Rick Cole: The Four Horsemen of the 'Fiscal' Apocalypse

They are here: the Four Horsemen of the Fiscal Apocalypse.  Cities are under attack.

The Federal government can print money.  States can just go bankrupt, according to Senate Leader Mitch McConnell.  But city governments are literally on the front lines of the pandemic with no help in sight.

On a red horse is Cratering Revenue.  On a black horse is Neglected Infrastructure.  On a white horse is Pension Debt.  And on a pale horse rides Community Need.

The red stallion is the one breathing fire.  The California League of Cities estimates that over next two years, revenues will drop over $7 billion across our state’s 482 municipalities.  The hardest and soonest hits come to sales, hotel, utility, parking and event taxes (and income).  The reduction in business and property taxes will follow.  Virtually every form of local revenue will be reduced – and no one is sure just how deeply -- or for how long.  City after city are beginning to report steep deficits – and no one expects the economy to come roaring back.  Too many businesses have been damaged.  Too many people will be skittish about travel or even normal activities of local shopping and dining.  Too many people will have lost income to immediately go out and spend. 

The black horse is easy to miss.  The Great Recession did what fiscal stress always does: drastically reduce capital investment in city facilities, equipment and technology.  In distress, cities naturally cancel or postpone even routine deferred maintenance of their vital infrastructure.  Expanding or replacing capital facilities must wait for better times.  So everything from upgrading water treatment plants to making street repairs get delayed.  That inevitably happens, even though both borrowing and construction costs are lower in tough times – and even though deferring maintenance usually means more extensive repairs later on.  To regularly slurry seal a street extends its life nearly indefinitely –  but failing to do so will require costly rebuilds at four times the life cycle price.  But who will close a fire station or lay-off police officers to put money into infrastructure, no matter how vital?  Instead, costs are pushed off, even as they escalate.  Cities were just beginning to catch up from 2008 when the pandemic arrived like a fiscal asteroid smashing into our communities.

The white horse has been there for years.  But because by their nature pension obligations are long-term, it is always politically tempting to postpone hard choices.  So, at both the state and local level, hard choices were postponed.  Good times offered the alluring prospect that a serendipitous combination of strong Wall Street investment returns and a slow ratcheting up of contribution rates might restore public pension balance sheets to good health. All that has come crashing down.  Billions of dollars in pension portfolios values have evaporated in just 45 days.  The ability of cities to absorb higher pension contributions has similarly dissolved.

The pale horse is the most ominous one.  Even in the unlikely case that the pandemic recession is relatively short-lived, it is unprecedented in its depth.  While it is states and counties that have the legal responsibility for unemployment and welfare costs, that will bring little comfort for cities as the desperate fall through a shredded safety net.  Academics used to say that as many as four out of ten American households were one paycheck away from homelessness.  Perhaps an exaggeration, but until COVID-19, the rising tide of homelessness was for many California cities an overpowering crisis already – one to which Governor Gavin Newsom devoted his entire State of the State address, less than a month before his shutdown order.  Local governments must now respond to a vast increased elemental human needs on their streets: homelessness, hunger and small business distress.  Cities must do so with radically reduced resources – and vociferous political upheaval protesting either cutbacks or higher taxes.

Cratering Revenue.  Neglected Infrastructure.  Pension Debt.  Community Need.  These four Tribulations are not specters or prophecies. They are stampeding through our streets.  How can cities cope with these four dire threats to their solvency?

One can always hope.  Perhaps the fifth time will be the charm as Democrats press again for aid to state and local governments in the wake of the Congressional Budget Office’s projections of 16% unemployment and the ongoing meltdown in processing claims.  But Republicans, after handing out business relief and tax breaks, will point to the CBO’s eye-popping estimate of a $3.7 trillion Federal deficit this year -- and reiterate McConnell’s message to blue state governments: drop dead.  Even if Joe Biden wins and carries the Senate, help from a Democratic resurgence is at least nine months away.

The conventional response is lay-offs, furloughs and service reductions.  But the magnitude of cuts is staggering.  In Santa Monica, stripping our AAA balance sheet of reserves and stomping on the brakes for capital investment barely bought us runway until the end of the fiscal year in June.  A cautiously optimistic scenario projected a shortfall in revenue next year of $150 million, a drop of nearly 40%.  Even if you can pay the political and organizational price of cutting that much from your budget, where is the capacity needed to reconfigure the remainder to function effectively?  As the Seattle Times observed, if you take a blowtorch and remove 40% of the body of a Lexus, you don’t get a Camry, you get a wreck. 

While nothing quite like this has ever hit local governments, there have been recessions, natural disasters and epidemics before and they not only offer some guidance, but some solace.  They also teach a sobering warning about the magnitude of the work ahead.

The historical fact is that today’s local governments were born out of the chaos of cities as America industrialized.  Widespread crime and disorder produced municipal police.  Catastrophic fires led to the founding of the first city fire department.  Packed tenements spawned public parks.  Industrial contamination forced land use planning.  The need for adult education forged local libraries.  City governments lacked both the organizational capacity and the tax revenue to deal with those staggering challenges.  Necessity was the mother of the invention of city services and the tax system to pay for them. 

The fight to create, fund and professionalize city services was brutal and protracted.  It was fought not only in the bare-knuckled political wars of the Gilded Age and the Progressive Era, but in the decades-long evolution of the craft of “public administration.”  Today, those once progressive innovations have ossified and fallen behind the needs of the times.  Necessity will force the reinvention of city services to meet the needs of today’s urban realities.

The Four Horsemen cannot be wished away.  They must be vanquished.  We can draw inspiration from the struggles of past generations.  Lincoln Steffans’ landmark book, “The Shame of the Cities,” galvanized leaders across the nation to impose fundamental change to address the poverty, hunger and disease of early 20th Century Cities.  It is our turn to forge the reforms and innovations that will overcome the Four Horsemen of the Fiscal Apocalypse.  It was far from easy then, it will be far from easy now.  It is our curse to live in interesting times.  It is our responsibility and opportunity to rise with the occasion.