The Enormous Problem of Municipal Distress (by George W. Dougherty, Jr., PhD)

The fiscal health of communities in the Pittsburgh Region has been a major concern for the past 30 years, but much of our understanding of the problem is based on intuition, sensational stories of fiscal catastrophes, and filings for Act 47 Distressed Community status. A more informed discussion of local government financial health requires a thorough analysis of the available data to identify the scope of the problems. PittsburghToday.org and the University of Pittsburgh’s Graduate School of Public and International Affairs have teamed up to provide the data necessary for improve public dialogue. 

Download the summary tables here.

Annual Deficits
The most basic measure of municipal fiscal health concerns the annual results of municipal revenue collections and expenditures. Healthy communities run a small annual surplus that allows them to build a rainy day fund and budget for long-term capital and infrastructure needs. Even healthy municipalities face the occasional shortfall due to unexpected events. Governments that run regular deficits, commonly defined as two or more annual deficits in a 5-6 year period, show significant signs of fiscal distress.

Using data from the Pennsylvania Department of Community and Economic Development surveys of municipal governments (cities, townships, boroughs) over a six year period from 2000 to 2005, Table 1 shows that 58.5 percent of municipalities in the ten county Pittsburgh Region experienced two or more annual deficits. A full 80.2% of our local governments experienced at least one deficit during the period, with only 101 of 509 (19.8 percent) cities, townships, or boroughs able to avoid deficits during the period. This is an astounding finding and represents widespread financial problems beyond expectations.

Structural Deficits
Because annual surpluses and deficits simply give us a snapshot of governments’ finances, a better measure of fiscal health compares growth in revenues and growth in expenditures over a period of time.  Structural deficits occur when expenditure growth is greater than revenue growth over at least a five year period, a trend that is not sustainable. One would expect struggling municipalities to increase revenues and/or reduce expenditures in response to poor financial performance, but there are substantial impediments to doing so. On the revenue side, elected officials face state imposed limits on tax rates, citizen sentiments strongly opposed to increased tax burdens, and placing their town at a competitive disadvantage if rates are raised higher than surrounding communities. Expenditure cuts are limited by statutory requirements to provide specific services, labor contracts, and citizen demands for services. After all, someone needs to police our neighborhoods, respond to fires and car crashes, and plow our roads.

Table 2 shows that 48.9 percent of municipalities in the region experienced a structural deficit from 2000 to 2005. This means that expenditures grew at a faster pace than revenues. A closer look at the data shows that 29.3 percent of our local governments faced severe structural deficits where expenditure growth was more than 3 percent larger than revenue growth. Cities, townships, and boroughs in the severe category will quickly run out of rainy day funds and face increasing annual deficits. Once again we find that almost half of municipalities in the Pittsburgh Region face fiscal distress.

Factoring in Inflation
One important factor that we have yet to address is the effect of inflation on municipal finances. Inflation has the awful effect of reducing the value of money raised as revenues and decreasing the level of services we receive for a given level of expenditures. It may be the case that even those municipalities that have not experienced annual or structural deficits are providing lower levels of service due solely to the corrosive effects of inflation. While 87.9 percent of municipalities experienced revenue growth from 2000 to 2005, Table 3 shows that a little less than two thirds (63 percent) of local governments were able to increase revenues at or above the rate of inflation. On the expenditure side, 77.4% of local governments saw expenditure growth in real dollars. Table 4 indicates that 58.2 percent experienced expenditure growth at or above the rate of inflation. In both cases, substantial numbers of our cities, townships, and boroughs lost buying power by not keeping up with inflation.

To download the complete dataset, click here.

Summary
The purpose of presenting this information is to improve the quality of dialogue on an extremely important topic. The findings presented here do not constitute a thorough review of municipal fiscal health in the region, but they review a handful of the most important measures analysts should use. It is shocking that most of the measures above suggests that almost half of our local governments are facing financial crises.

These results lead to a number of important questions that we hope to see discussed in this forum.

• What tools can elected officials and managers use to stem the tide of red ink?
• How can currently healthy local governments avoid financial distress and maintain their competitiveness within the region and nationally?
• What actions should state officials take to respond to local government distress?

Note: The revenue and expenditure figures used in this analysis remove the categories of “other revenue sources” and “other expenditures” since these categories traditionally include transfers from surplus accounts, nonrecurring revenues, and nonrecurring expenditures.

George W. Dougherty, Jr., PhD is Assistant Professor and Public Service Degree Coordinator in the University of Pittsburgh’s Graduate School of Public and International Affairs.

Comments

[brandon]

very interesting and informative.does not suprise me to learn that these municipalities are over spending. they are between a rock and a hard place. they need more money to operate but nobody wants there taxes to ever go up..

[Ken Boyer]

This is all interesting data, and at least one solution has been proposed to address it: merge all Allegheny County municipalities into one giant entity. However, this solution is an extreme and unnecessary one. The goal should be to seek mergers among municipalities in order to bring the total to a more sensible number. Even if we halved the number, there would be greater efficiencies. Perhaps municipal mergers along the lines of the already-existing school districts would be logical.

[Susan Hockenberry]

This post touches on the important civic issue but misses key points basic to understanding the full story of municipal fiscal health.

Municipal "deficit" as measured in the University of Pittsburgh study, is not the ultimate measure of municipal "solvency". There are numerous municipalities that routinely run deficits but are in good fiscal shape by virtue of maintaining fund balances accumulated due to financial prudence or economic good fortune. It is appropriate for those municipalities to spend down their positive fund balance (thereby returning it to the taxpayers). Additionally, it is not uncommon for resources to be accumulated in one period and expended in another. As such, deficits alone, or a history of deficits, is not an accurate measure. Finally, in judging municipal finances, it should be factored that governments segregate resources into different funds for accountability purposes. It is important to know which fund has or is causing a deficit. Without this fund information nor even disclosing the source of the article's data, one cannot draw meaningful conclusions.

Certainly, there are many communities in the region struggling financially because of weak economic conditions combined with limitations of statewide structure and taxation policies. The growing disparity among communities needs to be addressed. To do so, we must have meaningful discussion on maintaining a strong and responsive local government system. This report and its blanket judgments on unverifiable information does not move us closer to this result. Please see http://www.lgalyceum.org for some suggested measures.

Susan G. Hockenberry
Executive Director
Local Government Academy
800 Allegheny Avenue
Pittsburgh, PA 15233
412.237.3171
http://www.localgovernmentacademy.org