Why States and Cities Need More Policy Financing Mechanisms

Los Angeles raised taxes to fund a mass transit expansion ahead of the 2024 Olympics, which it is competing for the right to host.

Los Angeles raised taxes to fund a mass transit expansion ahead of the 2024 Olympics, which it is competing for the right to host. Reed Saxon / AP Photo

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Connecting state and local government leaders

Proposed cuts to the federal budget and local preemption could kill the fiscal capacity of municipalities to deal with disasters like Hurricane Harvey or even provide basic government services.

The ability of states and cities like Houston to withstand and bounce back from shocks like Hurricane Harvey, their resilience, comes down to their fiscal capacity, which is threatened by everything from proposed reductions in federal spending to state preemption of local governance.

U.S. House Republicans on Wednesday revealed what’s likely a throwaway proposal to cut $876 million from the Federal Emergency Management Agency’s disaster relief account to pay for about half the cost of the down payment on President Trump’s U.S.-Mexico border wall proposal, The Associated Press reported.

California would be left vulnerable to a natural disaster like an earthquake in the event of a watershed federal policy move like the repeal of the Affordable Care Act, taking a $30 billion hit over 10 years on a $180 billion annual budget. While local governments in the Golden State are better off than most, cities in other states are often limited in their ability to work with voters to tax themselves.

“There’s just been this dramatic rise in preemption activity as state legislatures, largely in red states, are preempting the authority of blue cities, of progressive cities to tax themselves, to raise their minimum wages, to create municipal broadband, to invest in their own infrastructure,” said Chris Hoene, California Budget & Policy Center executive director, during a Governing Across the Divide panel hosted by the National Academy of Public Administration on Tuesday in Sacramento. “That’s a harmful trend in the sort of sense that we ought to at least be going in the other direction and sort of saying, ‘Look, the state doesn’t have the capacity to help you in the case of shock, but we’re going to give you some flexibility and some space to address your own challenges.’”

Even when states and cities are able to raise taxes, the national fiscal environment isn’t exactly conducive. The increasing number of U.S. retirees and slowed growth of the working age population is resulting in declining national income to the tune of $688 billion last year—twice the growth in GDP, said Mark Pisano, University of Southern California Price School public administration professor.

Other state fiscal pressures include increased spending on criminal justice and health care, along with unfunded pension liabilities.

“Unless we get a handle on our pension unfunded liabilities, we are delivering less services,” said Thomas Reilly, the new chancellor of the Nevada System of Higher Education. “It’s costing more, and the number of employees per 1,000 residents is decreasing.”

When higher education, a discretionary part of budgets, has to compete for funds it suffers, said Jack Knott, University of Southern California Price School dean. Michigan, he said, solved that problem by allowing local tax districts to increase property taxes, a driver of higher education investment,  a certain amount in addition to the per capita amount spent by the state.

In California, Los Angeles voters have increased local taxes significantly, primarily for infrastructure spending, but the potential for that elsewhere is limited, Knott said.

“The fiscal challenges really don’t bode well for a lot of the relationships between state and local governments,” Reilly said. “It’s political, in that most states are actually run either at the governor level or the legislature by Republicans and cities by progressive Democrats.”

Municipal attempts to assess a fee for plastic bag use in retail stores have even been met with resistance by state governments, which often sweep the general budgets of localities when faced with a budget deficit.

In Nevada, Republican Gov. Brian Sandoval has encouraged better working relationships between state and local officials by focusing on one consensus-building policy initiative a year and promoting joint-purchasing agreements and contracts.

California is experimenting with enhanced infrastructure financing districts that use tax increment financing for redevelopment infrastructure, as well as public finance authorities that cities and counties can set up—new, specialized government structures based on investment that Pisano suspects could snowball to other states if successful. Passing flexible procurement provisions for public-private partnerships is another step in the right direction, Pisano said.

Hoene’s only worry with P3s is that because investors want to see return on investment, they’re not always reliable.

“The reality was we weren’t going to fund infrastructure improvements without raising gas taxes, and we got that done. State leaders are about to announce a housing package later this week that’s going to have a housing bond, a real estate transaction fee and then some issues around streamlining regulations,” Hoene said. “It won’t solve the state’s housing crisis, but it will make some steps in the right direction. In each of these areas we’re talking about financing mechanisms that can leverage some policy response.”

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