The Great Recession,
Municipal Budgets, and
Land Development
Tuesdays at APA Chicago
29 January 2013
Michael A. Pagano
Dean, College of Urban Planning & Public Affairs
University of Illinois at Chicago
View From 18th Street Bridge, a watercolor by Pat Wright
MAPagano@UIC.edu
The Great Recession, Municipal Budgets, and Land
Development
• Setting the stage:
–The contemporary situation
• Challenges
– Economy is Changing
• Aligning Economic Base with Fiscal Authority
– Fiscal Foundation is Changing
• Narrowing the Tax Base
– Linking fiscal architecture and space
• Spatialization of revenue structures
• Options: The Fiscal Policy Space
• A new sustainable fiscal architecture?
Percentage of Cities "Better Able/Less Able" to Meet Financial Needs
In Current Fiscal Year
40%
54%
Percent of Cities
20%
58%
65%
68%
69%
75%
73%
63%
56%
45%
21%
22%
70%
37%
34%
33%
65%
Recession
December 2007 – June 2009
60%
Recession
March –November 2001
80%
Recession (peak to trough)
July 1990-March 1991
100%
57%
43%
36%
19%
12%
13%
0%
-46% -42%
-20%
-25% -27%
-30%
-37% -35%
-44%
-55%
-63%
-66%
-67%
-40%
-35% -32% -31%
-79% -78%
-81%
-43%
-57%
-64%
-88% -87%
-60%
Less able
Better able
-80%
-100%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Christopher Hoene and Michael Pagano , City Fiscal Conditions
in 2012 (Washington, DC: National League of Cities, 2012)
Percentage of Cities "Better Able/Less Able to Meet Financial Needs Next Year
60%
49%
50%
53%
63%
55%
59%
55%
46%
40%
29%
40%
33%
56%
39%
21%
17%
20%
% of Cities
56%
Recession
December 2007 – June 2009
64%
61%
Recession
March –November 2001
80%
20%
11%
0%
-20%
-40%
-39%
-51%
-60%
-50%
-48%
-36%
-36%
-37%
-41%
-45%
-44%
-45%
-54%
-60%
-61%
-67%
-80%
-72%
Less able
Better able
-79%
-83%
-80%
-89%
-100%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: Christopher Hoene and Michael Pagano , City Fiscal Conditions
in 2012 (Washington, DC: National League of Cities, 2012)
Year-to-Year Change in General Fund Revenues and Expenditures
(Constant Dollars)
3.8%
3.7%
3.0%
4.1%
3.1%
2.8%
2.5%
2.2%2.2%
2.0%
1.2%
1.0%
1.3%
1.5%
1.3%
1.1%
0.7%
0.5%
3.3%
2.5%
1.6%
1.0%
Recession
December 2007 – June 2009
Recession
July 1990-March 1991
4.1%
4.0%
Recession
March –November 2001
5.0%
1.8%
1.7%
2.0%
1.9%
1.3%
1.3%
1.6%1.6%
1.4%
0.9%
0.5%
0.8%
0.6%
0.2%
0.5%
0.3%
0.2%
0.3%
0.0%
0.0%
-1.0%
-0.1%
-0.2%
-0.6%
-0.3%
-0.7%
-1.0%
-2.0%
-3.0%
-1.9%
Change in Constant Dollar Revenue (General Fund)
-1.8%
-2.3%
-2.3%
-2.7%
Change in Constant Dollar Expenditures (General Fund)
-4.0%
-3.6%
-4.2%
-4.0%-3.9%
-5.0%
Source: Christopher Hoene and Michael Pagano , City Fiscal Conditions
in 2012 (Washington, DC: National League of Cities, 2012)
Year-to-Year Change in General Fund Tax Receipts
(Constant Dollars)
8%
4.2%
4%
3.6%
3.4%
2.8%
2.4%
2.0%
2%
1.3%
1.2%
1.5%
4.2%
4.0%
3.3%
3.0%
2.2%
2.3%
2.2%
2.3%
0.6%
-0.2%
2.4%
1.6%
1.3%
1.0%
1.0%
-0.1%
6.2%
4.4%
2.0%
1.4%
0.9%
-0.1%
6.3%
Recession
December 2007 –June 2009
6%
Recession
March –November 2001
6.0%
0.5%
0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
-1.1%
-2%
-2.3%
-3.4%
-4%
2006
2007
2008
2009
2010
2011
-1.0%
-0.3%
-2.0%
-2.5%
-2.5%
2012
(budget)
-0.8%
-2.1%
-3.2%
-3.9%
-4.7%
-5.3%
-6%
Sales Tax Collections
-5.1%
Income Tax Collections
Property Tax Collections
-6.6%
-8%
-8.4%
-10%
Source: Christopher Hoene and Michael Pagano , City Fiscal Conditions
in 2012 (Washington, DC: National League of Cities, 2012)
City Personnel-Related Cuts 2010 - 2012
45%
68%
Hiring freeze
74%
32%
50%
Salary/wage reduction or freeze
54%
18%
31%
Layoffs
35%
14%
25%
23%
Early retirements
2012
2011
11%
19%
22%
Furloughs
2010
27%
30%
Reduce health care benefits
17%
16%
18%
15%
Revise union contracts
15%
18%
Reduce pension benefits
7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Source: Christopher Hoene and Michael Pagano , City Fiscal Conditions
in 2012 (Washington, DC: National League of Cities, 2012)
Ending Balances as a Percentage of Expenditures
(General Fund)
30
Recession
March –November 2001
Recession
July 1990-March 1991
25
19.6
20
18.5 18.3
18.0
15.7
15.0
15
13.4
11.8
11.1
11.6
10
10.3
9.0
9.6
12.2
15.3
18.2
10.5
8.9
5
Actual Ending Balance
18.0
16.5
16.9
16.0
15.4
14.3
12.3 12.2
9.8
19.9
22.4
19.1 19.1
16.9 17.2
16.6
14.1
10.5
20.8
Recession
December 2007 –June 2009
11.5
24.4
21.6
19.0
13.2
12.0
24.3
24.0 23.7
16.2 16.1
17.1
12.7
12.3
25.2
12.7
Budgeted Ending Balance
0
Source: Christopher Hoene and Michael Pagano , City Fiscal
Conditions in 2012 (Washington, DC: National League of Cities, 2012)
The Great Recession, Municipal Budgets, and
Land Development
• Setting the stage:
– The contemporary situation
• Challenges
– Economy is Changing:
• Aligning Economic Base with Fiscal Authority
– Fiscal Foundation is Changing:
• Narrowing the Tax Base
– Linking fiscal architecture and space
• Spatialization of revenue structures
• Options: The Fiscal Policy Space
• A new sustainable fiscal architecture?
Bureau of Labor Statistics
Industry:
Total Nonfarm
Data Type: ALL EMPLOYEES, THOUSANDS
Bureau of Labor Statistics
Industry:
Manufacturing
Data Type: ALL EMPLOYEES, THOUSANDS
Bureau of Labor Statistics
Industry:
Service-providing
Data Type: ALL EMPLOYEES, THOUSANDS
Bureau of Labor Statistics
Industry:
Leisure and hospitality
Data Type: ALL EMPLOYEES, THOUSANDS
Estimated Total State and Local
User and Sales Tax Revenue Loss
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
2007
2008
2009
2010
2011
2012
Source: State and Local Government Sales Tax Revenue Losses from
Electronic Commerce By Donald Bruce, William F. Fox, LeAnn Luna. April 13,
2009 http://cber.utk.edu/ecomm/ecom0409.pdf
Growth of 501-c-3
• The nonprofit sector accounts for roughly onetenth of the U.S. economy, whether measured
by employment or total spending
• Houston: A “drainage fee” last year did not
exempt 501-c-3 organizations.
• Chicago: Nonprofits with assets below $250
million will pay 80 percent of their water use
by 2014 (The largest nonprofits now pay their
full water bill.)
Source: Daphne A. Kenyon and Adam H.
Langley, Payments in Lieu of Taxes: Balancing
Municipal and Nonprofit Interests
(Cambridge: Lincoln Institute of Land Policy,
2010).
PILOT Revenue as Percentage of Budget
Pittsburgh
Philadelphia
(Estimates
For FY2000)
Minneapolis
Indianapolis
Detroit
Boston
Baltimore
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
States Move to Revoke
Charities’ Tax Exemptions
(February 27, 2010)
Provena-Covenant
Medical Center v.
(Illinois)Dept. of
Revenue (2010)
Pittsburgh Pushes Tax on
College Students
State Aid to Municipalities and to All Other
45%
Local Governments
$400,000
40%
$350,000
35%
$300,000
$250,000
25%
$200,000
20%
$150,000
15%
$100,000
10%
$50,000
5%
0%
State aid as Percentage of General Municipal
Revenue
State aid as Percentage of Total Local Government
Revenue, Excluding Municipalities
State Aid to Municipalities ($Millions)
State Aid to Local Governments, Excluding
Municipalities ($Millions)
1971-1972 1976-1977 1981-1982 1986-1987 1991-1992 1996-1997
2001-02
2006-07
24.1%
23.2%
20.8%
20.2%
21.3%
20.7%
21.9%
19.6%
36.8%
37.6%
38.2%
36.7%
37.3%
37.8%
38.1%
35.2%
$40,358
$45,450
$40,613
$46,470
$55,906
$61,064
$71,887
$68,838
$127,806
$148,942
$163,194
$194,268
$240,062
$282,247
$337,677
$335,011
$0
Millions of 2005 Dollars
30%
Source: Phil Oliff, Chris Mai, and Vincent Palacios, “States Continue to Feel
Recession’s Impact “ Center for Budget and Policy Priorities, (updated June 27, 2012)
http://www.cbpp.org/cms/index.cfm?fa=view&id=711
Federal Aid to Municipalities and to All Other
Local Governments
$40,000
14.0%
$35,000
12.0%
$30,000
10.0%
$25,000
8.0%
$20,000
6.0%
$15,000
4.0%
$10,000
2.0%
$5,000
0.0%
Fed aid as Percentage of General Municipal
Revenue
Fed aid as Percentage of Total Local Government
Revenue, Excluding Municipalities
Federal Aid to Municipalities ($Millions)
Federal Aid to Local Governments, Excluding
Municipalities ($Millions)
1971-1972 1976-1977 1981-1982 1986-1987 1991-1992 1996-1997
2001-02
2006-07
7.3%
14.7%
12.0%
6.4%
4.6%
5.3%
5.3%
5.3%
2.8%
6.2%
5.1%
3.7%
2.8%
3.0%
3.6%
3.5%
$12,145
$28,735
$23,500
$14,757
$12,119
$15,553
$17,511
$18,487
$9,633
$24,652
$21,927
$19,357
$17,953
$22,692
$31,966
$33,580
$0
Millions of 2005 Dollars
16.0%
Spatialization of Revenue Structures
Parcels will be identified for development that
maximize revenues or minimize costs. This
choice is informed by a city’s revenue structure
and manifests itself spatially in the design, landuse designations and development patterns of
the city and region, or the spatialization of
revenue structures.
STRATEGIC BEHAVIOR OF PROPERTY-TAX CITIES
Property-tax cities think strategically about development based on the market value of the
development and on the possibility of shifting service-delivery costs to other jurisdictions
(fiscal externalities).
Property Tax
• Concentric urban structure
• Clear physical and historic identity
• High-end residences close to center
• High-end office and retail in center
Graphic design by Steve Price, Urban Advantage, Inc.
Adapted from Ann O’M. Bowman and
Michael A. Pagano, Terra Incognita:
Vacant Land and Urban Strategies
(Washington, DC: Georgetown
University Press, 2004).
STRATEGIC BEHAVIOR OF SALES-TAX CITIES
Sales-tax cities think strategically about development based on their mental constructs of
“shopping sheds” and on which market transactions are taxable.
Sales Tax
• Development pressure at urban edge
• Tax dollars drawn across city borders
• Development formulaic
• Urban center languishes
Graphic design by Steve Price, Urban Advantage, Inc.
Adapted from Ann O’M. Bowman and
Michael A. Pagano, Terra Incognita:
Vacant Land and Urban Strategies
(Washington, DC: Georgetown
University Press, 2004).
STRATEGIC BEHAVIOR OF INCOME-TAX CITIES
Income-tax cities think strategically about development based on their assessment of the
income growth potential of the individual or firm.
Income Tax
• Development less formulaic
• Targeted to higher incomes
• Development locations idiosyncratic
• Results depend on where tax collected
Graphic design by Steve Price, Urban Advantage, Inc.
Adapted from Ann O’M. Bowman and
Michael A. Pagano, Terra Incognita:
Vacant Land and Urban Strategies
(Washington, DC: Georgetown
University Press, 2004).
Site Value City?
City A
Commercial
Density determined by market forces
City officials are motivated to behave in ways that differ
from typical property-tax cities. The incentive to put
land to its highest and most productive use has little
revenue-enhancing benefit to the city treasury.
High Density
City B
Industrial
City C
The Great Recession, Municipal Budgets, and
Land Development
• Setting the stage:
– The contemporary situation
• Challenges
– Economy is Changing:
• Aligning Economic Base with Fiscal Authority
– Fiscal Foundation is Changing:
• Narrowing the Tax Base
– Linking fiscal architecture and space
• Spatialization of revenue structures
• Options: The Fiscal Policy Space
• A new sustainable fiscal architecture?
Fiscal Policy Space of Cities
• FPS= a confined
decision space within
which city officials are
permitted to take
action, and shaped by
the following attributes:
1) Intergovernmental
System (tax authority, TELs,
revenue reliance, state aid)
2) Economic base
3) Local legal context
4) Citizen/consumer
demand
5) Political culture
Municipal Tax Authority by State
WAe
MTf
ME
ND
VT
MNf
OR
NH
IDf
WI
SD
NYa
WY
RI
MIa
CT
PAa
IA
NE
NV
OH
IL
UT
MDa
WV
KS
MOa
NJf
DEa
INc
CO
CA
MA
VA
KY
NC
TN
AZ
OKd
NM
ARb
SC
MS
ALa
GA
TX
AK
LA
FL
HI
a Income or sales tax for selected cities. b Cities can levy a local income tax, but no locality currently does so. c
A local income tax under certain circumstances. d Sales tax only; cities can levy a property tax for debtretirement purposes only. e Cities can impose the equivalent of a business income tax. f Sales taxes for selected
cities and/or restricted use only.
Property + sales + income
Property + sales OR Income
Property or sales only
Source: Michael A. Pagano and Christopher Hoene, “States and the Fiscal Policy Space of Cities” in Michael
Bell, David Brunori, and Joan Youngman, eds. The Property Tax and Local Autonomy (Cambridge, MA:
Lincoln Institute of Land Policy, 2010), pp. 243-284.
Municipal Revenue Reliance by State
WA
MT
ME
ND
VT
MN
OR
NH
ID
WI
SD
WY
RI
CT
MI
PA
IA
NE
NV
OH
IL
UT
MD
WV
CA
MO
NJ
DE
IN
CO
KS
MA
NY
VA
KY
NC
TN
AZ
OK
NM
AR
SC
MS
AL
GA
TX
AK
LA
FL
HI
Three tax sources
Two tax sources
One source + low 2nd source
One tax source
Source: Michael A. Pagano and Christopher Hoene, “States and the Fiscal Policy Space of Cities” in Michael
Bell, David Brunori, and Joan Youngman, eds. The Property Tax and Local Autonomy (Cambridge, MA:
Lincoln Institute of Land Policy,2010), pp. 243-284.
TELs and Municipalities
WA
MT
ME
ND
VT
MN
OR
NH
ID
WI
SD
NY
WY
RI
CT
MI
PA
IA
NE
NV
OH
IL
UT
MD
WV
KS
MO
VA
KY
NC
TN
AZ
OK
NM
AR
SC
MS
AL
GA
TX
AK
LA
FL
HI
Green
Yellow
Blue
Orange
Red
no TELs
non-binding prop tax limits
binding property tax limits
expenditure limits
Rev/Exp limit and Prop Tax limit
NJ
DE
IN
CO
CA
MA
State Clusters
WA
MT
ME
ND
VT
MN
OR
NH
ID
WI
SD
WY
RI
CT
MI
PA
IA
NE
NV
OH
IL
UT
MD
WV
KS
MO
NJ
DE
IN
CO
CA
MA
NY
VA
KY
NC
TN
AZ
OK
NM
AR
SC
AK
MS
AL
GA
TX
LA
FL
Blue
Green
Yellow
Orange
Red
2 or 3 general tax sources, relatively autonomous
no TELs
????
TELs, one tax source
most constrained
The Great Recession, Municipal Budgets, and
Land Development
• Setting the stage:
– The contemporary situation
• Challenges
– Economy is Changing:
• Aligning Economic Base with Fiscal Authority
– Fiscal Foundation is Changing:
• Narrowing the Tax Base
– Linking fiscal architecture and space
• Spatialization of revenue structures
• Options: The Fiscal Policy Space
• A new sustainable fiscal architecture?
A Sustainable Fiscal Architecture?
The fiscal shock of the Great Recession ought to
encourage a political discourse about reforming the
fiscal architecture of municipalities:
1. If States Want Cities to be Responsible for Their Actions,
States Should Give Them Adequate Tools. Diversify.
Authorize access to taxes. Eliminate TELs.
2. The Fiscal Mismatch Is Weakening Cities. Reform the tax
structure: Tax structures might be designed that link closer to
cities’ underlying engines of growth or to income and wealth.
Tax on income/wages. Is a tax on income at the place of
employment (such as Ohio’s, Kentucky’s) or a gross receipts
tax (such as Washington state’s Business and Occupation Tax)
a more accurate measure and reflection of a city’s tax base?
Broaden the sales tax base. As the retail sales tax base has narrowed as a
percent of consumer spending, is it time to reconsider a sales tax on
services?
Restructure the property tax. As real estate loses much of its value, as vacant
properties lie fallow, and as the number and value of tax-exempt properties
increase, might cities consider moving from a uniform to a split-rate system?
What’s lost and gained by exempting so much property from the tax roles?
3. Jointly Provide Services and Share Service Delivery Costs.
Create regional taxing powers. Municipalities will be looking for
regional partners and allies in designing a system that is less
destructive to the region’s long-term interests and fairer in
distributing the costs to the users.
4. Pricing Drives Consumer Behavior and Often Disadvantages
Cities. Approximating the market value of city-delivered services
would possibly reduce subsidies to free-riders. Mileage fee? Fee
for service? ….
a brief digression ….
Pricing infrastructure must include and recognize the
importance of planning, managing and financing.….
Finance, Budgeting, Management
Planning
Infrastructure
Project
Financing
Infrastructure
Projects
Managing
Infrastructure
Assets
The Utah Model. Government Performance
Project Grade (2008): A
Statutory Set aside of 1.1% of value of fixed assets in the
Operating Budget for maintenance and repair of state
buildings.
Political Challenge: Future legislatures are (theoretically)
bound by prior legislature’s decisions.
…. And returning to the Elements of a Sustainable Fiscal Architecture …
5. Revisit the Social Compact. The social
compact of the last century that bound
generations, socio-economic classes,
neighborhoods, cities and regions needs to be
reconsidered in light of demographic shifts,
the transformation of the underlying economy,
the forces of globalization, and an irrepressible
resolve to enhance the human condition.
•
•
•
•
•
•
•
•
fairness of revenue systems;
Spatial/land-use effects of revenue structures;
Benefits principle v. ability-to-pay;
pro-cyclical nature of local and state budget
practice;
accumulated long-term liabilities (pensions,
OPEBs, and infrastructure);
definition of “core services”;
pricing services and infrastructure assets;
Horizontal and vertical regional partnerships in
service delivery …
THANK YOU
The Great Recession,
Municipal Budgets, and
Land Development
Tuesdays at APA Chicago
29 January 2013
Michael A. Pagano
Dean, College of Urban Planning & Public Affairs
University of Illinois at Chicago
View From 18th Street Bridge, a watercolor by Pat Wright
MAPagano@UIC.edu