Matching the Services Offered by Local Governments with Revenue Realitites an ICMA White Paper

Striking a Balance
Matching the Services Offered by Local Governments with the Revenue Realities
A white paper prepared on behalf of the ICMA Governmental Affairs and Policy Committee
  on municipal finances is the consideration that cities are operating in an uncertain financial environment in which traditional local government service provision is strained, and that the difficult job of prioritizing services must be addressed.
 Garnering citizen input remains the greatest challenge for service prioritization. Specifically, the suggested framework for incorporating citizen involvement into the service prioritization process follows the spectrum of public participation2—to inform, consult, involve, collaborate, and empower citizens. The twelve steps recommended for development of a service prioritization process appropriate for a community are:

1. start early
2. commit political will, time, and resources
3. gather data
4. involve internal and external stakeholders
5. educate the public
6. establish objectives, goals, and a timeline
7. establish parameters for the process
8. select and prioritize core/elective services
9. honor the process
10. implement the recommendations
11. provide for two-way feedback
12. evaluate the outcomes and the process.3

This proposed framework might lead a city in new directions for service provision, and for allocating resources within the budget process. The process adopted by each city will need to be as unique as the city adopting it. This is not meant to be a one-size-fits-all approach to defining or prioritizing essential and non-essential services, rather, the political, financial, and environmental factors unique to each city must be given thoughtful consideration.
 

2 STRIKING A BALANCE

Introduction
The current catch phrase used to describe the reality of municipal finance is "the new normal." What is this new normal? As one manager stated, "There has been a revolution created in which we have had to recreate our organization to reflect the reality of our nation’s financial situation. We used to have more money than needed to meet our basic obligations. Now, we are redefining ourselves. Our new normal is that we know essentially to the dollar how much it costs us to run this city, to operate as is."4 There is no question that the rules of managing a municipality have changed, and each municipality is struggling to address challenges unique to its particular economy and community. As noted in a report by the National League of Cities (NLC), "…fiscal realities include managing concerns about real estate markets… slow growth…consumer spending, unemployment…cuts in aid and transfers…costs for health care and pensions…" The NLC also notes that "…city fiscal conditions are tight, but the overwhelming majority of cities are balancing their budgets and meeting debt obligations."5

In extreme cases, we read headlines of municipal bankruptcy,6 consideration of the possibility of eliminating a police department7 and contracting out public safety functions, or the proposed cutbacks of municipal salaries to minimum-wage levels.8 For most managers, budgetary changes over the past five years have been recurring, but more subtle—decreases in size of workforce, delays in filling vacant positions, temporary furloughs, limits on overtime, across-the-board budgetary cuts, increased contributions from employees to pension plans and health insurance premiums, reallocating responsibilities, delaying capital improvement projects, and/or restructuring of departments. For some managers,9 the new normal is simply a leaner, more efficient organization, which is something they point to with pride rather than regret or hand-wringing. Sadly, for some managers10 these subtle changes mean that expectations for employee productivity have been lowered in light of not having any money, and in some ways that makes preparing a budget easier in this new state of "normal," but it does not make it easier to motivate employees to continue to do more with fewer resources.

Further, this "new normal" has unfortunately not resulted in citizens being more willing to participate in the budget process nor in the process for determining how services are prioritized. Bob Bland eloquently summarized the process of balancing municipal budgets: "…leaders in local government have had to reassess what is worth doing, what can be delayed, what should be scaled back, and what should no longer be done. In that process, citizens have had an opportunity to engage in those deliberations."11 This paper analyzes current trends in an effort to describe the future role of citizens in the budget process, and to aid in understanding why participation is so difficult to garner when citizens are still expecting the same services to be provided at the same levels.




Financial trends
  In 2009, the Alliance for Innovation prepared recommendations for municipal managers to consider as they coped with the economic downturn of 2008. In their report, "Navigating the Fiscal Crisis: Tested Strategies for Local Leaders,"12 they suggested that there were lessons to be learned from past downturns in the economy. Specifically, the actions recommended to stimulate the economy were:

1. "Increase revenues or draw down reserves
2. Expand or accelerate local capital projects
3. Lead inclusively and encourage creativity and engagement13
4. Be strategic about budget cuts and take targeted actions
5. Educate the public about necessary reductions and fiscal stress
6. Refrain from moving money around as a short term fix
7. Refrain from deferring maintenance."14

Further, the Alliance for Innovation report reminded local officials that "Increasing a tax has a greater impact in speeding economic recovery than cutting expenditures; across-the-board cuts do not distinguish essential from less important activities; hiring freezes may weaken organizational performance more so than targeted layoffs; and pay freezes may be perceived as more fair by employees than pay reductions."15 Finally, the report suggested that leaders need to think about long-term adaptation tactics such as: 1) avoiding excessive commitments to fixed expenses; 2) trying to diversify revenue sources so they are stable; 3) engaging in long-term financial planning; and 4) maintaining reserves."16

Many cities followed these recommendations, but three years later the economy has not recovered. In his semi-annual report to Congress, Federal Reserve Chairman Ben Bernanke reported on July 18, 2012, that recovery of the economy is fragile due to high unemployment, slow job growth and manufacturing rates, STRIKING A BALANCE 3

and a weak housing market. He called the growth rate indicators, "disappointing."17 The Congressional Budget Office cites the following reasons that cities continue to experience fiscal stress. Weak economic conditions may: 1) lead to reduced tax revenues, 2) lessen the state aid received, 3) increase the demand for services, and 4) trigger investment losses.18 For city managers this information is not new; it is what they faced as they prepared their budgets for fiscal year 2013.

All municipalities are affected by cuts in intergovernmental revenues from the federal and state government. Federal grants-in-aid, a large part of state and local revenues,19 have decreased. For example, reduced CDBG funding has caused many cities to face program cuts or outright elimination.20 In 2008, state governments provided about 30 percent of revenues for local governments, but in recent years the primary sources of state revenues—income and sales taxes—have plummeted. This has affected the amount of money transferred to local governments.

The biggest cuts have occurred at the time when local governments need assistance most.21 The NLC City Fiscal Conditions report for 2012 shows that cities have experienced several cuts in state aid since 2010, including the city share of state collected revenues, general aid, reimbursements or transfers, and funding for services cities deliver on behalf of the state. Further, some states have transferred program responsibility to the cities for programs they previously operated.22

Other factors that further complicate the fiscal health of municipalities are pension costs, health insurance costs, unemployment compensation, fuel costs, labor union relations, debt service, and declining ending fund balances. As one manager said, "…since the first sign of recession, we knew we had to recreate our services to reflect the reality of our financial situation. We are facing a rock in the road….The big difference between those who are in panic mode now and those who are not, a lot of it has to do with how seriously they took the first signs of the recession back in 2008. We took immediate steps, others waited."23 For some the "new normal" is all about managing the decline—in light of little or no growth.

Some municipalities have tried to address financial concerns by restructuring. In November 2002, 153 cities in Illinois were home rule. By February 2011, 206 Illinois cities had either adopted home rule by referendum or reached the population threshold to achieve home rule status automatically.24

One of the advantages of home rule is the ability to adopt additional taxes such as the real estate transfer tax or a hotel/motel tax, if approved by the citizens. A city can then collect additional taxes and diversify its revenue sources.25 Other home rule powers could include the authority to incur new debt, impose regulations, enter into intergovernmental agreements, change government structure, and control or initiate development. Some of these approaches can shift the tax burden away from residents to non-residents.

But in Prospect Heights, Illinois, when the question of home rule was put to the citizens in the spring of 2012, it was defeated. The voters who participated in this particular referendum seemed to uphold what has been found in previous research findings: that often home rule is viewed as a way for elected officials to abuse their powers and will lead to greater increases in property taxes. This lack of trust may be unwarranted, but it is a reality that elected officials strive to overcome as they seek to diversify their revenue sources.26

Another tool used to address financial concerns through restructuring is the creation of special districts, but much of the growth in special districts occurred prior to the economic downturn. As of 2007 there were 37,381 special districts27 and a recent report shows the number of special districts in 2012 at 37,203.28 Despite the slight decline, these numbers grew from a reported 35,052 in 2002.29


Click the Excerpt from the White Paper above to be taken to the entire document!