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