MRSC has joined with Carl Neu, Director of the Center for the Future of Local Governance, P. Stephen DiJulio, Attorney, Foster Pepper PLLC, and Ann Macfarlane, Registered Parliamentarian, Jurassic Parliament, to bring you the "Council/Commission Advisor." The Council/Commission Advisor will feature a new article each month with timely information and advice you can use.*

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"RESET" Stewardship for City Governments: 2009-12

September 2009

by Carl H. Neu, Jr.
President of Neu and Company and Director of the Center for the Future of Local Governance™

City officials, whether newly-elected or incumbent, in office after the elections held in 2009 and 2010 will be called and held to a wholly new standard of duty and stewardship; that of redefining and initiating the RESET in municipal government finances essential for the preservation and future fiscal sustainability of their cities. The same holds true for state and county officials. State and county, along with city, finances are in shambles with little, and maybe no, prospect of returning to the pre-October 2008 recession levels before 2012-15.

The Harsh Realities City (Local) Governments Face

City officials must first RESET their perspectives about and comprehension of some harsh probable realities that are ahead:

1. Federal spending, deficits, debt, and taxation (however craftily packaged and sold to American citizens) will grow much faster than the total GDP over the long run and especially after 2015. In reality, federal spending according to the June, 2009, Congressional Budget Office Long-Term Budget Outlook, is on an unsustainable path that can result in substantial harm to the entire US economy, the dollar and our country’s credibility as a respected financial power among nations. Currently federal spending as a percentage of GDP is 26% - the highest level since World War II. Federal debt held by the public by 2035 could be as high as 200% of projected GDP. All this portends higher federal taxes, reduced national savings, more borrowing from abroad, and less domestic investment, job and wage growth.
   
   Final analysis: the federal government is not going to be the savior of state and local governments as one might believe it to be based upon current stimulus spending. But what about 2010 when stimulus declines or ends? Stimulus will be gone and may trigger more budget crises and even further unfunded mandates for state and local governments.
   
   
2. State and local government, especially city government, revenues will remain depressed even if the national economy shows improvement. Three reasons:
   
   
   • property tax revenues will likely continue to decline due to falling real estate values and increased demand for further limitations and property tax caps,
   • the recovery may be a jobless recovery in which unemployment remains high (around 10%), wage growth stagnates, and wages when adjusted for inflation decline. In the last year, median household incomes, adjusted for inflation, fell 3.6% (the largest drop since 1967) and are now back to 1997 levels.
   • sales tax revenues may continue their decline as people and businesses feel insecure about their economic future and purchasing power.
   
   
3. Local government credit worthiness is under pressure. In April, Moody’s Investor Services assigned a negative outlook to all local governments; the first time it has issued such a blanket report on state and local governments.
   
   
4. The National League of Cities reports that 89% of city finance officers doubt their city budget will be able to meet fiscal needs in 2010 and 2011.
   
   
5. Local government costs are likely to continue rising regardless of economic circumstances. The main pressures will come from pension obligations, health-care costs, law enforcement/public safety demands and responding to requests for expanded public assistance.
   
   
6. State governments, when the “stimulus” sharing funded by Uncle Sam’s printing press runs out, may resort to cutting state aid to local governments, imposing more unfunded mandates, and even be tempted to impose further limits on local government taxing and revenue generating authority. Many “progressive” state governments, most especially California, have allowed binge spending to occur in pensions, health care funding, education, and economic development through ill-conceived plebiscites and irresponsible legislative budgeting actions. Now, some offer remedies that are mostly charades and palliatives with little prospect of making the structural fiscal resets needed. A refreshing exception is Mitch Daniels, governor of Indiana, who feels the “time to plan and debate is now. This is a test of our adulthood as a democracy. Washington, as long as Chinese lenders enable it, can practice denial for a while longer. But for states [and cities] the real world is about to arrive”.

Making The Tough “RESET” Decisions in City Hall

Some critical steps:

1. Initiate and stick to long-term/strategic thinking, planning and analysis as the basis for financial decisions.
   
   A city without a vision for its future and a sound plan to achieve and sustain that future it desires is condemned to reacting to the vagaries of events and flights of political expediency. A long-term strategic horizon, 10-20 years, and accompanying strategic plan, are essential to framing the “long-view” perspective needed to sort out what really matters to achieving and sustaining a community’s future, identifying and addressing obstacles, and establishing realistic trend analysis and projected pro-forma operating and capital budgets. Every short-term decision must be evaluated as to its long-term contribution or hindrance to achieving the city’s vision, goals and fiscal sustainability.
   
   All city officials want to be leaders who create great things for their constituencies and communities. But leadership provides little benefit if that which is created proves to be unsustainable. The need for RESET in how we see and ensure viable futures for our communities is an act of stewardship – ensuring that which we have created will have the discipline and means to sustain its existence. RESET is all about thinking ANEW and giving democratic institutions the discipline to be sustainable institutions that benefit present generations and do not saddle future generations with mountains of unfunded obligations.
   
   
2. Establish resolute revenue generation and resource allocation projections and policies.
   
   All too often, the focus especially in these hard times is to cut, furlough, stimulate, and fund short-term palliatives to ease the pain until we muddle through to the “good times again”. All of these approaches do little to address the real fiscal challenges facing state and local governments and produce the fundamental restructuring (RESETS) required to position them to deal with the future, which is not just trying to return to the past.
   
   Some key requirements:
   
   
   • Cities must give more attention to revenue generation including tax increases, new revenue sources, and more balanced and diversified tax bases that lessen dependence upon property taxes for example.
   • Spending, resource allocation, must be based upon “what we know we will have”.
   • Set and maintain reasonable operating/working capital reserves and capital asset replacement reserves.
   • Consider innovative ways to overcome scarcity by the sharing of resources via arrangements with other jurisdictions, private and non-profit partners, etc. An example: the SCALE Program in Scott County, Minnesota, in which a county government, seven municipalities, school districts and a Native-American Nation share costly capital assets and facilities for their mutual benefit.
   • Be sure all pro-forma revenue and resource allocation projections are kept current and are consistent with the goals in the Strategic Plan which also must be kept current.
   • Test these projections constantly against budget vs actual analyses and “what if” scenarios that can affect the projections and help the city to address/prepare for anticipated obstacles.
   
   
3. Don’t make promises, contracts and obligations you aren’t absolutely sure you can honor.
   
   The most obvious example here is employee compensation, pension and health care commitments. Employee contracts with guaranteed annual pay raises, defined benefit pension plans and luxurious health care benefits are no longer sustainable in the public sector any more than they have proven to be in the battered private sector. Employee wages, health care benefits and pensions are a major component of municipal budgets. A major RESET toward defined-contribution plans must begin now for all future hires to transition cities away from unfunded obligations that satisfy past and present commitments but burden taxpayers and enfeeble a community’s ability to achieve a sustainable fiscal future.
   
   
4. Work to extricate city budgets from state government influence and control.
   
   Many state governments, especially in Dillon Rule states in which the state sets the rules on how cities operate, have vast influence over municipal revenues and local control options that put cities at the mercy of state local-aid formulas, mandates, and preemptions on local control over revenue generation. What is needed is a revitalized realistic state-local government partnership in which both entities work for their mutual success in a responsible and accountable manner. The California State “borrow back” of city funds, the Minnesota unallocation of funds to local governments and similar plans in states to fix their fiscal problems at the expense of city and county governments are unconscionable actions.
   
   Local California city governments (Rebuilding California from the Ground Up), Minnesota (Redesign Minnesota) and North Carolina county governments are working to redefine and revitalize the State-Local Government Partnership.
   
   Another approach, one that is more clearly defined and permanent, is constitutional home-rule powers for municipalities as set forth in Article XX of the Colorado State Constitution which reserves for citizens of home rule municipalities “the full right of self government in local and municipal matters”. This is not the functional home rule authority some states provide for cities, it is the absolute structural home rule in which citizens decide how their city government is to be organized, funded, and will respond to and solve local issues. Minimal state legislature interference in city affairs occurs only when the State Supreme Court rules a particular matter requires state-wide uniformity of regulation.
   
   
5. Involve citizens in all the above efforts to create the RESET plans, mechanisms, and policies for their communities.
   
   A major contributor to the current unsustainability in many state and local governments is the “free lunch” dichotomy that states:
   
   
   • governments should provide vastly more programs and services; and
   • citizens should pay vastly less for these programs and services.
   
   Citizens, working with their elected and appointed city officials must get a grip on reality and actively contribute to the creation of rational and sustainable fiscal policies that can preserve and hopefully achieve their vision for the community’s future and which they are willing to fund.

The class of 2009 and 2010 elected and incumbent city officials must be the RESET Stewards for the sustainable future of city government – the bedrock of our American democratic principles and Republic.

P. Stephen DiJulio, a partner at Foster Pepper & Shefelman PLLC, focuses on litigation involving state and local governments, and land use and environmental law. Particular experience includes representation of jurisdictions on eminent domain, utilities (water, wastewater, storm water, solid waste systems), local improvement districts, facility siting and contractor litigation. More.

Carl Neu, author and consultant, is recognized nationally as an authority on, and an experienced practitioner of, the theory and application of governance and leadership to city councils and county boards, local government managers, and community leaders. More.

Ann G. Macfarlane is a Professional Registered Parliamentarian. She created Jurassic Parliament to make parliamentary procedure easy to learn and memorable. She provides training on leadership, meeting management, parliamentary procedure and organizational development across the U.S.

*The Articles appearing in the "Council/Commission" column represent the opinions of the authors and do not necessarily reflect those of the Municipal Research & Services Center.