Institute for Government

Mayors and the Fiscal Powers Needed to Deliver Change: Lessons From the United States

Editor's Note: This essay was first published in the Institute for Government's March 2012 report titled "What Can Elected Mayors Do for Our Cities?"

The 21st century will be an urban and metropolitan century, with cities and metropolitan areas acting not only as the engines of national prosperity but the vehicles for environmental sustainability and social inclusion. The challenge for many nations will be to reform governance powers and structures to fit the new urban and metropolitan reality.

With 10 mayoral referenda looming in May and broader localism efforts underway, the United Kingdom has recognized the devolution imperative. As these efforts proceed, it is helpful to reflect on the US experience of powerful cities and innovative mayors.

This essay will draw three primary lessons.

First, the innovation of US cities is not just about the creative freedom that mayoral governance brings, but the powers that are delegated to cities and elected officials. American mayors are innovative, in large part, because they have the power to raise and allocate substantial revenues. Thus, fiscal devolution must accompany the devolution of power and the direct elections of mayors.

Second, metropolitan areas, rather than cities, form the true geography of the economy.

As the UK referenda proceed, it is critical to square the direct election of mayors in core cities with the broader economy-shaping, talent-preparing and place-making efforts which must proceed at the metropolitan or even regional scale.

Finally, the demands on city and metropolitan leaders are growing as the global economy restructures, societies diversify and the public sector contracts. Building the capacity of a new empowered class of city leaders needs to be a prime focus of all sectors, delivered perhaps through a Devolution Academy operated independently from government, in conjunction with a major university.

The powers of directly-elected mayors in the US

The American federal republic diffuses power among different layers of government and across disparate sectors of society. Our union of states means that enormous power resides with the 50 states, which in turn devolve powers and responsibilities to local governments. Although the structure of local government varies considerably across the country, US cities and their mayors enjoy considerable powers, both formal and informal.

Most municipal governments in the US deliver a broad range of local services: police and fire protection, trash collection, parks and recreation, public library systems, support services for the youth and elderly, and, in some cities, schools. Cities help finance these kinds of services with locally raised revenues that they control. On average, 60% of local revenues are raised through a broad range of local tax schemes – property taxes, income taxes, business taxes, sales taxes, tourist taxes, and user fees.

Cities also help deliver a large number of programmes that are funded in large part by the federal or state governments. These range from overseeing the provision of affordable housing and workforce and community development programmes to implementing homeland security measures financed largely by the federal government. It should be noted, however, that mayors do not directly manage all of the aid that flows from the federal government. For instance, highway and transit funding is administered by state and metropolitan entities, and some affordable housing funding is controlled by state housing finance agencies or local public housing agencies.

Finally, cities have enormous ability to grow and shape their economies given their substantial control over local land use, zoning and planning. The design and implementation of these powers helps set the framework not just for the physical landscape of the city, but also the industry structure and residential and commuting patterns. How a city plans physically has a major impact on how it grows economically.

There is an inextricable link between fiscal devolution and the shaping of economies in cities and metropolitan areas. While US cities do receive support from federal and state governments, a large share of financing for local services come from revenues generated at the municipal level. Given these fiscal tools, cities are able to access the municipal bond markets and utilize innovative financing techniques, such as tax increment financing (TIF), to support specific economic development strategies and projects. Cities and counties also have the power in most states to go to voters with ballot initiatives to ask for bond issues or dedicated tax sources to support smart, targeted investments. All these financing tools leverage additional funding and resources from the private sector.

Against this backdrop, mayors play both formal and informal roles within cities. In many cities, Mayors are the CEOs of the local government, responsible for the overall management of city agencies and departments and the appointment of board members and even senior staff members to quasi public agencies. In other cities, mayors share managerial responsibilities with an appointed city administrator.

The less formal roles played by US mayors are arguably as important as the formal ones. Most US mayors, for instance, set the broader competitive vision for the city, in coordination with corporate, university and civic leadership, and develop strategies to achieve that vision. Mayors are then responsible for advocating for private sector investment as well as federal and state assistance in implementing this vision – in terms of spending, taxes, regulations, and administrative support.

Strengths and weaknesses of the US system

The devolution of fiscal powers is one of the great strengths of the American federalist system and one of the primary reasons why American cities are considered to be ‘laboratories of democracy’ and centres of policy innovation. There are, however, several drawbacks, especially during economic recessions, since federal and state governments rarely take corrective actions to shore up local finances.

Strengths

One of the main strengths of the US system is that cities across the US, armed with fiscal powers, have traditionally been at the vanguard of policy innovation on economic development, physical growth, education and social issues. Fiscal devolution enables cities to benefit from smart revenue enhancing policy choices rather than waiting for central governments to redistribute additional resources.

In New York City, for instance, Mayor Michael Bloomberg is working to diversify the city’s economy from an over-reliance on financial services, real estate and consumption by investing in assets that will drive productive growth. The Applied Sciences NYC initiative, the most ambitious effort underway, aims to boost tech research and development, spark job growth, and foster entrepreneurialism by establishing a state-of-the-art applied sciences and engineering campus in the heart of New York City.

To support this project, New York City has pledged up to $100 million as well as a 99-year lease for nominal rent on Roosevelt Island, directly adjacent to Manhattan. In December 2011, New York announced its decision to partner with Cornell University and Technion-Israel Institute of Technology to create the NYCTech campus. Beyond conducting classes and research on the Roosevelt Island campus, Cornell and Technion also plan to contribute to area K-12 education by training 200 science teachers each year. This project has the potential to help significantly diversify New York’s economy by expanding the innovation and research-driven industries that will create the businesses and jobs of the future.

Cities and their metropolitan areas have been particularly aggressive in the transport arena, given the ebbs and flows of federal interest and finance. In 2004, for example, voters in

Denver, Colorado approved a 0.4% sales tax increase for a $4.7 billion (now $6.8 billion) plan to expand the regional transport system. The plans for the ‘FasTracks’ programme call for building 119 miles of new commuter rail, light rail, and bus rapid transit lanes and construction of 57 new transit stations. This major regional investment, which leveraged additional private sector funding, is helping to connect residents and commuters from outlying areas of the Denver metropolitan area to downtown Denver, and catalyze significant development and private investment along the new transit corridors.

Similarly, in 2008, voters in Los Angeles approved a half cent sales tax increase to build a major transport system in the county over a 30-year period. The 30-year certainty of tax revenues has given Mayor Antonio Villaraigosa the platform to seek innovative public and private financing to complete construction of the system in 10 years. The project will create 160,000 new jobs in construction, operations and maintenance in a metro area where about 717,000 people are currently unemployed, as well as reduce greenhouse gas emissions and traffic congestion.

Weaknesses

A primary weakness of the US system is that fiscal devolution enhances the vulnerability of cities during economic recessions since federal and state governments rarely take corrective actions to shore up local finances. The weakness has become especially apparent in the wake of the Great Recession and the collapse of the housing sector, which has wreaked havoc on municipal finances throughout the US. With the sharp decline in home prices across almost all of the 100 largest metropolitan areas in the country, property tax revenue in cities has fallen dramatically. The persistent trend of high unemployment has also suppressed income and sales tax revenues and increased costs, further contributing to municipal budget shortfalls.

Rather than coming to the aid of cities, federal and state governments have made cuts to key programmes for cities – including education, transportation, health care, community development, and public housing – in order to address their own major budget issues.

Another major weakness is that the artificial geography of cities does not fit with the metropolitan geography of the US economy. Strictly speaking, a US metro area is a core urban area of more than 50,000 people, the surrounding county, and the adjacent counties that are economically and socially connected, as measured by commuting patterns. As the decades have passed, cities and suburbs have become more integrated, as people and jobs have increasingly moved beyond city borders. It no longer makes sense to think about New York City without thinking about northern New Jersey, or Chicago without looking to Joliet.

The Office of Management and Budget, which sets the metropolitan area definitions, and the Census Bureau no longer even refer to central cities but instead to ‘principal cities’, in an acknowledgment that there is no single ‘centre’ in many metropolitan areas.

The bottom line is that metropolitan areas represent the true economic geography in the

United States. Yet, whereas markets, and more importantly lives, operate in a metropolitan context, government often does not. While almost every US metropolitan area is engaged in some kind of formal or informal collaboration given that critical economic, environmental and social issues clearly cross borders, many city government structures – particularly in the Northeast and Midwest – cling to boundaries more suited to an 18th century township than to a 21st century metropolis.

So, the power of mayors in a Pittsburgh or St Louis or Baltimore – where annexation is not permitted and city/county merger is difficult – may be illusory in the broader metropolitan context. In the 21st century, the right geography of governance for many issues is not at the level of a city with fixed and immutable borders. Rather, the geography of governance more naturally lies at the level of the conurbation or the metropolis.

Lessons for the United Kingdom

There are several important lessons about the fiscal powers and influence of directly-elected mayors in the United States that are of direct relevance as United Kingdom devolves more power from Whitehall to its major cities. The mayoral referenda, Localism Act and the recent announcement of the ‘City Deals’ from the new Cities Policy Unit are key steps in the devolution process. The menu of policy options that will be offered to cities in potential City Deals, in particular, will help cities develop their own bottom-up plans for growth, and will require more decisive leadership from directly-elected mayors. As devolution unfolds, the US experience offers three lessons for the United Kingdom.

First, fiscal devolution needs to accompany the direct election of mayors. In the US, fiscal power – through property taxes, business taxes, sales taxes, tourism taxes, user fees, financing mechanisms like TIFs and ballot-box referenda – is a necessary foundation of, and impetus for, the entrepreneurial and innovative way in which mayors work.

While the Localism Act grants cities “general powers of competence,” this does not include the power to raise or introduce new local tax schemes. Some City Deals could grant increased financial flexibility and discretion to cities by providing them with a consolidated funding pot, the ability to set business discount rates, and significant power over transport, infrastructure, and workforce skills funding. It does not appear, however, that any City Deal would grant to a city the power of local taxation on a similar level to the power granted to local governments in the US. In addition to direct taxation, UK mayors should also be granted the power to take ballot initiatives (referendum questions) to the voters that raise local taxes to support targeted, transformative investments for the city and greater region, as illustrated by the examples in Denver and Los Angeles.

Devolution of this type of fiscal power to England’s largest cities would allow mayors considerable flexibility to react more quickly to market pressures without having to wait for Whitehall to respond. Currently, for instance, cities with gentrifying neighbourhoods that are displacing lower-income residents need to wait for the central government to recognize the problem and respond with enhanced funding or other tools to stimulate the production or preservation of affordable housing. In the US, mayors are able to address the issue by channelling increased local tax revenues to programmes like affordable housing, but cities in the UK do not have this option. For the most part, tax revenues go directly to Whitehall. This creates a fiscal ‘circuitry’ that is broken.

In fact, the fiscal devolution would likely incentivize greater policy innovation at the local level. Currently, cities that take innovative steps to regenerate and grow their economies are not rewarded by Whitehall, and cities that do not have their act together can still count on a revenue stream that is essentially equalized between places – thus providing little incentive for cities to act in bold and innovative ways under the current system. Although the New Homes Bonus is an important step in the right direction, more needs to be done.

Second, leaders in the UK must grapple with how the election of mayors in core cities enables better governance at the metropolitan and regional scale. The upcoming mayoral referenda occurs at the same time that metro and regional governance is emerging through the creation of local enterprise partnerships (LEPs) between business, political, and civic leaders throughout England (and, in Greater Manchester, the creation of a Combined Authority to oversee key functions of economic development, transport and regeneration).

Since these LEPs help determine and shape the economic development priorities for the multi-county city region, it only makes sense for a directly-elected mayor to utilize their powers – both formal and informal – to assist the LEPs in the creation and execution of the broader regional economic development plan. Mayors should further be involved with their LEPs in the decision-making process for City Deals with the Cities Policy Unit, as an elected mayor in the UK would be in a unique position to reach across the many programmes and constituencies within a region to ‘connect the dots’ between issues that are clearly related but kept separate and distinct by government bureaucracies, in the way that Sam Sims outlines in his chapter in this volume.

Central government leaders should also consider in subsequent mayoral referenda whether to place the geography of mayoral governance at the metropolitan rather than city scale.

Finally, the UK must develop the right governance capacity to make the devolution of powers to the local level successful. With 10 cities deciding whether or not to elect mayors in this year, and more potentially deciding in the coming years, there will likely be an influx of new mayors without the knowledge or experience of how to govern with the new powers devolved to England’s cities and regions. One way to address this issue would be to establish a ‘Devolution Academy’ for newly-elected mayors on an annual or biannual basis.

This academy could be modelled on the bi-annual ‘New Mayors Conference’ that is co-hosted by the Harvard University Institute of Politics and the US Conference of Mayors. It might cover topics ranging from how to transition from the campaign to actually governing in a city, to seminars on leadership, municipal finance, crisis management, and best practices in metropolitan/regional governance. It could also feature lectures from successful big city mayors in the United States and throughout Europe on the challenges of urban governance and ways to build coalitions across disparate groups in a city and metro area. As in the United States, the academy could be operated in conjunction with a major university with special expertise on city matters.

In addition to newly-elected mayors, Members of Parliament and other government officials might attend to discuss ways for cities to collaborate on policies with Whitehall, and perhaps share ideas about ways to devolve more fiscal powers to the local level.

Business and civic leaders from the various cities with new mayors, in addition to the leaders of the Local Enterprise Partnership, should also be invited to the conference to work with the new mayors on ways they can collaborate on regional growth strategies.

These steps would help the newly-elected mayors develop the capacity to effectively deliver change in England’s cities and regions as Whitehall devolves powers to the local and regional level – the primary engines of the British economy.

Conclusion

As devolution proceeds in the United Kingdom, the United States offers some helpful lessons on how to structure city and metropolitan governance, particularly on fiscal matters. For both countries, getting devolution right is a key part of ensuring that growth is productive, sustainable and inclusive.