Measuring the Fiscal Health of U.S. Cities

This paper analyzes the fiscal health of 148 U.S. central cities using a specially constructed Fiscally Standardized Cities (FiSC) database that accounts for the revenues and spending of all the governments that provide public services in cities – municipal governments, school districts, counties, and special districts. These data permit comparisons of city finance between cities with widely different governance structures. The fiscal health of a city is defined as the relationship between its expenditure needs and its revenue-raising capacity. The expenditure needs calculations are obtained from regressions of six separate categories of spending. The analysis makes it possible to identify variables that are likely to affect the cost of providing different types of local public services. Tax capacity is measured by applying average tax rates to the major tax bases used by each FiSC in the database. User-charge capacity is based on residents’ ability to pay. Own-source fiscal capacity is supplemented by grants from the federal and state governments. The empirical analysis is based on a panel dataset for 2000 through 2014. The results indicate that that a substantial number of U.S. cities are in weak fiscal health because their revenue-raising capacity, including intergovernmental transfers, falls short of their expenditure needs. Fiscal disparities, measured as the variation in these fiscal gaps, were large in both 2000 and 2014 and increased over that period. On average, own-source revenue-raising capacity grew much faster than intergovernmental transfers. The largest single contributor to the increase in fiscal disparities was the uneven growth in own-source revenue-raising capacity across cities. Targeted increases in federal and state grants could help improve the fiscal health of U.S. central cities and reduce fiscal disparities.