The federal governments looming fiscal cliff—$607 billion in tax increases and spending cuts, should they take effect as scheduled in January 2013—would impose a fiscal-austerity program more severe than those recently adopted by Spain, Italy, and even Greece. Taxes would go up for almost 90 percent of American households, $3,500 on average, and most federal programs would face cutbacks. On the upside, the deficit would be cut in half, an outcome most people claim to support, though they would prefer that it occur more gradually.
For its part, the U.S. Conference of Mayors (the official nonpartisan organization of cities with populations of 30,000 or more) opposes austerity, particularly the spending-cuts portion. To date, 163 mayors have signed a letter that predicts fiscal and economic doom for cities should the cuts go into effect. Their alarm is misguided. The massive tax increases pose a far greater threat to the economy than the so-called sequestration cuts to defense and non-defense programs, which account for barely more than 10 percent of the $607 billion total. Moreover, cities are much more dependent on states than on the federal government; their greater concern should be with how states react to Washingtons cuts. Instead of lobbying Congress, cities should lobby their states to offset local-aid cuts by granting them additional authority to address their ongoing budget problems.
The 2011 Budget Control Act mandates sequestration: in exchange for raising the debt ceiling by $2.4 trillion, Republicans demanded an equal amount of deficit reduction. The BCA capped discretionary (non-entitlement) spending between 2012 and 2021, yielding $1.2 trillion in savings. A bipartisan super-committee was then charged with negotiating an additional $1.2 trillion. In the event the super-committee couldnt reach consensus, the BCA specified $984 billion in automatic cuts—split evenly between defense and nondefense programs—to begin in January 2013 and stay in effect up through 2021. (Estimated debt-service savings of $216 billion bring the total to $1.2 trillion.) As it happened, the super-committee did fail, and these cuts now loom in 2013. To be precise, theyre only cuts in 2013. In subsequent years, sequestration will impose spending caps. Annual appropriations wouldnt be cut year after year, or even frozen; they would just grow more slowly. Relative to current baseline projections, most programs would see a funding-growth reduction of around 8 percent initially, down to 5.4 percent by 2021.
The Congressional Budget Office predicts that the fiscal cliff in its full measure would reduce 2013 GDP growth from a projected 4.4 percent to just 0.5 percent, putting the brakes on the economic recovery. If that estimate is accurate, it would be much more the result of the scheduled tax increases than of sequestration. The CBO projects that, if Congress extended all tax provisions now set to expire, with the exception of the payroll tax cut, the economy would see nearly twice the near-term boost it could receive from eliminating sequestration. The mayors grossly exaggerate, then, when they argue that sequestration represents perhaps the biggest threat to our metro economies.
Though the mayors rhetoric suggests otherwise, federal grants are not a significant source of direct funding for local governments. According to the Census Bureau, the federal government provided 25 percent of all state and local revenues in 2010 (the most recent year available)—but only 4 percent was direct federal-to-local transfers. Since 2010 was a stimulus year, these figures actually overstate state and local dependence on federal revenues. Local governments biggest expense by far is K12 public education. Over the last decade, federal funds composed, on average, 9 percent of school districts budgets. Eight percent of 9 percent would mean a budget cut of less than 1 percent.
Cities second-biggest expense is public safety (police and fire), which the federal government supports through grant programs such as Community-Oriented Policing Services (COPS) and Staffing for Adequate Fire and Emergency Response Grants (SAFER). These provide funds to help staff local police and fire departments, but because the grants are so small (the SAFER and COPS hiring programs together total less than $1 billion), even their complete elimination would not produce a general crisis in public-safety staffing levels, much less an 8 percent cut. Moreover, SAFER and COPS provide onetime revenues for recurring expenses, a fiscally dubious practice. Minneapolis mayor R. T. Ryback worries that his citys new firefighter recruit class, enabled by SAFER funds, now faces an uncertain future. In fact, sequestration would simply force a decision on whether to support the recruits with local revenues, which Minneapolis was going to have to decide on anyway when the four-year grant expired. Under sequestration, that decision would come earlier.
Local governments do rely heavily on state aid, which accounted for 30 percent of all local revenues in 2010. Because Congress exempted the biggest federal-to-state grant programs—Medicaid most notably—from the cuts, sequestrations effect on states will be muted. But local governments should be concerned about how states will react to sequestrations effect on programs such as Head Start (cut by $621 million in 2013), the Low Income Home Energy Assistance Program ($271 million), and Special Supplemental Nutrition Program for Women, Infants and Children, or WIC ($543 million). If the federal-to-state cuts go through, states would be tempted to pass on the pain to local governments, perhaps through reduced local aid. Coupled with their own sequestration cuts, city governments revenue challenge would, at this point, become serious.
What to do? Cities should lobby states to enact policy reforms that soften the blow of revenue cuts. New state legislation could help cities bring personnel costs—now 70 to 80 percent of city budgets—under control. Examples might include binding arbitration reform, a local version of Wisconsin governor Scott Walkers Budget Repair Bill reforms, or allowing local government to adjust employee health-insurance copays and deductibles outside of collective bargaining. Massachusetts passed such a reform in 2011.
Fiscal crises restrain flexibility for some but enhance it for the astute and opportunistic. In recent years, some mayors—including several signees to the U.S. Conference of Mayors letter, such as Rahm (never let a good crisis go to waste) Emanuel and Kasim Reed of Atlanta—have enacted reforms that would have been unimaginable before the recession. Last year Reed, who frets about the impact of sequestration on Atlantas streetcar project, passed a pension reform just as substantial as better-known reforms passed by San Jose and Rhode Island.
Regardless of what happens with the fiscal cliff, cities will face continued austerity. Mayors should use the situation to increase their leverage with state governments. Congress will be too preoccupied with preventing categorical economic collapse to spare much attention for lead-abatement programs in Philadelphia or streetcars in Atlanta.