By Glenn Halstead
A new report from IBM argues that the health of the country depends on the health of our cities. However, the current “business model” of most local governments is not sustainable in the current environment of budget cuts and little to no local revenue growth. Local governments’ current problems, the report’s authors argue, are structural, and not totally a symptom of the recession, and the provision of public infrastructure cannot be financed with existing public revenue streams.
The report stresses the importance of infrastructure investment. Local governments, they argue, face a trade-off when it comes to expenditures: investment in services or investment in capital. With scarce resources, local governments almost always maintain investment in services at the expense of capital and infrastructure. Since the early 1990s, investment in infrastructure and capital projects by local governments has fallen by over one-fourth.
However, this disinvestment creates several problems at the local level, including a less-efficient and less-productive workforce, lower service levels, and higher costs in the future when any current savings in capital and infrastructure spending are offset by higher maintenance fees on aging facilities. What is more, failure to invest in local infrastructure acts as a constraint on future economic growth, because efficient transportation, water, and sewer systems attract private investment and commercial activity, which increases the local tax base in the long run.
The report offers several strategies to help cities overcome their current slow revenue growth and increase future investment in vital public capital and infrastructure projects. Among the recommendations, they advocate a Return on Investment (ROI) approach to spending and making revenue growth an explicit goal. Cities dedicate significant financial resources to the collection of tax revenues, but not to activities that stimulate revenue growth. When creating budgets and allocating public funds to various projects and services, cities should conduct an alternatives analysis and invest in those options that create the greatest public value.
Historically, local governments have funded about 50 percent of all infrastructure costs nationally. IBM estimates that by implementing strategies that increase revenues and decrease operating and service costs, local governments can save 5 to 15 percent of their expenses. These savings, according to the report, could free up enough money to fill the funding gap for necessary infrastructure and capital projects.
Glenn Halstead is an assistant at SSTI. He can be reached at Halstead@cows.org.