America’s Big Cities: If They Get So Much Aid, Why Are They Always in Trouble?Published: June 06, 2001 in Knowledge@Wharton
Do you frequently look forward to spending an afternoon or evening in the city, dining, dancing, going to clubs, theaters and museums, provided, of course that you can return to your home in a nearby suburb where taxes and crime are low and the schools are excellent?
You’re not alone. "People may not want to live in cities any more, but they sure do want to live in metropolitan areas," says Anita Summers, Wharton professor emeritus of business and public policy. "All the population growth in this country has occurred around core cities. People are still attracted to them." And because of that, "cities are here to stay."
Given that situation, the question then is: Are the venerable metropolises we treasure - New York, Boston, Washington, D. C., Philadelphia, Chicago, Los Angeles, and others - being run into the ground by waning populations and the resultant plummeting revenues? Why are the major U. S. cities, despite large infusions of federal and state aid, almost continually facing a fiscal crisis, fighting to keep their heads - and skyscrapers - above water?
Summers is a contributor to a book to be published next winter by The Brookings Institution entitled Forging Metropolitan Solutions to Urban and Regional Problems. The book looks at metropolitan areas across America in the hard light of the city-suburban schism that so many of them are experiencing. In the chapter co-authored with Joseph Gyourko, Wharton professor of real estate and finance, Summers focuses on one major U. S. city, Philadelphia. Documenting the "often stark differences in economic and social conditions between Philadelphia and its suburbs," Summers asserts that these differences are not compensated for by state and federal aid. She and Gyourko make recommendations for "leveling the playing field" for Philadelphia with its surrounding local governments in order to promote more balanced, efficient economic growth and development throughout the region. The problems and solutions the authors present have implications for all major urban areas in the U. S.
As Summers and Gyourko demonstrate, poverty in the Philadelphia metropolitan area is clustered in the city itself. While only 34% of the region’s total population live in the city, 63% of the poor do. "Cities have incredible concentrations of poverty," says Summers. "The poverty rate in the city of Philadelphia today is something like 27%, as compared to only about 5% in the suburbs. This creates an impossible situation for cities trying to raise the tax revenue they need."
In addition to poverty rates being five to six times higher in Philadelphia (and also in the nearby city of Camden, N.J.), further comparisons to the suburbs show that unemployment is two to three times higher in the city, crime rates are seven to ten times higher, and housing and education levels are substantially lower. These factors, along with more multi-family dwellings, a higher proportion of African-Americans, and a higher proportion of land in non-residential developed usage, are linked with poverty in many large U. S. cities. It is the strength and persistence of these interrelationships that make simple interventions to any one of them unsuccessful, the authors say.
And, while federal and state aid is much larger to cities than to the suburbs, the authors add, it isn’t large enough to cover the substantial poverty service costs that Philadelphia must supply from its own local revenue sources. "One of the striking findings of our research was the extent to which intergovernmental flows to the region, from both the federal and state government, were not redistributional," Summers says. "Redistribution means you give areas with high poverty rates proportionally more money than areas with low poverty rates. It turned out the total impact was not at all redistributional which partly explains why cities like Philadelphia have such desperate problems."
Summers identifies a related way in which Philadelphians and other city dwellers are placed at a significant disadvantage. She shows that statistically across metropolitan areas, the least wealthy jurisdictions actually pay the most taxes relative to their income. "The poorest places tend to have the highest local taxes, further adding to their problems."
Philadelphia is required to use a large chunk of its local tax revenues to provide services to the poor, an activity which Summers and Gyourko assert belongs at higher levels of government. They estimate that over 7% of the city’s own-source revenues go to direct poverty services; over 3% go to the indirect poverty costs of the police department; and nearly half of the school district’s own-source revenues go to educating poor children. ("Educational dollars are a very major part of what a state does for its locality," Summers points out, "and Pennsylvania is below the average in its redistribution of school finance. Many states do much more of what’s known as equalizing.") "As long as cities have the concentrations of poverty that they have," Summers adds, "and don’t have the middle and upper-income people, they won’t have the revenue. And you won’t get those people without a good educational system."
Summers and Gyourko also found that the poorer suburbs around Philadelphia are forced to fund poverty needs disproportionately out of own-source revenues. The authors say their data shows that as with the city of Philadelphia, federal flows to these poorer communities are indeed larger, but not large enough to offset the fiscal burdens associated with higher poverty.
Turning to the issue of road and highway investments, the authors assert that these state monies most often find their way to the suburbs. At first glance, they say, this doesn’t seem true, since highway aid from both state and federal sources favors the city. But aid tells only part of the story, because higher levels of government have the ability to provide roads directly rather than through aid. In a recent study, state direct and indirect highway spending turned out to average only $103 per capita in the city of Philadelphia, as compared to $136 per capita in the suburbs. (That $33 per-capita difference may not seem like much, but in one time period analyzed, the suburbs received $641 million more from the state than did the city.)
Another factor Summers cites as contributing to the erosion of big cities is current federal tax policy regarding owner-occupied housing. This policy is generally not considered significant at the metropolitan level, yet in practice it allows a few choice suburban areas to reap the rewards. "It is well known that owner-occupied housing is favored in the tax code and the benefits are skewed toward higher-income households," she says. "What is not known is the extent to which these benefits are skewed across space, not merely income." Recently, the aggregate value of tax code-related benefits to homeowners in the greater Philadelphia region was calculated at $2.7 billion. Of that amount, $2.3 billion - or 84% - went to suburban owners; only 16% went to city owners. Obviously, says Summers, communities with plentiful rental units are also at a disadvantage under this tax program. She finds that taken together, the city of Philadelphia’s renters and owners end up funding nearly $620 million, or about 23%, of the housing-related tax benefits enjoyed by non-residents.
Perhaps most Americans just don’t care if the big cities collapse. But Summers has a different idea. "I don’t think Americans have a fundamental hatred of cities. I think quite the opposite. With all the extraordinary stress that cities have undergone in the last 30 to 40 years," cities like New York and Chicago are thriving. Yet others, like Philadelphia, are struggling. The question is why.
Summers talks about one way a city can help boost its middle-class population: "Philadelphia has not had a concerted policy toward residential amenities. They have worked on getting business there, but not people. Chicago, for example, had all the basic problems Philadelphia did, but has done much better. They still have their large concentration of poor, but they’ve turned around. Their population is increasing in a way Philadelphia’s is not. Chicago has devoted a great deal to creating residential attractions like their Miracle Mile. People want that central place with cultural attractions, theatre, cafes, restaurants. That’s why they live in urban areas."
Holding that "state and federal intergovernmental flow allocation formulas - as well as welfare, tax and land use policies - all could be revised to help promote more efficient regional growth and development," Summers and Gyourko make recommendations for equalizing the disproportionate burden they assert that Philadelphia and many large cities now bear:
• A substantial revision in the criteria for state aid, and the introduction of redistributive components to the large federal block grants: The authors believe that measures of expenditure efficiency should be part of these new distribution formulas in order to reward better-run governments and spur improvement in those less well-run. In addition, there should be a reconsideration of the current housing tax policy; differentiated poverty policies in cities versus suburbs, and a state review of infrastructure investment policies.
• The tailoring of poverty programs to specific groups: Since the city poor are made up of relatively few retirees, more female-headed households, and more unemployed, a greater emphasis should be placed on job search/training and child care.
• A re-examination of public capital spending: Summers gives the example of the recent decision to expand the Route 202 highway corridor in suburban Philadelphia, a decision she says will shift the economic center even further from the city. "The appropriate public policy response would be to provide more equal quality of public infrastructure investment across locations, on something like a per capita basis," so that fiscal policy doesn’t make one location more attractive than another to homes and businesses.
• An examination of other federal policies for inadvertent effects on metropolitan areas: Federal tax policy with respect to owner-occupied housing may have been imposed for other reasons, Summers says, but has ended up benefiting only a relatively few suburban areas. "An economically efficient metropolitan policy is one that reduces these distortions so that location decisions are not artificially biased toward one part of the region."
How likely are the authors’ recommendations to be put into practice? At the federal level, it is not very likely there will be any substantial revisions of the big formulas, the biggies like job training programs, the welfare programs and highway funding," Summers says. "This administration is not likely to go further in the direction of redistribution. If the Democratic administration didn’t really visit the issue, it’s much less likely that a Republican administration will.
"But if we were hit with a big recession and the cities were in deep trouble, yes, it might be considered. In the end, most public policy changes happen because there is some acute crisis," she adds. At that point, the work that public policy researchers do is "there in the corridor, waiting to be used."