By Judy Hirst | 1 July 2011
The American economy is hurting, and the pain is being pushed down to local government level. As debt rows rage on Capitol Hill, how are US cities and states trying to balance their budgets? PF surveys the nationwide fiscal scene – and talks to Chicago’s city treasurer about making tough choices
Barack Obama’s recent state visit to London was judged quite a success by Number 10. Ping-pong, burger flipping – and reaffirmation of the ‘essential’ transatlantic relationship. What was not to like?
Next door though, at Number 11, the high-fiving was a bit less enthusiastic. Instead of the hoped-for thumbs up for the chancellor’s deficit-cutting strategy, all the US president would offer were a few measly words about ‘balanced approaches’ and each country doing things their own way.
George Osborne had to wait for the International Monetary Fund to drop by, a couple of weeks later, to get the seal of approval he craved.
But the White House’s reticence was entirely understandable. The UK visit was, after all, just a pit stop on the long-running road trip that will culminate in the 2012 presidential elections. And Obama has some home-grown issues with deficit reduction that put any piffling coalition concerns firmly in the shade.
More specifically, he has a $14.2 trillion issue – the sum that legally the US debt is not allowed to exceed without the approval of Congress.
The problem for Obama is that the federal government has already maxed out on its credit limit – and, at the time of writing, the Republicans in Congress are refusing to raise the amount without a promise of trillions more dollars in spending and tax cuts.
The alternative – highlighted by repeated ratings agency warnings about downgrading the dollar’s triple-A status – is for the US to do the unimaginable, and default on its debt. The cut-off date for a decision is August 2.
This, in a nutshell, is the game of political brinkmanship that has been playing out in Washington – and, beyond the beltway, sending shudders through every cash-strapped state and city legislature in the land.
The US, like the UK, is very far from being out of the double-dip danger zone. The latest data confirm that, despite a modest upturn from the depths of the recession, the US economy has hit a so-called ‘soft patch’. Federal Reserve chair Ben Bernanke calls the recovery ‘frustratingly slow’ and has warned that aggressive spending cuts could be ‘self-defeating’.
Joblessness stands at over 9%; the slump in house prices has left more than a quarter of homeowners in negative equity; business and consumer confidence is plummeting. There are calls for renewed forms of fiscal stimulus and a fresh round of quantitative easing as QE2 ends. Against this backdrop, cities and states are struggling with huge revenue and pension fund shortfalls, while demands on social security and health budgets soar. In a country synonymous with the ‘small state’, local government is far more dependent on raising local revenues than in the UK, and much more exposed to the vagaries of the market. Some states – notably California – are at breaking point. Most are pushing their problems down to local government level.
Bitter, partisan conflicts have broken out between state legislatures and the unions – for example, in Wisconsin and Ohio – over attempts to cut services and strip away employee rights. Elsewhere, as in Connecticut, the local Democrat governor has taken matters into his own hands, and – in a move guaranteed to fire up the Grand Old Party – has put up taxes to help cover the deficit.
Ironically, whatever the outcome of the ‘bully pulpit’ rows raging on Capitol Hill, US state expenditure is on an inexorable upwards trend. In fact, according to public policy experts Gerry Stoker and Peter Taylor-Gooby, by 2014/15 US spending is set to overtake the UK’s as a proportion of gross domestic product.
Short of completely dismantling Obama’s health reforms (unlikely, despite the best efforts of the GOP and the Tea Party), and totally disengaging from its world policeman role, the US is on an irreversible path, says Stoker, while Osborne is taking UK spending the opposite way. Meanwhile, local government funding models here are heading in the direction of cities and states across the pond. The coalition’s focus on slashing central government support – relying instead on localised business rates, local enterprise partnerships, tax increment financing and other schemes for economic self-sufficiency – mimics many of the regeneration strategies employed in the US.
The only hitch is that these remedies tend to work in the boom years, when revenues from businesses and individuals are sound, but not in a slump. Many US legislatures are crying out for more federal and state support, not less, to meet the basic needs of their citizens (see 'Windy city limits', below), as local sources of income run dry.
Still, perhaps all this convergence means it’s true: there really is a meeting of minds between the US and the UK. All the evidence suggests that we may indeed have a special, symbiotic – even essential – relationship. Just not necessarily in a good way.
Windy city limits
Stephanie Neely, Chicago’s city treasurer, is a feisty, fast-talking, can-do kind of person. When she’s not looking after the windy city’s $8bn portfolio, sitting on its pension boards, hosting financial literacy classes for school kids, or raising her 12-year-old son, she runs marathons, rides horses, and – slightly scarily – trains and shows Rottweilers. Short of energy she is not.
But even Neely is a little daunted by the scale of the financial challenges confronting the US’s third largest city. Under its newly inaugurated mayor, former White House chief of staff Rahm Emanuel, Chicago city council is trying to tackle a $700m structural deficit that is expected to reach $1bn in a few years. Meanwhile, the city’s pension funds face a $14bn shortfall.
No wonder Emanuel, who replaces the long-serving Mayor Daley, is talking about ‘hard truths and tough choices’ and has announced immediate cuts of $75m to the 2011 budget.
Like all big cities across the US, Chicago has been suffering from declining revenues since the financial crash. Despite the glitz and glamour of the city’s more prosperous neighbourhoods, it has been badly hit by the real-estate crisis and its knock-on effects. ‘And we’re not out of the Great Recession yet,’ Neely tells PF.
‘For the first time since the late 70s and early 80s, all of our revenue sources – property tax, sales tax, income tax – are down. But as a municipality we’re required to provide a basic level of service. That creates quite a challenge for us.’
Chicago has the added problem that the state of Illinois is also in a big financial hole. It has the dubious honour of having been one of the top ten states for foreclosures since 2007. And although it recently put up income tax by 2%, it has been slow to distribute revenues to the municipalities, says Neely. There’s been no trickle-down effect for Chicago as yet.
Nor has federal aid for natural disasters, such as this winter’s huge snow storm in Chicago, gone anywhere near covering the city’s $35m costs.
As for the pensions crisis, Neely – who spent two decades in business before becoming city treasurer in 2006 – is clear there are no quick fixes. ‘We can’t invest our way out of this,’ she says categorically. ‘When you’re underfunded to the extent of our police and fire services, even top-tier, high-return investments barely touch the problem. We’re eating into principal 10 out of 12 months a year.’
Raising employee and city contributions to the pension funds is one step being actively considered, along with a possible two-tier benefits structure. New federal legislation is putting pressure on cities to fully fund fire and police pensions within 30 years.
‘But where are we going to get that extra money?’ she asks. ‘You can’t continue to tax, tax, tax. It will drive citizens as well as corporations out of the city.’
That’s something 47-year-old Neely, who grew up on Chicago’s South Side and is described by Emanuel as ‘a superb public servant’, wants to avoid at all cost. She is also concerned at the trend towards raising more revenues by, for example, extending casino licences: something she fears will ‘have a very recessive effect on the poor’.
Fiercely proud of her city, Neely was recently elected to her second term as city treasurer. Her office is responsible for managing Chicago’s cash and investments, its four city employee pension funds, and the teachers’ pension fund. ‘We provide the checks and balances between the mayor’s appointees,’ she tells me, ‘between those with the money, and those with the cheque books.’
Right now, everything is on the table, as the city council tries desperately to balance its budget. ‘We’ve been looking at every business we’re in and every service we provide to see if there’s a better way to do it,’ she says. That may include privatising the garbage service, reducing the number of firefighters, and getting city employees to take more furlough days.
Chicago has already been selling off or leasing some of its assets. In one instance, the Chicago Skyway toll bridge, the city struck a really good deal, claims Neely, which has helped build up its reserves. In another – the privatisation of the city’s parking meters – she concedes that those after-the-event ‘Monday morning quarterbacks’ might have a point. With hindsight, if a better analysis had been done, they might have opted to put up parking rates and keep the service in-house.
A pragmatist, she is in favour of selling off more city assets, but only where the price is right and the case compelling, she says.
She is also even-handed on the debt debates that have been engulfing Washington. As a public official who invests her city’s money in triple A-rated US Treasuries – and as ‘a card-carrying Democrat’ – she is absolutely in favour of raising the debt ceiling to avoid credit downgrading or default.
‘But we also need some serious, hard decisions about cutting expenses and making cuts,’ she insists. ‘I’m sort of in the middle between the Democrats and Republicans on that.’
So how has all this been going down with the city’s workforce and the unions, I ask, mindful of some of the recent showdowns in the Midwest. ‘We’re not Wisconsin, thank God,’ says Neely, who insists no one wants existing employees’ benefits torn up.
‘That feels like the breaking of a contract. But at the same time, the union leaders I’ve spoken to know we’ve got to look at how the city is going to fund its pensions and services, and are looking at some kind of increase in contributions. We’re all kind of on the same page on that,’ she says hopefully. Or, at any rate, she’s keeping her fingers crossed.
Stephanie Neely will speak at the CIPFA annual conference on Thursday July 7
This feature first appeared in the July edition of Public Finance
