Special Briefing: Avoiding Municipal Distress

“WE’RE IN A MOMENT OF INFLECTION”: EXPERTS DISCUSS HOW CITIES CAN AVOID MUNICIPAL DISTRESS

Hosted by the Volcker Alliance and the Penn Institute for Urban Research, the Special Briefing Focused on How Factors like Underfunded Pensions, Deteriorating Infrastructure, and Population Loss Pose Threats to Cities’ Fiscal Health

New York, NY – The Volcker Alliance and the Penn Institute for Urban Research (Penn IUR) held an online Special Briefing on how cities can avoid municipal distress. Experts discussed how many American cities are enjoying healthy budget surpluses due to low unemployment and $5 trillion in federal pandemic aid. However, panelists noted that many of the underlying contributors to previous municipal distress and bankruptcies—such as underfunded pensions, deteriorating infrastructure, and population loss—still pose threats to cities’ long-term fiscal health. The panel also discussed how cities are also being confronted by the risks of fallout from a possible US government default and the cost of a growing influx of foreign asylum seekers in need of housing and other public services.

In 2020, “right before the pandemic hit, we had released our budget for the upcoming year and made the kind of investments we thought were really important to continue us on the path of growth that we were enjoying after decades of seeing decline. By June, we had to do two more versions of the budget to stay in balance,” said Rob Dubow, director of finance, City of Philadelphia. “Things could have been much much worse with that ARP funding. We would have had to make even more painful cuts, and those cuts would have been not only bad for the city, but bad for the entire region because we are the economic engine for the region.”

“We received $1.4 billion but our projected losses from the pandemic were $1.5 billion, so that meant that unlike a lot of other jurisdictions, we had to use all of our money for revenue replacement,” he said. “We have all of those funds allocated,” he added, and they will be “spent by the end of next calendar year, as required by the ARP legislation. One of the big challenges other cities face is making sure we don’t fall off the fiscal cliff when those dollars go away.”

Heather Gillers, reporter, the Wall Street Journal said of Chicago, “You have this pretty significant expense as Chicago and other cities start to go and weather this next period where you have a possible recession. You have the impact of remote work on city revenues, you have the expiration of the federal stimulus aid that was handed out during COVID. So that’s sort of a new chapter in a lot of ways.” She added: “How you have this question in Chicago and other places of what is happening downtown? Transit ridership is 50%, 30% in San Francisco and not back to where it once was … The big mystery is, what’s going to happen with downtown property value because that’s such a significant source of property tax revenue for so many cities.”

Stephanie Miner, former mayor, Syracuse, New York, said that many cities: “Have the same crises facing them once again. And they’re the crisis of, whether you say legacy costs or unfunded liabilities, both pensions and something that nobody really wants to talk about because it is so hugely immense, which is retiree health care. When I was facing this after the Great Recession, Dick Ravich said to me, ‘Kid, it’s not that hard. You either have to cut your expenses or increase your revenues. That’s how you balance a budget.’ But of course, it is extremely difficult.”

“Starting with the latter,” she said, “you can’t cut expenses [or]pensions, because in most states or in states like Illinois, New York, New Jersey, they’re guaranteed by the constitution. So when you hear people talking about cutting pension benefits, in many cases when you read between the lines what you’re seeing is that they’re cutting the benefits of the unborn—people who are going to retire 20, 30 years from now.”

“We’re in a moment of inflection right now,” said David Schleicher, professor, Yale Law School. “We’ve been living through this period of flush state and local budgets, and we’re about to see a real turn. We can use that to look forward, but we can also use that to look backward to say, ‘How good of a boom did we have, and how does that set us up for the coming difficulties?’” He added that “this is coming sooner than anyone thought. Revenues have already started falling in most major states and federal aid is not only going to dry up, it may be pulled back.”

Hosted by William Glasgall, Volcker Alliance senior director, Public Finance and Penn IUR fellow, and Susan Wachter, co-director of Penn IUR, the panel was part of the Special Briefing series—conversations featuring experts from the Volcker Alliance's national research network and Penn IUR, along with other leading academics, economists, and federal, state, and local leaders. A replay of the Special Briefing is available on the Volcker Alliance website.