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Observation: The emerging crisis for local governments in New York April 2012

The emerging crisis for local governments in New York

By Robert B. Ward
Deputy Director/Director of Fiscal Studies, the Rockefeller Institute of Government

Robert B. Ward

In Highland Park, Mich., most of the street lights in residential neighborhoods have been turned off and taken away. Stockton, Calif., has cut the number of police officers by a quarter, even though violent crime is on the rise. Large municipalities in Pennsylvania, Rhode Island and Alabama have entered bankruptcy, with unknown but clearly unwanted results coming for taxpayers and for people who depend on local services.

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Deputy Director Robert Ward leads the Institute’s research on state and local government finance and on New York State government. He has been appointed deputy comptroller of budget and policy analysis for New York State effective April 12. An earlier version of this commentary appeared in the Albany Times Union.

Municipalities in the Empire State have not experienced such trauma yet. But it may be coming. In Albany, City Treasurer Kathy Sheehan warned earlier this year that the state’s capital city is approaching a budgetary “cliff” as available fund balances dwindle and a temporary boost in state aid expires next year. In Syracuse, Mayor Stephanie Miner informed residents that “we are in jeopardy of compromising the basic delivery of services our constituents expect.” Rochester Mayor Thomas S. Richards told the Legislature’s fiscal committees last month that a number of Upstate cities may need fiscal control boards such as those already in place in Buffalo and Nassau County — and that “cultural and social bankruptcy precedes financial bankruptcy.”

In March, Governor Cuomo warned that cities and counties across New York would face the threat of bankruptcy if the Legislature did not reduce mandated costs by enacting major pension reform. The governor’s alarm about potential fiscal emergencies for local governments was an important step forward in raising awareness of the issue. Although the pension changes enacted by the Legislature will restrain benefit costs, truly significant savings will only come a decade or more in the future as new employees gradually replace current workers. For now and the next few years, the threat remains: Cities and counties across New York face large budget gaps, and increasing chances of fiscal failure. This is a big, widespread problem with lots of moving parts — each of which must be addressed realistically if we are to avoid needlessly severe damage to essential services.

A rising tide of budget gaps is a predictable result of the lingering impact from the Great Recession. Counties’ sales-tax revenues fell nearly 6 percent in 2009; the state’s general-purpose aid to localities has been reduced; property tax revenues are constrained both by economic conditions and the state’s new tax cap.

But even before the recession’s full impact, many localities ran into trouble by repeatedly adopting annual budgets in which recurring costs outpaced continuing revenues. Economically struggling cities are by no means the only examples. Many of the wealthiest jurisdictions in the state — counties such as Westchester and Nassau, and towns including East Hampton — have repeatedly pushed today’s costs off to the future. And the problem occurs under elected leaders from both major political parties. When the recession depressed tax receipts, the structural imbalances that had been hidden with temporary solutions burst into the open.

Now, local officials may be able to postpone tough decisions for yet another year or two by drawing down fund balances, borrowing against pension obligations and otherwise shifting today’s problems to the future. Such steps only delay, and may worsen, the inevitable reckoning. At some point, the checkbook is empty. Then comes the emergency slashing of spending and services, often accompanied by sharp increases in property taxes.

A lack of comprehensive state policies to prevent local fiscal crises contributes to the problem. Unlike some other states, New York has no law requiring local governments to plan ahead so they can avert fiscal emergencies, or to deal in a predictable way with crises when they arise. The state Constitution rules out only the most egregious budgetary behavior, prohibiting localities from taking out long-term debt to pay for current operating deficits unless explicitly authorized by statute. Although state law permits municipal bankruptcy, such has not happened in recent decades — and is not likely — because policymakers broadly agree that allowing one locality to go bankrupt would hurt the state’s credit rating and those of other municipalities. Thus, when local officials run out of short-term borrowing capacity, they ask the Legislature for special permission to use longer-term bonds. The Legislature tends to say yes to such requests, creating control boards and other extraordinary forms of oversight to impose some measure of new discipline along with temporary budget relief.

State oversight of local budgets — with or without a control board — is not a happy prospect. City workers in Buffalo went for more than three years with no raises, and seven years without contracts, as its control board wrestled the budget into balance. The city of Newburgh has slashed funding for street repaving and other essentials to meet its responsibilities under a fiscal recovery act adopted in 2010.

Local-government leaders and their constituents have two broad options to deal with approaching fiscal crises. One is to await state oversight and expect to give up significant control over local budget decisions. The second option is to identify looming crises early by, for instance, using multi-year planning tools provided by the Office of the State Comptroller — and then taking the steps necessary to avert an emergency before it arrives.

Municipal officials often say that relief from costly state mandates will go a long way toward resolving local budget woes. There’s no question that many local officials would find ways to operate more efficiently if given more flexibility over their own programs. But the pension-reform law enacted this year — providing only relatively modest savings to local taxpayers — illustrates that mandate relief by itself is not enough. Each jurisdiction will have to find its own cost-efficiencies in coming years, inevitably including steps to limit the growth of employee compensation costs. In the longer term, state and local leaders will need to think seriously about the potential for broad changes in the fiscal relationships between Albany and municipalities around the state.

Voters have heard warnings of fiscal crisis before. The threat now is real and widespread. It’s not simply a matter for political leaders and budget experts to think about. Where voters pay attention, elected officials may act more decisively and effectively — and where voters are disengaged, damaging results are much more likely. Public employee unions do not want to embrace concessions, but may prefer action sooner rather than later if it means limiting harm to workers and services. Property owners, including organizations whose facilities are tax-exempt, have a vested interest in their local government’s financial stability and can help identify useful solutions. The individuals often ignored in discussion of public budgets — those who depend most on quality public services — deserve to be kept high on the agenda.

The opportunity to avert real crises is still here. But time is running out.


The Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York, conducts fiscal and programmatic research on American state and local governments. It works closely with federal, state, and local government agencies nationally and in New York, and draws on the State University’s rich intellectual resources and on networks of public policy academic experts throughout the country.