The name of Michigan’s largest city has been on the minds of many leaders over the past few weeks. CGR’s own Chief Economist, Kent Gardner Ph.D., examined what killed Detroit in a recent blog post.  Govistics data also help tell the story of Detroit’s tumultuous struggle to regain fiscal stability over the decade—a story we know led to current headlines on bankruptcy.

Both revenue and spending have been below the inflation benchmark since 2005.

 Detroit rev

Detroit spending

Fifteen Years of Detroit Revenue and Spending

detroit chart

The above chart (created using Govistics excel downloads) shows that while Detroit’s problems began before 1997, the city’s most recent downward turn began in earnest between 2005 and 2006, when spending and revenue dropped 43% and 38% respectively.  Total revenue plummeted in 2009 due to losses in insurance revenue before recovering slightly in 2010 and 2011.

Can Detroit recover? Stay tuned!

The City of Compton, California, home to just over 96,000 residents, is part of the “South Side” of Los Angeles County. It is a diverse, young city – the majority of residents are Latino and the median age is 25. Although its name became synonymous with gang culture and crime in the popular hip hop music of the 1990s, new businesses and middle-class residents began to move into the infamous city in recent years due in part to relatively affordable housing and declining crime rates. But that “renaissance,” as it was called, has since been reversed. From the Los Angeles Times, October 31 2011:

While cities in California have been hit hard by the recession, Compton is in a small class of cities that have ended up in critical condition. [Proposed budget] cuts [are coming] at a bad time, with unemployment in the working-class community already at 20 percent.

Among the financial concerns plaguing the city:

  • Compton has accumulated $369,000 in late fees through 2011 because it could not afford to pay its policing contract with the Los Angeles County Sheriff’s Department on a timely basis; and
  • The city anticipates an impending deficit of $39 million, which is a figure that embodies about 80% of Compton’s general fund.

S&P has lowered ratings on several of Compton’s outstanding bonds to slightly above junk status. Approximately 15% of Compton’s public workforce has been laid off, with an estimated 90 more layoffs forthcoming. Many programs and events have been cut from the budget, including a popular annual gospel concert.

But these issues were more or less avoidable. Blamed in large part for the city’s mounting deficit is a recent contentious effort to re-launch a city police department:

Last June, when the City Council voted to move forward with a $19.5-million venture to revive the municipal police force, the city’s reserves were already used up and its general fund nearly $15 million in the red [...] The city had disbanded its department in 2000 in part as a cost-savings measure, bringing in the L.A. Sheriff’s Department to patrol the city. The Sheriff’s Department has won praise as violent crime in Compton has declined sharply in the last few years.

The Govistics database shows the steep drop in the number of Compton City employees due to that shift in 2000:

Not to mention the cost savings reflected on their payroll:

And the savings reflected on Compton’s balance sheets after they shifted from paying their own force to paying a fixed contract fee to Los Angeles County:

Despite those savings, the Govistics database shows that in FY 2008, spending outpaced revenues in Compton City $121 million to $110 million. In many spending categories, the city wasn’t tightening its belt. In revenue categories such as property taxes and – especially – state and federal aid, the city wasn’t collecting as much as it had previously:

Proponents of the move to reinstate Compton’s police department claimed that they didn’t know the city’s financial issues were growing increasingly severe:

“At that time, we were being told that we were stable, that we had to be cautious, but we were stable,” said Councilwoman Yvonne Arceneaux, who nevertheless voted against the project last year, citing concerns about costs.

Unlike their counterparts in Harrisburg, PA, city officials in Compton have vowed not to file for bankruptcy and instead are banking on a line of credit or short-term loan to get through the year. In Harrisburg, the case is in the hands of a bankruptcy judge as the state contests city leaders’ decision to file for Chapter 9. That city faces a debt five times its general-fund budget because of an overhaul and expansion of an incinerator.

Stories about cities and other municipalities making drastic moves to improve precarious financial situations have become common in the present economic climate, but such stories about cities of Compton’s and Harrisburg’s size and stature are a newer trend. The CGR Govistics team is keeping an ear to the ground and we’ll keep you in the loop.

Compton isn't "welcoming" many new residents and businesses these days as the city faces a budget deficit that's almost 80% of the size of its general fund.

 

Tax collection revenue in states across the country are down, especially in the larger states, including New York, New Jersey, California, Florida and Washington State.

An article published recently by the New York Times titled “Warning by States as Tax Revenues Fail to Rebound” put a spotlight on the issue with a sobering reckoning from the State of Washington’s chief economist, Arun Raha:

“We are in the fragile aftermath of the Great Recession, where a return to normalcy seems like a mirage in the desert — the closer we get to it, the further it moves away.”

Washington State will likely take in $2 billion less than originally projected this fiscal year, and Governor Christine Gregoire has reacted by calling a special legislative session to deliberate additional budget cuts, even after the state slashed $10 billion in spending since the dawn of the current recession.

CGR Govistics often touts its access to municipal and school district budget data, but the database also includes snapshots of the fifty states. Looking at Washington’s revenue trend line over the course of several years is illuminating. See how Washington’s tax collections did move along at a healthy pace up through 2007, when they leveled off:

But drill down further into the “Property Taxes” category (the overall “Taxes” category covers all tax revenue from licenses, sales taxes, income taxes, property and other taxes). Remember the effect that increased foreclosures and high joblessness can have on home ownership:

A precipitous decline in Washington State property tax collections happened not just in 2008, when the Great Recession made its big debut, but between 1999 and 2000, just before the early 2000s recession. It’s important to remember that state budget crunches are not a new issue; the seeds for the monumental problems states are facing today were planted many years ago.

Take a look at some of the other states profiled in the same New York Times article, and note the following:

  • California property tax revenue also took a huge slide prior to the year 2000, and continues to stay well below the inflation benchmark.
  • New York’s total revenue took an approximately $31 billion dip from 2007 to 2008;
  • New Jersey’s property tax collections were relatively erratic through the last decade, diving $1.5 million in 1999 before spiking above the inflation benchmark again, then dipping from about $4 million to $3 million just before the onset of the current recession:
  • And in Florida, where foreclosure “gloom and doom” has become a widely-discussed identifier, property tax collections from 1997 through 2008 take on the appearance of the only ski slope in the Sunshine State:

When big states face big crises – and react with big job/program cuts or big tax hikes -  it can mean big changes in your community. It could mean your local police force shrinks. Or that your child can no longer attend P.E. class at school. Your local library or community center could shut down. Or, you might notice that your trash collection services are being trimmed back.

The words of Washington State’s chief economist – “a return to normalcy seems like a mirage in the desert” – are haunting. Get ready to witness a tough road ahead for school districts, police departments, local libraries, neighborhoods, and everywhere else that is touched by state and local government services.