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Harry Moroz

Why Cuts In State Aid To Cities Matter

Below, Karin writes about the impact that cuts in state aid to city and local governments are having on budget deficits. The National League of Cities demonstrated this point in a recent report revealing that such cuts could total between $21 billion and $30 billion in fiscal years 2010-2012.

These cuts are not only big, but could have lasting consequences for city budgets. In recent years, state governments have become the primary benefactors of city governments, making up for the federal government's diminishing support. As Brookings Bruce Wallin points out, federal aid decreased from 17.5 percent of city general revenue in 1977 to 5.4 percent in 2000. But he also points out that:

Equally noteworthy was the increase in state aid over this time period, which in the aggregate substituted for the decline in federal aid, allowing the overall level of city intergovernmental aid to return in 2000 to 1977 levels in real dollars per capita.

Gaping state budget deficits will lead more and more states to cut aid to city and local governments, placing more of the burden of revenue raising on local governments, which in many places are already limited in how they can do so. This creates an opportunity for the federal government to reestablish its financial relationship with city governments, one that could be based as much on revenue sharing as on a recognition of the important role cities play as economic engines. However, if the federal government does not step in to assist urban areas, fiscal austerity measures taken by cities in times of economic stress will persist in times of economic recovery.

Finally, though direct aid for cities would be preferable, the Obama administration's extension of Medicaid assistance for states - which the Senate is considering this week - will assist cities by easing the fiscal pressure on state governments. Presumably, the lower the deficit at the state level, the less aid to cities state governments will cut.

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Posted at 5:15 PM, Mar 08, 2010 in Cities
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