity(Levine,Rubin,andWolohojian1981).Peoplearemorelikelydefendprogramstheyalreadybenefitfromdirectly;politicalactivismaroundthepotentialforadditionalspending(oreventhereinstatementofpreviousprograms)israre,eveninprogressivecities.Thereisagreatneedforresearchonthespacesofcontestationandcounter‐narrativesfromDetroit,Dallas,Philadelphia,andothercities.Thisdissertationdoesnottakeupthatproject,butIoneofthecriticalformsofcontestationhasbeentheexposureofalternativeexplanationsforcrisis,exposingthe“taken‐for‐granted”asideology,notfact.

What’satstakeindebatesaboutretrenchmentandservicereductionarethusquestionsaboutwhatcitiesrepresentasapoliticalimaginary,andhowthatimaginationchangesovertime.Cityservices,Frugargues,arenotsimplypublicgoods,butaremechanismsfor“communitybuilding”(Frug1998,24).Thismakesthemnotjusteconomicquestions(subjecttotheoriesofefficiency)butalsopoliticalones.AsCastellsargued,urbanpoliticsarefundamentallyaboutconflictsovercollectiveconsumption(Castells1977;Castells1983).

TheattacksonpublicemployeesandfiscalsovereigntyfollowingtheGreatRecessionwillproduceadifferentpost‐crisisconsensusthandidNewYorkCity’scrisis,aswillthefalloutfromincreasinglycomplexdebtsuchastheswapagreementsthatultimatelyledtoDetroit’sinsolvency.Ifthecrisisdirectsmoreattentiontothefinancialrisksincreasinglybeingshoulderedbycitiesandtaxpayers,wemayseeashiftinthelongstandingdiscourseofcitiesneedingtoemulatetheprivatesectorthroughfinancialinnovation.Thereisacentralroleforscholarstoplayintellingthatstory,toavoidthetendencytocompartmentalizeblameandregulationoffinancialmarkets(ashashappenedwiththefalloutfromsubprimeandforeclosurecrisis,withpotentialhomebuyersbearingthebruntofbothblameandpost‐crisisregulation).Thequestionofpensionsandswapsoffersrichterrainforexploringthefinancializationofcitiesandtheirbudgets.

Intenyears,thiserawillnodoubtbeaswell‐studiedasthe1980s,andframedasanotherprimarywaveof“urbanfiscalcrisis.”Itwillalsobetheneweraofcrisisthatinformstheoriesofhowcitiesmakechoicesaboutrespondingtofiscalstress.Theautopsyisalreadybeingperformed,Ihopethisdissertationservestocomplicatethediagnosis.

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