DMI Blog

Harry Moroz

The Bomb In Obama’s Budget

The budget is an opportunity for the president to establish priorities for Congress and for the country. President Obama has clearly stated that job creation and economic recovery are his administration's short-term priorities. His 2011 budget, however, fails to offset lost growth potential, higher unemployment, increased taxes and fees, and service cuts at the local level--all negative economic indications that cities will hinder national recovery from the recession in the months to come.

As I show in a new report, the administration's signature programs for cities would receive only $2.8 billion in 2011 under the president's budget, an amount that pales in comparison to the $19-$29 billion in deficits that cities will face next year and the $25 billion the President has budgeted for state fiscal assistance.

The federal government, unlike city governments, can increase its deficit in times of economic distress in order to create jobs, ease the impact of downturns on distressed households, and stimulate economic growth. However, when city governments reduce services, cut public employment, and increase taxes and fees they offset Washington's stimulative, job-creating measures. The result is federal stimulus spending that has less "bang for the buck" and that does not promote quick recovery.

As Mark Zandi, chief economist for Moody's, testified to the Joint Economic Committee in October:

Unless municipalities receive more help from the federal government, they will be under intense pressure to cut jobs and programs and to raise taxes and fees. This will be a serious drag on the economy at just the wrong time.

Cities are the engines of our economy, responsible for 90 percent of the country's GDP. But a fiscal collapse has blunted job creation in metro areas, which account for 86 percent of the country's employment, and sapped cities of their economic potential and power to ensure that the rest of the country recovers from the recession. Plummeting tax revenue due to a recessionary economy has strained municipal budgets. This has led to service cuts that have nothing to do with stimulating the economy, or even with sound economics. Instead, such cuts degrade the quality of the schools, public safety agencies, social services, and infrastructure that can create the conditions for a shared recovery.

Nationally, city budget deficits could total between $19 billion and $29 billion in 2011 with a three-year shortfall of $83 billion. The majority of cities have instituted hiring freezes or layoffs and delayed the infrastructure projects that are so effective at creating jobs. Others have cut social services and increased taxes.

New York City plans to shrink its workforce by 4,286 jobs, including more than 1,000 police officers and 400 firefighters. Cuts to state aid could result in layoffs for 8,500 teachers who are already subject to wage cuts. Los Angeles has ordered the elimination of 4,000 city jobs. Chicago will force city workers to take 24 unpaid and furlough days in 2010 and eliminated 220 vacant positions. Phoenix will soon impose a 2 percent sales tax on food, a highly regressive tax on lower-income families already struggling to make ends meet. San Francisco will be forced to slash in half its $1.2 billion discretionary budget, which includes funding for public safety, health and human services, and public works.

At the same time, jobs losses have been significant in metro areas. Over the last year (December 2008 to December 2009), the number of unemployed in the five biggest metros increased by approximately 700,000. This represents almost 20 percent of the total national increase in unemployment during this period. Job losses were also widespread: Phoenix lost more than 42,000 jobs; Atlanta more than 61,000; and Miami more than 100,000.

Unfortunately, President Obama's budget focuses on freezing non-military discretionary spending instead of concentrating investment in cities to counter the ill effects of deepening urban unemployment and brutal cuts to city services. Absent a budget that confronts the urban fiscal collapse and growing urban unemployment, cities are caught in the tightening vice of increased need for services and drastically diminished capacity to provide them. This means cuts to city workforces and services that have eased inequality and poverty and improved the quality of life in recent years. It means that cities will in the near term exemplify the new normal of elevated unemployment rates instead of renewed economic capacity. And it means that the economic resurgence of the country will be delayed.

To be fair, the budget does demonstrate a concern for how federal policy impacts the health and vibrancy of neighborhoods and communities. Continued and increased spending for programs like the Sustainable Communities Initiative, Choice and Promise Neighborhoods, and the Community Development Block Grant program affirms a positive and important shift in how presidential budgets treat the interaction between transportation, housing, and service delivery.

Such a shift might have been sufficient in an era of robust job growth with a humming economy and expanding city revenues. In the current climate, though, it suggests an administration that is certainly aware of the importance of cities, but is unwilling to commit the necessary resources to meet the basic economic needs of cities and their local governments. It now risks undermining the very programs it has proposed in the budget because it has not confronted--much less counteracted--the darkening fiscal and economic situation of urban America.

It cannot strengthen all communities and neighborhoods without first restarting job creation in the nation's cities and minimizing the harm and damage of the urban fiscal collapse over the next year. Only substantial direct assistance to city governments, coupled with an ambitious and targeted jobs program, can ensure that cities, the economic engines of the country, do not soon run out of fuel.

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Posted at 2:50 PM, Feb 25, 2010 in Cities | Fiscal Responsibility
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