Five years after the start of the covid-19 pandemic, many American cities still adapt as best they can to “new normality”, with more telework and reduced economic activity in city centers. Other factors, such as the underwater retirement schemes for municipal employees, tip numerous municipal budgets in the red.
If these budgetary difficulties in cities are not new, they hit the small cities so far, poor or led by incompetent managers. Today, even big cities like Chicago, Houston or San Francisco in particular, are in the grip of serious financial difficulties.
Ultimately, this could threaten the whole country financially, as the extent that the crisis could take is great. The causes are multiple, and we can cite climate change, the decline of activity in the city centers, the loss of federal funds and significant commitments in terms of retirement pensions. The budget cuts abound in many cities in the United States while inflation persists and the recovery measures linked to the time of the pandemic see their magnitude decrease.
Previous worries in the 20th century
Many cities in the United States have been faced with budgetary crises during the last century, for various reasons. Most often, these financial difficulties occurred after an economic slowdown or a sharp drop in tax revenue.
The municipalities of Florida began to be lacking in 1926 after the collapse which followed a real estate boom. Municipal payment defects were frequent throughout the country in the 1930s, during the Great Depression. As unemployment increased, social spending inflated and tax revenue decreased.
In 1934, the Congress modified the United States code of bankruptcies to allow municipalities to officially file the record. Subsequently, 27 states promulgated laws authorizing cities to become debit and to request the protection of the bankruptcy law.
How to get out of bankruptcy?
Declaring bankruptcy was not a panacea. If this allowed cities to refinance their debt or spread out the payment deadlines, this could also lead to an increase in taxes and taxes for the inhabitants, as well as a drop in wages and benefits for municipal employees. And bankruptcy was likely to stigmatize a city for many years afterwards.
In the 1960s and 1970s, many residents and companies left the cities to settle in the neighboring suburbs. Several cities, including New York, Cleveland and Philadelphia, struggled to repay their debts as their tax base decreases.
Following the collapse of the real estate market in 2008-2009, cities like Detroit, San Bernardino, California and Stockton, California, filed for bankruptcy. Other cities encountered similar difficulties, but were located in states that did not allow municipalities to declare bankruptcy.
Even the great affluent jurisdictions can derail financially. For example, the County of Orange, California, went bankrupt in 2002 after its treasurer Robert L. Lemon continued a risky investment strategy of complex leverages, losing some $ 1.65 billion in public funds.
Today, cities are faced with a convergence of growing costs and decreasing income in many places. To the point that the tax crisis in cities is now an omnipresent national challenge.
Climatic disasters
Climate change and the increase in the number of major disasters which result from it exert financial pressure on municipalities across the country.
Events such as forest fires and floods have a double effect on cities finances. First of all, you have to spend money to rebuild damaged infrastructure, such as roads, water pipes and public buildings. Then, after the disaster, cities can act on their own initiative or be held, under national or federal legislation, to make expensive investments to prepare for the next storm or the next forest fire.
In Houston, for example, the court decisions rendered after several years of serious floods force the city to spend $ 100 million to repair the streets and pipes by mid 2025. This requirement will increase the deficit of the annual Houston budget to 330 million dollars.
In the Massachusetts, CAPE COD cities spend millions of dollars to switch from septic tanks to public sewers and modernize wastewater treatment plants. Demographic growth has greatly increased water pollution over the course, and climate change promotes the proliferation of toxic algae which feed on the nutrients present in wastewater.
The growing uncertainty about the total costs of attenuation and adaptation to climate change will inevitably lead the rating agencies to lower the credit note of the municipalities. This will increase cities' borrowing costs for climate -related projects, such as coastal protection and improving wastewater treatment.
Sub-financed pensions
Cities also spend a lot of money on their employees, and many large cities find it difficult to finance pensions and health benefits from their workforce. As municipal retirees live longer and need more health care, total costs are increasing.
For example, Chicago is currently faced with a budget deficit of nearly a billion dollars, which partly results from the under-funding of pensions of nearly 30,000 public sector employees. The city has 35 billion dollars of unpaid liabilities for pensions and nearly $ 2 billion in health benefits for retirees. Fourteen billion not funded social benefits are due to Chicago teachers.
Political science research has long shown that political leaders tend to underfire pensions and retirement benefits of civil servants. This approach supports the real cost of the police, fire protection and education for taxpayers of the future.
Centers in difficulty and less federal support
Cities are not only faced with an increase in costs, they also lose income. In many cities in the United States, economic activity linked to retail and commercial offices is declining.
The promoters have built too many commercial areas, creating an excess offer. The increase in vacant commercial spaces induces lower tax revenues. At the same time, federal aid linked to the pandemic, which has made it possible for a time to amortize the difficulties encountered by municipal finances from 2020 to 2024 is falling.
States governments and local administrations have received $ 150 billion in the CARES (CORONAVIRUS AID, REAL, AND ECONOMIC SECURITY ACT) law of 2020 and $ 130 billion by the 2021 American Rescue Plan Act.
However, this federal generosity, some of which have been used to fill increasing budgetary deficits, is coming to an end.
New tax resistance
On the side of their resources, municipalities can act on different taxable bases: sales of goods and services, companies, real estate and public services. Nevertheless, it can be very difficult to increase municipal taxes, in particular property taxes.
In 1978, California adopted proposal 13, a measure subject to referendum which limited increases in property tax at the inflation rate or to 2 % per year, the lowest of the two being retained. This highly publicized campaign created a widespread discourse according to which land taxes were out of control, and it made very difficult for local elected officials to support the increases in land taxes.
Due to ceilings such as proposition 13, because of a public opinion which continues to estimate that taxes are too high and due to political resistance, land taxes have tended to be inflation in many regions of the country.
The crisis that is announced
If we take all these factors into account, a large -scale tax crisis is looming. Small cities with modest budgets are particularly vulnerable. But the larger and richer cities are also, as San Francisco with its offices market in full collapse, or Houston, New York and Miami, which are faced with increasing costs linked to climate change.
A municipal director who heads an easy municipality in the northwest of the Pacific indicated that, in these difficult circumstances, political representatives must be more frank and transparent with their voters and convincingly explain how and why taxpayers' money is spent.
Efforts to balance municipal budgets are an opportunity to reach a consensus with the public on what municipalities can do, and at what price. The coming months will show whether the elected officials and the inhabitants of the cities are ready for this dialogue which promises to be difficult.
It is very unlikely that the administration of President Donald Trump will come to the rescue of urban areas, in particular more liberal cities like Detroit, Philadelphia and San Francisco. Trump has portrayed the big cities governed by Democrats in the darkest terms – describing, for example, a baltimore “disorder infested with rodents” and Washington D. C., “deadly, dirty trap and plagued by crime”.
Trump's animosity towards big cities, which was a key element in his 2024 campaign, could become one of the characteristics of his second mandate.
