Lost in the Balance: How State Policies Affect the Fiscal Health of Cities

Despite recent signs of economic and fiscal recovery, many U.S. central cities continue to struggle with declines or slow growth in population and employment, higher tax burdens, lower quality public services, and poorer performing schools compared to their suburban neighbors.

This paper examines the factors that have led to fiscal distress in central cities, and fiscal disparities between cities and suburbs, in three states—California, New York and Wisconsin. Using data on intergovernmental aid, it also presents new evidence on how these state governments are responding to fiscal issues in their cities.

Throughout most of the 1990s, both the population and the tax base of most of the central cities in these three states grew more slowly than the population and tax base in their suburbs. Rather than serving to compensate these cities for their slower rates of growth in fiscal capacity, however, state aid and state tax policies in CA, NY and WI over this same period tended to favor suburban communities, making it relatively more difficult for cities to afford basic services for their residents.

These trends suggest that the devolution of welfare programs to the state level may exacerbate cities' fiscal problems, especially during an economic downturn. Drawing from the evidence on state-city fiscal relationships in these three states, the papers offer recommendations for new policy directions at the federal, state and local levels that could serve to improve the fiscal health of central cities.