 Well good afternoon everyone and welcome welcome to this session on fiscal policy space I'm Barry rave. I'm the director of the Center for local state and urban policy close-up We're delighted to be joined in our sponsorship today by the citizens research council the nonprofit and public management center And the Center for social impact. I also want to take this occasion to Introduce and officially welcome the two members of our entering post a post-doctoral class at close-up We're really excited to have a terrific team of junior scholars And I want to just briefly introduce and welcome dr. Davi duel from the University of Toronto who will be joining us in the coming months Soon to be dr. Davi duel. It's very close and Dr. Sarah Mills Sarah Sarah Who's joined us earlier? Welcome to you both you'll be hearing more from them in coming close-up events The topic for today is one of these really great Public policy questions so appropriate to this time and so appropriate to this region the future of our cities and their fiscal viability going forward in Thinking about people to talk thoughtfully about this it's hard to imagine a better candidate than you have today and This is an individual who's contributed in so many ways over the course of his career to our understanding of these issues and a wide range of Leadership roles among them the co-editorship of one of the premier urban affairs journals in the world for more than a decade Currently the Dean of the College of Urban Planning and Public Affairs at the University of Illinois, Chicago Where he recently had to move an entire faculty across building across campus because of building and other issues It was also Dean of another college in the middle of this Which I've never heard of before doing two deanships at the same time the author of five books and numerous Publications and I've actually never said this publicly, but two of the last three major projects I began research projects began with reading a lot of your work and so I'm deeply in your debt He also directs the uiC urban forum on key urban issues and has played a major major role over a couple of decades now with the National League of Cities Somehow he found time in the middle of all of this to launch and direct the fiscal Policy space project not based at uiC with the number of partners Supported by the MacArthur Foundation, which is examining City fiscal behavior and city financial adaptations during the Great Recession It is my great pleasure and privilege to introduce Michael Pagano. Thank you very much Barry very kind words. I Paid him enough. I think Good afternoon. Good afternoon. It is even in Chicago. Good afternoon. Thank you I was told before I came here that I should find something to connect with an audience from the University of Michigan And I said well, that's blue, right? Don't you do this go blue thing and my wife reminded me that I'm a Penn State alumnus And so that's the different kind of blue, but there is another connection How many of you are Go to football games at all Yeah, so I grew up in slippery rock, Pennsylvania And was very proud when the band and the football team decided that they could actually perform in the big house And I don't know that they filled it But it's certainly with capacity at their stadium is all of 5,000. They certainly surpassed that so it's it's good to be here I appreciate the invitation the kind words and an opportunity to engage in a conversation That is near and dear to my heart, which is the fiscal position and well-being and behavior of municipalities this is a as Barry said this is a very Very Broad and large project. We are not at the end. We are still at the data analysis Part of the of the project it will be issuing a major report Sometime before the end of the calendar year God willing and We're at a point that I would like to Generate as much interest with all of you and and hear your reaction and feedback So this is the this is the the outline of the presentation today The I think the a major I hope a major contribution of this project is to reframe the public discourse and the political discourse About cities finances cities in particular We could probably extend it to other local governments and even the state the states But in particular this project focuses on on cities and reframing the conversation And then we'll move into a some of the background work and then the project itself so The first thing is that I we weren't satisfied with the way the conversation about cities Having having the right frame is important having the right words are important Describing the narrative is important and we use short-hand words to do so close-up. What a great name I don't know if this was your invention, but close-up just sort of sums up everything I thought well, that's just terrific It it's finding the word to capture what it is that you're trying in this case a center or a Concept that you're trying to put forward and once you've captured that you've captured the conversation So I was listening this morning to To morning addition in which the there are counties in the Commonwealth of Kentucky That are invoking the right to declare themselves right to work counties and I always found that to be an interesting Right to work. So how could you not be in favor of right to work? Until you realize what it means, but the concept that word has right to work. That's terrific So it's really looking at the world through a different lens Grabbing the narrative in a way that we can rethink what we're talking about and maybe provide better clarity And for my purpose is it's not just clarity in the concept But the applicability of the concept to solve public problems and in this case is the problem of Public finance or municipal finance second is We are all unique. We are all individuals are unique and all Municipalities and all states are unique. We do not live in a unitary system And we we worship the fact that places are different and yet our narrative in our conversation tends to blur that we move from We move to a position of sameness and uniqueness. We want this sense of moving toward the mean and in fact much of our conversation has to do with comparing my city or Myself to the mean to the average Medicine got it, right? It's been a number of years now that they've stopped talking about clusters of people and treating clusters of people or all humans alike, but rather Diagnosing problems with individuals and prescribing an individual approach to addressing their concerns It's that kind of approach that we need to take and that's what the fiscal policy space is attempts to do So a word and I'm maybe stepping on toes here But a word or words that I I try not to use and because I don't find them to be very useful are best practices best practices Means that if only you would mimic my behavior, we all would be vanilla ice cream I like vanilla ice cream, but we would all taste like vanilla ice cream or we would all be doing Exactly the same kinds of things whether they're good or bad or obnoxious doesn't matter mimicking behavior again this project on fiscal policy space is about understanding the Diversity the differences the uniqueness of municipalities and how to address the problems that they have so the objectives of this presentation and of the project is to reframe the dialogue from city fiscal conditions, which tends to be the fairly common parlance of Cities and their finances to city fiscal behavior That is how cities respond to certain stimuli within a controlled environment Second is to identify pathways of adjustment by filling data gaps Which is part of what we'll be talking about that the data collection process on this has been monumental and finally to Not to completely diss the idea that we can learn from others I just don't believe there are best practices that apply to all people or all cities at all times But rather there are cities that are similar Because they have similar Decision space or fiscal policy space within which they operate and they can learn from each other Although it wouldn't at this point advocate mimicking behavior So let me let me walk through a couple of things that sort of prompted this project from years ago as as Barry noted I have been involved with the National League of Cities and their annual city fiscal conditions report since its inception In 1986 when I was only eight or nine years old and in 1991 I became the author or co-author of each of the annual reports that the the city fiscal conditions report is the only contemporary snapshot of municipal finances that's that's at least Accessible today rather than five years from now And so we're a little quicker than censuses. It's also if a report or a collection of data on just one element of Government or municipal finances and that's the general fund it doesn't include all the enterprise funds We do have data on the on the capital funds, but we haven't That the data to they're not very good in that but the general fund is where we've been focusing most of our attention so I want to talk a bit about what we've learned from these These reports on the general fund conditions of municipalities and that there are there's a lot of work on on fiscal conditions So the city fiscal conditions report in 2014 is the latest one It was released last last September October and what we found not too surprising if you follow city finances There was a small decline in so let me back up just a second. You're all understanding of what? Municipal finances are about but because all municipalities almost all municipalities Depend to some extent on property tax receipts when the property when the real estate bubble burst in 2007 and the stock market collapsed in 2008 the impact on Municipalities wasn't felt for a couple of years because of assessment practices. You don't get your property tax bill I don't know what it's like in Michigan, but I'm paying my property tax bill today from 2011 So there's I'm sorry 2012 there's a there's a few year lag between the the bill and the value of your properties and It's always good when property values are escalating because you say gee my house is worth 50,000 I know I could sell it for 70. I must be getting a discount That's great, but when it goes the other way you say wait my house isn't worth 70,000 It's only worth 50,000 now, and I'm still paying at the higher rate That's the lagging in property tax assessments, which means that the fiscal Cycle lags the business or economic cycle by several by several years We are still coping with the decline of the the impact of the Great Recession today So these are some of the I'll show some of these in just a second So one of the questions I was talking to Tom earlier that this is what you do a close-up Trying to understand for for Michigan local governments what their perception is of this either the city manager or the mayor Here we ask the perception of the CFO of the municipalities The sample is all cities over 50,000 and we get a response rate of it's an annual report The response rate has ranged between 32 and 46 percent over the years So this sort of not what you would not Put this in positive terms. This is what you would expect Right when the economy is booming in the 1990s CFOs are pretty confident that next year is even going to be better in 2000 in 2007 90% of the CFOs thought that this year was better than last year then we asked them well, what about next year in 2007 over half of the municipal these are CFOs. We weren't asking The clerical workers. We weren't asking the interns. We were asking the chief finance officer of the city What do you think next year is going to be over half of them thought 2008 was going to be better than 2007 2007 is when the real estate bubble burst. They were not anticipating it and so We collect data on year-to-year general fund revenue and expenditure data back as I said back to 1986 and you can see that Again during the economic decline that's that yellowed area There are the the formal recessions that the national the NBER identifies every year and Believe it or not the recession the great recession only lasted from December 2007 to June 2009 I think those who are still looking for work in 2010 through 13 and 14 wondered how it ended so soon because jobs were still scarce at the time But that's the official definition of a recession and you can see that at that time What's important to note is that revenues continued to decline after the the peak the trough of the the recession in part It's because that because of the the property tax collections lag But this is the average This is the average growth for municipalities or the average change in revenues and expenditures for municipalities and you look across that and it was always fun to go to meetings with with Mayors and managers and CFOs and say see Revenues have increased by two percent. Not in my town. It hasn't and in fact we said well, why is that? We started asking questions a little better and that is not just what is the general fund revenue What's the composition of the general fund? in other words Most municipalities and now all large municipalities and always put an asterisk by this before Levy a property tax One of the largest cities in the country Mesa, Arizona didn't levy a Property tax until 2009 because it had to be approved by the voters and voters just wouldn't approve it until 2009 So now all municipalities have some sort of of a property tax, but they don't all depend on the property tax Cities that have only the property tax as a general tax form do but there are a lot of municipalities with a more diverse Revenue mix and to understand that you understand how they respond to economic cycles or to business cycles so if you look at the Unfortunately the yellow covered up a bit of the blue. I guess that's a greenish whatever If you look at the line that's supposed to be the sales tax collection the blue line You see that when a recession hits Immediately retail sales begin to decline So does income tax collections very few only about nine percent of municipalities collecting income tax The most prevalent is your neighbor to the south in Ohio The other is Pennsylvania and then there are municipalities I think the last number for Michigan was 23 municipalities collecting income tax in Michigan Most in Kentucky, which are very few municipalities and a few in Alabama St. Louis and Kansas City in Missouri New York City And of course my favorite is Yonkers, New York, which I don't quite understand But anyway outside of those minutes those municipalities others are prohibited from collecting the income tax Sales and income taxes tend to decline immediately when a recession hits. We stop buying. We don't have a paycheck We don't have income withholding Property on the other hand goes through the recession because the collection point for the decline in property values isn't until a couple of years out in the During the dot-com bust of 2000 2001, which is the first recession identified up here You'll notice that the green bar, which is property tax collections remain positive This is year-to-year growth remain positive through that period of time and doesn't decline until 2010 that is three years after the start of the The burst of the real estate bubble is when we've noticed for the first time a decline in year-to-year collection of property taxes Now sales and income again increase by 2012 13 and 14 But that's only over the prior year if you aggregate all of those together property sales and income taxes today 2014 that is we are we are at about 92 percent of collections in 2007 so even though we've had three years of total growth in the sales and income tax property tax Increases have lagged and have held down the growth so that we're only we're not back to the pre-recession levels General fund ending balances. These are these are similar to the savings accounts the states have what they call Rainy day funds, which they'll sock money away in for a rainy day and they'll bring it back out when there's a recession Municipalities don't they tend to have what they call reserves and they'll put money in a reserve and pull it out whenever they need it they'll often roll it into the the The incoming or the the new year budget as as a transfer from the last year or a roll over from the from the previous year and they think of these as Savings accounts a lot of cities will set aside money in this account or not spend it as a way of as you would if You're trying to buy a car you wait for three or four years and you pay cash for the car at the end They use it for capital assets. They also use it for I think you've had two just like we have had two years in a row of unpredictable weather in which last year I don't what it is in this year but a year ago the city of Chicago Ran through its salt and snow removal budget in January and the worst of the winter hadn't hit yet The reason because it's based on a forecast where do they get and the forecast the previous 12 years had been fairly mild The last two years we've been hammered Where do they get the extra in the middle of the of the fiscal year? Where do you get the funding to provide for snow removal and salting? Well, you reach into your reserves and you draw it down. What happens when you hit a recession? Same thing you still have union obligations That is union contracts tend to be multi-year and if you're in the first or second year of a five-year contract You've got to continue to pay them So we'll draw down on ending balances or the reserves in order to ensure some Consistent level of service delivery during a recessionary period. So you draw that down in each of these recessionary Eras the the actual ending balances remain flat or declined and they increase in in other years The the academic research and I won't go through all of these except to make two points the academic research identifies many many ways of measuring fiscal stress or economic stress or changes in city Wealth or other measures that we we hope can reflect the well-being of the municipality most of those and To just show tip my head of it I think one of the the best studies most comprehensive was done It's now an old study by lad and yinger called America's ailing cities in which they identify what they call standardized fiscal health and what they were trying to say is if all municipalities had access to the same tax levers What capacity do they have and also recognizing that taxes some taxes are more exportable than others meaning that? If you own property commercial property in downtown Chicago You may be an owner who lives in Miami Beach, and so you're effectively transferring some funds in the prop due to the property tax It's not a lot of track transfer that way the largest exportable tax is the income tax according to their calculations and yet so interest interesting study measure of fiscal health, but it makes assumptions as to do many of these indices that the the Representative tax system that ACIR created and was picked up by Bob Tannenwald later and The Hirschman and Herfindahl index all make a basically the same what I consider to be inappropriate Comparison and what it is is they compare your city to the average city So if you look at the Herfindahl Hirschman index, they're effectively saying if you have four act if you have four revenue sources And they are 25% of the total how close you do the 25% of each of those and the answer is as I just said 90% of municipalities are forbidden legally or Constitutionally from accessing the income tax so it really doesn't help policymakers. It's a nice intellectual construct It's not a good construct to advise policymakers as to what to do again the comparison to the average when you don't want to be Everybody's in Lake Wobigun, right? We're all above average, but even besides the Lake Wobigun effect To compare us to the average assumes that all cities have access to the same tax levers and the same spending responsibilities as well so During the great this recession Tremendous dislocation huge exogenous shock that had a differential effect across across Municipalities and it exposed a lot of gaps that we have a lot of gaps in data Knowledge and research and the policy solutions, which is what we're trying to introduce with the fiscal policy space And each city has a unique set of challenges again Emphasizing uniqueness that averages don't matter a whole lot and we need to reset the frame And so we created something called the fiscal policy space. This came about from a number of focus groups and conversations with a lot of Academics policy analysts and mayors and city managers and CFOs of municipalities over a number of years And we said so what is it that you do and how do you know what to do and what constraints you and for most of The responses what we hear is that you know, we don't think about what constrains us because that's what we operate That is our environment. That's our assumed environment. We don't and I said well, let's talk about what those are so we've identified what we consider to be the five key attributes of The constraint or the expansion but the constraint on fiscal policy behavior on the part of Municipal officials first is the intergovernmental context Of course, I'm a federalism scholar This is clear than the United States with a federal system in which municipalities only exist because the states allow them to exist And not because the federal government created them not mentioned in the US Constitution Mentioned in all state constitutions and are regulated by their states. So what are those? Items in which the state regular over which the state regulates the behavior of municipalities One is there are there are limitations on what they can do on taxing and spending property taxes in many states are capped or The or expenditures are are restricted to the growth in population or The cost of living and access to taxes almost all municipalities can access the property tax Only a little more than half of municipalities about 55 percent can access a sales tax and only around nine or ten percent can access an income tax Those are the three main general nationwide general tax sources there are others there are there are Utility taxes telecom cat taxes, but they they vary there They're not general taxes that municipalities have access to around the country second is that there there obviously is a wealth element that Taxes are connected to that's the underlying the underlying economic base what the city derives its resources from so if the cities I know we're close to Detroit as the city's economic base declines the cap the capacity No matter what fiscal linkages that the city has the capacity to generate Additional resources from a shrinking pie is very different more challenging than accessing additional resources from an expanding pie So we need to understand the connection between the fiscal architecture of the municipality and its underlying economic base We'll talk about measures for that in just in just a few minutes and third is that as much as states Constrain the behavior of municipalities cities self-constrained So many cities actually pass something like a property tax limitation that they have to abide by not imposed by the state But imposed locally by themselves And these last two I'm I think you notice they flip flashed up together I said there were five the the fourth is we have to be cognizant of the demands and preferences that we municipal officials have to be cognizant of the demands and preferences of the citizens the residents the users of services within the municipality in other words It's it's a demand function that we just can't operate as if the person or corporation that's demanding services Don't exist that demands and preferences for quantity and quality of services very across the country There are some municipalities that couldn't imagine not having four day a week garbage pickup There are other municipalities in which the residents couldn't imagine for paying for more than one today a week pickup of garbage We have demands and preferences change local political culture. This is the one that are in political science We have a lot of fun with because we know that it's different in Ann Arbor than it is in Birmingham But what's different about it? Well, that's political culture. It's sort of becomes the unexplained term It's attempted to be explained in many many occasions I did know Dan Ellis are quite well, and I appreciate what he created with the three subcultures And it helps us understand that there are differences in expectations Outlook approaches to freedoms and liberties etc. Etc. And there is no way that we can identify exactly what that is So we've collapsed that variable or attribute into the demands and preferences saying that it probably shows up Political culture what we want probably shows up and what we demand of our local governments So big asterisk there. Sorry. This was a by the way first articulated in a piece that Chris Haney and I wrote for the Lincoln Institute back in 2010 And we realized that there was a lot of connection between the fiscal policy space framework that we were trying to create and in Liz Ostrom's Institutional analysis and development framework as well and the the the connections were pretty striking and pretty different Where as she talks about an action situation We're talking about about one type of action situation in the fiscal policy arena and she identifies Biophysical conditions we're talking about the underlying economic base. That is that that organism that we derive or Take resources from in order to survive The rules in use the intergovernmental context the rules are imposed by the state as to what we can do and what we can't do What we have access to and what we don't and the attributes of the community and here Political culture demands of preferences of citizens as well as the local legal context So anticipate a bit the local legal context is as it tends to be a minor part in this conversation So we created a framework Everybody has to have a visual right so we threw in this visual as a way of thinking about this as as as a base of two big circles the economic base cities can only do what it has the resource base to Drive from the intergovernmental context which which also varies quite a bit across the way then they're the the the actions the revenue Decisions and the spending spending decisions inside that are framed by or are influenced by the demands and preferences of the Citizens and the revenue constraints and transfers or the fiscal architecture of the municipality So this project was large enough. We decided we couldn't Review the fiscal policy behavior of nineteen thousand seven hundred municipalities. So we identified a representation from the municipal spec sector Using making sure we had a diverse sample and of course feasibility of data collection So we selected the largest central cities in the hundred largest metropolitan statistical areas So we began with the statistical the the msa's and selected just the largest city from that So we end up missing a lot when you're in larger msa's we understand that but we also acknowledge it And it looks like this by census region Again, just a pretty map it looks for our purposes more useful to look at it this way And that is what was is the tax the general tax authority of the municipalities of those of those hundred cities? So the cities in green have access to three of the three main General revenue sources sales property and income. I included Seattle and Spokane Washington in that not because they have an income tax, but they have a gross receipts tax that in many ways Mirrors an income tax and just to demonstrate that at least it's tied to the the wealth of in this case the wealth of firms It is a it is a very prevalent tax in in Washington State But the others are typical income or wage taxes the other those other five cities the the yellow Cities are those that have access to the property and Usually the sales tax And not except for this except for Ohio and Pennsylvania and Michigan as it turns out where it's the property and the income tax that those municipalities have access to They the red states are the states that have access to only the property tax They do not have access to the art They don't have the authority to levy a sales or an income tax The the exception to that statement are those two cities in Oklahoma in which They have access only to a sales tax Which is kind of interesting and we'll talk about why that's interesting at the very end data collection efforts This this consumed the better part of two years We data on state collected state imposed tell since 1980 for all 50 states were collected and coded by the constraining effect Which I'll show in just a second, but also by something I think that's even more important to measure and that is the actual property tax gap rather than the The the statute or the the legislation each cities are coded is coded also according to its authorities I just did to the three general tax sources the economic base attribute relying on census which we you can understand But we also Connected the economic base to the fiscal architecture of the municipalities So let me just take a second to explain why that's important economic base in in most economic Most studies that rely on a measure of economic base Economists default to per capita income or some measure of income within the municipality That demonstrates roughly what the wealth of the municipality is and that's that may be that may be useful for understanding the economic base But if you don't have access as a city to the tax on that income then what are you taxing? only if all of the income wealth is falls into property Exactly in the proportion that it is in the wealth or the income side does property reflect the value of the municipality But municipalities have access some of them have access to three most of them to two sources of revenue So it's really the growth in that connection between the fiscal architecture and that economic base so if your property base is not increasing But your sales tax or your retail sales in the community is it doesn't help the Fiscal fortune of the municipality you may be able to buy a whole lot But it's not coming back to the city in those cases usually counties benefit from that but not but not the municipality So we've created a measure that linked the fiscal architecture to the three measures of the economic base that that linked to property per capita income and and retail sales the local legal context Wait, this is a tough one. We went through the ordinances of the hundred municipalities back to 1980 to see at what time Did they impose a locally imposed? primarily property tax Attribute this was a project that was to be was begun by an economist about eight years ago And she gave us our data her data. Thank God and we went back and tried to pick up from where she left off. It was There's an interesting slide on that This is probably the most difficult parts. How do you collect data on fiscal policy actions that municipalities took or thought about? Well This would be an entire year's project just on one city to look at all the fiscal policy actions that a city were to think about So what we did was we relied on a search from on newspapers and Lexis nexus And what we were trying to pick out from that were major changes in fiscal policy that rose to the level of being covered by by the news media It may not be the best it isn't the best But it's all we had and finally city financial data. We could only go back to to We wanted to go back to 1982 to pick up the every five years the census of government to match the census of governments with what we're we could collect from the electronic municipal market access Data were not available from 1987 and 1982 on a consistent basis So we began in 1992 every five years to 2012 and then merit research provided data for us on only two years 2007 and 12 for infrastructure and pension liabilities Primarily because anything before 2002 was not consistent across municipalities So what we have in this database are consistent measures of all of these for the for the hundred municipalities So we began to cluster data by Through legal research through on Lexis nexus to find out What exactly the the statute said about the restriction on Tax and expenditure limitations and then we calculated the actual gap And I think I've already said this we did create a demand variable which will be controversial I'm sure but we we asked another of our team members to go through the literature on how to measure demand and preferences of Citizens and what would be a single index that we might use to best represent whether they're whether the demand pressure Actually shrinks the fiscal policy space again The the the idea behind this is the more fiscal policy space the more opportunity municipal officials have to Maneuver within that fiscal policy space to address their concerns the more that's constrained the more that it's taken up the less Opportunity the fewer opportunities they have so the demand for services was measured by the percent union of the workforce in the city The Democratic vote assuming that they're with Democratic mayors there are or councils There are stronger demands on services which mean more expenditures per capita and percent poverty which is a demand measure as well So the tell measurements we used Straight out of the the literature on trying to understand the restrictiveness of tells that either on the rate limit or the assessment growth It's probably not terribly binding. So not all tells are the same And we then created this State it's a map of the states those with no tells are the darker ones those I'm sorry. This really got washed out, didn't it? Those the the very lightest of those have a have a binding. Well, maybe it shows up quite well if you notice the Southwest disappeared That's where the most binding tax and expenditure limitations are the Arizona, New Mexico Colorado, California and Nevada and Nebraska and That is Colorado, isn't it? Yeah Yeah, so the others are they're they're a little less in other words There's a little more room that they have and so we thought well that's an interesting way of categorizing municipal of the the Restrict the the constraints on municipal behavior, but there's probably a better one I mean what if you lived in what if you lived one in those washed out states on the West Coast? Then you're in a city and you say well, no, I can raise my property taxes Why is that because you may not have filled up the gap? So we created a measure of the percent property tax or an actual property tax gap That is that allowed by the tell minus the actual levy divided by the maximum amount We come up with something like this if we cluster the cities into those that operate under binding Tax and expenditure limitations imposed by the state and those on that are non binding You can see that the non binding tells have a a lot Of latitude on the property tax site not surprising at all the point is that this is a mean This doesn't include the variation among all the municipalities So even those municipalities that have a little the average is as little such as in 2006 when or 2005 when only there was only a 2% Availability it was more for some in fact there were some that were beyond they were actually in violation But they had to get special exemptions of some sort So I pulled out I Thought maybe some of you would identify with some of these cities So I pulled out of our hundred city database a few in which we actually calculated the maximum permissible levy the 2012 actual tax levy and then the gap so the dollar amount in the gap is It's kind of interesting Because it's it tells you if you are an elected official That's how much more you could actually raise your your your taxes if you wanted to so you know Raleigh could raise another seven billion dollars by raising the property tax to them to the maximum Whereas Des Moines could raise one million by raising its property taxes to the to the maximum and Denver Of course was out of whack that was the year that it repealed Tabor and allowed itself to get out from under The restrictions imposed by by Tabor The taxpayer bill of right Locally imposed tells as I said this was a lot of fun to collect the data searching through all the ordinances since 19 This begins in 1960 and it categorized This is only for the hundred cities that were in the that were in the sample of the hundred cities what this shows if you go clear I love to use this gadget. There we go. So if you go clear out to the end it shows it about 25 municipalities of the hundred have imposed some sort of Property tax limit on themselves. So that that's about a quarter of all of the municipalities in our samples So so it's not just and those in addition to state imposed tells these are additional Property tax limitations imposed by the city. So they're constraining their own behavior Which of course is a little different than the state because if they can strain their own behavior They can unconstrained their own behavior Unlike they can't tell the state what to do so here's the measure of that I referred to as of Linking the fiscal architecture with the economic the taxable economic base of the municipality. So what we've what we've done here with the economic Base is to calculate the percentage of the total municipal revenue generated from the sales tax property and income tax and Then assign that to the growth and retail sales to the assessed property or to per capita income So that if one grows but you don't have access to that your your index is going to be much lower If you do have access to it your index is going to increase with it. So Again, this is a the the states coded by that's a duplicate picture. Sorry about that Those are the states that have one two and three revenue sources. Okay, so back to those same municipalities They are rank ordered according to the breadth of their economic base. So so Raleigh Fortuitously has created a fiscal architecture that connected pretty neatly with its underlying economic base Which is why the economic base is at 79. It has a retail sales. Let me back up just a second These are not entirely consistent data Thanks to the census Bureau this for per capita income, which is important only for those cities that levy an income tax It's the growth between 2000 and 2010 for the for retail sale retail sales. It's also I'm sorry for property values It's also the growth between 2000 and 2010 in property values And then this third one the latest we could get close to 2010 from census in the growth of retail sales was a 10-year period between 97 and 2007 2007 is just the beginning of the the real estate Bubble burst so it doesn't capture as 2010 does for the for income and values doesn't Capture the full effect of the of the Great Recession. So it's it's a it's not quite what we would have preferred But it's it's all we have right now So I call your attention to places where I'll see if I have a mark. Yeah, so places in which the St. St. Louis for example, there's a decline of retail sales of 29 percent But only an overall decline of 10 percent and it's because it's offset by the growth in in real estate or property values and the decline in income wasn't as severe as One might have expected between 2000 and 2010 and st. Louis does indeed have have an income tax a Detroit Well, okay, there's Detroit Decline of 48 percent in per capita in private income between 2000 2010 But property values actually increased during that that period starting from a low base. They actually increased during the 10 years and And retail sales dropped by 31 percent. So the overall effect was only a decline in 7 percent in the in again the connection or the fiscal architecture between the Economic base and the fiscal base on a per capita that this is I cannot explain the big numbers the Portland and the Virginia Beaches, but I think the other ones I can't the per capita fiscal base change so if you take the dollar amount change between 2000 and 2010 with this Whirly thing with 2007 on retail sales and you you Calculate the per capita contribution that eat all three of those have made The the dollar amounts or the the change in the fiscal base changed for for Tulsa from 5,000 to 12,000 I think that could probably be credited almost entirely to the effect if you look down at Tulsa It's showing a small decline in retail sales. It's because a retail sales collapsed in Tulsa by 2008 9 and 10 that number would be much smaller than the 12,381 if we had 2010 data Virginia Beach is showing just to speculate a hundred twenty-two thousand because it's a high property tax dependence day probably a lot of growth in the commercial sector and and in that ten-year period growth in the early two thousands But at any rate you can see the change in the fiscal base in that ten-year period By by city not the again not the underlying economy, but the connection between the fiscal architecture and the underlying economy Finally, the the the other attribute is called the demand index. That's preferences of the of the the electorate which we used that the three measures of demand and Virginia Beach, Oklahoma City are Very that that's is inverted very low on the demand side Whereas Detroit Philadelphia Baltimore Pittsburgh and St. Louis and Portland are are on the other end very high demand Which means high unionization? Democratic mayors high demand for services and and high poverty So those are our three big measures that that that we pulled together in this Incredible two-dimensional three-dimensional space I'll come back with the cube and we can see this is this is the three-dimensional space the the y-axis is the demand pressure and the demand pressure actually you can see it as the the little circle ball on the end of the string that string is If you were the will give you an idea of where the demand variable is Economic and these are these are all Z scores according to the all the data from the hundred municipalities So the demand pressure as you as you go toward what is the negative three down there? It's not a zero base, but it's That's the least amount of fiscal policy space that municipalities can operate in Going in the other direction where they have a large property tax gap That's what they could actually move into if they had to or their economic and their economic base was growing That is the linkage between the fiscal architecture and the economic base was growing and demand pressures were low Then you end up with those cities up in that that cluster of cities that have a lot more fiscal policy space than than other municipalities Those of you who haven't passed the eye test yet at those are Raleigh, Richmond, Virginia Beach, Durham Greensboro Winston Salem Fayetteville and another city that got buried under there on the other end are not surprisingly the cities of Detroit Rochester Buffalo Cleveland in Philadelphia in other words the cities that are that we consider to be Suffering and having a lot of problems are those cities that don't have the fiscal policy space to address those questions to begin with and Those that are in fairly good fiscal policy space shape Probably don't need help because they they have enough space to work within on their on their own so just a quick Descriptive between Virginia Beach and Detroit Property values increasing decrease and as we know local tax authority a little different per capita income Is quite a bit different state-imposed to tell not in in Virginia? tax revenue reliance 50% of Virginia Beach's Budget is is generated on the basis of the living of taxes a very large debt capacity not so much for Detroit and Fund balances in 2012 were in the opposite ways as well So we started looking at and this is the part that is not completed because this is the modeling part We're having difficulty with and that is the fiscal policy actions So what did Virginia Beach do over the 20-year period of data that we collected and this by the way? Even though the financial data we're collecting in every five years the fiscal policy actions are every year So from from 2002 through I'm sorry from 1992 to 2012 We've collected data on major policy actions that were considered or adopted by the municipality These are the ones that were just adopted or approved by The City Council's property tax increases were proposed by Virginia Beach three times during this period of time other taxes again Major increases in the tax rate five times and and major increase in charges and fees and we just qualify that Cities are always adjusting their charges and fees every year every year That's this these are major increases in charges and fees one time for the city of Virginia Beach Detroit on the other hand engaged in much fewer at least over the 20-year period in large Changes to the the tax and fee structure or or spending or and then finally filing for bankruptcy Again Virginia Beach had the capacity they had the fiscal policy space to move into particular areas And they do those that don't have the fiscal policy space are constrained So what's next with the project? We're still going back to that beautiful model working through the cluster analysis to Identify what cities are similarly situated to identify the types and understand the types of policy actions that they proposed And they took and the impact of those policy actions on constraining or opening up fiscal policy space in the future Second do fiscal policy actions create more fiscal policy space or less not not all of them are the same And what are the what are the effects in the future? So this is we was talking with students just before this the the decisions that were made 20 and 30 years ago to extend pension benefits and other Post-employment benefits that were made 20 years ago. That was great. It was an easy decision to make Well, it had a huge impact today great great decision at the time Yeah, it was as we learning the term kicking the can down the road. It was a great decision at the time that had just Consequences that are unimaginable today. We're we're continuing to to Refine and cleanse the database it will be posted We're trying to create a system whereby anybody can go in and pull down the data and Do what you want with it, but also for the other non 100 cities It can compare to what your data are compared to a city and see if there's a comparable city with in terms of fiscal policy space That you might learn you might learn from so we're creating that data portal New additions to the initiative. We're adding an infrastructure layer to it As I said, we have some data on on infrastructure and pension liabilities for the last 10 years Again the comparability of those data across a long period of time is not so great So we're sticking with the post 2002 or three era in which gas be 34 is pretty much Abided by by at least these hundred municipalities the largest one and with the other gas be rulings on pensions so that we have some consistent estimates and consistent I'll put in quotation marks because how one CFO measures the asset value of the municipality especially an old one is different than than another and Then we're going to be in gate and we started this deep dive into some comparative case study Analyses of those cities that are situated in similar types of fiscal policy space Okay, so I I promised that that that's that's sort of the project but I wanted to throw something out recognizing that there are some urban planners out here and I Think Liz said this might be something that your folks would be some of your students might be interested in here So let me throw out just as you are thinking about Brand-new city and you're creating a whole new fiscal architecture for that city What revenue sources would you consider would you consider the property tax? Would you consider the income tax would could you consider the sales again staying with the three main general taxes and understanding at least what I would propose here understanding that the selection of the fiscal architecture Can have and will have an Impact on urban design Let's take the sales tax You have the sales tax you have access and so you you you create a city and you say you know what we don't want to tax property We don't want to tax that's not good people always fight about property Let's just tax retail sales will be 100% dependent on retail sales and now You're this you're the you're the CFO of the city. You're the mayor of the city and You're building a new city. Where do you invest? Well, I propose what you do is you invest on the border of the city. That's where you build your shopping mall That's where you build where people will buy things because the only way you can afford your city is if people buy things And you collect a retail sales tax from it and who do you want to have pay for the retail sales tax? You want your neighbor to pay for it You want to offload and where do you want to so that's that middle? I think it's a yeah the middle one and where do you want to put your industrial parks you want to Maximize revenue by putting the retail sales out as far away from the center of the city as you can so that others will pay By the way those if you live in the middle of the city if there's a residence in the middle of the city You still have to shop in the edge of the city if that's where you're putting all of your commercial shopping centers but so to the neighboring municipality Dwellers the miss municipality and also that's where you want to offload your costs by building your industrial parks on the edge too Why should you have to absorb all of the traffic congestion? Let's increase the cost on your neighbor as well Look at some of the development options and activities in states that are heavily dependent on the sales tax and You see something that is not exactly like this But you can see the logic of trying to extend retail sales malls on the edge of the city one of my favorite stories It's happened a long time ago now, and there's a post script to it back in the late 1990s this the city of Tempe, Arizona, which is completely surrounded by other incorporated municipalities and the city of Gilbert Which is one of those municipalities? Realized this that they need to put their shopping malls at the edge of the city and that would mean that they would each Build one right next to each other only one is going to survive So remember the game of risk you ever play that anymore, right? So what's the first thing you do when you realize that somebody's going to invade your territory you buy them out? So city of Tempe said look Gilbert will give you two million dollars a year two million dollars a year if you don't build here They said that's a great idea They did that I remember going back for an interview a follow-up interview in about 2001 or 2002 talking to the the city manager in Tempe and the city manager said oh by the way Gilbert rescinded that agreement and now They're building them all right where they had come to an agreement for it before in other words these are voluntary agreements and the logic of where you're generating revenue doesn't change and so those agreements can come in To be challenged as well a property tax dependent cities so that that little egg sunny side egg is If you if you think about you as an investor of public money And you're going to invest and you want to get the biggest return What do investments usually do? investments usually asset investments physical infrastructure tend to benefit neighboring properties right so when the city comes through and puts in a nice new Sidewalk and street and park system for you the value of property tends to ripple effect tends to benefit the neighbors neighboring properties Why would you want to invest on the edge of the city and benefit your neighbor? Why would you want your neighbor to benefit from the investment that you made so why not make sure that wherever you make an investment? The rippling effect of increased property values are captured by your own property tax collection system so that that encourages the investments away from the edges of the city the Capital investments and parks and recreation kinds of of investments so that the benefits can can be can be taxed The third one on income tax dependent city. I still haven't figured that one out I'm I'm not sure what that does except one thing we do know is that we want rich people to live in our town So that that's sort of so when you think about creating your own city And I know as planners I am the dean of an urban planning school So we they talk about Spatial modeling and Transportation routes and I said so what kind of how are you gonna raise revenue to pay for all of this? Well, I don't know we'll probably use the property tax then why would you want to build something on the edge of the city? That's going to make a really nice, but you're paying for it. Why don't you bet? Oh, hmm so What does that do the reliance on one of those three general tax structures? What does that do to your motivation to your strategic behavior to make investment decisions? Interesting fun planning exercise So the fiscal policy so go back to the original this is it's a it's a frame It's a new frame For understanding constraints on cities adjustments to the changing environment And we think it's a new approach to understanding city fiscal behavior that proverbial mousetrap And we do have a blog who doesn't we all have a blog and This is the team so far that's been working on the project and I promise to leave some time for Q&A So I'm done. Thank you Measure the behavioral impact of different taxation schemes as you're balancing out because you're you're dealing with different cultures in each municipality And they have similar constructs in terms of the structure But how do you account for that or how should we think through that? Which part are you speaking now? So as you change your taxation structure, are you trying to maximize the optimum? I have an impact on your population We've learned both with your feet and people will move How do you account for that? Yeah, so that's a great question this it is There are Tebow implications to this that we haven't that we haven't addressed We do have the So the the the fiscal architecture of the city is designed by the city within certain limitations How the city adjusts to that could actually have the effect of pushing people out? You're right and I'm not sure that That's sort of that. I think that we put that on the demand side of it Although we the way we've measured demand doesn't include the capacity to migrate to other municipalities the way we have it the way we have it set up, so it's not it's not iterative in that sense that Because the reaction the behavioral part of it is really it's part of it's a two-step process It's an actions taken and an individual or firm decides to move someplace else Because or or that municipality or that county decides to offer something else to attract and this municipality responds in kind And so it can go it can go back and forth, but we haven't we haven't explicitly incorporated the the voting with one's feet in In this particular model question You're nominally about Detroit's assessor the property values rising during with counterintuitive That's because the assessors were cheating on the high side. They discovered that so that's being corrected big time now So okay, so that number will change. Oh, yeah Counterintuitive why it's going down when everything else is going up, but that's why that's why okay a second little tidbit is Detroit Also as a casino tax, which also adds a different dimension to this whole of the three sources you're talking about and finally these This constrained FPS concept that you've described Also tends to because of that constraint if it's at least reasonable Forces of communities to get more efficient. Can you touch on that part of the equation? Yeah, so we we have not we have not Yeah, and I think it's almost the question on on TV We haven't talked about whether services are being Delivered efficiently rather what we've talked about was demand for services and measuring that as a high Union Democratic city with a high poverty rate. So there's much more demand for services efficient service delivery is a Whole new project and a great project, but it's not it's not incorporated in this fiscal policies So cities have on the operating side even within a constrained environment They can make they can do productivity enhancements and performance measures that will improve and still provide a higher or same level of Services without any adjustments and that's that gets into the general operations of the cities which we haven't done Smurfs and I thought I read a reference that said that for the head no property tax Cities in Florida depend wholly on the property tax. They have Florida has municipalities have the authority to levy sales tax for specific activities or for For bond issuance for example for transportation and bond issue, but no, they're wholly dependent on the property tax the cities are Related to the issue of our efficiency. So you also mentioned about exceeding fiscal behavior Did you connect data about expenditures by the city's your actual expenditure? We we do have we do have data on expenditures, but we've taken them from the caffers So it's standardized data by gross accounts or gross line items. It's not disaggregated very well But you can see a public safety line for example in 92 97 2002 2007 2012 and we have not gotten into an examination of the exp on the expenditure side We have the data, but we don't have the analysis Now the quality of census data is okay, the only reason that I I don't For for financial analysis purposes that I don't rely or use census data as the following Census census does census's purpose is to provide Data on revenue and expenditures that are according to their own definitions They fit in the categories the way they want and they ignore all fund boundaries Because they ignore all fund boundaries It doesn't give me an understanding of city fiscal behavior because when you combine all fund activities into Into the say property tax receipts it doesn't say whether I as a mayor or or the CFO have control over that those receipts They can be dedicated for something else or they can be part of an enterprise fund Or they can be in a special projects fund that cannot be used for the general operations of the city so the the motivation behind the The city fiscal conditions survey with the National League of Cities to focus just on the general fund was to look at the discretionary fund of municipalities and not total funds combined And that's the that's the biggest for me the biggest reason that I stay away from using census data if I want to understand what municipal officials are Making decisions about and what the revenue flow is you need to look at the general fund That's the discretionary part of the budget enterprise funds are prevented from spending on other activities Usually by ordinance but not by state statutes and certainly by accounting standards So it's the And it's interesting you should mention that I just received an email from the former director of government finance at the census Who's it who's retired and saw that this about this presentation and his comment was exactly the same thing He said the data that census provides on government finances is not conducive to the kind of studies about city fiscal behavior it needs to be disaggregated and by by Presenting general fund data revenue and expenditure activity in the general fund You're you're focused on that part that city elected officials have control over and the others are They're they're just they're set aside for a particular purpose and they can't be used and they don't they don't provide They don't provide fiscal policy space Because they're they're separated So much of the conversation comes back to this idea of efficiency and things like that which I think are because the reality is discretionary spending Is not the issue the issue is we have a cut-only model of mission mission municipalities have really no Revenue generating space and if you think about how how municipal finances work We're over 50% dependent in most cases on property taxes And if my only way to balance my budget is to cut Which makes my place less desirable it lowers my property values which provides less income and I'm in a death spiral so What would be a model based on the research that you see that make me better in Michigan that allows you to invest Making the revenue drivers go up which gives you the resources to do that because you have this disconnect between service demands As you talked about and the ability to generate revenue to do those That's the $64,000 question, isn't it? As I was talking with a group before this presentation my hope Seven years ago Eight years ago now my hope was that when this huge exogenous shock smacked the real estate market After this enormous growth So if you if you saw those earlier slides about growth and revenue mean property tax receipts were coming in hand over a Fist and then bam the bottom fell out and now we're going to work the housing experts are saying We're going to go back to the modest growth and housing prices that we experienced prior to about 1995 and so we can't count on on The piggy bank anymore that we can draw down on and I was I was hopeful that this would Force and gender the kind of conversation to answer the question that you've raised and that is what is What is the appropriate fiscal architecture for my municipality my municipality not all municipalities I I'm afraid I have to plead ignorance about Michigan, but you do know there are me there are municipalities that are retirement communities Why would you want a retirement community? Why would you not create a fiscal architecture and a spending apparatus that meets the needs which would be very different from a young 20 and 30 year old Community in which there are a lot of young people and and children in elementary school very different set of demands issues and Priorities and the fiscal architecture needs to be layered on to that so that it matches the engines of growth of the municipality And they're not always the same. They're not always the same. I So I yeah, I think I think we missed although we may not be done yet We missed a huge opportunity in 2007 2008 to engage in this in this important political conversation about what's best for my community We missed that although I will also add that I think the at least for many municipalities the pension crisis the OPEB crisis and The infrastructure crisis are forcing those conversations now because now we're asking the question back to the question about Efficient service delivery. Do we need all of those paved streets? If we can't afford them Do we need to pave all farm to market roads if only two tractors are using it a day? Do we need as many bridges? That have a long useful life, but they have to be maintained during that useful life Are we willing to pay for it? And I would argue we've never had that conversation Are we willing to pay for what it requires to provide an adequate level of services in an adequate sized infrastructure? Not just today, but for your grandchildren Are we all going to assume those costs from now until for the next four year 50 years rather than saying, you know 40 or 50 years from now, that's somebody else's problem We're right in the middle of the effects of the largest infrastructure build-up in the United States with the Interstate highway system and with the huge expansion projects in the 1960s and 70s that of course we were all in favor of It provided better water It provided better and more efficient transportation But the price we paid for it only paid for building it That's it. It didn't pay for maintaining it for its useful life useful life Has now we've passed the useful life because we've under maintained our infrastructure and we've promised too much more than we can afford on the Pension in the OPEB side so though those conversations about what can we afford not not just what do we want? What do we like? But what can we afford? What are we willing to afford? We haven't had that political conversation When President Obama talks about the need for an infrastructure bill Yeah, I agree, but not the kind of infrastructure bill He's talking about we need an infrastructure bill that pays for the maintenance of the assets that we've already built and haven't used not new assets That was my political We're running through a simulation on Classes and which is very hot topic and I wonder if the FPS framework Complicates or what if it if it means that regional cooperation it means that the most stringent constraints kind of supersede those Those those more relaxed constraints and make cooperation regional more difficult or if There may be in case if you're doing revenue tax revenue sharing or tax-based sharing if that can relax some of those constraints It could work in either direction almost I I The vantage point that I come from is one in which I believe local more local autonomy is better than less local autonomy That means each municipality should design its own fiscal architecture, which may be different in the region one neighboring city to another And then it has the possibility of creating a Tebow effect if that's if that's the case, right? And what does that do for for thinking regionally? This is sort of outside this presentation, but I don't think that you can think regionally when you have hundreds and hundreds of Municipalities all trying to accomplish the same thing why were municipalities created to begin with you those lines need to to exist Cook County, Illinois has Over 170 municipal governments within the county not County of the city of Chicago They don't get along So no matter what we find out in the fiscal policy space. How's it going to help them work together? I don't know Maybe it will if we recognize Which isn't part of this project But if we recognize that the services that I'm consuming are provided by you and I'm not paying for them maybe there's a way for us to look at consumption patterns of Municipal services and figure out figuring out a better way of a more a fairer way a more effective way of paying for those services But that that's somewhat apart from the the the fiscal policy space Yes Well Detroit certainly the most intriguing at this point, but we all know why Most intriguing no, but I will do a plug because I know I'm supposed to look at the clock and Barry told me that we're running out of time So let me do this plug probably one of the most interstudied Municipal finance systems in the country is the Ohio Municipal finance system So this isn't from this study, but this is from other work that I've done Because the question came up about a regional tax policy And you know we don't like to talk about regional tax policies because that you're taking away my identity How could I possibly go? So there are those kinds of concerns, but there are regional tax policies that aren't called regional tax policies, but It's like the duck. It's still quacks like one And that's the municipal income tax system in the state of Ohio in which over 440 municipalities Have the authority because they've taken the authority. It's a homeworld state they've taken the authority of approving an income tax at the place of residence and at the place of employment and This is different from what's happened in Detroit, which has I know the 50% income tax on on Non-residents this is one in which it is the dominant tax form for all municipalities So if I want to go to another municipality, I'm not going to get a tax break on the income tax So it doesn't create the t-bow effect. I'm not getting pushed from one community to another because of the income tax School districts and property taxes are completely different but for municipalities. That's not what pushes people away or attracts people But because it's an income tax at the place of employment Cleveland Cincinnati even Youngstown Haven't gone the way of coming under state receivership Cleveland for a whole different reason in 1979 had nothing to do with tax collections. It was completely political It was about the electric utility power but all of the other municipalities the industrial structure employment and income are not too different from those in Michigan, New York, Illinois, Indiana, Wisconsin and at those municipalities because there still is an employment base These are cities. It's not that everybody's abandoned the cities. There are a lot of white-collar workers They are still paying an income tax to the city of employment That's a regional tax Washington DC has been fighting this for years It's called a commuter tax there and as soon as you say commuter tax the residents from Virginia and Maryland say we don't want to Pay for anything. We're already paying our federal taxes. Well, yeah, that's right But you're also using all of their facilities as well and you're not paying for them and that's what a regional tax does is it distributes the The revenue from the region to cover the costs that are of services that everyone benefits from the municipal income tax in Ohio study That's a great one Okay, I'm being pulled away But there's always room for exception especially when we are greatly indebt to our speaker So please join me in thanking Mike for a very thoughtful presentation