Cato Policy Analysis No. 188 February 22, 1993

Policy Analysis

The Myth of America Underfunded Cities

by Stephen Moore and Dean Stansel

Stephen Moore is director of fiscal policy studies and Dean Stansel is a research assistant at the Cato Institute.


Executive Summary

For more than a quarter century Americans have been voting with their feet against the economic policies and social conditions of the inner cities. Since 1965, 15 of the largest 25 U.S. cities have lost 4 million people, while the total U.S. population has risen by 60 million.(1) The exodus is no longer just "white flight"; the 1990 census reveals that minorities are now leaving the cities in record numbers.(2)

In recent years the departure of businesses, jobs, and middle-income families from the old central cities has begun to resemble a stampede. For example, since the late 1970s more than 50 Fortune 500 company headquarters have fled New York City. A stunning 370,000 jobs left the city between 1989 and 1992, and another 130,000 were expected to disappear by the end of 1992.(3) Cleveland, Detroit, Philadelphia, St. Louis, and other major U.S. cities are also suffering from severe out-migration of capital and people. Those once- mighty industrial centers are becoming hollow cores of poverty and crime.

Ever since the Los Angeles riots and looting, the urban lobbyists--including the mayors, the public employee unions, urban scholars, and many members of Congress--have been arguing that the inner cities were victims of federal neglect under Ronald Reagan and George Bush.(4) "There was, quite literally, a massive federal disinvestment in the cities in the 1980s," says congressional delegate Eleanor Holmes Norton of Washington, D.C.(5) To revive the cities, the U.S. Conference of Mayors is asking for $35 billion in new federal funds--a "Marshall Plan for the cities."(6)

Unfortunately, the federal government has already tried the equivalent of some 25 Marshall plans to revive the cities.(7) Since 1965 the federal government has spent an estimated $2.5 trillion on the War on Poverty and urban aid. (That figure includes all spending on welfare, Medicaid, housing, education, job training, and infrastructure and direct aid to cities.) Economist Walter Williams has calculated that that is enough money to purchase all the assets of the Fortune 500 companies plus all of the farmland in the United States.(8) But it has not spurred urban revival. In 1992 federal aid to states and cities rose to $150 billion. Adjusted for inflation, that is the largest amount of federal intergovernmental aid ever extended--hardly a "massive disinvestment."

The budgets of Cleveland, Detroit, Philadelphia, New York, St. Louis, and other large central cities have not been shrinking; they have been rapidly expanding for decades. In constant 1990 dollars, local governments spent, on average, $435 per resident in 1950, $571 in 1965, and $1,004 in 1990. The largest cities saw an even faster budget rise. In real dollars, New York City's budget nearly tripled from $13 billion in 1965 to $37 billion in 1990. Philadelphia, another nearly bankrupt city, allowed its budget to rise by 125 percent between 1965 and 1990--from $1.6 billion to $3.5 billion. During the same time period, the city lost 20 percent of its population. In short, 25 years of doubling and even tripling city budgets have not prevented urban bleeding.

Not all U.S. cities are in decline. Among the nation's largest urban areas there are dozens of cities--many on the West Coast, in the Sunbelt, and in the Southeast--that have been booming financially and economically for at least the past 20 years. Las Vegas, Nevada; Phoenix, Arizona; Arling- ton and Austin, Texas; Sacramento and San Diego, California; Raleigh and Charlotte, North Carolina; and Jacksonville, Florida, all have rapidly rising incomes, populations, and employment and low poverty and crime rates.

The key policy question addressed in this study is, What do growth cities--Phoenix, Raleigh, and San Diego, for example--do differently from shrinking cities--such as Buffalo, Cleveland, and Detroit? The answer is found, at least partially, in the fiscal policies of the cities. Using Bureau of the Census city finance data from 1965, 1980, and 1990 for the 76 largest cities, we find significant and consistent patterns of higher spending and taxes in the low-growth cities than in the high-growth cities. Table 1 highlights the difference between the fiscal policies of the 10 cities with the greatest growth in population in the 1980s and the 10 largest urban population losers. The data in Table 1 support the following findings.

Table 1 [Omitted]

* For every $1.00 of per capita expenditures (excluding dollars spent on anti-poverty programs, education, and health care) in the highest growth cities, the shrinking cities spend $1.71. In 1990 expenditures in the highest growth cities averaged $673 per person, or 6 percent of personal income, versus $1,152, or 12 percent of personal income, in the shrinking cities--up from the 1980 figures of $257, or 5 percent of personal income, in the highest growth cities and $497, or 10 percent of personal income, in the shrinking cities.

* In 1990 a typical family of four living in one of the shrinking cities paid $1,100 per year more in taxes than it would have had it lived in one of the highest growth cities. A family of four paid $2,352 in taxes in the shrinking cities and $1,216 in the highest growth cities.

* Shrinking cities' bureaucracies are twice as large as those of growth cities. In 1990 the highest growth cities had, on average, 99 city employees per 10,000 residents; the shrinking cities had 235.

* Cities with high spending and taxes in 1980 lost population in the 1980s; cities with low spending and taxes gained population. High spending and taxes are a cause, not just a consequence, of urban decline. The fastest growing cities in the 1980s had very low average spending--$577 per resident, or 5 percent of personal income--at the start of the period. The cities with the most severe population losses had 1980 average spending of $995 per resident, or 10 percent of personal income. Taxes were $257 per capita, on average, in the highest growth cities and $497 in the shrinking cities in 1980 (see Figure 1).

Expenditures are high and rising in large central cities primarily because their governments generally have above-average unit costs for educating children, collecting garbage, building roads, policing neighborhoods, and providing other basic services.(9) For example, in 1988 the shrinking cities spent roughly $4,950 per pupil on education, whereas the high-growth cities spent $3,600. The $1,350 cost differential cannot be explained by better schools in places such as Detroit and Newark.

Figure 1

The influence of municipal employee unions also contributes to higher costs in declining central cities. Compensation for unionized local employees tends to be roughly 30 percent above wages for comparably skilled private-sector workers.(10) In New York City the average school janitor is paid $57,000 a year.(11) In Philadelphia the average municipal employee receives more than $50,000 a year in salary and benefits. According to the Census Bureau, cities with populations over 500,000 pay their mostly unionized workers more than 50 percent more than do cities with populations under 75,000, whose workforces are less likely to be unionized. In short, thriving cities are places where costs are lower, bureaucracies are smaller, and services are better.

Some city officials are beginning to recognize economic reality. The newly elected Democratic mayor of Philadelphia, Edward Rendell, is challenging the entrenched municipal unions and other spending constituencies with a budget plan that calls for $1.1 billion in savings over five years. He has spurned more federal aid as the poison that produced Philadelphia's near-insolvency last year. Meanwhile, Chicago mayor Richard M. Daley and Indianapolis mayor Stephen Goldsmith have contracted out dozens of services to private providers and have slowed the growth of massive, bloated budgets to a crawl.

The decline of America's major cities is not inevita- ble. They can and should be saved. For generations they have served as the nation's centers, not only of industrial might, but of culture, diversity, and intellect. Through an aggressive agenda of budget control, tax reduction, privatization, and deregulation, America's declining cities can rise again in prominence and prosperity.

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