Devolving the Budget Crisis

An important piece in the NYT from back in March about state efforts to balance their budgets by cutting aid to cities. The article talks about the “balloon” effect: states reduce spending and sometimes taxes by reducing (or eliminating) aid to cities. Cities may respond by raising local taxes in order to fill the gap (sometimes needed to maintain basic services). But not all cities will be able to pass tax measures or squeeze more money out of their residents, especially if state law restricts their ability to levy new taxes. A double whammy of falling property values and falling state aid has left many cities struggling to meet basic needs.

Ben S. Bernanke, the Federal Reserve chairman, said in a speech this month that “many localities have been hard hit by reductions in state aid, which in 2008 accounted for about 30 percent of local revenues.” And Moody’s Investors Service, the ratings agency, said in a report last week that many states “are increasingly pushing down their problems to their local governments.” The Moody’s report warned that this would be “the toughest year for local governments since the economic downturn began.”

Budgetary pain, indeed “flows downhill.” In many states, direct aid to cities was severely reduced in 2010-2011, and indirect aid (to public schools and social services) is next on the chopping block. These indirect cuts may not affect city government budgets, but they do severely impact cities.

Read: States Pass Budget Pain to Cities as Cutbacks in Services Cascade –