Municipal Finance: Vulnerable and Distressed
In the July issue of Governing magazine, Publisher Mark Funkhouser astutely notes that money is the “lifeblood” of all cities. The same day I read his article, the Lexington Herald- Leader front page noted the major declines in city and county tax revenues throughout Eastern Kentucky, both from the decline in mining as well as the dwindling population.
The Governing editorial pointed out several reasons for ongoing local municipal financial distress across the country, all of which apply in Kentucky. First, local government entities are creatures of state law, and as such, cities are subject to the financial issues within their state. These include unfunded liabilities, such as the Kentucky pension obligations, cuts in state aid and grants, restrictions on any local option taxes, and in certain areas, preemption of local authority in favor of overriding state interests. The one-cent local option sales tax has been rejected by the Kentucky legislature year after year despite massive lobbying efforts.
Second, cities are required by law to act within a balanced budget each year. This means many have incurred significant debt to meet this requirement and/or missed their annual projections by far. To be balanced, current revenues should equal current expenses—but when revenues drop precipitously like in Eastern Kentucky, in the midst of a budget year, juggling and amended budgets must occur. To act within a fully balanced budget, current year pension contributions should be funded, but that has failed to occur for many years in our state. It is extremely difficult in today’s volatile world to project all revenues and expenses, such as unexpected capital maintenance, which is not supposed to be deferred in a city budget, unlike many in the private sector who use deferred cap ex as a current funding source.
Finally, adjusting a budget for funding declines means fewer services and fewer jobs, which can start what is called the “death spiral”—fewer services, fewer jobs means both residents and employers move out and both the population and jobs drop, further decreasing the tax base. Cities are left to deal with code violations and abandoned properties, both residential and commercial.
There are no easy answers. As Mr. Funkhouser states, “in [municipal] finance terms, there are only two types of cities in this country: the distressed and the vulnerable.” We all want new bright shiny toys, but in Kentucky, it is past time to prioritize the use of our limited dollars. There are not enough of them to go around.