A New Strategy for Helping Cities Pay for the Poor

America’s big cities are being forced to bear a disproportionate share of the public costs of dealing with poverty, and this fiscal burden is hurting both our cities and the nation as a whole. Almost one in five households lived below the poverty line in America’s largest cities in 1990, compared with one out of seven nationally. Since 1970 this disparity has worsened as the percentage of poor households among city residents increased by one-quarter.

National antipoverty policies have principally been “people based,” providing direct aid to poor families and individuals through AFDC, food stamps, Medicaid, and other programs. But recent research shows that the increase in big-city poverty effectively acts as an unfunded federal mandate on many large cities. It leaves them with unsustainable fiscal burdens that make them expensive places to live and work for those who are not poor. Thus national antipoverty policies should also be “place based,” recognizing that the costs of poverty also have a direct effect on urban communities and the families and businesses that reside there. This Policy Brief explores the problem of concentrated poverty and its cost to cities and offers a new urban strategy to help address it.


In the nation’s largest of cities, the proportion of all residents who are poor is close to 20 percent, compared with only 8 percent in suburbs taken as a whole. Poverty is especially concentrated in a relatively small number of the nation’s largest cities.

The 23 U.S. cities that each had more than 500,000 residents in 1990 comprised 12.1 percent of the nation’s total population, but 17.2 percent of its poor people, or 5.8 million poor residents. An average of 19.2 percent of the residents in these cities were poor, compared with 13.5 percent in the nation as a whole. Thus these cities held 1.7 million more poor residents than they would have if they had the same fraction of poor residents as the entire nation.

Because the poverty population is disproportionately concentrated in big cities, the cities are compelled to spend more of their own fiscal resources per overall resident to combat poverty than are smaller cities—especially most suburbs—with lower percentages of poor residents. Some inner-ring suburbs also have high poverty burdens, of course, but most do not. This imposes a much higher than average tax burden on the nonpoor residents of most big cities.

The Wharton Real Estate Center at the University of Pennsylvania recently released five studies on the costs of city services to the poor. Two concentrate on direct expenditures—spending on local services that explicitly target aid to the poor, such as homeless and welfare programs. The other three focus on increased indirect expenditures, or costs for basic local services such as police, schools, and court systems that are expanded as a result of concentrated poverty. Their findings are as follows.

Direct Expenditures

Although most direct expenditures on poverty are financed by federal and state governments, local governments in the United States still devote an average of more than 12 percent of their own revenues to public welfare, health, and hospitals.

In 1992 municipal revenues raised by cities themselves (excluding utility and liquor store costs and revenues) averaged $1,202 per capita among cities with 300,000 or more residents, compared with $439 per capita among cities with fewer than 75,000 residents, the category that encompasses most suburbs. The large cities spent an average of $364 per capita on health, hospitals, and public welfare, or 30 percent of their own-raised revenues. The smaller communities and suburbs spent only $40 per capita on those poverty-related categories, or 9.1 percent of their own-raised revenues. Even after adding in the transfers from state and federal governments, cities with more than 300,000 residents in 1992 spent 19.8 percent of their total revenues of $1,848 per capita on health, hospitals, and public welfare, three times the 6.7 percent spent by cities with fewer than 75,000 residents out of their much smaller total revenues of $595 per capita.

The City of Philadelphia spends 7.6 percent of own-source revenues ($84 per capita) on poverty-related services. If one excludes the costs devoted to support purely public hospitals, Philadelphia spends twice that of other cities on poverty-related programs and services. The table provides a detailed breakdown of the City of Philadelphia’s budget in 1995 and its direct expenditures on poverty-related programs.

Indirect Expenditures

Poverty has a deep effect on nonpoverty expenditures. Cities with populations greater than 300,000 and approximate poverty rates of 20 percent have average indirect expenditures of $746 to $1,078 per capita (the higher number is for those cities that are city-county governments). This is $168 per capita more than a city that has the national poverty rate of 14 percent.

A recent Wharton Real Estate Center study estimated that Philadelphia, which has a poverty rate of 21 percent, spent $23 million more per year in police services than it would have if the city’s poverty rate had equaled the national average of 14 percent. This meant that more than 3 percent of the city’s total expenditures financed “excess spending” on police protection stemming from the city’s above-average poverty rate.

Education-related costs in municipalities with higher than average poverty rates tend to be large. In a sampling of 73 large cities, expenditures from own-source revenues were an estimated $105 per capita for a city like Philadelphia that had a 21 percent poverty rate. For school budgets, these costs represent 25 percent of revenues from the city’s own sources.

In short, big cities have to spend a lot more of their own funds coping with poverty, both directly and indirectly, than smaller communities with much lower poverty rates.

The national strategy of combating poverty through federal and state spending is not relieving these big cities of all the fiscal burdens of this disproportionate concentration of poverty within their borders. People-based poverty assistance is not sufficient to prevent big cities from having to spend a significant share of their own revenues to combat poverty. This reduces the resources cities have to serve nonpoor residents and increases the tax rates they have to charge all their residents. Thus in 1992 the average city with a 1990 population of 300,000 or more was charging its citizens and businesses overall property, sales, and gross receipts taxes of $915 per capita, 86 percent more than the $491 per capita in cities with populations of less than 75,000. This was due in large part to higher concentrations of poor people in larger cities.

Preserving the Status Quo: The Undesirable Effects of Concentrated Poverty in Cities

The costs of the concentration of poverty in big cities drives many nonpoor residents and viable businesses to migrate to the suburbs. The withdrawal of households and firms from big cities impairs the cities’ ability to provide adequate services to their residents, both poor and nonpoor. First, the flight reduces the per capita fiscal resources left in these cities, putting pressures on their governments to raise taxes or cut services or both. Second, most small suburban communities can escape from having to pay anything like a fair and efficient share of the public sector costs of dealing with the nation’s poverty, which creates even stronger incentives for people to move to such communities from cities. It is a fundamental economic principle that if people do not have to pay the full costs of enjoying some benefit—such as living in a community with a low percentage of poor residents—more people will seek that benefit than if they had to pay the full costs of providing it. Among the costs of providing low-poverty environments in smaller communities are the “excess fiscal burdens” and related “excess social burdens” that big cities must bear because they contain a disproportionate share of the nation’s poor. But the suburban residents who enjoy this benefit do not have to pay its full costs.

A Need for a New Place-Based Strategy that Aids Cities

This spatial distribution of the burdens of dealing with poverty cannot be removed by simply continuing people based forms of antipoverty assistance. Even expanding such assistance—which is very unlikely in the present political climate—would not remedy this situation. Those programs do raise the incomes of poor residents slightly. But transferring aid directly to people does not nearly compensate local governments for the extra services they must deliver for being home to increasingly large shares of the impoverished. It does not provide the fiscal relief that cities desperately need to deliver better services and provide quality education for the children of poor households. It has not generated fair competition between cities and suburbs for residents, businesses, and jobs.

Some other approach is necessary, one that complements people-based strategies by focusing on cities or places themselves to meet these communities’ unique needs. Otherwise, big cities will experience continued fiscal and social weakness caused largely by their disproportionate concentrations of poor people.

Elements of an Alternative, Place-Based Strategy

There are a host of government policies and programs that can be used to help develop a place-based response to the problems of concentrated poverty. One approach is to provide direct federal subsidies to cities to help them address their burdens of poverty, just as the government provides direct subsidies to the poor. In this time of greater devolution of federal responsibilities to states and cities in the form of more flexible or new block grants, large-scale federal block grants should be reallocated to better meet the fiscal needs of cities burdened by extensive pockets of poverty. These cities cannot adequately carry out new responsibilities from the federal government without some form of additional aid. There is a need for more targeted block grants, designed with the help of an urban audit, and a number of other key elements to develop an alternative, place-based strategy.

Targeting Block Grant Assistance to High-Poverty Jurisdictions

Federal block grants to states and cities are existing place-based programs that can be refined to better recognize the disproportionate impact of concentrated poverty on large cities. That means restructuring block grant allocation formulas so that cities with relatively high proportions of poor residents receive greater per capita assistance than cities with fewer poor residents. For instance, Community Development Block Grants (CDBG) and public housing grants are already largely directed toward high-poverty jurisdictions. However, the allocation formulas for such programs could be improved to better equalize the poverty and immigration costs across many of the nation’s largest cities and their suburbs. Even so, the dollars involved in these traditional urban programs are not sufficient to address the magnitude of the fiscal imbalance faced by cities with higher concentrations of poverty.

For block grants to be used in a significant way as part of a new urban strategy, it is essential that the larger transportation and job training grants also be tailored to respond to the fiscal disparities among jurisdictions. For example, the Intermodal Surface Transportation Efficiency Act (ISTEA), which is up for reauthorization for the first time this year, could be oriented more toward central cities if a larger proportion of its funds were required to be spent on mass transit. This would effectively lower infrastructure costs in cities, thereby allowing them to compete more effectively with suburbs that already benefit from highway subsidies. ISTEA also could more heavily subsidize transit programs involving reverse commutes of poor inner city residents to the relatively job-rich suburbs. Such a program might even be people based in that it could directly subsidize poor riders by reducing the price of train or bus fares. Strategies that benefit place do not need to exclusively involve direct subsidies to political jurisdictions.

Understandably, better targeting of block grants to those cities with high-poverty needs might be wasteful if the cities are poorly managed. Any adjustments to aid formulas must not only respond to the level of fiscal burden experienced by cities with high poverty rates, but also include incentives for them to use their overall resources efficiently.

To determine the calculations needed to restructure block grant formulas, the federal government should consider constructing a regular urban audit, similar to the Federal Reserve Board’s audit of the national banking system. The urban audit would have two components. First, it would measure the excess fiscal burden borne by each city because of its concentration of poverty. This would help determine on a continuing basis where to target fund transfers to best serve areas most affected by the changing demographics of poverty. Second, the audit would rate the efficiency with which city governments use their fiscal resources, as compared with other cities. This component would help minimize waste and provide incentives for improvements in the delivery of local services.

The art of carrying out such urban audits is now in its infancy. It requires further development before an effective place-based antipoverty strategy can be carried out. The Wharton Real Estate Center is currently engaged in developing these urban audits.

Better targeting of block grants to higher-poverty jurisdictions is especially relevant today. Congress is shifting a number of federal responsibilities for key programs to state and local governments mainly through block grants, including proposals to turn aid programs into block grants. In this era of devolution, Congress and the administration should be acutely conscious of the need to relieve big cities of the excess fiscal and social burdens they bear because they contain disproportionate shares of the nation’s poor. It is important that Congress guard against placing even greater spending burdens on these cities.


Revenue Sources of Direct Poverty Expenditures, 1995

Department Budgeta Spent on Povertyb Sources of Poverty Expendituresb Own- Source Expenditures on Povertya
Intergovernmental revenues Own source
Public health 411 71 80 20 62
Human services 284 73 78 22 47
Homeless and adults 35 100 54 46 16
Recreation 34 42 76 24 9
Housing and community development 136 100 100 0  . . .
Mayor’s office 5 45 100 0  . . .
Office of community services 6 100 100 0  . . .

Percent of operating budget 4.8b
Percent of own-source revenue 7.6b

SOURCE:   Anita A. Summers, and Lara Jakubowski, “The Fiscal Burdenof Unreimbursed Poverty Expenditures in the City of Philadelphia: 1985-1995,” working paper #238, Wharton Real Estate Center, University of Pennsylvania, August 1996.

a.  Millions of dollars.
b. Percent.

Other Place-Based Strategies to Aid High Poverty Citites

Forging Regional Solutions to Urban Problems

Regional collaborations, such as regionalizing taxation and service delivery efforts between central cities and their suburbs, can help spread the costs of poverty concentrations and, if there are efficiencies in service delivery, reduce the total costs. Fundamentally, however, the redistributive responsibilities of poverty are the social responsibility of all citizens in the country and therefore reside primarily with the federal government.

To the extent that suburbanites experience economic benefit from their central city, they should pay for it, as is recognized in the Minneapolis, Portland, and Seattle metropolitan areas. The impetus to foster this recognition will have to come primarily from state governments, whose constitutions, legislation, and grant formulas play a pivotal part in fostering regional cooperation. The federal government’s role is restricted to providing incentives for states to do this through their block grants.

Breaking the Concentrations of the Poor

As part of regional solutions, federal, state, and local leaders should also design incentives to physically deconcentrate the pockets of poor families by enabling more of them to move voluntarily out of big cities into surrounding suburbs. Today, they cannot follow the path of many middle-income city households because the costs of housing and transportation in most suburbs are too high. But key changes in some antipoverty and other policies, such as changing state and local zoning and other ordinances and making greater use of portable housing vouchers, could encourage more deconcentration of the poor in big cities. Housing vouchers are a prime example of a component of a place-based strategy that works through people, not places.

In the long run, efforts to break the concentration of poverty in cities will relieve local fiscal burdens, improve services, and help attract middle-income households and businesses to the city.


A new strategy is critically needed to help our nation’s cities pay for the costs of the growing concentrations of the poor, one that calls for place-based aids to complement today’s people based programs. This strategy should be applied to all major federal expenditure programs that affect cities, not just to those few explicitly labeled antipoverty programs. Cities with relatively high poverty rates remain high-cost places in which to live and work and are plagued with many debilitating social problems. This is true in spite of billions of dollars of means-tested transfers flowing to their poorer residents. The costs to our entire society of this inefficient arrangement are immense. In fact, the viability of many large cities depends on society’s reducing the fiscal burdens that separate them from many suburbs that do not have to bear much of the social burden of dealing with poverty. In addition, all parts of society, including affluent suburbs that consider themselves too far from the poor to worry about them, will pay huge costs in the near future for neglecting the development of millions of young people now being reared in poverty in big cities. We believe that such a new urban strategy can begin with reallocations of existing fund flows rather than with any net increase in the federal deficit. But this strategy cannot become effective without a new focus on restructuring federal and state relationships with America’s great cities—the heart of a place based urban strategy.