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Fixing municipal finances in Pennsylvania

by Adam Millsap on November 24, 2015

in Balanced Budget, City Life, Economic Policy, Public Finance, Public Goods, Tax and Budget

Last week I was a panelist at the Keystone Conference on Business and Policy. The panel was titled Fixing Municipal Finances and myself and the other panelists explained the current state of municipal finances in Pennsylvania, how the municipalities got into their present situation, and what they can do to turn things around. I think it was a productive discussion. To get a sense of what was discussed my opening remarks are below.

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Pennsylvania is the 6th most populous state in the US – just behind IL and in front of OH – and its population is growing.

PA population

But though Pennsylvania is growing, southern and western states are growing faster. According to the US census, from 2013 to 2014 seven of the ten fastest growing states were west of the Mississippi, and two of the remaining three were in the South (FL and SC). Only Washington D.C. at #5 was in the Northeast quadrant. Every state with the largest numeric increase was also in the west or the south. This is the latest evidence that the US population is shifting westward and southward, which has been a long term trend.

Urbanization is slowing down in the US as well. In 1950 only about 60% of the population lived in an urban area. In 2010 a little over 80% did. The 1 to 4 ratio appears to be close to the equilibrium, which means that city growth can no longer come at the expense of rural areas like it did throughout most of the 20th century.

urban, rural proportion

2012 census projections predict only 0.66% annual population growth for the US until 2043. The birth rate among white Americans is already below the replacement rate. Without immigration and the higher birth rates among recent immigrants the US population would be growing even slower, if not shrinking. This means that Pennsylvania cities that are losing population – Erie, Scranton, Altoona, Harrisburg and others – are going to have to attract residents from other cities in order to achieve any meaningful level of growth.

PA city populations

Fixing municipal finances ultimately means aligning costs with revenue. Thus a city that consistently runs a deficit has two options:

  1. Increase revenue
  2. Decrease costs

Municipalities must be vigilant in monitoring their costs since the revenue side is more difficult to control, much like with firms in the private sector. A city’s revenue base – taxpayers – is mobile. Taxpayers can leave if they feel like they are not getting value for their tax dollars, an issue that is largely endogenous to the city itself, or they can leave if another jurisdiction becomes relatively more attractive, which may be exogenous and out of the city’s control (e.g. air conditioning and the South, state policy, the decline of U.S. manufacturing/the economic growth of China, Japan, India, etc.). The aforementioned low natural population growth in the US precludes cities from increasing their tax base without significant levels of intercity migration.

What are the factors that affect location choice? Economist Ed Glaeser has stated that:

“In a service economy where transport costs are small and natural productive resources nearly irrelevant, weather and government stand as the features which should increasingly determine the location of people.” (Glaeser and Kohlhase (2004) p. 212.)

Pennsylvania’s weather is not the worst in the US, but it I don’t think anyone would argue that it’s the best either. The continued migration of people to the south and west reveal that many Americans like sunnier climates. And since PA municipalities cannot alter their weather, they will have to create an attractive fiscal and business environment in order to induce firms and residents to locate within their borders. Comparatively good government is a necessity for Pennsylvania municipalities that want to increase – or simply stabilize – their tax base. Local governments must also strictly monitor their costs, since mobile residents and firms who perceive that a government is being careless with their money can and will leave for greener – and sunnier – pastures.

Fixing municipal finances in Pennsylvania will involve more than just pension reform. Act 47 was passed by the general assembly in 1987 and created a framework for assisting distressed municipalities. Unfortunately, its effectiveness is questionable. Since 1987, 29 municipalities have been placed under Act 47, but only 10 have recovered and each took an average of 9.3 years to do so. Currently 19 municipalities are designated as distressed under Act 47 and 13 of the 19 are cities. Only one city has recovered in the history of Act 47 – the city of Nanticoke. The average duration of the municipalities currently under Act 47 is 16.5 years. The city of Aliquippa has been an Act 47 city since 1987 and is on its 6th recovery plan.

Act 47 bar graphAct 47 under pie chartAct 47 recovered pie chart

The majority of municipalities that have recovered from Act 47 status have been smaller boroughs (8 of 10). The average population of the recovered communities using the most recent data is 5,569 while the average population of the currently-under communities is 37,106. The population distribution for the under municipalities is skewed due to the presence of Pittsburgh, but even the median of the under cities is nearly double that of the recovered at 9,317 compared to 4,669.

Act 47 avg, med. population

This raises the question of whether Act 47 is an effective tool for dealing with larger municipalities that have comparatively larger problems and perhaps a more difficult time reaching a political/community consensus concerning what to do.

To attract new residents and increase revenue, local governments must give taxpayers/voters/residents a reason for choosing their city over the alternatives available. Economist Richard Wagner argues that governments are a lot like businesses. He states:

“In order to attract investors [residents, voters], politicians develop new programs and revise old programs in a continuing search to meet the competition, just as ordinary businesspeople do in ordinary commercial activity.” (American Federalism – How well does it support liberty? (2014))

Ultimately, local governments in Pennsylvania must provide exceptional long-term value for residents in order to make up for the place-specific amenities they lack. This is easier said than done, but I think it’s necessary to ensure the long-run solvency of Pennsylvania’s municipalities.

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