Mayors and Money: Fiscal Policy in New York and Chicago 9780226267937

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MAYORS AND MONEY

AMERICAN POLllICS AND POllTICAl ECONOMY SERIES EDITED BY BENJAMIN I. PAGE

MAYORS AND MONEY FISCAL POLICY IN NEW YORK AND CHICAGO

Ester R. Fuchs

THE UNNERSIN Of CHICAGO PRESS CHICAGO AND LONDON

The University of Chicago Press, Chicago 60637 The University of Chicago Press, Ltd., London 01992 by The University of Chicago All rights reserved. Published 1992 Printed in the United States of America

ISBN 0-226-26790-3 (cloth) ISBN 0-226-26791-1(paper) Library of Congress Cataloging-in-Publication Data Fuchs, Ester R., 1951Mayors and money : fiscal policy in New York and Chicago 1 Ester R. Fuchs. p. cm. - (American politics and political economy series) Includes bibliographical references and index. 1. Budget-New York (N.Y.) 2. Budget-Illinois-Chicago. 3. Fiscal policy-New York (N.Y.) 4. Fiscal policy-IllinoisChicago. 5. Municipal finance-United States. 6. Intergovernmental fiscal relations-United States. I. Title. 11. Series: American politics and political economy. HJ9289.N46F83 1992 336.3'09747'1-dc20 91-31503 CIP

@ The paper used in this publication meets the minimum requirements of the American National Standard for Information Sciences-Permanence of Paper for Printed Library Materials, ANSI Z39.48-1984.

for my parents Naomi and Max fuchs

Preface Acknowledgments 1

Toward a Political Theory of the Urban Fiscal Crisis

2

Fiscal Crisis and Fiscal Stress: A Comparative Perspective

3

Depression-Era Fiscal Crises: Political Lessons for Urban Policymakers

4

City Budgets and the Urban Fiscal Condition: Trends in Expenditures

5

City Budgets and the Urban Fiscal Condition: Trends in Revenue and Debt

6

Intergovernmental Relations, Legal Arrangements and the Urban Fiscal Policy Process

7

Interest Groups, the Political Party, and the Urban Fiscal Policy Process

8

Conclusion Appendix A: Mayoral Administrations Appendix B: Some Methodological Issues Appendix C: Census Data Categories Notes Bibliography Index

ix xiii 1

I grew up in New York City during the 1960s, and my first political memory features Mayor John Lindsay and the blizzard of 1969. As anyone from the borough of Queens will tell you, Lindsay's cardinal sin was failing to remove nineteen inches of snow from the streets for an entire week. At the time, I thought this failure was wonderful, since schools were closed and there was no greater fun than playing in the snow. My parents, on the other hand, were less delighted. They and their friends were outraged at the mayor's apparent incompetence, which created untold personal hardships and missed days at work. I was soon to learn that this "incompetence" was a theme of Lindsay's first administration, which included strikes by sanitation workers, teachers, city hospital nurses and doctors, welfare workers, and police. Lindsay was actually rejected for a second term by his own Republican party, but managed to get reelected by running as a LiberaUIndependent and won the mayoralty with only 42 percent of the vote. I also remember how, despite the erratic politics of his first term and his narrow 1969 victory, Lindsay the patrician gained public respect during the "days of rage," when ghetto violence spread across urban America. John Lindsay rolled up his shirt sleeves, walked through Harlem, and kept the peace in New York City's most volatile neighborhoods. I was told by a good friend who grew up in Chicago in the 1960s about her first political memory. It too was about the mayor. While in grade school, she thought that the honorific title of the city's chief executive was "mayordaley." It was not until years later that she realized there was a distinction between the office and the man who had occupied it for over twenty years. "Mayordaley," boss of the Democratic machine and resident of working class Bridgeport, was extremely popular among parents and children. He was responsible for 'the city that works," especially keeping the streets clean. He was

PREFACE

also responsible for the "shoot to kill" orders during Chicago's 1968 riot. It is not surprising that these memories center on individuals. New York and Chicago are two cities where the cult of personality looms so large that individuals rather than institutions or events tend to be the focus of political histories. While it is hard to imagine New York City without John Lindsay or Chicago without Richard J. Daley, the historical presence of these two men in their own cities is not an accident. The individual personalities of these mayors are not really as important as what Lindsay and Daley represented politically. John Lindsay would never have been elected mayor of Chicago, while Richard Daley would never have resided at Gracie Mansion in New York City. The structure of politics in these two cities explains why these men were elected mayor. The historical and comparative perspective of this book provides insight into how political structures develop over time and constrain the policy choices available to individual mayors. Each city has its own rich political history which contributes to the development of institutional relations and a local political culture. It is within this context that mayors are elected and their policy choices are made. Fiscal policy is the focus of this book, and it too must be understood in the context of local political interactions, something that has escaped the attention of most practitioners and analysts. The isolation of fiscal policy from its political roots was most apparent during New York's 1975 fiscal crisis. While New York was struggling to remedy its fiscal crisis, its political leadership was searching for scapegoats and excuses. Ideologues from both the right and the left assisted the politicians in this time-honored activity. The conservatives took great pleasure in blaming "greedy unions" and "lazy" welfare recipients for the city's near-bankruptcy. The leftists found their villain in the capitalist system; the urban fiscal crisis was merely a symptom of the inevitable self-destruction of world capitalism. The ideological middle, as usual, split. There were those who viewed the city's condition as a consequence of " b a d management, the reformers' traditional lament, and those who saw New York as a victim of national economic trends, beyond the control of local decision-makers. All of these explanations had one characteristic in common: they succeeded in ignoring the interaction between politics and the economy and consequently divorced localpolitical decisions from fiscal outcomes. The first objective of this book is to demonstrate that politics has an important effect on a city's fiscal condition. A comparison is made be-

PREFACE

tween fiscal policy-making in New York City and in Chicago because of the similarities in the two cities' local economies and the stark contrast between their political structures and fiscal conditions in 1975. The book's second objective is to untangle the complex political interactions in the fiscal policy processes of these two cities in order to develop a theoretical framework for understanding why some American cities have experienced fiscal problems and others have not. Finally, I hope that a better understanding of the structure of fiscal policy-making will make it possible to create new forms of urban governance that improve the quality of life for all those who struggle with the daily problems of living in American cities.

Writing a book can be an overwhelming and lonely task, but I am lucky to have found an intellectual community which sustained and encouraged my efforts. At the University of Chicago I was fortunate to benefit from the wisdom of Ira Katznelson, Paul Peterson, Ben Page, David Greenstone (may he be remembered for a blessing), and Terry Clark. Ira and Paul helped me formulate a theoretical framework for analyzing the urban fiscal crisis grounded in the rich political histories of New York City and Chicago. Their personal warmth and continuous encouragement enabled me to complete this project. I must thank Terry for hiring me as a research assistant in his "Fiscal Strain" project and for patiently introducing me to the nightmare of census data and city government finances. Ben provided continuous intellectual stimulation and helped me make the important theoretical link between urban problems and federal policy. I am flattered and grateful to have this book included in his American Politics and Political Economy Series. I am thankful to Barnard College and the Columbia University Seminars for providing me with research support and to my colleagues in the Political Science Department for their encouragement. Jim Caraley has been a greatly appreciated colleague and friend whose comments on my work and personal support have been invaluable. I owe a very special gratitude to my colleagues and fellow travelers Bob Shapiro, Bill McAllister, Paula Newberg, Jeff Tulis, and Richard Briffault. Their intellectual inspiration, warm support, and genuine encouragement will never be forgotten. I must single out Bob, a precious friend and colleague, whose assistance had no limits and whose support has been unwavering. My sincere appreciation also goes to my friend and colleague Harpreet Mahajan, whose computer skills, graphic wizardry, and unending patience make this book dazzle with numbers. My thanks to Frank Kruessi, Bill Grimshaw, and Paul Green for keeping me in touch with Chicago politics despite my dis-

tance from the action. A special thank you to Susan Moore Juda for helping me find the strength to focus on life's blessings. I also want to thank the women of Barnard and the other students who provided research assistance and data collection at various stages of this project: Violanda Botet, Miriam Feldbloom, Sherry Jetter, Naomi Braine, Errika Kalomiris, Sara Offenhartz, and Bonnie Rosenberg. My thanks to John Tryneski, editor at the University of Chicago Press, for his helpful suggestions, patience, and gentle prodding. Thanks to Jennie Lightner for doing a wonderful job copyediting this book. Also, two anonymous referees provided excellent comments, which I found extremely helpful. My greatest appreciation must go to my loving and supportive family. My interest in politics really comes from my parents, who taught me that individuals have a responsibility for the well-being of their community. I would especially like to thank my sister Hana for helping me to organize my time, for babysitting, and for just being there. I am finally grateful to my husband, Daniel Victor, and our two children, Jacob and Rebecca. Without Dan's love, support, and humor I would never have finished this book. In the end, I accept complete responsibility for the content of this book and hope that I have made at least a small contribution to untangling the complexities of city politics.

TOWARD A POLITICAL THEORY OF THE URBAN FISCAL CRISIS

On October 29,1975, residents of New York City awoke to a banner headline on the front page of the New York Daily News: "FORD TO CITY: DROP DEAD." Although hyperbolic, that headline resonated in the minds of New Yorkers, who had just a short time before been stunned to learn that their city was perched on the brink of a fiscal catastrophe. Public distress grew with President Ford's callousness toward the city's plight, and the difficult realization that New York's fiscal troubles were deeply serious and resistant to quick-fix solutions. The harsh realities in October of 1975 were that the nation's largest and most prosperous city was seriously threatened with the prospect of bankruptcy, its debt obligations were unpaid, and its banks were refusing to extend its credit line without federal loan guarantees. At the time, no one understood that the Daily News'apocalyptic headline would soon strike a chord with a far larger audience: an alarming number of America's cities would need federal assistance to avert fiscal problems, and their pleas would also fall on deaf ears. New York City's fiscal crisis brought into stark relief the nation's urban crisis and an emerging federal policy that essentially told cities to solve their own problems. Because we now live in a post-fiscal crisis era when the jargon of budgets, revenue shortfalls, and balance sheets dominates political discourse, it is difficult to appreciate how suddenly the specter of New York's insolvency surged into the nation's consciousness. While it was not the first time that the public was unaware of impending political disaster, ordinary citizens were not the only ones caught off guard by the developing fiscal crisis. New York's fiscal crisis surprised the academic, political, and public policy community as well. After all, the chronicles of New York City's 1975 crisis bear a striking resemblance to the paradigmatic municipal fiscal crises that occurred all across the country during the Great Depression. Why, then, did the early

CHAPJIR ONE

signals of the greatest political and economic transformation in America's cities since the Depression go unnoticed? Political scientists failed to anticipate the urban fiscal crisis because there was no relevant political framework for predicting or explaining such a crisis. Prior to 1975, political analysts focused primarily on two questions: Who benefits from specificurban policy decisions? and Why is political and economic power unequally distributed in cities? These questions were remarkably similar to those that they asked about national politics, which were mostly derivative of Harold Lasswell's now famous definition of politics as the study of "who gets what, when, how?"l These analysts presumed conditions of economic prosperity and that resources would be endlessly available to fund government programs. They focused mainly on who controlled the distribution of the city's resources, since they thought this was the key determinant of political outcomes. While this framework addressed the problem of dividing the local fiscal pie while it grew, it could not address questions of how that pie was constituted or what to do when the pie began to shrink. To explain the urban fiscal crisis, a conception of politics was needed that considered the consequences of economic scarcity, for which the question was not "who gets what?" but "who gets cut?" Moreover, this conception of politics would also require an assessment of the role of local political structure in framing fiscal decisions. Although there existed ample historical precedents for both "scarcity" politics and the 1975 fiscal crisis, these lessons have yet to be recognized and applied, particularly to the study of urban fiscal policy. This book's principal objective is to offer such a framework for analyzing the fiscal policy process. By unraveling the complex relationship between fiscal conditions and political structure during periods of economic scarcity as well as prosperity, this study will advance our understanding of how cities can avoid future fiscal problems. Whether the focus is city, state, or national government, it is a mistake to analyze fiscal outcomes using decision models developed for periods of prosperity and those which assume that fiscal policy is insulated from the political process. Through a systematic examination of the fiscal policy-making process in New York City and Chicago, this book identifies the political factors-long-term budget trends, local party organizations, interest group activity, intergovernmental relations, and formal-legal arrangements-that have enabled certain cities to endure periods of economic scarcity without serious fiscal problems while causing other cities to succumb to them. New York and Chicago were chosen for this analysis as paradigms of America's urban industrial and commercial

TOWARD A POllTICAl THEORY Of THE URBAN FISCAL CRISIS

centers with rich and diverse political environments. Although they are often viewed as idiosyncratic, the political elements of New York's and Chicago's fiscal policy processes are common to all cities while their political interactions vary sufficiently to provide a framework for studying fiscal policy in other cities.

The Politics of Fiscal Crisis and Fiscal Policy What is the political context for fiscal policy-making, and how does the political process affect the fiscal well-being of America's major cities? The mayor in most cities is the key fiscal decision-maker and the final arbiter of budgetary decisions.2 The supports and constraints on his or her3 efforts to generate revenue sources and control expenditures are the focal points of the fiscal policy process. The mayor's capacity to centralize and control the budgetary process and to limit public demands on the system are the two most important elements of the fiscal policy process that affect fiscal stability.4 By retaining maximum local discretion in fiscal policy decisions, the mayor can affect fiscal stability in two critical ways. First, he can minimize the cost of service delivery to the city by having other governmental jurisdictions administer and fund the service, or by acquiring additional revenue for the city from nonlocal sources. Second, he can control interest group demands on local revenues so that expenses can be kept low and programs and personnel can be cut if the city's resource base shrinks. The mayor's capacity for centralization and control is either supported or constrained by the structure of the fiscal policy process in his city.5 A city's fiscal policy structure develops over time through the interaction of past budgetary decisions, the formal-legal structure of the city government, intergovernmental relations, interest group demands, and the local party organization. While structural relationships are not controlled by any one mayor, each mayoral decision that involves fiscal matters can further institutionalize, and therefore enhance, his control. Accordingly, the causes and effects of centralization and control become cumulative and mutually reinforcing. Centralizing and controlling fiscal policy-making should not be confused with imposing autocratic city government. On the contrary, the ideal model would demand active participation by the citizenry and organized interest groups in articulating the public policies and purposes that are to be served by city government expenditures. Ultimately, however, if cities are to retain fiscal stability during times of scarce resources, it is the mayor who must have the authority and political independence-informed, of course, by the substance of the

CHAPTER ONE

public debate-to make spending decisions and, most difficult of all, decisions to cut expenditures. Since urban governments have yet to produce political leaders with the wisdom of Plato's philosopher-king, vesting authority in the mayor to make responsible fiscal decisions does not guarantee that the policies he pursues will be either fair or equitable. In fact, the experiences of post-fiscal crisis cities suggests that, in the absence of strong interest groups and a competitive party system, mayors have used the "rhetoric of fiscal crisis" to pursue taxing and spending policies that primarily benefit business and development interests. For example, in the early 1980s, mayors across the country reminded their constituents of the dire consequences of fiscal profligacy by invoking New York's near bankruptcy in 1975. In this political atmosphere policies designed to enhance the local tax base dominated the political agenda while all other interests were delegitimized. Whereas this "unitary" model of fiscal policy seems dominant in today's cities, urban fiscal policy has varied from city to city and ultimately depends on complex political interactions that are rooted in each city's particular history. The important political interactions in the fiscal policy process cannot be identified by simply looking at the contemporary period.6 A historical perspective is needed to understand how structural relations developed and why they have persisted or changed. The starting point for this analysis must be the 1930s, because the onset of the Great Depression was the formative period for modern city governments.7 The early transformation of America into a "nation of cities" actually began in the mid-nineteenth century, with dramatic changes in technology and explosive growth in the urban population. By 1930the agitation of progressive reformers had led most cities to develop some capacity for providing public schools, water, public health services, regular police and fire departments, sewage disposal, parks, mass transit, and highways. While services to the city's growing industrial working class were certainly not adequate, even for essential services, it was a vocal business community, especially real estate developers, that demanded more efficient and expanded public services during the 1920s.8 Yet it was the Great Depression that fully transformed policymaking in America's cities for the rest of the century. Two important changes occurred during the 1930s. First, city government became the primary target of demands for not only basic "housekeeping" services like police, fire, and sanitation but also social welfare services like unemployment relief, housing, and health care for the poor. The

TOWARDA POLITICAI THEORY Of THE URBAN FISCAL CRISIS

city's service delivery role was both expanded and rationalized through the development of a "professional" city government. Moreover, demands for services were not simply those articulated by the business community: the broad range of groups that populated the city also became legitimate claimants on the city treasury. Obviously, not all these demands were met, nor were all interests equally represented in the process. Nevertheless, this period solidified the city's role as service provider.9 Second, intergovernmental fiscal relations were transformed. A federal role in assisting cities in the provision of these services, especially social welfare services, became firmly entrenched. Mayors established a formal presence in Washington through the United States Conference of Mayors (USCM), which lobbied for a collective city interest.10 Cities' dependency on state governments for legal fiscal authority also became more clearly delineated as a consequence of widespread fiscal crises during the Depression. The new functional responsibilities of cities were reflected in their budgets; city expenditures expanded dramatically while revenue sources became more varied and complex. These budgetary changes took shape in the 1930s and defined the transition to the modem era of urban fiscal policy. The Depression is also an important historical analogue to the 1970s recession. During the 1930s the issue of scarcity dominated the urban political agenda, and the modem industrial city was forced to deal with fiscal crisis, unemployment, and widespread economic deprivation. Like many ofAmerica's major cities, both New York and Chicago experienced fiscal crises in the 1930s which gave them the opportunity to restructure their fiscal policy processes. The political responses inNew York and Chicago,however, were strikingly different. Distinctive fiscal policy processes emerged during the Depression which were reinforced by decisions during the ensuing decades. Ultimately, Chicago's mayors were able to achieve the critical objectives ofcentralization and control over the fiscal policy process far more successfully than New York's. Consequently, Chicago was protected from the negative impact of the 1970seconomic recession whereas New York was left once again vulnerable to a fiscal crisis.

The Politics of Fiscal Crisis and Fiscal Policy in New York and Chicago The fundamental question, then, is why do some economically declining cities experience fiscal problems while others remain fiscally stable? The cases of New York and Chicago are particularly useful for considering this issue. Both cities shared socioeconomicdevelopment

CHAPTER ONE

patterns, yet New York faced a fiscal crisis in 1975 while Chicago remained fiscally sound. Clearly, these different experiences cannot be explained strictly in economic terms. In fact, differences in the local political processes of these two cities help explain the differences in their fiscal conditions. How, then, do the political interactions work differently in New York and Chicago? Chicago avoided fiscal instability in 1975 partly because its leaders were able to deflect interest group demands for increased spending. Why were New York mayors unable, unlike Chicago mayors, to say no to interest group demands and to control budget decisions with an eye toward fiscal stability? One answer offered has looked to the role of the local party organization.11NewYork mayors were unable to centralize authority over the budget process after the destruction of the Democratic machine. Without a strong party organization New York mayors relied on interest group support to create winning electoral coalitions; their support came with a fiscal price tag. Moreover, without party discipline, New York's borough presidents, all key players in the city's budget process, often acted independently by supporting spending demands not endorsed by the mayor. In contrast, Chicago mayors relied on one of the most dependable instruments for centralizing control, the Chicago Democratic party organization. The party guaranteed Chicago mayors a loyal vote on election day and assured that the City Council would follow the mayor's lead on the budget. Consequently, interest groups in Chicago had difficulty influencing mayoral spending decisions. Yet it was not just the machine in Chicago that enabled the mayor to centralize his authority and control interest group demands. Chicago's mayors managed to increase the authority of their office not only by controlling interest group demands through the party organization but also by manipulating government institutions. Special districts, public authorities, and county government to this day have allowed Chicago mayors to share the fiscal burden of service delivery with a larger and often more affluent suburban population, while the mayor retained control of most substantive policy decisions affecting the city. In the period between its two twentieth-century fiscal crises, New York received little in the way of fiscal relief from state-created special districts or public authorities. In fact, New York assumed fiscal responsibility for more public services than any other local jurisdiction in the nation. Most analyses have failed to acknowledge the importance of these formal-legal arrangements and their interaction with the party organization in affecting fiscal policy choices.12 The structure of political competition in New York during the 1960s, when the local economy was in a downswing, made it virtually

TOWARD A POLITICAL THEORY OF THE URBAH FISCAL CRISIS

impossible for city officials to address effectively the fiscal problems that became apparent only in the 1970s. In contrast, Chicago's fiscal decision-making structure enabled its mayor to take the steps necessary to assure that the city remained fiscally sound during this same period of economic decline. New York's mayors were hamstrung by competing interest groups on whom they depended for political support, were fiscally burdened with an extraordinary number of deficitproducing services, and were unable to take the decisive cost-cutting action that deteriorating economic conditions required. Since 1975 the fiscal policy processes of New York and Chicago at first glance appear to be converging. The Chicago Board of Education experienced a serious fiscal crisis in 1979,and then the city's own budget deficits became newspaper headlines. The newly elected mayor, Jane Byrne, blamed the city's revenue shortfalls on her predecessors, mayors Michael Bilandic and Richard J. Daley. Byrne's accusations were taken seriously, and she managed to generate enough negative publicity to provoke Moody's to downgrade Chicago's bonds from Aa to A in January 1980. Was Chicago's fiscal stability in the 1970s, then, a sham that led to the problems of the 1980s? Not really. Chicago was fiscally stable in the 1970s, but it was shaken by the political upheaval following Daley's death. Six mayors served Chicago in the following thirteen years (between 1976 and 1989).The Chicago Board of Education crisis was a separate matter, but the important point is that its special district status effectively insulated the city corporation from more serious fiscal fallout. In the case of Jane Byrne's fiscal crisis, property taxes were increased and the budget deficit was narrowed so quickly that the extent to which there was really a crisis, in the traditional sense of the phrase, is dubious. The city's former budget director, Donald Haider, claimed that Byrne had overdramatized the city's fiscal problems and that the deficit was not more than $50 million. Byrne's figure seemed to change daily and ranged from $100 million to $180 million. Moreover, Haider maintained that the deficit could have easily been handled with some internal economies and modest tax increases. In November 1980,Byrne actually told the City Council that she expected a slight surplus in the 1981budget to restore the city's credit rating, and it did.13 This fiscal instability was not a crisis but, rather, the political strategy of an insecure mayor who wanted to discredit anyone whom she saw as a potential challenger in the 1983 election. While Jane Byrne's political shenanigans cost the city dearly, the "Council Wars'' during the early part of Harold Washington's administration also contributed to the downgrading of city bonds to Baal in

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March 1984. Until Washington put down the revolt in the council and demonstrated his political control, the city's fiscal position was hurt despite balanced budgets and the growth in the local economy. Moody's did not return the city's rating to its A level until October 1987,only a month before Washington died. Far more important than Byrne's accusations of financial mismanagement or the Council Wars was the breakdown of Chicago's political machine as a result of a series of electoral defeats of machine candidates, first in 1983 and again in 1987, by Harold Washington, the city's first black mayor, and as a result of Washington's decision to implement the Shakman decree, a 1970 court decision barring the use of political patronage in city hiring and firing decisions. It was the machine that gave Chicago mayors extralegal control over important budget decisions, and its decline weakened mayoral control over the city's fiscal policy process. The black and reform coalition that elected Washington disintegrated after the mayor's untimely death. Eugene Sawyer, who is black, became acting mayor after receiving support in the City Council from a block of white ethnic aldermen and a minority of black aldermen. The circumstances around Sawyer's initial appointment and subsequent defeat were marred by charges of conspiracy and racism. Many thought that Sawyer was a weak candidate and was supported by the ethnic block precisely because he would be vulnerable in a general election. In 1989,Eugene Sawyer was defeated by Richard ("Rich)M.Daley, the son of the city's political icon, Richard J. Daley. Many of the older ethnic aldermen thought the machine had returned to power with Rich Daley, but this has turned out not to be the case. Daley has understood that the city's demographics have changed, that, taken together, the minorities have become a majority of Chicago's residents and that the mayor cannot govern effectively without their support. Daley's task has been to keep the business community, his ethnic base, and the city's minority population reasonably content without the patronage jobs that his father could depend upon during the machine's heyday. Has this been a recipe for fiscal problems? There is no doubt that Rich Daley has brought fiscal stability to Chicago. He expeditiously resolved a $105 million budget shortfall when he took office and won the respect and support of the city's business and financial community.14An editorial in the Wall Street Journal praised Daley's management skills and his bold pledge to downsize government and scrap entrenched bureaucratic models of governance. Chicago was presented as an example for cities like New York to emulate.15 Not coincidentally, these same comparisons were made during the 1975 fiscal crisis.

TOWARD A POLITICAL THEORY OF THE URBAN FISCAL CRISIS

A document produced for Daley's 1991 reelection campaign describes the "hallmark of Daley's two-year term, "to run government more efficiently, providing better service to the public while holding the line on taxes."16 Daley has taken a page out of his father's diary and has dedicated himself to restoring Chicago's image as the "city that works," and this includes keeping Chicago fiscally stable. Daley has understood the strengths of Chicago's fiscal policy-making structure and has effectively used intergovernmental arrangements to spread the burden of service delivery outside the city. A two-year state income tax surcharge, scheduled to expire June 30, 1991, has allowed Daley to keep down property taxes, important to both his homeowner and his business constituencies. Federal and state money was obtained for a downtown light rail transit system, airport and highway projects, restoration of Navy Pier, and a new west side stadium. Daley has also determined how effectively to use privatization strategies. The city's addiction treatment programs and its janitorial services have been largely contracted out, saving the city over $1 million. Without hurting the fiscal condition of the city, Daley has also worked on issues of importance to the city's minority community, such as strengthening the minority contract set-aside program established during Washington's administration and increasing minority representation in the city's workforce by 2.2 percent to 44.6 percent.17 Daley was elected to a four-year term in April 1991, and his most serious challenge in the fiscal policy arena will come at the end of the year when the city's labor agreements expire. Daley's position is stronger than that of many other big-city mayors. Although he no longer has a strong Democratic party machine to control union demands for increased spending, his own political fortunes on election day were not linked to union support. His bid for reelection was not endorsed by the Fraternal Order of Police, the firefighters' union, or the American Federation of State, County, and Municipal Employees (AFSCME).Daley's approach to these negotiations will have a critical impact on Chicago's fiscal policy for years to come. What has happened to New York's fiscal policy process since its 1975 crisis? Under the legal authority of the Emergency Financial Control Board (EFCB),the city put its fiscal house in order with such success that analysts identified a "restructuring" of city government.18 In truth, not much changed during the Koch years (1978-89) that would have a permanent impact on the city's fiscal policy process. The EFCB became the Financial Control Board (FCB)in 1978and receded into the background of New York's politics. In 1986 the FCB went into its "sunset" provision, changing its legal responsibilities from direct oversight to advising. The state agency was expected to quietly fulfill its role until 2008, when its legal mandate would expire.

CHAPTER ONE

It was not until 1991, during Dinkins's mayoralty, that a forgotten clause in the state law would provide a new challenge to the city's fiscal policymakers. The law states that the FOB'S formal powers over city finances would be restored if the city lost access to the credit market, failed to meet interest payments on its debt, or ended the fiscal year with a budget deficit exceeding $100 million.19 Ironically, a downturn in the city's economy and a delay in the approval of the state budget have created a sufficiently large revenue shortfall that David Dinkins faces a possible FOB takeover of city finances. Some analysts have also argued that overly generous settlements with municipal employee unions and increased costs of debt service have also contributed to the city's projected budget deficit. A January 1991 settlement with one hundred fifty thousand city workers provided a 5 percent increase in wages and benefits over fifteen months at an estimated cost of $233 million, while an October 1990 agreement with the teachers provided a 5.8 percent increase in wages and benefits for one year at an estimated cost of $236 million.20 It is also estimated that in fiscal 1992 debt service costs will increase by $962 million, nearly half the city's projected $2 billion budget gap.21 Dinkins may have made some mistakes in projecting city revenues; however, his fundamental fiscal problems relate directly to the structure of the city's fiscal policy process. Most of the structural changes made to resolve the 1975fiscal crisis were temporary. The city was left with a disproportionate burden of redistributive services to pay for from its own budget, and the dominant role of interest groups in the fiscal policy process remained. The only significant structural change that came out of the fiscal crisis was the FCB, and, ironically, mayoral options for balancing the city's budget have been reduced by the lingering fear of an FCB takeover. During the early 1980sthe city improved its financial management systems but the mayor's formal-legal authority over the budget had not increased. Yet Ed Koch appeared to have significant control over the fiscal policy process, highly unusual for a New York mayor. Koch's successes came from his personal style; he was a master at the "rhetoric of fiscal crisis" and used it to control the demands of interest groups. Not surprisingly, each year that the city's budget registered a surplus, it became increasingly difficult for Koch to sell fiscal austerity to the city's organized interests. By the end of the 1980sinterest group politics had reemerged in New York with a vengeance and even Koch's fiscal wizardry was no match for New York's "politics as usual." David Dinkins's historic election in 1990 as New York's first black mayor was soon overshadowed by fiscal problems. Dinkins faced a

$1.8 billion revenue shortfall for the 1991 fiscal year, which was in part attributable to the policies of Koch, who had increased spending on everything from housing for the homeless to jail construction, and in part to a downturn in the city's economy. Dinkins has made fiscal issues his number one priority, yet the financial community remains skeptical that he is capable of balancing the budget. In February 1991,Moody's dropped New York City's credit rating from A to Baal, citing a potential operating deficit of $732 million for fiscal 1991and a projected $2.2 billion gap in fiscal 1992's $29 billion budget.22 As ofApril 1991the city was still struggling to close a $465 million budget gap before July 1, the end of the 1991fiscal year, and to eliminate a $3.5 billion shortfall in fiscal 1992's budget. Dinkins's proposed $28.7 billion "doomsday budget" for fiscal 1992 included proposed cuts in street cleaning; the closing of shelters for the homeless, drug treatment centers, libraries, and the Central Park Zoo; layoffs of twenty thousand municipal workers; and a $1 billion package of tax increases.23 It is acknowledged that these cuts will hurt the city's fiscal condition over the long term, just as they did in 1975. Yet conditions which precipitated the 1975 crisis-excessive shortterm debt, accounting gimmickry, and general mismanagement of the budget-were not problems for the city in the spring of 1991. Dinkins's problems are structural, and he has the added political burden of avoiding takeover by the FCB. Dinkins cannot, for example, close the budget gap over several years as mayors did in 1975. Union leaders are resisting the idea of "givebacks" or furloughs; MAC has decided not to lend the city $210 million in surplus revenue, which is theoretically the city's own money; the City Council can block the mayor's proposed real estate tax increase; and the state, facing its own $6.4 billion budget deficit, is in no mood to help. "Politics as usual" had returned to New York during the 1980s,but the structural deficiencies in the city's fiscal policy process were once again masked by growth in the local economy. Dinkins's problems, although triggered by the city's economic downturn, are essentially political.

The Urban Fiscal Crisis, Political Science, and Public Policy This book argues that politics and the political context of economic scarcity are central to understanding the urban fiscal condition. Surprisingly, the political dimension of the urban fiscal crisis has, in fact, been considered last and least, even by political scientists. Changes in academic discourse on American politics and govern-

CHAPTER ONE

ment have tended to parallel transformations in the nation. Rather than anticipating change, political scientists have reacted to it. In the 1960s urban riots were a catalyst for focusing our attention on the problems of inequality. In a similar fashion the 1975 fiscal crisis led most urban analysts to abandon the question of redistribution and pursue the issue of financial management. In the absence of an appropriate political framework to analyze the New York City 1975 crisis, a public administration perspective dominated the early debates. Social scientists followed the lead of policymakers who looked for solutions to local fiscal problems in the canons of public administration, in which fiscal policy is decidedly apolitical.24 The crisis was expected to end if cities could only improve their accounting procedures, restructure their debt, improve their ability to forecast revenue, and cut back on waste. Even the Advisory Commission on Intergovernmental Relations (ACIR) has continued to argue that unsound financial management is the principal cause of local government financial emergencies.25 Yet it has been clear since 1975 that financial mismanagement is only a small part of a much more complex problem. High levels of debt and deficits are merely symptoms, not causes, of fiscal stress. To explain how any government develops fiscal problems, budgets must be viewed as political documents, often reflecting the power of entrenched interests. The relationship of economic scarcity to the urban fiscal crisis was eventually examined in studies of the city but only in terms of broad national trends. Like the ones which adopted a public administration framework, these studies also failed to consider seriously the impact of local political decisions on the city's fiscal condition. They have simply tended to portray the city as a victim of economic trends beyond its control. The critical determinants of urban fiscal problems were considered to be population loss, large poor or minority populations, and the loss ofjobs, particularly in the manufacturing sector.26 These factors were linked to the political process only insofar as they affected a city's tax base and the loss of local tax revenue. Consequently, these socioeconomic trends were seen as the primary causes of urban fiscal stress. While it is undoubtedly true that cities will never be in a position to control national and regional economic trends, cities experiencing similar downturns in their economies can weather the storm in vastly different ways-one city may retain its fiscal equilibrium while another will teeter on the brink of insolvency. There are many examples of cities that have insulated themselves from the vicissitudes of such trends. During the 1960s and early 1970s, cities like Pittsburgh, Baltimore, Trenton, St. Louis and Chicago were able to mitigate the

TOWARD A POLITICAL THEORY Of THE URBAN FISCAL CRISIS

impact of these adverse economic trends through local political decisions. In contrast, even in times of economic growth, some cities have adopted fiscal policies and practices that undermined their fiscal stability in the long term. Houston, Dallas, and Tulsa have been such casualties: poor fiscal planning during their economic boom in the 1970s left them with serious fiscal problems in the 1980s. Even the overtly political analyses of urban fiscal problems are limited in their scope. The neo-Marxist focus on macroeconomic factors, for example, has had the same deficiencies as the emphasis on general declining economic trends, as it provides no framework for making distinctions among the disparate experiences of similarly situated cities. Some neo-Marxists expected widespread urban fiscal crisis in the 1970s and 1980s, and instead most cities avoided crises by actively implementing retrenchment strategies.27 Other studies of politics and fiscal problems provide variations on the themes expressed in pluralisthnterest group analyses, with a marked shift in focus from the causes of fiscal problems to their consequences. The earliest and perhaps most compelling expression of this approach argues that increased demands and the incapacity of political leaders to restrain the demands of particular groups were the key causes of the urban fiscal crisis. A later study considers how the relationship of city employee unions to the Democratic party contributed to New York's fiscal crisis. While the interest group and party argument remain important, these studies did not closely examine longterm budget policies or the impact of formal-legal arrangements on New York's fiscal conditions. As a consequence, one study incorrectly identifies the political conflicts between machine and reform government as the cause of New York's fiscal crises. In fact, the budget data indicate that there was constant growth in New York's budgets throughout the period from the Depression until the 1975fiscal crisis, regardless of who was governing.28 Moreover, after the fiscal crisis ends in 1978, New York's spending resumes its upward spiral signaling a return to the political relations of the prefiscal crisis period and not a "regime" change, as some analysts have suggested.29 Some more traditional interest group studies of the causes of fiscal problems are notable for their effort to integrate political variables, especially political leadership, with budgetary, economic, and management indicators in multivariate statistical analyses of large samples of cities. Unfortunately, the difficulty in measuring political factors that are not readily expressed as quantitative values and the difficulty in examining long-term dynamic relationships with crosssectional or panel data diminish the importance of political processes in these works.30

CHAPTER ONE

Offering not quite a pluralist political argument and not quite a Marxist view, another analysis suggests a social control theory of the urban crisis, which attributes New York's problems to the postwar patterns of capitalist development, in which cities became the repositories of the nation's impoverished population. City government's inability to broker demands of these new groups caused a crisis in social control.31 Like the other interest group analyses this does not examine the consequences of differences in local political structures and the important impact of the federal system on the city's legal fiscal authority. If there was a crisis of social control, it did not occur uniformly across American cities. Offering a sharply different perspective on the treatment of the urban poor, one of the most widely cited approaches synthesizes diverse theories of urban policy formation into a meaningful "unitary" framework for studying urban fiscal policy. It rejects the competitive interest group model of political decision making and argues instead that there is a unitary city interest in economic growth which produces fiscal policy that favors the interests of those groups (i.e., business and real estate in contrast to the poor) who contribute most to the city's tax base. While it acknowledges the importance of "competitive politics and group activity" in explaining New York's fiscal condition, it considers this case exceptional.32 When examined together with the empirical evidence presented by its critics, the "exceptional" framework is, ironically, more appropriate than the unitary model for analyzing fiscal policy in most cities. If city leaders always made decisions by considering what was in the city's best economic interest, it is unlikely that any city would experience fiscal problems unless there was serious financial mismanagement or political corruption. While academic discourse is often only interesting to its participants, in this instance there is a greater significanceto the preceding discussion.33 The shortcomings of the academic community in recognizing and understanding the urban fiscal crisis were mirrored by those who govern our cities. While depressed economic conditions existed in most old northeastern industrial cities since the early 1960s and fiscal instability was a widespread, although not uniform, phenomenon among these cities, most mayors did not attempt to solve their fiscal problems until after New York's crisis. Not until New York and other cities had suffered serious fiscal problems did mayors and their policymakers begin to rethink the issues critical to both governing and managing America's cities. History indicates that cities can "afford" to be mismanaged and can even tolerate political corruption for decades if enough revenue is available to pay the interest on their debts, regardless of the revenue

TOWARD A POllTICAl THEORY Of THE URBAN FISCAL CRISIS

source. In times of national scarcity, the political status quo is shaken by the need to reconsider public sector spending at all levels of government. Not coincidentally, during times of national recession, mayors and policymakers are under the greatest pressure to put fiscal problems on the urban agenda. Cities almost uniformly confront local fiscal problems only when forced to by the advent of a crisis. Thus, fiscal problems find a prominent place on the political agenda only when banking interests threaten to exclude cities from the bond market; then cities attempt to restructure their policy processes to deal more efficiently with the problem of scarce resources. The restructuring can be temporary, designed simply to resolve the immediate crisis, or it can be permanent, having a long-term impact on the city's fiscal policy process. The policy choices made during the crisis period are crucial for understanding how effective future mayors will be in retaining fiscal stability during the periods of "normal" or prosperity politics. As compared to state or national governments, city governments face the most difficult problems dealing with scarcity because their policy choices are severely limited. As a result of their position in the federal system, cities do not control many of their most important revenue, expenditure, or debt decisions. Moreover, public expectations for efficient city services do not disappear in the face of diminished resources and these demands are central to local electoral politics. Particularly, the need to retain winning coalitions for reelection makes spending cuts difficult for mayors. Despite the experience of the 1930s and 1970s, mayors have continued to be reactive fiscal policymakers, learning few historical lessons. Our only prospect for ensuring future fiscal stability in America's cities is to focus on the structure of the fiscal policy process. If a fiscal policy process is structured to insulate mayors from interest group demands and to share the cost of local service delivery with noncity tax jurisdictions, the mayor's ability to retain fiscal stability in the city and survive in office can improve dramatically.

The Plan of the Book The chapters that follow demonstrate how the fiscal policy processes developed differently in Chicago and New York and how different political components of the process interacted to affect the fiscal conditions of these cities. Chapter 2 examines the problem of defining "fiscal crisis," and it emphasizes the importance of distinguishing between "fiscal instability" and actual "fiscal crisis." This chapter uses the cases of New York and Chicago to demonstrate why commonly

CHAPTER ONE

held views are inadequate for explaining what causes fiscal problems and crises in some American cities and not others. Chapter 3 describes the fiscal crises that occurred in New York and Chicago during the Depression. This period provides a striking parallel to the 1970s recession and sets forth a basis for distinguishing between the actual condition of fiscal crisis and its causes. Both New York and Chicago experienced fiscal crises during the Depression, but only New York had a crisis in 1975. The short-term conditions that precipitated the crises of the 1930s in both cities were alleviated by state intervention, by a restructuring of the debt, and by national economic recovery. Furthermore, differences in political interactions during the post-fiscal crisis periods had long-term consequences. In Chicago, fundamental changes occurred in the fiscal policy process which strengthened the mayor's ability to control fiscal policy and avoid future crises. In contrast, the changes that occurred in New York reinforced the existing fragmentation in the city's fiscal policy process, increasing the city's vulnerability to future crises. Examining revenue, expenditure, and debt patterns for each mayoral administration in New York and Chicago from 1929 until 1989, chapters 4 and 5 show how past budgetary decisions contributed to the present fiscal condition of both cities. Close scrutiny of the budget data reveals long-term differences between New York and Chicago and some distinctive and critical patterns which have persisted over time. Particular historical moments have had special fiscal significance for both cities, and, most important, the data show how past budget decisions reflect political priorities and constrain future fiscal policy choices. Chapters 6 and 7 investigate the overtly political components of the fiscal policy process. Chapter 6 considers how formal-legal arrangements and intergovernmental relations interacted to affect the fiscal conditions of both cities. Chapter 7 examines the important relationship between interest group demands and the local party organization and how it affected New York's and Chicago's ability to maintain fiscal stability. The final chapter reappraises urban fiscal crises and fiscal policy from the vantage point provided by New York's and Chicago's experiences. It also examines how the quality of life in America's cities has been adversely affected by the way in which fiscal issues have dominated the urban agenda for fifteen years.

FISCAL CRISIS AND FISCAL STRESS: A COMPARATIVE PERSPECTIVE

Chicago's and New York's fiscal policy processes as the 1975 fiscal crisis began, and the developments in each city after the Great Depression, offer valuable insights into the political dimension of fiscal policy-making. Since conventional wisdom suggests that declining economic conditions are the primary cause of urban fiscal crisis, the following two propositions must hold true for a meaningful comparison: (1)New York and Chicago both experienced a comparable decline in general economic conditions before and during New York's 1975 fiscal crisis; and (2) New York suffered a fiscal crisis whereas Chicago did not. This chapter demonstrates that Chicago and New York both suffered from a remarkably similar list of general economic ills prior to the 1975 crisis; in fact, the prospects for Chicago's maintaining fiscal viability were in some respects worse than New York's. Yet, despite the general economic deterioration experienced by both cities during this period, Chicago avoided fiscal crisis by a wide margin while New York teetered on the brink of insolvency. The reasons for Chicago's fiscal success in 1975 cannot be explained by differences in economic conditions. Rather, they are understandable only by examining the political differences in the ways both cities managed their money.l

What Is Fiscal Crisis and Fiscal Stress? Fiscal Crisis There is considerable disagreement over the definition of fiscal instability2 and thus over the conditions which constitute actual fiscal crisis.3 Historically, only when cities are locked out of the bond market and cannot finance their debt and operating expenses are they considered to be in a state of fiscal crisis. As a practical matter, only when a city has no means for raising additional revenue to meet its operating expenses do its fiscal problems become a matter of public

CHAPTER WO

concern. Consequently, cities can accumulate alarmingly large debts for long periods of time and not actually experience a fiscal crisis until the banks refuse to continue lending them money. At the point of crisis, cities face the threat of default, actually default on their loans, or declare bankruptcy.4 Fiscal crises resulting from default or the threat of default have been surprisingly common while bankruptcies have been rare. During the Great Depression, 1,434 (8.3 percent) incorporated municipalities defaulted on their loans, including such diverse cities as Detroit, Akron, Fall River (Mass,), Fort Lee (N.J.), and Asheville (N.C.).5Between 1940 and 1969 the relatively few local debt defaults mostly involved small municipal units or special districts.6 Between 1960 and 1983 there were 330 general purpose government bond defaults by such cities as New York, Cleveland, Yonkers (N.Y.),Parlier (Calif.), and Saco (Me.). Municipal bankruptcy, however, has been a fairly rare occurrence since the Depression: between 1960 and 1984 only seven Chapter 9 bankruptcy petitions were filed.7 Unlike businesses, cities provide essential services and tend to view bankruptcies that require liquidating all assets as the least acceptable outcome to financial difficulties. Recent revisions of the Federal Bankruptcy Law are likely to preserve this aversion. Elected officials remain resistant to relinquishing authority voluntarily over expenditure priorities, and in bankruptcies their power would be given to the courts. Cities can experience fiscal stress for extensive periods of time without degenerating into fiscal crisis. In the 1970s this was fairly common, occurring in cities like Philadelphia, Boston, Newark, St. Louis, and Detroit.8 While chronically unbalanced budgets and extensive borrowing through the municipal bond market are signposts of a city heading toward insolvency, these conditions themselves do not necessarily precipitate a fiscal crisis. A full-fledged fiscal crisis requires that the city be locked out of the bond market.

Fiscal Stress Providing a reasonable working definition of fiscal stress is a greater challenge than identifying a fiscal crisis; there is no consensus among the experts. One definition of fiscal instability is linked to a city's economic condition, and the other involves the mismanagement of resources. The problem in defining fiscal instability has resulted from confusing cause with condition and from failing to consider fully the political dimension of fiscal policy decisions. By expanding the analysis of fiscal instability to include politics, socioeconomic factors be-

FISCAL CRISIS AND FISCAL STRESS

come part of a more complex causal explanation. The defining characteristics of fiscal instability are, then, logically related to the mismanagement of resources. In management terms, fiscal strain can be defined as an imbalance between revenue and expenditures in a city's budget.9 This simple definition works well for business but is of limited utility when applied to city finances, since city budgets are designed to obscure the relationship between expenditures and revenues. Most cities have statutory requirements to balance their budgets, and, as a result, deficits rarely appear on their balance sheets. Cities simply "balance" their budgets on paper at the end of each fiscal year in order to meet their legal obligations. As the New York fiscal crisis revealed, the accounting gimmickry used to balance the city's budget intentionally obscured the city's fiscal problems. According to one observer, "In New York, budget balancing was seen as a game-an annual rite of spring."lO Budget directors were lauded when they could develop new techniques for making deficits disappear. Although fiscal instability can be conceptualized simply as an imbalance between revenues and expenditures, additional individual indicators of fiscal strain and summary measures to evaluate a city's resource management provide a fuller picture of its fiscal well-being. These indicators include level of per capita short-term and long-term debt; interest on debt; common function debt; overlapping debt; and municipal tax burden. Considered together, these measures provide a fairly accurate picture of a city's fiscal condition. In the next section, they and several summary indicators are used to compare New York, Chicago, and Houston in 1975 and in the post-fiscal crisis period. These comparisons provide substantial evidence that fiscal stress is definitionally distinct from local economic conditions, and thus help to explain more accurately and completely urban fiscal problems and policy. Economic factors clearly contribute to fiscal problems. Cities cannot balance their budgets or provide local services without a reasonable local tax base. A declining local economy invariably affects the amount of revenue a city can raise through local taxes, and this dependence on growth in the local economy is reflected in the current struggle among cities to attract business and industry through taxincentive programs and through what have generally come to be known as "pro-growth development policies. But to recognize that a strong local economy provides an advantage in designing fiscally sound policies does not mean that there is a simple causal relationship between the state of its economy and a city's fiscal condition. The data establish the similarity in the economic bases of New York and

CHAPTER TWO

Chicago in 1975,and distinguish them both from Houston, the classic growth city of the 1960sand 1970s.The data also show the precipitous decline of Houston's economy in the 1980s while the two snowbelt cities made remarkable economic recoveries. The comparisons suggest a more complex web of causal relations: logically, economic dedine contributes to fiscal problems though it is not their defining characteristic.

Economic Decline and Its Relationship to Urban Fiscal Instability Explaining fiscal strain in terms of a declining local economy was most popular just after New York City's crisis. A critical change occurred in the economic bases of American cities during the period from 1960 to 1975. The older industrial cities of the Midwest and Northeast, such as Chicago and New York, were declining in marked contrast to the growth that was taking place in the sunbelt cities, such as Houston. The emergence of fiscal problems in the 1970s was also disproportionately concentrated in the snowbelt cities.11 This pattern led to the obvious causal inferences linking economic decline to fiscal problems. These studies of large samples of cities found that population loss, a weak local tax base, large poor or minority populations, and the loss ofjobs contributed significantly to fiscal instability. How, then, did New York and Chicago compare with Houston in terms of various accepted socioeconomic indicators of fiscal strain? In 1975 the two snowbelt cities had similarly declining local economies, significantly different from the growing economy in Houston. Nathan and Adams analyzed fifty-five cities in the nation's most populous SMSAs12 and developed an index of central-city hardship based on economic competition from their surrounding suburbs.13According to this measure, Chicago was economically weaker than New York but Houston's economy was one of the strongest in the country. Using the same variables, Nathan and Adams also constructed an index of intercity hardship, comparing economic competition among cities. Chicago still ranked higher than New York while Houston ranked virtually at the bottom of the chart.14 Chicago and New York continued their economic decline through the 1970s while Houston continued to grow. However, between 1977 and 1982 New York and Chicago experienced greater growth in their central business districts than Houston. The economic picture in all three cities was mixed in the 1980s, with Houston exhibiting a vulnerability in its local economy that seemed more characteristic of frostbelt cities in the 1970s. Nathan and Adams recently updated their study of centralcity hardship and made some projections for the 1990s.15

FISCAL CRISIS AND HSCAI STRESS

While simple summary indicators are useful when considering the impact of socioeconomic factors on a city's fiscal condition, an examination of individual measures makes it possible to distinguish the extreme and moderate cases from among the cities characterized as economically declining. New York and Chicago were certainly not as economically depressed in the pre-1975 period as cities like Newark, Gary, Detroit, or Cleveland, which rated high on the first Nathan and Adams hardship index. The individual measures of economic decline show that certain sectors of the New York and Chicago economies remained vital even during this fifteen-year economic downturn. New York and Chicago showed growth in both taxable property value and retail sales, two important measures of the local capacity to manage economic decline. Property and sales taxes are the primary sources of local revenue. Chicago and New York were similar to each other but were, in fact, moderate cases of economically declining cities. This is significant from a political standpoint, because if a city is doing poorly on all economic indicators, differences in the decision-making structure can only have a minimal effect on local fiscal conditions. Within the framework of the American federal system, there is no local decisionmaking structure that could have saved cities like Newark or St. Louis from fiscal distress in the 1970s, given the state of their local economies.16 The alternative to revenue from local sources is intergovernmental revenue. But changes in the urban policies of the states and federal governments have made intergovernmental aid an unreliable source of revenue for cities. As a result, excessive reliance on intergovernmental aid has been considered an indicator of fiscal instability.17 If local economic decline is drastic, it is simply impossible for a city to remain fiscally healthy regardless of the mayor's political and managerial skills. In comparative studies, the indicator of economic decline most often cited is population loss. As George E. Peterson explains, "The dilemma confronted by the older cities is that few ofthe costs associated with urban growth are easily reversible into economics of diminution."18 Loss of population has not enabled cities to cut costs commensurately. Table 1 shows population change in New York, Chicago, and Houston from 1960 to 1975. Chicago's population loss was greater than New York's, but both starkly contrast with Houston's 41.4 percent increase. Since 1975the pattern has changed: both New York and Chicago continued losing population through 1980, but from 1980 to 1990 New York's population showed a moderate but significant in-

CHAPTER TWO

Table 1 Population Change, 1960-90

1960 1970 1975s 1980 1990"

New York

Chicago

Houston

7,781,984 7,895,563 7,481,613 7,071,639 7,322,564

3,550,404 3,369,357 3,099,391 3,005,072 2,783,726

938,219 1,253,479 1,326,809 1,611,382 1,630,553

1 Change

aPopulation estimates. "Figures are subject to corrections due to undercounts or overcounts. Source: U.S. Department of Commerce, Bureau of the Census, "Current Population Reports"; "Local Population Estimates," series P-25, June 1977; "Public Law Data 74-191," unpublished.

crease while Chicago's decline slowed. In contrast, Houston's population growth almost stopped completely from 1980 to 1990. It is not simply the population loss that contributes to the economic problems of central cities but also the composition of the population that remains. Cities have increasingly supported a numerically and proportionally larger nonwhite, poor, and welfare-recipient population.19 Between 1970 and 1980, the poor population in America's five largest cities (NewYork, Chicago, Los Angeles, Philadelphia, and Detroit) increased by 22 percent while their total population dropped by 9 percent.20 In 1988, 18.3 percent of the population in central cities was below the poverty level, compared to 8.3 percent outside central cities.21 The "urbanization of poverty," as W. J. Wilson describes it, and the increase in the numbers of black and Hispanic poor had serious public policy implications.22 There is little question that the needs of this population cannot be met by city governments alone. As cities struggle to provide basic services, the social service needs of the poor have lost their humanitarian appeal and are callously portrayed as a fiscal burden. From the simple perspective of fiscal policy, the contribution of the urban poor to the economic base of the city is necessarily much less than that of the middle-class population, which continues to leave. Table 2 shows Chicago with the highest percentage of nonwhite23 residents in 1970, while New York and Houston had similar, if some-

FISCAL CRISIS AND FISCAL STRESS

Table 2 Nonwhite Population as a Percentage of Total City Population, 1960-90

1960 1970 1980 1990"

New York

Chicago

Houston

15% 23 39 48

24% 34 50 55

23% 26 39 47

10% 26 16 31 21 5

3% 16 13 24 21 8

% Change

1960-70 1960-80 1970-80 1960-90 1970-90 1980-90

8% 24 16 33 25 9

"Figures are subject to corrections due to undercounts or overcounts. Source: U.S. Department of Commerce, Bureau of the Census, County and City Data Book, 1967, table 4; County and City Data Book, 1972, table 6; County and City Data Book, 1988, table C , col. 9. "Public Law Data 74-191," unpublished.

what lower, percentages. Between 1960 and 1970,however, both New York and Chicago had greater proportional increases than Houston in their nonwhite populations. This comparative growth in minority populations is all the more striking given that, at the time, New York and Chicago were shrinking in overall population while Houston's population was nearly doubling. The more recent data show that nonwhite residents continue to be a growing proportion of the population in all three cities. By 1980, 50 percent of Chicago's population was nonwhite whereas both Houston and New York had 39 percent. Estimates for 1990 indicate that the rate of growth in the nonwhite populations for all three cities slowed down during the 1980s. While New York and Houston have remained similar, Chicago has become a majority "minority" city. New York and Chicago also had smaller increases than Houston in median family income between 1960 and 1970 (see table 3). All three cities' median family income grew at a greater rate in the subsequent decade, but by 1980 Houston's median income was highest, at $21,881, and New York's was lowest, at $16,818. The welfare data,2* which are only available for county populations, show in percentage terms that New York's and Chicago's per

CHAPTER WO

Table 3 Median Family Income, 1960-80

1960 1970 1980

New York

Chicago

Houston

$6,091 9,673 16,818

$6,738 10,239 18,776

$5,902 9,874 21,881

52.0% 178.7 83.4

67.3% 270.7 121.6

% Change

1960-70 1960-80 1970-80

58.8% 176.1 73.9

U.S. Department of Commerce, Bureau of the Census, County and City Data Book, 1967, table 4 ; County and City Data Book. 1972, table 6; County and City Data Book, 1983, table C , col. 92.

capita welfare burden was nearly three times Houston's in 1975 (see table 4). The five-year increase in welfare recipients as a percentage of population between 1970 and 1975 was greatest for Chicago and lowest for New York, while Houston's 2.2 percent increase was quite small in comparison. In the post-fiscal crisis period New York and Chicago's welfare burdens remained almost constant while Houston's dropped between 1975 and 1980.However, between 1980 and 1990the proportion of welfare recipients declined in New York and Chicago, while it rose in Houston. Despite this increase, Houston's welfare burden remained significantlylower than that of the two frostbelt cities. In 1990,11.3percent of New York's population was receiving welfare benefits, slightly greater than Chicago's 8.4 percent but vastly greater than Houston's 4 percent. Other indicators more directly related to the tax base and the strength of the local economy had comparable readings for New York and Chicago during this critical period before New York's fiscal crisis. Both New York and Chicago experienced a decline in the size of their labor forces between 1960 and 1973 while Houston's nearly doubled (see table 5). Labor force data from the post-fiscal crisis period provide a mixed economic message about all three cities. Chicago's and Houston's labor forces grew between 1973and 1982 while New York's continued to decline. Houston's growth rate was far greater than Chicago's. However, between 1982 and 1986 only New York's labor force grew, a modest 4.7 percent, while Chicago's declined by 6.9 percent and Houston's by 2.1 percent. The 1980s data indicate a positive turnaround in the economies of Chicago and Houston between 1986 and 1989, but only

FISCAL CRISIS AND flSCM STRESS

Table 4 Number of Welfare Recipients as a Percentage of Population, 1970-90

Citya

New Yorkb

(Wc)

Chicago (Cook)

Houston (Harris)

5.3% 2.2 0.2 -2.3

2.2% 2.0 -0.8 2.1

% Change

1970-75 1970-90 1975-86 1980-90

0.6% -0.5 0.7 -1.1

Note: Number of Welfare Recipients = Recipients (General Assistance) + Recipients (Aid to Families with Dependent Children); 1990: Number of Welfare Recipients = Recipients (Aid to Families with Dependent Children) + Recipients (Home Relief, New York only) "Data are for county jurisdictions as indicated in brackets. "City and county are coterminous. Source: 1970 from U.S. Department of Health, Education, and Welfare, Recipients of Public Assistance, report for month of February 1975. 1975 from Census of Governments, vol. 4 , no. 3, table 12. 1980 from Public Assistance Recipients and Cash Payments by State and County for February 1980. 1986 from Family Support Administration, Quarterly Public Assistance Statistics, Fiscal Year 1986, table 121(February 1986). 1990 from the Administration for Children and Families (May 1991). County Population: County Government Finances in 1970-71, table 4; County Government Finances in 1980-81, table 7, appendix A, 1990, U.S. Bureau of Census Bulletin 91-101, March 1991. Census year populations used.

New York had sustained labor force growth from 1982 to 1989. The labor force data indicate a fragile economic recovery in all three cities during the 1980s. The dramatic transformation among the three cities in local economic performance is also revealed in the unemployment statistics. While unemployment can be volatile from year to year, table 6 shows New Yorkand Chicago with similar unemployment rates between1960 and 1973while Houston's were generally lower. In 1982 all three cities experienced increased unemployment, but in 1988New York's unemployment rate was significantly lower than both Houston's and Chicago's. By 1989 New York's unemployment rate had jumped slightly, while Chicago's and Houston's had dropped. Since 1960 Chicago has

Table 5 Total Civilian Labor Force, 1960-89 New York

Chicago

Houston

% Change

1960-73 1973-82 1973-86 1982-86 1982-89 1986-89

-8.9% -3.6 1.0 4.7 7.4 2.6

-13.3% 8.8 1.3 -6.9 -3.7 3.5

59.3% 63.4 60.1 -2.1 0.7 2.9

Source: U S . Department of Commerce, Bureau of the Census, County and City Data Book, 1962, no. 333, table 6; County and City Data Book, 1972, no. 334, table 6; Manpower Report to the President, April 1974. U.S. Department of Labor, Bureau of Labor Statistics, Handbook of Labor Statistics, 1975, Bulletin no. 865, table 52; Bureau of Labor Statistics, "Local Area Employment Statistics," April 1991, January 1990, and August 1989, unpublished.

Table 6 Unemployment Rate, 1960-89 New York

Chicago

Houston

Source: U.S. Department of Commerce, Bureau of the Census, County and City Data Book, 1962, no. 333, table 6; County and City Data Book, 1972, no. 334, table 6; Manpower Report to the President, April 1974. U.S. Department of Labor, Bureau of Labor Statistics, Handbook of Labor Statistics, 1975, Bulletin no. 865, table 52; Bureau o f Labor Statistics, "Local Area Unemployment Statistics," April 1991, January 1990, and August 1989, unpublished.

FISCAL CRISIS AND FISCAL STRESS

Table 7 Per Capita Equalized Value of Property Subject to Local Taxation after Exemptions, 1962-86

1962 1967 1971 1981 1986

New York

Chicago

Houston

$7,468.03 7,923.82 13,655.89 29,685.10 39,040.28

$8,232.39 7,450.64 11,831.90 23,727.28 27,818.04

N.A. N.A. N.A. N.A. N.A.

% Change

Note: PC Equalized Value of Property = (Assessed ValueIAssessment Ratio x lOO)/Population. In lieu of 1986 assessment ratio, which was unavailable, 1981 assessment ratio was used in 1986. Source: U.S. Department of Commerce, Bureau of the Census, 1967, 1972, Census of Governments, Taxable Property Values, Assessed Sales Price Ratio and Tax Rates, vol. 2, tables 20 and 11; 1962 Taxable Property Values, Assessed Sales Price Ratio and Tax Rates, table 121; 1982 Taxable Property Values and Assessment Sales Price Ratios, tables 20 and 22; 1987 Taxable Property values, table 11. Population Source: U.S. Department of Commerce, Bureau of the Census, "Current Population Reports." Census year populations used.

generally had the greatest unemployment problem among the three cities. Per capita retail sales and assessed property value grew in all three cities25 during the pre- and post-fiscal crisis periods (see tables 7 and 8). This is especially important for New York and Chicago since these measures show that not all sectors of their local economies declined before New York's fiscal crisis. Yet Houston's rate of growth in retail sales was, as expected, much greater, reinforcing the economic contrast between sunbelt and frostbelt cities for the pre-1975 period. Houston's sales continued their rapid rate of growth through the early 1980s but then slowed down. Between 1982 and 1987 New York led the three cities with a 47.2 percent increase in sales; Chicago had a 16.5 percent increase while Houston's retail sales increased by only a modest 4.9 percent during the same period. The evidence is clear. New York and Chicago were both declining cities in the 1970s, and according to some indicators Chicago's economic condition was worse than New York's. Neither city, however, experienced total deterioration in their local economies, facilitating the

CHAPTER WO

Table 8 Per Capita Retail Sales, 1963-87 New York

Chicago

Houston

40.2% 116.5 54.4 152.2 16.5

74.2% 370.1 169.9 393.4 4.9

% Change

1963-72 1963-82 1972-82 1963-87 1982-87

41.0% 153.5 79.8 273.1 47.2

Source: U.S. Department of Commerce, Bureau of the Census, 1963 Census of Business, vol. 2, part 1,table 15; 1967 Census of Retail Trade, Final Area Report, tables 4 and 5; 1972 Census of Retail Trade, Final Area Report, tables 4 and 5; 1977 Census of Retail Trade, Geographic Area Series, table 5; 1982 Census of Retail Trade, Geographic Area Series, table 7; 1987 Census of Retail Trade, Geographic Area Series, table 6. Population Source: U.S. Department of Commerce, Bureau of the Census, "Current Population Reports." Census year populations used.

economic turnaround they enjoyed during the 1980s. Nevertheless, before 1975the economies of New York and Chicago were certainly in decline relative to the growth experienced by Houston. A number of cities faced more serious social and economic problems than New York at the height of its fiscal crisis,26 yet their fiscal problems did not generally result in a crisis. Similarly, both New York and Chicago experienced serious declines in their local economies, but New York had a fiscal crisis while Chicago remained fiscally stable. The next section examines some of the standard fiscal strain indicators, sharpening the distinction between fiscal stress and economic decline for the three cities.

Urban Fiscal Instability as the Mismanagement of Resources Urban public administration has developed some generally accepted indicators of fiscal strain which evaluate resource management proficiency. These include level of short-term and long-term debt; interest on general debt; level of overlapping debt; and the municipal tax bur-

FlSCAl CRISIS AND FISCAL STRESS

den. How did New York, Chicago, and Houston compare in 1975 on these measures of fiscal instability? The data show that Chicago, like Houston, was fiscally stable while New York was experiencing fiscal crisis. Moody's Investors Service and Standard and Poor's are two private agencies paid by the issuing governments to rate their bonds. In the 1970s, these ratings were based on the traditional resource management measures and were recognized by the financial community as authoritative indicators of municipal fiscal conditions. Ratings are intended to gauge investor risk that a bond's principal and interest will not be paid in full and on time. Moody's scale ranges from Aaa (best quality, least risk) to C (in default); the higher the rating, the lower the interest rates cities pay on their debt.27 If a city's bond rating falls below Baa, it is no longer considered investment grade. Investor confidence in these rating institutions was seriously shaken after New York nearly defaulted on A rated bonds in 1975. While both firms have since revised their rating systems to reflect a more complex set of fiscal strain indicators, bond ratings alone are seriously deficient for evaluating the pre-1975 fiscal condition of cities.28 Several other methods have been developed for this purpose. One method for constructing relative measures of fiscal instability computes a mean for a representative sample of cities and scores these cities according to their deviation from the mean. In 1974 New York City ranked the highest (most inadequate budget management) and Chicago ranked one of the lowest and compared favorably with Houston in several of these studies.29 Since 1946 the Municipal Finance Officers Association (MFOA)has awarded a certificate of conformity to cities which issue a report by independent auditors and adhere to generally accepted accounting principles. The budget-balancing gimmicks used by New York in the period before its crisis, such as intentionally overestimating future revenues in order to borrow on false estimates, rolling over shortterm debt, and using the capital budget to meet current operating expenses, are all unacceptable to the MFOA, and New York was not a recipient of their certificate.30 Before 1975very few cities had met the MFOA standard for sound fiscal practice, but Chicago received its first award in 1963and retained its certification while New York experienced its fiscal crisis.31 While the summary measures indicate that New York had fiscal problems in the 1970s and Chicago's condition was stable, these findings were questioned in Chicago in 1979, when Jane Byrne was elected mayor. Without minimizing the budget problems she faced, her motives for discrediting her predecessors were blatantly political

CHAPTER TWO

and other analysts confirm that Chicago was well run and well managed in the 1970s.32 Per capita debt is considered one of the best individual indicators of fiscal stability. There are two general types of debt: short-term debt and long-term debt. Cities use money from short-term loans to pay current expenses in anticipation of future revenues. Recurring and excessive short-term debt, however, implies financial mismanagement, which is an indicator of fiscal instability. Long-term debt is generally used to finance large capital projects. Although it is expected to be high in rapidly growing cities, cities with consistently high long-term debt burdens and shrinking tax bases are considered to be heading toward serious fiscal problems. Table 9 reveals that New York's short-term debt before the fiscal crisis was consistently higher than Chicago's or Houston's, and its excessive increase occurred between 1970 and 1975 (238.2 percent). By 1975 New York's short-term debt of $618.58 per capita was extraordinarily high, even by New York standards, leaving no doubt that drastic measures were necessary to regain control of the city's finances. New York's short-term debt dropped substantially after the fiscal crisis but remained higher than Chicago's and Houston's. Between 1980 and 1989 New York's short-term debt began to rise again, in contrast to zero short-term debt at the end of Chicago's and

Table 9 Per Capita Short-Term Debt, Fiscal Years 1965-89 New York

Chicago

Houston

% Change

1965-75 1965-89 1970-75 1975-80 1975-89 1980-89

437.2% 97.3 238.2 -89.2 -63.3 239.7

61.8% -100.0 -7.6 -49.3 -100.0 -100.0

Source: U.S. Department of Commerce, Bureau of the Census, "City Government Finances," 1964-65,1969-70,1974-75,1979-80,1988-89. Population Source: U.S. Department of Commerce, Bureau of the Census, "Current Population Reports." Census year populations used.

FISCAL CRISIS AND FISCAL STRESS

Houston's 1989 fiscal year. Despite this increase, New York's shortterm debt in 1989 bears no resemblance to its 1975 level. While short-term debt is only one indicator of fiscal problems, it speaks directly to the political dimension of fiscal policy. The 1970s decade was the turning point for cities which had previously prospered from a strong national economy and the flow of federal revenue. New York's short-term debt during this period was partly the result of efforts to continue financing, from local revenue sources, services which expanded during a "politics of abundance" with the aid of a strong national economy and federal funds. Chicago, however, never accumulated a particularly high short-term debt burden, reflecting an ongoing concern for maintaining fiscal stability. Chicago's early trend toward growth in short-term debt during the 1960s was stabilized by 1975. Chicago's capacity to manage the change in intergovernmental assistance relates directly to the structure of its fiscal decision-making process and remains a key factor in avoiding a future crisis. The post-fiscal crisis period is also instructive. Between 1980 and 1989, New York's short-term debt increased by 239.7 percent while Chicago's declined by 100 percent. Since New York's fiscal crisis, cities have been more careful not to accumulate short-term debt. As a consequence, it may have become a less revealing indicator of fiscal problems. Houston clearly managed with only minimal dependence on short-term borrowing even during the 1980s, when its local economy was declining and fiscal problems were brewing. During the pre-fiscal crisis period, of the three cities, Chicago consistently had the lowest long-term debt per capita but not the lowest growth rate. New York's long-term debt was dramatically higher than that of both Chicago and Houston in the pre-fiscal crisis period, but Houston increased its debt burden at a greater rate in the 1970s than both frostbelt cities (see table 10). While New York's long-term debt did not decline after its fiscal crisis, the growth reflects a restructuring of its entire debt burden, when its exorbitant short-term debt was converted into long-term debt through the creation of the Municipal Assistance Corporation (MAC). Between 1975 and 1979, when New York was locked out of the bond market, MAC was able to borrow for the city. New York's long-term debt for the 1980s included city and MAC borrowing. A dramatic transformation occurred in the 1980s post-fiscal crisis period. As New York regained its fiscal footing and experienced an economic resurgence, its long-term debt grew, but both Houston and Chicago increased their long-term debt at a greater rate than New York's. The comparative rate of growth in Houston's long-term debt

CHAPTER WO

Table 10 Per Capita Long-Term Debt, Fiscal Years 1965-89

1965 1970 1975 1980 1989

New York

Chicago

Houston

$843.38 917.84 1,255.11 1,438.48 3,076.19

$227.12 247.88 315.08 319.46 1,211.06

$307.70 365.11 521.06 878.57 2,131.14

% Change

Source: U.S. Department of Commerce, Bureau of the Census, "City Government Finances," 1964-65,1969-70,1974-75,1979-80,1988-89. Population Source: U.S. Department of Commerce, Bureau of the Census, "Current Population Reports." Census year populations used.

between 1965 and 1989 is particularly striking. By 1989 Houston's long-term debt was at $2,131.14 per capita but was still lower than New York's. Chicago's long-term debt remained the lowest of all three cities, even through 1989. Long-term debt contributed to Houston's fiscal problems in the 1980s. During the 1970s the growth in Houston's local economy justified its growth in long-term debt, but its economic downturn during the 1980s caught the city by surprise and made the rate of growth and relatively high level of Houston's longterm debt a catalyst for fiscal problems.33 Another indicator of fiscal strain on city resources associated with debt is the amount paid in interest on debt. As was explained, floating bonds can often be justified as a sound investment in a city's future. But regardless of purpose, interest on debt is an expenditure that is never recovered. An unvarying pattern of high interest costs indicates a potentially serious imbalance between resources and expenditures. Cities that are considered greater credit risks by the bond-rating agencies pay higher interest rate costs on their debt. Ironically, cities are saddled with the greatest interest costs when they can least afford to pay. If a city's credit rating is downgraded, interest costs will increase. A mere .2 percent increase in interest rates could result in an added $250,000 per year in interest costs on a $100 million bond issue.34

FISCAL CRISIS AND FISCAL STRESS

Table 11 Per Capita Interest on General Debt, Fiscal Years 1965-89

1965 1970 1975 1980 1989

New York

Chicago

$16.61 26.33 86.30 66.98 226.15

$6.90 8.91 14.76 13.11 74.15

Houston $6.73 17.81 20.35 27.18 164.05

% Change

Source: U S . Department of Commerce, Bureau of the Census, "City Government Finances," 1964-65,1969-70,1974-75,1979-80,1988-89. Population Source: U.S. Department of Commerce, Bureau of the Census, "Current Population Reports." Census year populations used.

New York City's per capita expenditure on general debt interest was clearly the highest in the period between 1965 and 1975. Houston was a "growth city" during this period and could justify higher debt costs; yet New York's interest expenditure was four times higher than Houston's in 1975and its rate of increase over the decade was twice as high. In contrast, Chicago had consistently low interest expenditures, and in 1975 these expenditures were even lower than Houston's (see table 11). The 1975 data are particularly revealing when the effects of legal limitations on debt are taken into account. New York has always had more legal discretion in borrowing than Chicago. Until 1972 Chicago could only borrow on limited tax anticipation warrants and required referendum approval for bond issues. This changed with greater home rule power provided by the new state constitution, which gave the city authority to float bonds with only City Council approval. The 1975 and 1980 data show that Chicago did not initially abuse its new legal mandate. Faith in Chicago's fiscal management was demonstrated by the response of the financial community to Chicago bond sales during the same period. In a 1976 sale of $134 million in tax notes, the city drew two bids of under 4 percent.35 However, during the early 1980s, Chicago experienced some fiscal problems of a shortterm nature, which resulted in a downgrading of their bonds and a consequent increase in their interest costs.

CHAPTER WO

Per capita interest on debt is another indicator of the fiscal transformation that occurred after New York's crisis. Between 1975 and 1980,New York's debt costs dropped. By 1989the per capita amount of interest that Houston was paying on its debt obligation was close to New York's level. Moreover, the rate of growth in debt costs between 1975 and 1989 was highest for Houston at 706.1 percent while New York's was only 162 percent. Chicago's interest burden grew at a rate in between Houston's and New York's, but its amount per capita remained the lowest among all three cities. While general debt statistics indicate the level of indebtedness of the municipality, they are only of limited utility in assessing a city's true fiscal condition. Cities are not legally responsible for providing the same services and are usually not the exclusive public sector service providers to their residents. This problem is often addressed when comparing the cost of services in different cities, and it is referred to as the "functional performance" issue.36 What services are being compared, and which jurisdictions, if any, are providing those services? There is both a historical and a legal dimension to the problem of functional performance. Until the mid-nineteenth century, the services cities could provide were generally limited by their state governments. With the exception of education, which in some cities was provided by an independent special district, most municipal governments were legally mandated with similar responsibilities for services. As cities grew in population and economic diversity, their role in service delivery expanded and there was an increase in functional variability between cities; many cities shifted the responsibility for certain functions to other jurisdictions and added new local services. As a consequence of differences in their political histories, there is no uniform pattern of service provision among cities. Two measures were constructed to assess the impact of functional performance on a city's debt burden: common function debt,37 which is the proportion of a city's total debt that is attributable to basic housekeeping services (provided by most cities from their corporate budgets), and total overlapping debt,38 which combines the city's gross direct debt with a proportion of the debt from overlappingjurisdictions which both tax and provide services to city residents. The common function debt measure compares debt for only those services which most cities provide. It assumes that cities which concentrate on providing traditional services are at a fiscal advantage compared to cities which have expanded their budgets to include the "deficitproducing" non-common function services like education, public welfare, and mass transit. The overlapping debt measure assumes the

FISCAL CRISIS AND FISCAL STRESS

Table 12 Per Capita Common Function Debt, Fiscal Years 1965-89 New York

Chicago

Houston

20.6% 225.8 170.1 226.0

88.0% 565.7 254.1 115.3

% Change

1965-75 1965-89 1975-89 1980-89

23.4% 154.2 106.0 141.1

Note: PC Common Function Debt = (Percent Common Function Expenditures x Gross DebtVPopulation. Source: U.S. Department of Commerce, Bureau of the Census, "City Government Finances," 1964-65,1969-70,1974-75,1979-80,1988-89. Population Source: U.S. Department of Commerce, Bureau of the Census, "Current Population Reports." Census year populations used.

opposite-even when special districts, authorities, or counties are paying for services provided to city residents, there remains a fiscal burden on the city through extra taxes and debt. Overlapping jurisdictions are, however, independent legal entities and the extent that their debt burden can be a fiscal problem for the city itself is often a political question.39 The common function debt statistics are especially useful for comparing New York, Chicago, and Houston. New York has been responsible for more services than any other city in the nation; its corporate budget funds, for example, education, health, welfare, mass transit, and corrections. Chicago and Houston have historically concentrated on housekeeping services like police, fire, and sanitation and have relied on other jurisdictions to provide the non-common functions.40 How would the debt burdens of Houston, New York, and Chicago compare if they were all responsible for a similar mix of basic services? In 1975 New York's and Houston's common function debt burdens were quite similar while Chicago's was lowest with $233.53 per capita (see table 12). Even though there is no absolute level of debt that is considered prudent fiscal policy, in relative terms, given the downturn in their economies, New York's and Chicago's should have been similar. Houston's debt, however, was a reflection of its growing economy. Yet both New York's and Chicago's common function debt

CHAPTER TWO

increased virtually at the same rate between 1965 and 1975, indicating that there was no dramatic change in this aspect of New York's fiscal policy in the ten years that preceded the crisis. The post-1975 period is fascinating for all three cities. Both New York's and Chicago's common function debt declined through the early 1980s, and by 1989 they were at virtually the same level. Both snowbelt cities looked fiscally stable. Houston's common function debt, however, was over twice the level of the other two cities' in 1989, another indicator of its fiscal problems during this period. Chicago's common function debt level has shown the greatest stability of the three cities' since 1975. It is important to keep in mind that the common function debt statistics do not reflect the legal and fiscal realities in these cities. In Houston, common function debt represents on average 60 percent of gross debt, in Chicago it's 55 percent, and in New York it's only 22 percent. The credit-rating services do not compare common function debt across cities but, rather, gross debt when they rate cities' fiscal conditions. However, the debt measure is a prelude to the political dimension of fiscal policy that is the focus of this book. The common function debt statistics clearly show that, if New York were providing predominantly housekeeping services like Chicago and Houston rather than a broad range of redistributive services, its fiscal condition would have remained relatively stable. Since Chicago and Houston have a considerable number of special jurisdictions which can legally float their own bonds, overlapping debt statistics are also interesting for assessing relative fiscal burdens. In 1975New York's per capita city debt was three times the level of Chicago's overlapping debt, and even higher than Houston's (see table 13).41After its fiscal crisis the rate of growth in New York's debt slowed down. Between 1975 and 1989, New York's gross debt grew by only 32.7 percent while Chicago's overlapping debt grew by 200 percent. By 1989 Houston's fiscal problems were reflected in an overlapping debt burden that was even greater than New York's. Chicago's overlapping debt burden, while growing, has remained significantly lower than both Houston's and New York's. These differences are important since overlapping debt statistics indicate that Chicago's fiscal stability is not simply attributable to legal differences with New York in the provision of services. The final indicator of fiscal instability examined is per capita tax burden. Tax burden is the average cost to the individual resident of a city for service delivery.42 Although this measure tells us nothing about the range or quality of services that residents receive for their taxes, high tax burden is still an indication of fiscal problems because

FISCAL CRISIS AND FISCAL STRESS

Table 13 Per Capita Overlapping Gross Bonded Debt, 1965-89 New York

Chicago

Houston

118.9% 556.7 200.0 158.1

102.6% 414.5 153.9 107.3

% Change

1965-75 1965-89 1975-89 1980-89

95.4% 159.2 32.7 65.2

Note: Overlapping Debt = City's Gross Diret Debt Outstanding for End of Fiscal Year + Overlapping Debt. Source: Moody's Municipal Credit Reports: Houston, Texas: June 7, 1990; July 20, 1976; December 30, 1965. Chicago, Illinois: February 5, 1990; March 26,1981; July 9,1976; August 19,1966. "City Government Finances," New York City. Population Source: U.S. Department of Commerce, Bureau of the Census, "Current Population Reports." Census year populations used.

of its potential impact on the local economy. While there is much disagreement over why people actually migrate from cities, studies have found tax burden to be a contributing factor. Cities with high tax burdens attract fewer new residents and lose more old residents than those with lower tax burdens.43 Why businesses actually choose locations or leave cities is an even more complex question than why individuals migrate, and the empirical evidence on the relationship of business location to tax burden is ambiguous at best.44 Nevertheless, tax burden has become a powerful political issue in the post-fiscal crisis era of high stakes competition among cities for jobs and businesses. In fashioning their tax policies, mayors tend to accept the unproved assumption that firms choose locations on the basis of tax burden.45 Table 14 shows that per capita municipal tax burden was highest in New York and considerably lower in Houston and Chicago for the period between 1965 and 1975. This is, in part, a result of the scope and level of services performed by the municipal government in New York. Although New York's tax burden is highest from the beginning of the period under consideration, importantly, the rate of growth in the tax burden for all three cities is almost identical between 1965 and 1975. Still, despite improvements in its economy after its 1975fis-

CHAttCR TWO

Table 14 Per Capita Municipal Tax Burden, Fiscal Years 1965-89 New York 1965 1970 1975 1980 1989

$285.93 382.90 614.61 948.50 2,052.79

Chicago

Houston

$83.99 122.76 176.63 245.00 478.12

$64.95 82.41 144.23 221.15 397.31

110.3% 469.3 43.9 170.7 95.2

122.1% 511.7 75.0 175.5 79.7

% Change

1965-75 1965-89 1970-75 1975-89 1980-89

115.0% 617.9 60.5 234.0 116.4

Note: Municipal Tax Burden = General Revenue from Own Sources/Population. Source: U.S. Department of Commerce, Bureau of the Census, "City Government Finances," 1964-65,1969-70,1974-75,1987-88, tables 4, 5, 6, 7.

Population Source: U.S. Department of Commerce, Bureau of the Census, "Current Population Reports." Census year populations used.

cal crisis, New York's tax burden grew at a faster rate than that of either Chicago or Houston. This comparison of the economic and fiscal conditions for the preand post-fiscal crisis periods in all three cities is highly instructive. Before 1975, the local economies in both Chicago and New York were declining, while Houston's economy was booming. Since 1980, sunbelt cities, as demonstrated by the Houston case, have learned that their local economies are not growth machines, forever protected from national and international economic trends. Moreover, while the sunbelt suffered from an oil-driven economy gone bust and overdevelopment of commercial and residential real estate, many frostbelt cities, including Chicago and New York, experienced dramatic improvements in their economies. As we enter the 1990s, slow growth in the national economy is changing this picture once again. The important lesson is that all cities are vulnerable to economic downturns. Yet the fiscal picture for cities cannot simply be deduced from economic indicators. These data show conclusively that Chicago's fiscal condition, like Houston's, was quite stable in 1975 and in no way resembled the disastrous situation in New York. The post-1975 period

FISCAL C R I S I S M D FISCAL STRESS

shows changes for all three cities. By 1980 New York's fiscal recovery was complete but some serious underlying weaknesses remained, as indicated by its tax and debt burdens. Houston's fiscal condition clearly deteriorated in the 1980s, but it regained its stability rapidly, as most of its fiscal indicators remained positive despite its economic decline. Chicago, too, showed some weakening in its fiscal health, but nothing sufficiently dramatic to create a serious crisis. All three cities entered the 1990s fiscally stable but anxious about their local economies. As cities currently struggle to insulate their fiscal conditions from swings in their local economies,the need for a more complete analysis of the causes of fiscal stability takes on added significance. There are cities, like Chicago, which managed to retain fiscal stability even during periods of decline in their local economies. Their successes and the failures of other cities can only be understood by examining the political dimension of fiscal policy-making. The next chapter begins analyzing the politics of fiscal policy in New York and Chicago by tracing its development to the Depression era. The fiscal policy processes that emerged in these two cities during this crucial period help explain the differences in their current fiscal conditions.

DEPRESSION-ERA FISCAL CRISES: POLITICAL LESSONS FOR URBAN POLICYMAKERS

Like other municipalities, both New York City and Chicago faced fiscal crises during the 1930s.lYetNew York experienced a fiscal crisis in 1975 and Chicago did not. The similarities and differences in the causes and consequences of the two Depression era fiscal crises provide the basis for a political explanation of why New York had a fiscal crisis in 1975but Chicago remained solvent. This explanation also offers a historical rationale for using the cases of New York and Chicago to develop a general political theory of urban fiscal policy-making. The immediate causes of municipal fiscal crises during the 1930s were found to be remarkably similar in an ACIR study which identified economic factors and fiscal policy decisions.2 The economic factors included a significant decline in taxable income and wealth; numerous bank failures; sudden pressures for increased municipal expenditures caused by a rapid rise in the demand for relief services; and sudden declines in municipal revenues caused by increases in tax delinquencies. Fiscal policy decisions contributing to the crises included permitting real estate overdevelopment;allowing expenditure and revenue imbalances during prosperity; permitting debt service to become an increasing proportion of expenditure; and ignoring demands for better budgeting and reporting. Fiscal problems worsened because those municipalities, when faced with the Depression, were slow to reduce expenditures, used short-term debt to finance large operating deficits, and continued ignoring sound budgeting techniques. Although the ACIR's study is invaluable for outlining the economic and fiscal management conditions which precipitate urban "fiscal emergencies," it does not address the political factors which allow these conditions to develop and persist in some municipalities but not in others. Even at the height of the Depression, only 19.9 percent of all incorporated municipalities defaulted on their loans.3 Somehow, those cities that managed to avoid fiscal crises were better insulated from the ravages of the Depression.

DEPRESSION-ERA FISCAL CRISES

The Depression period was in many ways analogous to the 1970s. In both periods fiscal crises were triggered by a downturn in the economy, although not all cities were affected in the same way. In 1932 as in 1975, cities confronting fiscal crises found themselves with large deficits, high debt service, revenue shortfalls, and a loss of credit in the bond market. In both periods, the first signs of a crisis came when civic or reform groups publicly decried the excessive borrowing that the city needed to do to meet its current operating expenses. The actual revenue shortfalls resulted either from overestimating expected tax revenue or because revenue owed to the city came in too slowly. Cities failed to estimate their revenues correctly for a variety of reasons ranging from corruption and incompetence to an unforeseen decline in the economy. The moment of crisis occurred only when the banks refused to continue lending the city money to meet its operating expenses and debt obligations. Thus, a city's fiscal condition can remain unstable for decades without becoming a crisis. Although economic and financial factors can produce crisis conditions, it is the political interactions before, during, and after the crisis that determine the probability for renewed fiscal problems. A brief period of retrenchment and restructuring debt obligations may be enough to resolve the short-term crisis while a return to economic prosperity can completely remove fiscal issues from a city's policy agenda. But if the long-term pattern of relationships in the fiscal policy process are not permanently altered during the retrenchment period, it is likely that fiscal problems will reemerge and quietly build up, until the next cycle of national economic scarcity triggers a response from the investment community. Examining the causes of the 1930s fiscal crises, the conditions which defined the crises, and the policy proposals that were offered by both cities to remedy the crises can reveal how different fiscal policy processes developed in New York and Chicago and provide a basis for understanding why in 1975 these two economically similar cities had vastly different fiscal conditions.4 While the conditions which define these fiscal crises were similar, the two cities devised different political remedies and responses to scarcity in the 1930s, remedies and responses that were reinforced by subsequent policy decisions in the years that followed. Chicago's reaction to its Depression crisis created the policy process that insulated it from fiscal crisis in the 1970swhile New York's reaction created the conditions that wreaked fiscal havoc in 1975. Moreover, New York's policy response in 1975was an uncanny repetition of its past.

CHAPTER THREE

Fiscal Crisis in Chicago, 1930-32

The Crisis Erupts In January of 1930 Chicago was experiencing a fiscal crisis: the city had no money to meet its day-to-day operating expenses, and the banks refused to buy any more city bonds. No money and no prospects for borrowing money are the two basic conditions which define fiscal crisis, but the conditions which led up to Chicago's crisis were grounded in the city's policy-making process. Why did Chicago have no operating revenue in January 1930 and no prospects for borrowing in the bond market? The short-term causes, such as revenue shortfalls and high levels of debt and deficits, are easily identified, but complex long-term causes are deeply rooted in the economic and political landscape. The potential for fiscal crisis is generated by the city's policy process, and the immediate conditions which precipitate a crisis merely ignite the already volatile political environment. The long-term causes of fiscal problems can best be understood by examining the political dynamics of fiscal policy before, during, and after the crisis. Big Bill Thompson, the last Republican mayor of Chicago in this century, had the dubious distinction of presiding over the city's only fiscal crisis. This was a period when machine politics was in its heyday in most cities across the country. The party label was often irrelevant, as Democrats and Republicans both worked to build powerful organizations. This old style political machine, while concentrating on delivering votes, was primarily noted for the corruption that it brought to the government of the new industrial cities. Machine corruption involved not only patronage jobs but payoffs and special favors in both contracts and tax breaks for those considered the machine's "friends." These machine activities were significant in precipitating the city's fiscal crisis. The result was ongoing struggle for control of the city government between the machine and reformers, who were dominated by business interests. State and county party leaders controlled a highly politicized tax assessment process. After valuations were fixed by a board of assessors, reductions in taxes were routinely granted to those with the proper political connections. The "fixers," as these machine operatives from both parties were called, reassessed property values in exchange for personal "fees" and "contributions" to the political party. A tax reform movement evolved in response to this corrupt process. Tax reformers maintained that the machine extorted between $25 and $50 million annually. Despite a law which required valuations to be published, none had been for thirty years.5

DEPRESSION-ERA FISCAL CRISES

The machine operation might have continued to run smoothly, except that in early 1928 State Tax Commission Chairman William Malone ordered the publication of assessment rolls for Cook County at the request of a petition filed by the chairman of the Joint Commission on Real Estate Valuation (JCREV) and Margaret Haley, leader of the Chicago Teachers' Federation.6 The JCREV was created in 1926 by the Cook County Board to rationalize the county's assessment process, and it was dominated by real estate interests and reformers. By publishing the rolls Malone engendered broad-based public support for the tax reform movement. Confirming the findings of an earlier Northwestern University study by Professor Hubert Simpson,7 the published rolls revealed that, in 1927, property was taxed on assessments ranging from 1 percent to 105 percent of its demonstrable or salable property value. Understandably, the public was outraged. Neighbors often found that they were paying different property taxes for the exact same property, and one hundred thousand property owners complained to the State Tax Commission. In May, Malone ordered another reassessment of property. A special session of the state legislature authorized the Board of Review to revalue all Cook County property, beginning in December of 1928. This reassessment would provide the impetus for unraveling Chicago's fiscal policy.8 The city of Chicago, Cook County, and their special districts9 had joined forces to fight the property reevaluation, and as a result they had not levied property taxes from May 1928 until July 1930. During this two-year period, no property tax revenue was received and all these jurisdictions operated on borrowed money and credit from banks and suppliers. Like most other cities in the United States, Chicago depended on property tax revenue for its operating budget, and in 1930 about three-fourths of Chicago's revenue was obtained from real estate taxes. It is not surprising that a city unable to collect property taxes for two years would eventually experience a fiscal crisis. The assessment issue, however, was merely the tip of the iceberg. In reality, the city of Chicago, the school board, and Cook County had been building up operating deficits for at least sixteen years. Under Illinois state law, these jurisdictions were permitted to borrow on taxpayer anticipation warrants (short-term bonds) up to 75 percent of their respective tax levy. The city had followed that practice for forty years, the county for twenty-five years, and the school board fifteen years. After the city exhausted its legal borrowing power, it was standard practice to borrow against the trust and surplus funds for the other 25 percent.10 As a consequence of these borrowing practices, by December of 1929

CHAPTER THREE

the city had accumulated exorbitant short-term debt and unpaid bills to city vendors, owed back pay to much of its work force, and had been dipping into trust funds to meet operatingexpenses. The City Council Finance Committee called on the JCREV to develop a solution to the city's fiscal problems. The JCREV formed a Citizens' Committee of seventy-five business and civic leaders, headed by Silas Strawn, to consider the fiscal condition of the city. Strawn was vice-president of the U.S. Chamber of Commerce, chairman of the board of Montgomery Ward, director of the First National Bank of Chicago, and former president of the American Bar Association. The First National Bank just happened to own several million dollars' worth of tax anticipation warrants.11 The Citizens' Committee proposed that a $20 million fund be created to buy tax anticipation warrants from the city. Strawn claimed that the reassessment may have caused the immediate budget problems but that the city's financing methods and wastefulness would have eventually brought the same result. Despite their intense efforts, Strawn and the reformers could not effect a change in the city's fiscal policy until the banks refused to advance credit to the city. Mayor Thompson, meanwhile, attempted to find a way of converting the city's budget problems to his own political advantage, since he intended to run again for mayor in 1931. Thompson posed as the champion of the small homeowner and the small businessman by arguing that the new assessments gave an advantage to the downtown business district and reduced the city's revenue. He blamed the city's fiscal problems on the reformers who supported the reevaluation. Thompson did not realize, however, that the assessment issue was not Chicago's biggest problem and the Depression would completely unravel long-standing policies of fiscal mismanagement in the city and its related governments. Until the stock market crash of October 1929, the banks were willing to tolerate-and even profit fromChicago's reliance on short-term debt.12 Despite the city's precarious fiscal condition the mayor persisted in vetoing two austerity budgets supported by the City Council and proposed a budget with a $4.6 million deficit which kept basic services at the 1929 level. As the Democratic opposition in the City Council began its effort to override the mayor's second budget veto, they received assistance from the rapid deterioration of Chicago's position in the bond market. Not only did the banks refuse to purchase any tax anticipation warrants from the city but also they refused bond issues by other special districts and Cook County. Chicago's fiscal crisis was officially under way when the banks refused to fund its debt. Thompson's initial desire to prevent budget cuts is not unusual

DEPRESSION-ERA FISCAL CRISES

among politicians, particularly those running for reelection. But his flagrant disregard for the city's precarious fiscal situation-the simple absence of revenue to fund services-gave Thompson's Democratic opponents in the council and the public-spirited reformers the opportunity to criticize him for his fiscal imprudence. The 1930 budget problems enabled reformers to link their earlier criticisms of political corruption in the machine with deep-rooted problems in the city's fiscal policy process. In desperation, Thompson searched for new sources of revenue and was led straight into the arms of Strawn's Citizens' Committee and its $20 million treasury, collected to ease the city's credit problems. Not only were there no buyers for the city's tax anticipation warrants but the city and county also needed money immediately to meet an $11 million overdue payroll. As a condition for receiving funds, the Strawn committee stipulated that three of the contributors would decide how to spend the money and that public officials would cooperate fully with a legislative plan for improving the taxing system and confiningexpenditures to necessities. The Strawn Plan set a schedule for the payment of the past due property taxes: tax payments would increase annually, and three years' worth of property taxes would be paid in only sixteen months. Strawn's program for property tax increases sent into action another group of wealthy real estate owners with extensive holdings in "the Loop," Chicago's downtown business district. On May 9,1930, the Association of Real Estate Taxpayers of Illinois (ARET)was formed.13 This group eventually initiated the 1931 taxpayer strike that would send the city back into the depths of fiscal crisis. The Strawn committee's edict was interpreted as a form of receivership in which its members dictated to elected officials how public money would be spent. Strawn's "blackmail" initially backfired by giving Thompson support from some opposition members of the City Council, the county commissioners, and the school board.14 The city's hope of raising new revenues along with its administration's ability to retain control of city government were shattered on January 30, when the State Supreme Court voided all 1927 property assessments and refused to allow the city to collect taxes based on the 1927 evaluation. Months of delay in the collection of long overdue taxes were expected.15 On February 5,1930, the Chicago City Council, in direct opposition to Mayor Thompson, pledged its full cooperation with the Strawn committee. But the political struggle did not end. Thompson tried to sell warrants to individual citizens in small lots. This constituted an

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open declaration of war by the Thompson forces against Strawn's committee, but little money was found. The public and the banks backed the reformers, and as a result the Strawn committee gained momentum. Bank support for Strawn's proposals was particularly important, since banks controlled city, county, and special district access to the bond market. Continuing failures of bond issues and the growing discontent from unpaid employees weakened the political factions that opposed the Strawn committee. City employees had not been paid for five weeks, county employees for seven weeks, and schoolteachers for six. Despite the politicians' efforts to blame the bankers for their problems, there would be no resolution of the fiscal crisis until political control was relinquished to the business and banking community. Until this point, the state was not involved in the politically volatile crisis. Like Mayor Thompson, Governor Louis Emmerson was a Republican, but he belonged to a different faction of the party and did not receive the mayor's support in the 1928 contested Republican gubernatorial primary. The governor decided to support the Strawn committee recommendations for a quick resolution of the property reevaluation problem rather than call a special legislative session to deal directly with the city's fiscal problems.

A Brief Respite In February of 1930 a plan to bail out Chicago came from eastern financiers, the largest marketers of municipal bonds, and was endorsed by the Strawn committee and the City Council. It took the form of a "temporary dictatorship committee of private citizens and city officials." A committee of three city officials and four Chicago businessmen was created. The Simpson Committee, named for its chair, was to sell short-term bonds to meet the overdue city payroll.16 Until this committee was formed, Thompson refused to confer with outsiders on the city's fiscal problems, maintaining that only city officials were authorized to handle city finances. Thompson was finally defeated because Chicago could not function without buyers for its short-term bonds. By denying the city access to the credit market, the bankers effectively destroyed the mayor's political power. The Simpson Committee, sanctioned by the banking establishment, was given this vitally important access to the money markets, and in the end the bankers with their business community allies forced elected officials to abdicate their control over spending decisions to an appointed body in order to keep the city operating. At the same time that the Simpson Committee was putting to-

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gether its bond offering, the municipal payroll had to be met. On February 17, Cook County paid almost four thousand of its employees in IOUs. Strawn's Citizens' Committee and the Civic Federation, Chicago's powerful reform organization, offered their own proposal to pay public employees: a "Cook County Tax Payer's Warrant Trust," with the Continental Illinois Bank as a trustee, to which taxpayers would loan money for the purchase of tax anticipation warrants. The trust issued certificates of participation for the purchase of warrants bearing 6 percent interest. When $50 million was collected, the trust began operating. Four thousand workers concentrated on selling bonds to industry and other large corporations, and the trust helped keep the government running until July 1,when two years of revenue became available from the collection of back taxes. While this relief was initially offered without political conditions, Thompson lost his political power when he accepted assistance from the tax trust, obligating himself to Strawn's reformers. At the same time, a political battle was brewing in Springfield. A legislative program was in preparation designed to bring assessment, taxation, and expenditure under tighter state control. City hall wanted to fight this program when a special session of the General Assembly was called. The goals of the machine and reformers may have converged for the bailout, but fiscal policy control was another matter. Thompson's dependence on the rescue committee became a permanent political impediment in his struggle with the state to control the city's finances. May 1,1930, was a turning point. Taxpayers received their first bills in two years. With these revenues, the city paid bondholders interest and principal that were due in 1928, and all 1928 bills of the city and special districts were also paid. Chicago avoided defaulting on a portion of the warrants which were due May 15,1930,by extending the maturity date with the approval of the financial community. A schedule for repaying the rest of the city's debt was developed in anticipation of owed property taxes. The bankers had restructured the city's debt burden and expected Chicago to operate on a cash basis by 1935. Governor Emmerson finally convened a special legislative session on May 17,1930, to consider both immediate and long-term financial relief for Chicago. By late June, the state authorized approval for the city to issue short-term direct obligation bonds to cover any deficits resulting from paying off the 1928 warrants. The legislature increased the city's tax levy so that it could raise sufficient revenue to pay for all 1929 and 1930 warrants. The city was also authorized to levy a tax that would provide about $20 million a year for the next five years to be put into a revolving fund so that the city could borrow

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against itself and avoid issuing additional short-term debt warrants. The revolving fund required approval by the Supreme Court of Illinois, but a favorable decision was expected. This legislation also allowed the city to reenter the long-term bond market. Most important for the banks, all outstanding warrants were validated so there would be no question of their legality. The state also passed new laws limiting the city's fiscal autonomy. No appropriations could be made until all unpaid liabilities of the former year were paid. Appropriations had to fall within limits of reasonably estimated revenue, subject to severe penalties in case of overappropriation. Finally, public accounting of appropriations and revenue sources was also required.17 The city's fiscal crisis appeared to end on July 4,1930, when Strawn dissolved the formal functions of his committee and the City Council adopted a resolution thanking him for his help. The city successfully reentered the bond market with a street bond issue, paid its 1928and 1929 debt, and repaid $40 million of the $50 million it owed the Strawn committee.

The Crisis Continues Fiscal relief for Chicago proved to be brief. The city's debt burden remained overwhelming even after it was restructured. In 1930 the city paid almost $9 million in interest on tax anticipation warrants alone while in 1927 it had paid only $1million. Beyond the problem of debt, the issue that had triggered the fiscal crisis was yet to be resolved: the continuing Depression-exacerbated tax assessment inequality and the revenue shortage it created. Reformers used the city's fiscal problems to defeat Thompson's bid for reelection. He lost the mayoralty to his Democratic opponent Anton Cermak, former president of the Cook County Board, in April 1931. Mayor Cermak vowed to put city finances on a steady course. Particularly conciliatory toward the bankers, he told the Chicago Association of Commerce that the fiscal solution was beyond the power of the mayor and City Council, and required assistance from the bankers and businessmen. He appointed three bankers to serve as auditors of the city, to work under the direction of the comptroller to improve financial management. The new mayor also dismissed Thompson's school board trustees and cooperated with the reform efforts to investigate city hall finances under the regime of Big Bill Thompson. Despite these mayoral efforts to clean house, the city's fiscal problems deepened. City tax collection was at 55 percent, insufficient to

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pay either its outstanding short-term debt or wages. Deputy Comptroller M. J. O'Conner told a group of bankers that Cook County was on the "verge of bankruptcy." Nevertheless, bankers ignored requests for assistance. The Depression had acted as a swift catalyst causing local fiscal problems to reach epidemic proportions all over the nation. Its role in exacerbating Chicago's fiscal problems was considered seriously when the federal government was finally brought into the search for revenue. In May of 1931, Senator James Lewis told the Illinois Bankers Association that the federal government should be able to lend money to cities and states to tide them over during emergencies. But no immediate action was taken by the federal government, and Chicago and its sister cities were forced to continue seeking their own solutions to the crises. The fiscal crisis would continue until the city restructured its fiscal policy process, which eventually required the combined assistance of two mayors, the state legislature, local bankers, the Association of Real Estate Taxpayers, the teachers' union, and Strawn's reformers. Mayor Cermak had two strategies for resolving the crisis. At the city level he implemented an austerity budget which reduced both services and municipal employee salaries. At the state level he supported the Kelly plan backed by the banking community and Strawn's reformers. The Kelly plan called for replacing the system of two boards of taxation with a simplified body, which would be appointed instead of elected. It also provided tax relief for the city's real estate owners. Since the tax strike was a direct consequence of favors distributed to precinct captains in Chicago by Cook County's Democratic machine, the banks refused to help Cermak until the method of assessment and collection was depoliticized. If the taxpayer's strike continued, revenue from short-term debt would be exhausted without any means for replacement while Chicago's real estate had depreciated by 35 percent. For each year of unpaid taxes, property values depredated, further reducing the city's tax revenue base. Increasingly, people were not paying their taxes because they could not afford to do so. Clearly, the fiscal problems in Chicago that resulted from corruption and mismanagement were made worse by the Depression. Cermak realized that Chicago's fiscal problems were the result of long-term political practices, and therefore sought the cooperation of the state legislature for a permanent resolution to the crisis. The mayor and a delegation of aldermen went to Springfield to lobby for the passage of tax relief measures. Cook County Treasurer Joseph McDonough also sought to pass a bill which would permit Cook

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County to refinance bonds falling due with new issues so as not to impair the county's credit. This policy is now referred to as "rolling over debt." Despite the urgency of the city's problems, the state legislature postponed hearings on city legislation. The Democratic mayor was not supported by the Republican governor or his majority in the state legislature. Emmerson demanded a complete restructuring of the city's fiscal policy process before the state would act on the tax issue. He selected a committee, the Britain Committee, after its head, Joseph K. Britain (chairman of the Joint Organization of the Association of Commerce), of eleven Chicago business, political, and civic leaders to solve the city's revenue problems. The governor supported a reduction in the commercial real estate tax burden. The state's importance in determining the city's future was once again affirmed. Without state legal authorization the city could not resolve its fiscal problems, and the political cost for the Democratic mayor of Chicago was high. While the governor and state legislature were slowly determining its agenda, the problems of the city, Cook County, and the school district deepened. On June 2, Cook County defaulted on bond interest payments, but seven large banks agreed to a bailout. The city was also unable to borrow on new tax anticipation warrants because of a revenue shortage due primarily to the tax strike. While awaiting state action and locked out of the bond market, Cermak began his service retrenchment program in June of 1931, hoping to cut expenditures by more than $30 million. He reduced appropriations for all purposes other than salaries by 10 percent and removed political contractors from Chicago's payroll, all the while defending the city's fiscal status to the financial community. Nevertheless, the city's efforts to resolve its fiscal problems were unsuccessful. In July of 1931, Chicago still owed $36.9 million lent to it by businessmen in 1929,because more than a third of its 1929taxes were still uncollected. Cermak's main reform strategy was to reduce city expenditures, but this initially was politically difficult. In order for austerity budgets to succeed, the public and organized interests must believe that the crisis is real. By this point, the financial community had left Cermak with a crisis obvious to all. Cermak's cutbacks finally hit the salaries of twenty-five thousand municipal employees. A fiscal crisis was also occurring in the school board and county, and the city's problems were exacerbated by shared responsibility for these other jurisdictions. Earlier, these government structures were coordinated informally by the party, as they provided another source for patronage jobs and contracts. In the 1930s there was neither a

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monolithic machine nor one dominant party. Each jurisdiction supported the operations of that branch of the party which controlled it. There was no formal administrative coordination between these structures, and the mayor's control came only at the pleasure of the machine. This decentralization allowed for much waste and duplication of functions. During times of plenty this strengthened each faction of the machine, but in the Depression elected officials associated with the machine became increasingly vulnerable to attacks by reformers. The city budget could not tolerate the extraordinary inefficiency spawned by the machine-taxpayers could not afford the cost, and bankers would no longer provide the credit. A bastion of political patronage and corruption, the school board still owed teachers $10 million in back pay. Especially hard hit were fourteen thousand teachers who had been paid by Board of Education script which bankers and merchants would not accept. The city actually purchased the Board of Education tax warrants in October so that teachers could finally be paid. The crisis also intensified for Cook County, which technically defaulted June 1on $1.45 million of bonds and $417,400 of interest. The Cook County Board had twice attempted since June to sell $2 million in poor relief bonds, but the bids that came in were so low that the statutes prohibited their acceptance. Finally, the County Board adopted a drastic salary reduction plan for all of its employees, including payless paydays for forty-five hundred employees. The state's response to the heightened crisis was remarkably slow. The state did not even provide temporary cash to meet immediate payroll and debt needs. Each jurisdiction was left to its own devices while the state considered long-term reform proposals. The goal of the reformers was clearly to depoliticize the budget process and fiscal decisions in the city of Chicago. By September 1931, as the Depression deepened, the political struggle changed. The old conflict between the public and the politicians changed into a dispute among the city, Cook County, and downstate interest groups, mediated by the political party. In the legislative debates, agricultural interests outside Cook County favored an income tax, which business interests opposed unless the bulk of the revenue was returned to the localities from which it was taken. Downtown businessmen supported the assessment ordered by the state commission, but outlying areas fought against it. Bankers wanted the city's credit maintained by prompt payment of taxes, while property owners already saddled with two years of tax bills and heavy loans were concerned primarily with tax relief. Real estate organizations tried to reduce or postpone tax obligations. The state remained the real problem. Chicago banks would not buy

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notes until the assessment system was changed, and this could not be accomplished without a special session of the legislature; the governor would not call this session until the Emergency Revenue Commission reported, but nobody knew when that would be. In desperation, Cermak called a meeting of large taxpayers in November of 1931 to help raise cash and James Simpson was again drafted into service to organize a campaign to sell short-term city notes. A special session of the state legislature finally met in December of 1931to discuss the recommendations of Emmerson's Emergency Revenue Commission, which included a state income tax, a tax on all forms of tobacco and other levies designed to raise $1 million to alleviate the tax burden on Cook County real estate, and a drastic reform to replace the assessment machinery of the Board of Assessment and Review with one single assessor and two assistant reviewers. The legislative session was also expected to consider provisions for an immediate bond issue to enable local governments to avoid default and a special provision for funds to the county for unemployment relief.18 Melvin Traylor, head of the First National Bank of Chicago, told the special session of the legislature that the city was near complete breakdown. It appeared that the crisis was about to achieve the impossible-a compromise plan to bail out the city that was acceptable to the governor, the state legislature, and leaders of both parties. Knowing from past experience that political infighting made most compromise proposals extremely fragile, the city did not wait for the legislature to act. In the middle of December, the mayor and the city's comptroller put together enough money to avoid defaulting in January, and despite all the talk of unity, the legislature adjourned at the end of December without taking any action on Chicago's crisis. By then it was clear that patronage politics and the proximity of a primary election (five months hence) were interfering with concerted state action. Many legislators feared that raising taxes or instituting new ones would ruin their chances for reelection. Governor Emmerson was also seeking reelection on an anti-Chicago ticket. Reforming the city's taxing assessment bodies was also a problem because the proposed changes limited patronage. Because the Board ofAssessors was a Democratic stronghold while the Board of Review was the domain of the Republicans, the decision-makers who could resolve the crisis remained deadlocked. Moreover, there was not merely a struggle between Democrats and Republicans but also a struggle between factions within each party.

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The Crisis Comes to an End The city's fiscal crisis finally ended in 1932. In January, the County Court held that the 1928 and 1929 assessment rolls were fraudulent and thus invalid. This ruling meant that $148 million owed on back taxes could not be collected and that 1930 taxes (based on 1928 assessments) would bring in very little money. Although the State Supreme Court overturned the ruling three months later, the tax strike was boosted at a time when city and state officials were trying to reorganize the taxing machinery. The state legislature met again in special session in January of 1932. By this time, Cook County, the Forest Preserve, and the Sanitary District had defaulted, creating the necessary crisis atmosphere to spur the legislature to act. Cermak agreed to support the Kelly plan whereby the governor and county president would jointly appoint the tax assessor and each would appoint one tax reviewer. By 1934 all three officials would be elected under a consolidated board. Downstate legislators agreed to support the Kelly plan in exchange for Cook County Democratic support of the income tax. The compromise on both the income tax and the consolidation were finally passed. Cermak continued his budget reductions, including drastic pay cuts for municipal employees. The City Council also passed a bill to increase its home rule, which included provisions to give the city authority to levy taxes, regulate utilities, condemn land for publicimprovements, and increase police power. The measures were submitted to the state legislature for approval.lg By 1932 the issues surrounding the fiscal crisis could not be separated from the serious Depression facing the residents of the city. Nearly five hundred thousand people in Cook County were facing destitution. Several downstate Illinois communities were in "moratoriums" with almost complete shutdown of business activities to restore confidence in financial institutions.20 The banks maintained their pessimistic attitude toward city finances. Melvin Traylor, president of First National Bank of Chicago, held out no hope that bankers would refinance the city's debt. The legislature again met in emergency session to consider immediate relief measures for the poor and jobless throughout the state. Cermak threatened to close city hall, schools, and other departments unless the state legislature provided immediate relief. Cermak actually cut the city's payroll by $15 million, or 21 percent, and his threat to cut police and fire services was particularly effective in heightening the crisis atmosphere. Governor Emmerson agreed to appropriate

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$20 million to help the poor, which would be offset by a tax on gasoline and a bond issue. The $20 million was divided equally between Cook County and the rest of the state. In March of 1932,$12.5 million worth of state of Illinois emergency relief 6 percent notes were successfully issued, distributed by Chicago's banks without profit. It was not until August 1932 that New York bankers would market Chicago bonds, their first financing in more than a year. There were several reasons for their changed policy. Cermak's budget cuts and a court resolution of the taxpayers' strike indicated improvement in Chicago's financial condition. While the federal government turned down Cermak's requests for direct aid, the Reconstruction Finance Corporation (RFC), the federal government's emergency banking institution, advanced Illinois a $3 million loan and most of the money went to Chicago.21 Sixty percent of 1930's taxes were already paid, and all 1928 and most 1929 warrants had been retired. Four Loop banks had also agreed to buy $2 million in tax anticipation warrants for 1931, making it possible to pay half a month's salary to school employees. The city had less than $18 million in floating debt, and its 1932 budget showed a 24 percent cut in expenditures from the previous year. It was also expected that 1930tax revenues would produce a budget surplus. Chicago's fiscal crisis did not end with reentry into the bond market. The state legislature and the mayor continued work to restructure the city's fiscal policy process. The state legislature continued its efforts toward reorganizing Cook County and ensuring the depoliticization of the state's taxing bodies, while Cermak worked on a plan to consolidate departments within the city government so that their budgets would be directly under the mayor's control. From abolishing the license bureau to centralizing city inspection services for public safety, the mayor's goal was greater control over departmental expenditures. Cermak also supported a proposed budgetary law that set up a commission to exercise centralized control of the budget policies of all the government jurisdictions within Cook County.22 The comptroller and mayor also agreed that a long-term resolution to the city's fiscal problems required tax reduction through lowering the cost of government, increasing employment, and consolidating the 438 taxing bodies in the Chicago-Cook County area. Illinois Democratic governor-elect Henry Horner had supported the consolidation plan, which was also recommended by a management report commissioned by the legislative subcommittee on local government and Professor Charles Merriam, of the Political Science Department at the University of Chicago and a former Chicago alderman.

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Mayor Cermak endorsed part of Merriam's plan for the consolidation of the three major park boards, the Forest Preserve system, and the more than one hundred small parks and playgrounds boards in the city and county into one municipal corporation to be governed by an elective board of three commissioners. Cermak pointed out that "it's easier to consolidate local governments when one political party is in power."23 When Chicago reentered the bond market, the financial crisis was formally ended. While restructuring the city's fiscal policy process remained an important issue, it was no longer urgent as compared to the need for assisting Chicago's victims of the Depression. The city of Chicago provided little in the way of welfare subsidies or unemployment relief from its own budget. These functions remained, as they had been since the city's incorporation, the legal responsibility of the county and the state. There were no laws preventing the city from contributing to relief programs using its own funds. However, the taxpayers' revolt had created chronic revenue problems which compelled Cermak to solicit private charities, the state, and finally the federal government for such assistance. Ironically, Cermak's decision reinforced the position that the state and federal governments were legally responsible for relief, sparing the city this long-term fiscal burden. On December 29, 1932, Illinois obtained another $7.255 million from the RFC to carry out emergency relief work in twenty-seven counties of the state through the month of January 1933. Cook County borrowed almost the entire state allotment, and the loan was repaid through annual deductions from the state's federal aid allotment. These relief bonds originally failed in the private market, making the role of the RFC all the more significant in relieving the ravages of the Depression. The last two loans granted to the state were predicated on the assurance that the state legislature, meeting in January of 1933, would take active steps to provide relief funds to its own localities.24 The first interim report of the Illinois Emergency Relief Commission was presented to the state legislature on January 25,1933. The report estimated that $92 million of state or federal funds was required for statewide relief that year. The number of unemployed in Chicago in October of 1932 was estimated by the Illinois Emergency Relief Commission to be between 715,000 and 800,000 people. The market for Cook County relief bonds was also uncertain because of litigation to prevent the use of motor fuel tax funds for relief.25 In response to the litigation, newly elected governor Horner supported the imposition of a state retail sales tax, which gained the approval of the

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state legislature. The tax was turned back to the counties according to the amount they contributed, and those which did not need it for relief purposes could use it to reduce the school property tax. Horner would later prove to be a conservative governor more concerned with balancing the state budget than funding its city governments' relief efforts.26 In February of 1933 Cermak traveled to Miami to appeal to President Franklin D. Roosevelt for federal relieffunds. As fate would have it, Cermak died by a bullet meant for Roosevelt. Alderman Francis Corr was elected acting mayor by the City Council. On the same day a bill was introduced in Springfield to allow Chicago to choose a mayor who was not a member of the council. By March 30 it had been approved by both houses and signed by the governor. On April 14 the City Council had approved Ed Kelly, chief engineer of the Sanitary District, as Chicago's mayor. This entire transition was engineered by Pat Nash, boss of Cook County's Democratic machine. Kelly became mayor as Chicago's fiscal crises ended, but the Depression was still in full swing. Kelly would completethe work that Cermak had started-ending the taxpayer strike, further cutting of the city and school board's budget, and getting increased relief aid for the city from Washington. Most important, Kelly would consolidate control over the Cook County Democratic party machine, providingimportant leverage in the city's fiscal policy process for future mayors. Fiscal Crisis in New York City: 1931-33 New York City's Depression era fiscal crisis fits the classic model. The crisis was precipitated by the city's exaggerated forecast of real estate revenue collections between 1929 and 1932. In 1932, when the anticipated revenues from real estate taxes did not arrive, the city did not cut back on its spending but instead turned to short-term borrowing, which grew at a staggering rate. The city's operating expenses and interest on short-term debt began to far exceed the tax revenues it was actually collecting. During the deepening economic Depression the crisis reached its peak when the New York banks refused to lend the city any more money until its budget was cut and its debt burden restructured. As the Chicago case demonstrates, the short-term causes of the crisis tell only a small part of the story. There are also more complex long-term causes that relate to the structure of the city's fiscal policy process, and they are apparent in the following discussion.

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The Crisis Erupts The specter of fiscal disaster began to loom over New York City in 1930,but unlike that in Chicago, New York's crisis did not erupt until 1932. Mayor Jimmy Walker started to draw attention to the city's finances when he went to Albany for special legislation to reopen the city's 1930 budget in direct response to demands made by fire and police department employees for increased salaries. Even with its home rule prerogative, the city needed approval from the state legislature for most of its revenue initiatives. Special legislation was granted, and, by early February, $4.2 million had been added to the city budget to cover the increased salary costs. Although Walker, himself, did not really wish to reopen the budget, he was a stalwart of New York's machine, Tammany Hall,27 and he knew only too well that Tammany's base of support, like all political machines, came from patronage jobs. His most important electoral constituency was the city workers, and he intended to keep them happy. As New York state's reform Democratic governor, Franklin D. Roosevelt assisted Walker with the necessary legislation in the Republican-dominated state legislature. Roosevelt and Tammany had been enemies during his early political career and later, when he sought the presidential nomination. But with the assistance of Edward J. Flynn, the Bronx boss and a longtime supporter, the governor learned to work with Tammany. Tammany's block of votes was crucial to both the mayor's and Roosevelt's ability to pass legislation, and even the governor rewarded its loyalty.28 By reopening the budget and proposing a tax increase, Mayor Walker put the general issue of fiscal mismanagement on the city's political agenda and became vulnerable to the attacks of traditional critics like the Citizens' Union and the League of Women Voters. It was also at this time that Comptroller Charles Berry issued a report to dispel fears in the financial community that New York City was having fiscal problems. Berry's report concluded, "No, New York City can never become bankrupt."29 This statement was a sure sign that fiscal problems were brewing. Berry pointed specifically to the charter, constitutional, and statutory safeguards that would prevent New York from ever becoming insolvent. Nevertheless, legal restrictions on the city's budgetary policy could ensure fiscal stability only if they were enforced. By 1930 it was clear that the city's policymakers could circumvent the constitutional and statutory limitations imposed by the state legislature and overspend. In fact, the ability of Walker to reopen the budget was the first public indication that political forces were overriding the legal boundaries of New York's fiscal policy.

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The city continued to move toward fiscal crisis when in June of 1930 other revenue shortfalls were discovered in the budget. The mayor decided to issue bonds and notes to cover the expenses, with the greatest share of bond revenue earmarked for transit programs. Despite these revenue problems, expenditures increased for all city services, including expenditures for the completion of new capital projects such as the Rikers Island penitentiary and a Bellevue Hospital psychopathic pavilion.30 Casualties of the Depression were also making new demands, which heightened the city's revenue problems. The Emergency Committee on Unemployment, with a five hundred thousand membership base in the city's private and public sector unions, proposed that the mayor assist the jobless by expanding public works projects and creating a comprehensive system of relief. Walker was sympathetic to their demands and promised more capital programs to provide jobs for the unemployed.31 A $1 million blanket appropriation was approved in mid-October of 1930 for unemployment relief to be used to hire emergency city employees. Clearly, by 1930, the city's budget was expanding without sufficient revenues to support its existing or new services. The mayor's unorthodox spending decisions invited further criticism from civic and business organizations. The most serious criticisms came in October from Peter Grimm, president of the Real Estate Board and head of the Civic Organization Committee on the Budget. Grimm's committee represented big business and banking interests in the city. He argued that, given the prevailing business Depression, the city should be retrenching, not increasing its spending by $55 million. Grimm also criticized city officials for proposing real estate tax increases to raise the needed revenue while real estate values had generally fallen. Despite these criticisms, on October 31,1930,the Board of Estimate and Apportionment adopted a $621 million budget for fiscal 1931, a 9 percent increase over the previous year. The budget was also adopted without dissent by the Board of Aldermen. Since Tammany Hall controlled the council, the real budget-making authority was shared by the mayor and the Board of Estimate. Half of the 1931 budget went for salary and wages and another third for servicing the municipal debt.32 The greatest change in the 1931 budget was an increase in the number of municipal employees and their salaries. Most of this increase targeted the police, fire, and sanitation departments. Public welfare costs, although they also began to increase, remained a minor expenditure by the city. Avoiding the issue of Depression relief, Grimm's criticisms of the city budget continued after its adoption and through the summer.

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The business community was convinced that the city was being mismanaged and that actual city spending for 1931would reach $700 million. Grimm stressed cutting waste and unnecessary jobs, especially in the construction and operation of city buildings. This, however, was a lucrative patronage operation for Tammany Hall, and it was not likely to be cut voluntarily. Grimm also opposed short-term financing of subway construction. In response to Grimm's criticisms, Mayor Walker began his 1932 budget preparations by requesting that every department head cut expenditures. At the same time, Charles L. Kohler, the city's budget director, explained that budget increases were needed for unemployment relief. Grimm responded that the city government was spending too much money, and the reference to unemployment was merely a 'justification for its extravagance."33 The coalition Grimm represented expanded to include the Real Estate Board, the Citizens Committee on the Budget, the Chamber of Commerce, the Merchants Association, the Association of Savings Banks, and the Fifth Avenue Association. He spoke of organizing a citizens budget committee to stop Mayor Walker. Grimm's rhetoric revealed a strategy meant to appeal beyond the business community to a broad-based group of city residents. He argued that the victims of city government negligence would not be merely businessmen and property owners, but tenants, taxpayers, merchants, and homeowners.34 The business community criticized the city for inefficiency and argued that the national Depression and an unhealthy business climate required the city to cut spending. However, they failed to consider that these very same economic conditions were putting real pressure on the city to increase spending on unemployment and social welfare services.35 Another service that was unpredictably draining city funds was the subway system. Comptroller Berry, a Walker political foe, proposed financing the construction of subways in 1931 by substituting longterm bonds for the usual four-year bonds. Using long-term bonds would have decreased the 1933 budget by about $12 million, and he proposed using the savings for the city's welfare program.36 Changing the subway financing procedure was not seen as a way to cut the budget but, rather, as a way to provide increased welfare services. Berry also made several retrenchment proposals, which amounted to converting short-term debt into long-term debt, a practice now referred to as rolling over debt. This policy essentially frees up money for short-term budget needs but increases the city's debt for future administrations. Expenses are not eliminated; they are merely

CHAPTER THREE

postponed. While city officials had become increasingly sensitive to their critics in the business community, they still showed no interest in abandoning their patronage minions or their relief programs. The proposals to roll over debt indicated that the political will to cut spending had remained weak. Spending on Depression-related services was among the hotly debated fiscal 1932 budget issues. Secretary Egan of the Board of Child Welfare testified that his agency could not withstand the cut recommended by Berry, because applications for relief had increased 60 percent over the previous year (1931) and the board was already two months behind in processing requests. As a result of this testimony, the mayor proposed increasing the funds provided for relief.37 Berry insisted that the only way to effect a real reduction in the tax bills of property owners was to reduce the fiscal 1932 proposed budget by at least $13 million. The mayor viewed Berry's statements as an attempt to discredit and blame him for the budget increases and to avoid taking responsibility himself. The mayor called an open meeting on the budget and mobilized all his department heads to defeat the comptroller's specific recommendations to the Board of Estimate for budget cuts. The Board of Estimate adopted the mayor's $631million budget for fiscal 1932. Berry's was the only dissenting vote. The strain on New York's finances was revealed in the 1932 budget. Of every dollar the city spent, 30 cents was required for debt service and 23 cents for education. The city expected to receive 72.7 percent of its revenues from real estate taxes, and 12.6 percent from the state.38 The major proportion of the city's budget was committed to interest payments and personnel costs. It employed nearly one hundred fifty thousand people and had a $30 million monthly payroll, over 50 percent of total spending. The property tax was the major part of the city's revenue, and expectations for property tax revenue were extremely unrealistic while the Depression was in full force. The city also faced a burgeoning debt problem. It had a net debt of about $1.75 billion, which was constantly increasing. In the five-year period between 1928 and 1932, the city's net debt grew at a rate of $70 million a year, accelerating in the last two years. This debt was all long-term, incurred for public improvements which included subways, schools, water systems, docks, hospitals, and such projects as the Westside Highway and the Bronx Terminal Market. Despite the value of these projects, the city had nearly reached its state-imposed debt limit. The second part of the debt problem was short-term debt. During this period the city was always in the market for short-term loans to carry on its business while taxes were being collected. In 1930, New

DCPRKSION-ERA FISCAL CRISES

York borrowed $229.05 million for periods of one to twelve months, excessive by any standard. Comptroller Berry had already warned in 1928that, unless the city put a brake on its borrowing, it was likely to become bankrupt.39 The needs of the unemployed were also overwhelming New York City's government. By 1932 the city was operating seventy-nine precinct Home Relief Bureaus, to which thirty thousand families had already applied for assistance. The welfare-spending issue combined with the problem of tax delinquency to create a shortfall in city revenues. By January 1932, the city needed to borrow to meet payroll obligations, short-term notes which were due, and debt interest. This finally gave the banks the necessary leverage to influence city policy. The definite signs of impending fiscal crisis appeared when the banks warned the city to adopt a strict economy program or lose access to the credit market. This action by the banks incited a public debate over the city's finances. In his speeches, Mayor Walker battled the bankers on the issue of humanity versus dollars, arguing that the bankers could not insist on retrenchment before lending the city any more money. The mayor gave dramatic accounts of the eight hundred thousand people out of work in the city and the thirty thousand families being fed by contributions from the salaries of municipal employees. Despite the strong rhetoric, pressure from the banks was taken seriously. In public, Mayor Walker championed the needs of the unemployed, but in private, he advised city department heads to retrench. The bankers engaged the accounting firm of Price, Waterhouse and Company to go over the comptroller's records. Their preliminary investigations of the city's financial condition were released to the press to counter the mayor's attempt to portray them as villains. They portrayed a cooperative relationship between the New York banks, the comptroller, and the mayor, and they made sure to mention that loans to the city were not contingent upon raising the city's subway fares or decreasing the city's social and charitable services. Mayor Walker desperately wanted to avoid a bank takeover of New York's finances and went so far as to send a telegram to New York's Democratic senator Royal S. Copeland urging federal legislation to permit the proposed federal Reconstruction Finance Corporation (RFC) to lend money to cities as well as to banks. As was the case with Chicago's loan request, the federal government refused to become involved. With no revenue sources the crisis escalated. The mayor announced a $110 million cutback of expenditures and the indefinite

CHAPTER THREE

postponement of projects for parks, new schools, and fire stations. As a result of the retrenchment approved by the Board of Estimate, the banks agreed to lend the city $12.5 million at 6 percent for eleven days. This loan enabled the city to meet short-term obligations maturing the day the loan was approved, interest payments, and payroll costs due the following Saturday. Despite the loan, the city's financial situation remained more serious than ever. The mayor issued a statement resolving that the city would curtail spending, retrench, and make enterprises pay their own way. As a result of Mayor Walker's pledge of strict economy, the bankers agreed to lend the city $350 million more. The banks also agreed to set up a $150 million revolving credit fund, at 6 percent interest, upon which the city could draw if necessary. The Board of Estimate's action to adopt the mayor's resolution was regarded in financial circles as a complete victory for the banking community. The bankers agreed to market the city bonds without profit in order to demonstrate their good faith to the public. At the same time, the state legislature quickly passed a bill allowing the city to issue special corporate stock notes, which essentially lifted the legal ceiling on the city debt. The city's skirmish with the banks was over by the end of January, and the Board of Estimate promptly took steps to provide $10.5 million for its relief programs while continuing its general retrenchment policy. Walker, however, resisted pressure from civic and business groups to eliminate the salary inequality among the seemingly grossly overpaid-but politically important-municipal employees. In June, continued frustrations over the city's fiscal policies among business and civic associations led to the formation of the Citizens Budget Commission (CBC). This commission, headed by Peter Grimm, was designed to be a permanent body to bring about reductions in the cost of city government and to study possible sources of new revenue. Most notably, this created a formally organized interest group which would articulate the business community's position not just on city finances but on budget priorities as well. The CBC, as part of a growing reform coalition, would provide formidable opposition to the political dominance of Tammany Hall in New York City politics. The CBC's agenda received an unexpected boost when, in the middle of the budget crisis, Mayor Walker resigned due to disclosures of political corruption brought to light by the Joint Legislative Committee to Investigate the Affairs of the City of New York. The committee's counsel, Samuel Seabury, had zealously pursued Tammany's leadership, exposing political payoffs and corruption in every facet of city government from the administration of relief to the police and judici-

DEPRESSION-ERA FISCAL CRISIS

ary.40 Walker was never indicted, but enough evidence surfaced to force his resignation, leaving Board of Aldermen president Joseph McKee as acting mayor on September 1. Walker's abdication left Tammany without a mayor to protect jobs and contracts, and the corruption investigation made all other machine politicians extremely vulnerable. Ultimately, Acting Mayor McKee's efforts to keep the city from fiscal ruin were undermined by members of his own party, and the struggle for control that followed Walker's resignation contributed to Tammany's eventual demise and its loss of the mayoralty to the Fusion candidate Fiorello H. La Guardia. McKee was mayor of New York for only four turbulent months. A special election was held in November for the remaining year of Walker's term, and the Democratic nomination was given to surrogate judge John O'Brien. Democratic boss John Curry of Manhattan engineered this replacement. McKee was from the Bronx and part of boss Ed Flynn's organization, and Curry was intent on protecting his borough's domination of city politics. Reformers were unsuccessful in their efforts to find a Fusion candidate to run against O'Brien, and the Republicans nominated the elderly Lewis Pounds, a former Brooklyn Borough president. The Democrats won with record pluralities, but McKee actually received two hundred sixty thousand write-in votes. Reformers knew that, if they could only organize for the next year's mayoral race, the machine could be defeated.41 During this political turmoil, Acting Mayor McKee demonstrated that he had different policy objectives than Walker, and made a serious effort, which impressed even the reformers, to bring the city's fiscal problems under control. McKee ordered that all departmental requests over the 1932 budget be slashed by 20 percent. However, in October, McKee's budget powers were revoked by the Tammany block in the Board of Estimate, which included Comptroller Berry and the borough presidents of Manhattan, Brooklyn, and Richmond, primarily in retaliation for his support of municipal employee paycuts.

The Crisis Is Resolved The final stage of the fiscal crisis began in October 1932when Charles E. Mitchell, chairman of the National City Bank, delivered the ultimatum to the Board of Estimate that the bankers would not lend any more money to the city until the 1933 budget was substantially reduced. As head of the Tammany block that had taken the power over the 1933 tentative budget away from the acting mayor, Comptroller Berry was the chief target of Mitchell's remarks. In response to the bankers' threat, the Board of Estimate slashed the budget by

CHAPTER THREE

about $75 million, including $49.75 million from subway refinancing and $1 million in hospital appropriations for temporary employees.42 At the end of October, the banks decided to lend the city $18.5 million to meet the immediate expenditure requirements for November, although they cautioned that the trial period was not over. Their response in an open letter to the New York Times became known as the Bankers' Statement. It warned of the rapidly increasing city debt and the apparent unwillingness of the administration to put its financial house in order. It noted that many of the proposed budget cuts were not really cuts at all; they were technically savings in the city's operating budget that were either moved to the capital budget or converted into long-term bonds. The banks also advocated state legislative action to authorize city control over municipal employees' salaries, which constituted the major proportion of the 1933 budget. Finally, the Bankers' Statement linked the city's fiscal health to its ability to provide unemployment relief.43 The Bankers' Statement marked the beginning of the final stage in the unraveling of New York's fiscal problems. The city was forced to implement the economy measures that the banking community had suggested, but this was not enough. The fiscal crisis and the split in Tammany provided the reformers with the opportunity they had been waiting for. A coalition to win city hall from the Tammany machine had developed, and fiscal management issues were part of the reformers' platform. As evidence against Tammany grew, the CBC took the offensive, collecting the necessary budget and payroll data to support its case. Grimm stated, "We should profit by the example of Chicago and lock the stable before the horse is gone."44 Political struggles within the Democratic party also continued. Each faction wanted to take credit for saving the city from fiscal disaster. In November, leaders of the Board of Aldermen framed an economy program in secrecy. Aldermanic President Dennis Mahon directed the sessions and reported back to John Curry, the leader of Tammany Hall. Acting Mayor McKee was left out of these sessions since surrogate John O'Brien was to become mayor on January 1. Tammany announced that its retrenchment program included a 10 percent cut during the next year for all municipal employees not protected by mandatory legislation. An application was also put before the legislature for the reduction of mandatory salaries paid to education, police, and fire department employees.45Just two days later, Comptroller Berry publicized his own solution to the city's budget problems, which was remarkably similar to the one proposed by Tammany.

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These plans were not merely intended to improve the city's fiscal condition. Tammany leaders had another very important agenda, as Mayor-elect O'Brien was facing reelection the following year and Acting Mayor McKee loomed as a threat if he ran as a Fusion candidate. Democratic leaders throughout the city were convinced that some form of real retrenchment was necessary if they were going to retain their power in city hall. Tammany feared that the banks would refuse further loans, and a single payless payday would result in a wide cleavage in its ranks. At the beginning of the crisis Democratic leaders thought that loans would be made whether the budget was reduced or not, but the Bankers7Statement changed their belief. During the previous month, the bankers had agreed to lend the city only enough to tide them through the month. Future loans were dependent on demonstrated cutbacks. The proposed reforms by Tammany Hall were also designed to quell the clamor of real estate owners for budget reductions as a preliminary step to reducing taxes. Much to Tammany's dismay, the city's financial problems would not be easily resolved. Each month brought another budget crisis. In December the city realized that it lacked the funds to finance its December relief program, and the banks refused its loan request. Driven to further budget reductions, the Board of Estimate finally pushed to adopt three resolutions asking for an immediate special session of the state legislature in order to appeal all mandatory salary laws as a forerunner to general salary reductions. Both Governor Franklin D. Roosevelt (soon to be president) and Acting Governor Herbert Lehman were reluctant to call a special legislative session because of the cost to the state, while the Republican majority block opposed giving the city unrestricted control over salaries, fearing the influence of Tammany. While the bankers' refusal to advance further loans to the city forced the administration to implement budget cuts, the political struggle between Acting Mayor McKee and the Tammany block continued to obstruct a final resolution of the fiscal crisis. McKee voted against requesting a special session of the state legislature and placed the blame for the city's financial problems directly on the Tammany-controlled block in the Board of Estimate. The final accusation came from Deputy Comptroller Frank Prial, head of the Civil Service Forum and a spokesman for the majority of the city's one hundred forty thousand employees. He ardently opposed salary cuts and attacked his immediate superior, the comptroller, as well as the acting mayor, by charging that control over the city administration had passed into the hands of the bankers. As a result of these disputes, the city's financial situation became a three-ring political circus, without

CHAPTER THRU

a clear voice that could forge a consensus among the competing interest groups. In an effort to bolster his reelection prospects, Mayor-elect O'Brien appointed a revenue advisory committee with a mandate to propose sources of income for the city that would reduce the real estate tax burden and bring tax relief to property owners. Taxation suggestions quite prophetically included increasing the city income tax and levying new taxes on movie theaters, hotels, cigarettes, soft drinks, and gross retail sales. Despite O'Brien's efforts to address the city's fiscal problems, the crisis escalated in early December as accusations of mismanagement were substantiated. The Hofstadter committee of the state legislature, which reviewed city finances, discovered that New York's three major sinking funds, the stabilizers of its financial structure, contained $191.4 million in municipal promissory paper which amounted to liens against future taxes. Accountants in the city's Department of Finance had been filling the sinking funds with city IOUs and releasing the money for operating expenses. On the same day that the Hofstadter committee's revelations became public, Comptroller Berry requested that the governor convene a special session of the state legislature. He stated that, if the city's $151 million short-term debt was not renewed or extended past the December 5 and 13 due dates, the city could not meet all its obligations, which included maturing subway bonds, weekly payrolls, and unemployment relief.46 Acting Governor Lehman approved the petition for a special legislative session scheduled for December 9. Two bills were presented: one provided for the repeal of mandatory salary legislation and resumption of control over city-paid salaries by the Board of Estimate, and the other provided for the reopening of the city budget before March 1,1933, to make the reductions effective next year. At the state legislative hearing Professor Joseph McGoldrick of Columbia University charged that the city's sinking funds were a "bookkeeping fiction" and that the city's budget was about $150 million out of balance. Having made an exhaustive study of the city budget for eight or nine years, McGoldrick explained that the city's budgetmaking process included "pyramiding of deficits." He pointed out that, although in 1931and 1932 the revenues were not received, they continued to be forwarded in all future budgets. Tax collections had also dropped steadily and delinquencies continued, but expenditures were passed on the assumption that taxes would be 100 percent received. Moreover, the city had borrowed not only from its sinking funds but from pension funds as well, which by December were made

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up of almost entirely city notes.47 Peter Grimm, chairman of the CBC, corroborated Professor McGoldrick's testimony. While the state legislature debated, the city's fiscal fortunes remained precarious. On December 7 the city faced default on its obligations once again. Forty million dollars of revenue bonds came due, and the city needed the approval of the banks to draw against the $150 million revolving credit fund they had established. The banks demanded $45 million in spending cuts before they would approve further loans. The Board of Estimate complied, and a last-minute loan was given to the city, saving it from default. At the December 9 special session of the state legislature, Governor Roosevelt proposed legislation to help the city resolve its crisis. The legislation would have repealed mandatory state laws controlling the pay of fire and police officials in New York City, reduced teacher salaries, and permitted cities throughout the state to reopen their budgets in order to retrench.48 While these proposals were being discussed, municipal employees mobilized in opposition. Members of the Patrolmen's Benevolent Society, together with teachers and firemen, had already launched a campaign to enlist the public's support against payouts. They were even more concerned about the possibility of local politicians controlling their salaries. The Civil Service Forum opposed paycuts in principle but conceded that, if paycuts were necessary, they should be temporary and limited to one year and pension rights should be protected. The CBC, the Hotel Owners' Association, the Merchants Association, the Fifth Avenue Association, and nearly sixty other organizations favored this legislation and argued that the city's real estate interests were burdened with an unfair proportion of taxation49 The original paycut legislation was discarded, and measures embodying compromises with the protesting employees were tentatively adopted in Albany. The bankers, however, were not satisfied with the compromise that reduced the salaries of firemen, policemen, and teachers for only two years. The tentative program included (1)keeping the laws fixing the salaries of teachers, policemen, and firemen on the statute books, (2) reducing the salaries of teachers through legislative action and those of police- and firemen through the Board of Estimate under legislative authority, (3)making reductions for these three classes of employees for a limited time, probably two years, and (4) guaranteeing existing pension rights by accepting the recommendations of the employers.50 On December 29,1932, the Board of Estimate approved pay reduc-

CHAPTER THREE

tion schedules ranging from 6 to 33.9 percent, which were designed to effect a savings of $18 million in the 1933 budget. Under the terms of the agreement with the city bankers, the Board of Estimate pledged to cut the budget an additional $40 million the following year, with half of the reductions coming from salaries. Mayor O'Brien took office in January and cut the final budget in excess of the $40 million reduction the city had pledged to the banks in December. Despite O'Brien's ideological preference to minimize the cut in worker salaries, he used the powers temporarily granted to him by the state legislature and cut salaries in every department. Education received the largest slash, and police was second. The city's capital outlay budget for 1933 was set at $20 million, with more than twothirds allotted to the city's subway system. The burden on the payers of individual property taxes was also reduced by reassessing the evaluation of property for 1933. O'Brien expected that the 1933 budget would be $271 million, $114 million less than the 1932 budget. Following Mayor O'Brien's announced budget cuts, New York's long-term bonds jumped half a point, a clear sign that the city's financial credit had improved. But the solution to this phase ofthe fiscal crisis was temporary. The mayor's powers to reduce municipal employee salaries and pensions were emergency grants of authority, while refunding short-term debt into long-term debt was simply a restructuring and not a reduction of the total debt burden. Also, the state and federal government still were providing minimal cooperation in absorbing relief costs. Despite O'Brien's austerity measures the city's debt problem continued. The Depression had caused tremendous hardship to many property owners, and as a result in 1933 the city still had about $150 million outstanding in uncollected taxes. Borrowing became the only way to pay municipal employee salaries and the long-term debt obligations that came due. In reality, the city still was spending money it did not have and might never collect. O'Brien was also determined to maintain unemployment relief even though to do so the city might have to borrow more money from the banks andlor raise the money from the issue of serial bonds. The mayor adamantly stated, "No one shall go hungry in the City of New York."51 The crisis finally peaked in April 1933. Bank-held revenue bills and short-term securities issued by the city that came due were extended to June in order to avoid default. But more short-term notes came due in June. The banks made it known that they would probably refuse to grant further loans unless some drastic change in the city's economic situation took place. Meeting payments on maturing short-term bonds was not the only problem. The city was spending some $7 mil-

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lion a month, about half of which came from the state, on relief programs. Desperate for more funds, in March the Board of Estimate had appropriated $5 million for work in home relief. The money was to be raised by the issue of five-year serial bonds.52 Until this point, most people had been discussing remedies for the city's fiscal problems in terms of saving money and not in terms of finding new sources of revenue. Local officials always hesitated to propose new taxes, because state legislative approval was required. The mayor's special financial adviser Samuel Untermyer went one step further by actually proposing that the state either provide enough funds to the city to meet its unemployment problem or completely take over the city's relief burden. Needless to say, the state turned down the request. Untermyer also proposed a new automobile tax, an increase in bridge tolls, an increase in the water supply tax, a tax on cab fare, and an ownership tax of $15 a year on trucks, buses, and cars.53 Tammany initially balked at these tax proposals, but given its constituency, the alternatives-curtailment of relief programs or an increase in subway fares-was unthinkable two months before the election. The bankers had flatly refused to advance the city any more money for unemployment relief and insisted that funding come from new revenues. Consequently, city administrators were forced to adopt the new taxes proposed by Untermyer. In July, Price, Waterhouse and Company's official audit of the city found that in 1932 costs had exceeded income by $162 million. The crisis escalated as the size of the city's deficit became known. In August, the city managed to obtain special power from the legislature to levy taxes, provided that such taxes would only apply to city residents and that the taxes be valid only from September 1933 to February 1934. Of all the taxes proposed, only one took effect, a tax of 1.5 percent on gross revenues of public utilities in the city from sales within the city. Water rates were also increased. The proposed taxes that provoked the greatest opposition were those targeted at the financial community. In response, the stock exchange started extensive preparations to move to New Jersey and the banks refused to continue negotiations for further financing of the city's short-term debt. The city finally agreed not to impose the financial taxes in return for implementing the "Bankers Agreement" approved by the state legislature at the end of September. The Bankers Agreement was a four-year program to finance the city, restore its credit, and provide for its relief needs. The program represented an agreement that had been reached between the bankers and the city in a conference with Governor Lehman. Tax defi-

CHAPTER THREE

ciencies were recognized as the basic defect in the city's financial structure so that collection of the city's back taxes formed an integral part of the plan. The agreement set forth responsibilities for both the city and the banks. The city agreed to a seven-point fiscal plan which included segregating tax revenue to retire outstanding debt and to pay back future debt. Funds in these accounts could only be drawn against securities for which they were earmarked. The next four city budgets would have a $50 million reserve against possible unpaid property taxes. The schedule for property tax payments would be restructured to improve collection, and property taxes would not increase for the next four years. Finally, the city would drop its taxes of stocks, savings banks, and life insurance companies.54 The banks agreed to refund $131 million of outstanding revenue bills issued against taxes in arrears over the next three years at 4 to 4.5 percent interest and to establish a revolving fund for the next four years against which revenue bills could be issued, limited by term and amount. The banks also agreed to advance the city $18 million on October 1and $36 million during October and November to be repaid by December 4. Finally, a $70 million fund would be set up from the sale of serial bonds to banks and life insurance companies to be used for the city's unemployment and relief needs. The Bankers Agreement resolved the city's immediate crisis and achieved the bankers' main objective: "To safeguard the money they had already lent as well as the funds they proposed to lend."55 By restructuring the city debt and earmarking specific revenues for the repayment of city bonds and notes, the banking community was satisfied that it had salvaged the city's credit and thus its finances. By 1934 tax delinquencies had dropped to a satisfactory level and the refunding of short-term debt into long-term securities enabled delinquent taxpayers to catch up through installment payments on their tax obligations. Ironically, La Guardia became mayor on January 1, 1934, "lacking a policy for anything but paying back bankers."56 With the support of these very same bankers, La Guardia, the Republican and City Fusion candidate, defeated the incumbent mayor O'Brien, the Tammany Hall candidate, and former mayor McKee, the Tammany renegade. After the Seabury investigations, Tammany's patronage system and the corruption in city hall became associated with the city's fiscal problems. Despite O'Brien's acceptance of the Bankers Agreement, the fiscal crisis paved the way for a reform candidate to win the New York City mayoralty in 1933. Certainly, other circumstances helped La Guardia win, like Republican support, the rift in Tammany Hall, and Roosevelt's endorsement.57 But the viability of La Guardia's candidacy depended largely on the public's

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perception that Tammany corruption was responsible for the fiscal crisis. As part of his platform, La Guardia promised to honor the Bankers Agreement and to balance the budget by eliminating political jobs without instituting new taxes.58 When he became mayor in 1934, La Guardia faced a political and fiscal reality that was quite different from any he had imagined. The $551 million budget he inherited for fiscal 1934 had a built-in $30 million deficit and general revenue funds which included a taxi tax which was voided by the courts, licensing and inspectional fees which were never enacted, a dubious refund of subway carrying charges, and $40 million of past due awards and bills. A full $50 million of municipal debt was also coming due.59 Once elected, La Guardia attempted to gain authorization from the state to reopen the 1934 budget and power for two years to reorganize the bureaucracy, fix salaries, and grant payless furloughs. His "Economy Bill" was defeated four times due to opposition from organized civil service employees and Tammany Democrats, both fearing job losses and salary reductions. With the help of Governor Lehman, a significantly revised version passed both houses in April. Most important, the Board of Estimate, not the mayor, was given the final authority to reorganize and abolish agencies, and only those directly under the mayor's control. La Guardia immediately cut the city's payroll, eliminating more than a thousand jobs. He urged the retirement of city employees over seventy years of age and implemented payless furloughs. La Guardia also economized on city purchasing. Despite these savings he needed to raise new revenue and received authorization to impose any tax, within the city boundaries, which the state legislature would pass. An income tax and a financial enterprise tax were passed, the utilities tax that O'Brien had used was renewed, and a 2 percent sales tax on commodities (except food and medicine) which would expire in 1935 was also passed.60 La Guardia also went to Washington to convince Roosevelt to spend federal dollars on unemployment relief. His effective lobbying would make New York the primary beneficiary of federal relief funds during the Depression. La Guardia was rewarded for his economies. In April the city successfully sold a $7.5 million short-term bond issue at its lowest interest rates since 1931. At the same time, because of the city's improved credit situation, the banks agreed to modify the Bankers Agreement by reducing their interest rate by 1 percent and allowing a 50 percent cut in the reserve fund.61 All through La Guardia's first term in office, questions about municipal salaries, redeeming bonds, payouts, and deficits continued to

CHAPTER 1HREE

plague the mayor. Despite these problems and La Guardia's opposition, salary restoration was implemented early in 1937 on the recommendation of the CBC, Governor Lehman, the Board of Estimate, and the budget director. The city's fiscal crisis formally ended when the banks restructured the city's debt and forced a brief period of retrenchment, but the remedies were only temporary. Politics as usual returned to New York City. The resolution to New York's fiscal crisis in 1933was, in fact, cosmetic. La Guardia was not able to resolve the city's financial difficulties until the national economy was revitalized by America's entry into World War 11.Although the city's debt was restructured in 1933, providing the immediate resolution to the fiscal crisis, the city's fiscal policy-making process had not seriously changed. The renewed prosperity strengthened the old political relationships which had caused New York City's fiscal problems in the 1930s, contributing to longterm fiscal instability. By the time a national recession emerged in the 1970s, fiscal conditions in New York were once again ripe for a crisis.

The Legacy of the 1930s Depression era fiscal crises in New York and Chicago provide an empirical base for explaining the short-term factors which trigger urban fiscal crises, the conditions which define a fiscal crisis, and how fiscal crises are resolved. Their examination can also help to identify the long-term political causes of fiscal problems and to explain why some cities retain fiscal stability during periods of economic scarcity while others develop problems. In the post-fiscal crisis period of the 1930s, fiscal policy-making structures were locked into place and reinforced by subsequent political interactions and policy decisions. Chicago's ability to retain fiscal stability in the 1970s and New York's crisis during the same decade can be directly linked to how they responded to their fiscal crises in the 1930s.

The Short-Term Causes of Fiscal Crisis The immediate causes of fiscal crisis are shortfalls in revenue which lead to deficit spending and heavy reliance on short-term debt. Cities develop deficits for many reasons: simple mismanagement and inefficiency, political corruption, an unpredicted decline in the local tax base due to a downturn in the economy. All of these conditions need not be present to trigger fiscal crisis. The short-term causes of New York's crisis are easily identified. Between 1929 and 1932, New York grossly exaggerated its forecast for

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real estate tax revenue, its revenue optimism based on the preceding decade's rapid economic growth. Between 1921 and 1932, assessed valuations of the city's property had doubled.62By 1929,however, construction was down and assessment lagged behind market-value changes creating a high level of tax payment delinquencies. By 1932 nearly 20 percent of the previous year's tax levy was uncollected. To compound these problems, the city's annual allowance for uncollectible taxes was inadequate: having allowed $5.75 million for delinquencies, its real 1931tax levy delinquency was $89.4 million.63 New York's revenues were also hurt by falling dock and water rents. Importantly, cities in this period were almost exclusively dependent upon the property tax for their revenue. There was no federal aid, insignificant state aid, and a small number of users' fees. Even sales taxes had not arrived at most cities yet. New York had expected to finance 80 percent of its 1932 budget from real estate taxes. When the anticipated revenues did not materialize, New York did not immediately cut spending but instead turned to short-term borrowing, which in turn was allowed to grow at a staggering rate. New York's short-term debt increased to $106.6 million by 1932 and the city's credit seriously deteriorated so that it was too expensive to float long-term bonds. Moreover, delinquent tax revenue was used to fund the city's operating budget, not to pay off short-term debt. When short-term debt became too high, the city's comptroller opted for the time-honored tradition of rolling over debt, converting short-term into long-term debt. The city also moved operating expenditures into the capital budget.64 New York's short-term debt problem was compounded by a longterm debt burden accumulated from financing hospitals, waters systems, docks, schools, the Westside Highway, and an expanding subway system. Comptroller Berry proposed replacing the four-year subway construction bonds with long-term (fifty-year)bonds, providing an immediate potential savings of $12 million. Berry, however, wanted to use this money to provide increased welfare services rather than to cut city spending. Chicago's fiscal crisis in 1930 was inadvertently triggered by a tax reform movement that had prevented the collection of property taxes for the previous two years. The agencies responsible for evaluating property in Cook County for the purposes of taxation were controlled by party leaders who used their position to benefit their political allies. A legal battle for control of these agencies forced Chicago to operate almost completely on borrowed funds from 1928 to 1930, since three-quarters of its revenues normally came from property taxes. Chicago, like New York, had also overestimated revenue projections

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and had already spent $23 million over what it could expect to receive in uncollected taxes. Moreover, Chicago's short-term debt problem was compounded by a fifteen-year practice of borrowing against its trust and surplus funds. When Chicago's debt and revenue problems were brought to light in 1930, the mayor had no interest in cutting spending to reduce the city's deficits. Two key factors contributed to revenue shortfalls and deficit spending in New York and Chicago during the early 1930s: the domination of city government by corrupt party machines and the Depression. The Depression, no doubt, was the critical factor in precipitating both crises. Certainly, both the Walker administration in New York and the Thompson administration in Chicago were corrupt and mismanaged, but nevertheless corrupt political machines had abused power, wasted city funds, and padded the payrolls with patronage employees for decades before the crises. The banks did not express serious concern about these practices until their investments in city bonds appeared jeopardized by the Depression. The Depression created "tight" money at all levels of governments and in the private sector as well, and as a consequence more cautious lending policies. Yet the Depression had somewhat different impacts in New York and Chicago. Property tax revenue shortfalls were attributable to the Depression in both cities, but Chicago felt their impact before New York because of Chicago's politically created tax collection problem. Spending was another matter. New York increased appropriations for the unemployed even when the city did not have enough revenue to maintain basic services. Walker refused to raise the five-cent subway fare to forestall an added burden for the city's working class and poor. By the 1930s the subway had already become a major drain on city revenue. In Chicago, on the other hand, spending was curtailed early in the crisis and the city never appropriated funds for the unemployed.

The Condition of Fiscal Crisis

A period of fiscal crisis can be charted from a city's exclusion to its reentry into the bond market. Once the banks lock cities out of the credit market, a fiscal crisis is formally under way. Using this criterion Chicago experienced two fiscal crises, since it was excluded from the bond market in January of 1930 and again in May of 1931. New York had trouble getting credit in January and October of 1932 and was finally excluded from the bond market in June of 1933. There are, however, other characteristic symptoms of a fiscal crisis period which are not identified in public administration textbooks.

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These include attacks by civic organizations that the city is inefficient; declarations by the city's chief financial officer that the city is in excellent fiscal health; public bickering among elected officials to avoid responsibility for the impending crisis; charges of conspiracy against the banking community; and hapless efforts to cut city spending. All the nontraditional indicators of fiscal crisis can be found in both New York and Chicago during the 1930s, as well. One of the best of these informal indicators involves the public relationship between the mayor and the comptroller. Since the two are generally political rivals, the mayor will request that the comptroller study the city's finances only when the city's fiscal problems are extremely serious. Commonly, when the comptroller issues a report which reassures the public that there is no possibility that fiscal problems can develop in the city, a crisis is imminent. So it was in 1930 when Charles Peterson, Chicago's treasurer, denied that the city was broke. In a New York Times interview he said that the bonded indebtedness of New York was 20 times higher than that of Chicago, 'and nobody but a lunatic would pretend that New York is in a bad financial condition."65 Of course, quite the opposite was true for both cities. Later New York's comptroller Berry made similar disclaimers. In February of 1931he issued the findings of his report on New York's fiscal condition to the New York Times, which stated that "statutory bars make bankruptcy such as Chicago faces impossible."66 Another nonconventional indicator that fiscal crisis is imminent can be found in the rhetoric and activity of the civic reformers. In the period leading up to a crisis civic organizations heighten their attacks on city government and their criticisms are taken more seriously by the press and the public. In New York, Peter Grimm, founder of the CBC, led the reform attack against Mayor Walker and the Tammany machine. He was assisted by Samuel Seabury, special counsel to the state legislative committee investigating political corruption in New York. The CBC was an organization dominated by the city's business elite. In this period "good government" forces were supported by the joint efforts of the city's real estate and business community. In Chicago, Silas Strawn became chairman of the newly founded Citizens' Committee at the request of the city's oldest civic organization, the Civic Federation. Strawn and the Citizens' Committee spearheaded the attack on Chicago's Mayor Thompson. Although Strawn's group had the support of the city's business and real estate elites, their efforts to control the city's fiscal crisis transition were subverted by an upstart real estate organization, the Association of Real Estate Taxpayers (ARETI. This group created the mass move-

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ment that led to the taxpayers' strike in 1931and triggered the second phase of Chicago's fiscal crisis. The success of political reformers depends on decisions by the banks. When banks refuse to give a city credit, services must invariably be cut and the city's population will suffer deprivation. This lends credence to the charges of reformers that the politicians in power are responsible for the crisis. Reformers can make charges about corruption and inefficiency for years without any impact on public opinion or government policy. Reformers need the banks to insist on politically unpopular budget cuts before they can succeed in changing public policy. The banks' role in the city's fiscal policy process is enhanced during a crisis. The publicity makes them easy targets for the threatened politicians. During the 1930s charges of conspiracy against the banks could be heard in every political corner in both Chicago and New York. At first the mayors used surrogates to attack the banks, but eventually both Walker and Thompson themselves went on the offensive. Whether fiscal crises were the result of banker conspiracies is almost irrelevant in this context, for there is no doubt that elected officials used these charges to divert attention from themselves. Fiscal crises eventually lead to budget cuts, and no politician wants to bear that responsibility. Banks are the obvious, if not the appropriate, target. Rather than forge political solidarity, rival factions and parties use fiscal problems to attack the mayor. In New York, Walker was attacked by the city's comptroller, the Republican minority leader in the Board of Aldermen, and Republicans in the State Assembly before he resigned in a cloud of political corruption. This political infighting also contributed to Tammany's defeat in the next election. Thompson's problems in Chicago were certainly as bad as Walker's in New York. Thompson's opposition came from machine Democrats in the City Council and reform factions in his own party. Even the state's Republican governor refused him assistance. Chicago's machine politicians therefore worked two fronts during the fiscal crisis: while they were trying to reenter the bond market and finance the city's budget, they were also trying to retain control of the county tax assessment machinery. In the end, old alliances broke down and provided leverage for reformers to defeat Thompson in the next election. Ironically, reform's candidate was a stalwart of the Democratic machine. The lively public debate during a fiscal crisis contrasts sharply with political discourse during growth periods. Politicians are eager to take credit for any improvements in their city during periods of prosperity, but during fiscal crisis everyone tries to avoid taking responsi-

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bility for unpopular decisions. The public debate may sound like name-calling, but it is very important in mobilizing support for the retrenchment period which invariably follows fiscal crisis. Public support is key in determining the types of policies pursued to resolve the crisis and in bringing about an orderly political transition during the postcrisis retrenchment period. Before the crisis is resolved, the city government generally tries to implement its own austerity measures in an effort to get back into the credit market, but these efforts are usually too late to avoid the inevitable loss of political control over the city's budget. Once a fiscal crisis is under way, the banks have the ultimate power and any resolution is likely to reflect their interests. In Chicago, when Mayor Thompson finally agreed to an austerity budget, the city could not meet its operating expenses and municipal employees actually went unpaid. It was too late to bargain with Strawn's Citizens' Committee or the banks. In New York, Mayor Walker originally refused to cut municipal employee salaries or relief assistance. At the end of November 1932, Acting Mayor McKee proposed cutting the 1933 budget by $75 million, including reducing the city's work force and cutting municipal employee wages. His efforts were thwarted by the rift in New York's Democratic machine, and McKee's budget authority was actually rescinded by the Board of Estimate. By the time Mayor O'Brien made his retrenchment proposal in January, the banks were not interested in bargaining.

Resolution of the Crisis: Temporary Changes or Political Restructuring of the Urban Fiscal Policy Process A fiscal crisis is not formally ended until the city is permitted to reenter the bond market. Since cities are in desperate need of funds throughout the fiscal crisis period, banks are in a position to dictate the terms for resolving the crisis. Not surprisingly, the banks have consistently taken advantage of their positions. Typically, the terms for reentering the bond market include restructuring the city's debt burden, an austerity budget, and new taxes. Elected city officials are usually forced to relinquish financial control of city government to an appointed committee as a final condition for the bailout. The issue of responsible government is muted during this period, since citizens have no direct control over appointed officials. Electoral accountability is suspended to justify saving the city from impending financial ruin. All these conditions were met in New York and Chicago during the 1930s. The fiscal crises in both cities were not resolved until their state governments legislated a temporary takeover of city government by the business and banking community.

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The Long-Term Causes of Fiscal Crisis and the Development of the Fiscal Policy Process As the cases of New York and Chicago in the 1930s demonstrate, the symptoms of fiscal crisis are not difficult to identify. Yet, resolving a fiscal crisis does not mean that the conditions which caused it have been eliminated. Beyond the short-term causes of fiscal crisis and its formal resolution there are still many unanswered questions. Why aren't cities more conservative about their revenue projections? Why do they allow deficits to build up? Why do they resort to excessive short-term borrowing when revenues are not available to support budgeted expenditures? Are mayors simply perennial optimists who expect that if they wait long enough the revenue necessary to balance their budgets will eventually be found? If they know the signs of fiscal stress, they also know that cutting spending can resolve their fiscal problems, at least in the short-term, yet this is a policy of last resort. The answers to these questions can be found by examining the long-term political interactions in the city's fiscal policy process. The political relations involve the mayor, the city council, the party, interest groups, and the state and federal governments. Like all cities which experience fiscal crisis, New York and Chicago had unstable fiscal conditions for decades before their 1930s crises. The two cities had remarkably similar fiscal policy processes as they entered the Depression. A period of prosperity had fueled expenditure growth with very little concern by elected officials for the revenue side of the budget. Deficit spending and excessive borrowing were acceptable fiscal practices. The mayor's control of the budget process was dependent on political machines interested in padding the payroll with patronage employees and selling city contracts to the highest bidder. Interest groups demanded higher city spending but worked mostly through the party in this period. Mayors interested in reelection responded affirmatively to the demands of both political parties and organized interest groups to expand the city's budget. In this period most cities were dependent on property taxes for their revenue; there was no aid from the federal government and minimal aid from state governments. New York and Chicago were no exception to this pattern. State governments also controlled municipal employee wages, local taxing authority, and debt levels. The major difference between New York and Chicago during the 1930s was their level of responsibility for municipal service delivery. Chicago already had an elaborate structure of special districts and a county government which shared in the burden of providing services to the city. In

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contrast, New York was essentially the sole service provider to its residents. Chicago, however, was not helped by these noncity jurisdictions during the 1930s, because they all shared structural weaknesses in their fiscal policy processes. The important difference between New York and Chicago was how they resolved their fiscal crises. When fiscal crises are resolved, there is an opportunity to change long-term political relations in the fiscal policy process. During the crucial period of stabilization, Chicago improved its ability to avoid future fiscal problems whereas New York reinforced existing dysfunctional fiscal relationships. The political transformation that occurred during Chicago's post-fiscal crisis period created structural changes in the fiscal policy process that enhanced the mayor's ability to retain fiscal stability. In New York, the opposite occurred. The political interactions which gave rise to the 1930s crisis were not permanently altered. Even in the area of party politics, where significant changes clearly took place, the outcome made no improvement in the city's long-term ability to retain fiscal stability. The party and interest groups i n the fiscal policy process. At the time of their 1930s crises both Chicago and New York's governments were dominated by corrupt political machines. Chicago's Mayor Thompson happened to be a Republican, and New York's Mayor Walker happened to be a Democrat. Both mayors fell from public favor with the fiscal crisis and brought down their political machines with them. In the 1930s, governing the city was not separate from controlling the party. In fact, the only way a mayor could control city policy was by also dominating a strong party organization. Mayors were not always party bosses, and machines were often factionalized; as a result, patronage politics was a double-edged sword. Mayors were often at the mercy of machine bosses for control over their bureaucracy and the city council, and for their reelection. In both New York and Chicago, machine mayors who governed during the fiscal crisis were defeated by reformers in the subsequent election. Whoever holds power during a fiscal crisis is naturally held accountable for the city's problems. Reform in this context means a change from the status quo. The crisis affords an opportunity for a new governing coalition to take over, with the interests of the banking and business community as its defining characteristic. To win elections during a fiscal crisis period, a candidate must run as a "reformer." This means that the new administration will be different from its predecessor by implementing the necessary fiscal changes to balance the budget and return the city to the credit market.

The real difference between New York and Chicago with respect to party transformation came during the retrenchment period, after the immediate crisis had been resolved by cutting spending and restructuring the debt. Before its 1930s fiscal crisis, New York did not have a monolithic party. La Guardia defeated an already splintered Democratic party by running as a reform candidate on a Republican and Fusion party ticket. La Guardia refused any reconciliation with the remaining factions of the Democratic machine and had no interest in creating a strong Republican party organization. La Guardia's real goal was to destroy Tammany Hall, and, in that one sense, he remained true to his reform roots throughout his three-term mayoralty. In Chicago, Cermak won the mayoralty on the Democratic ticket running as a good-government candidate, but he never severed relations with his faction of the machine and became chairman of the Cook County party organization. In effect, he consolidated the positions of mayor and boss. Cermak received his political training under the Democratic boss, George Brennan. He served as an alderman for several terms and was president of the Cook County Board, in which capacity he built new criminal courts and jails and acquired the Forest Preserve. WhenBrennan died in 1928,Cermak took over as boss of the Cook County Democratic party. Cermak understood the weaknesses in Chicago's government structure. He knew that there was no formal administrative coordination between the city, county, and special districts and that the party was the only real source of power. He also understood that to defeat the Republican mayor Thompson he needed the support of the reformers. Machines of both parties were associated with corruption, rising taxes, and, worst of all, the city's fiscal crisis. When Cermak ran against Thompson for the mayoralty, he ran as a reformer and on his record of reducing taxes during his reign as Cook County Board president. Cermak won the mayoralty in April of 1931with the support of reformers and with the machine he built in the tradition of early Chicago bosses like George Brennan, Bill Lorimer, and Fred Ludin. Cermak's organization brought together all the factions of the Democratic party in Cook County and a considerable number of Republican converts. Before Cermak's victory the Republican machine had depended on black voters, who were holdovers from the Civil War. The massive exodus of the blacks to the Democratic party did not occur until Franklin D. Roosevelt's presidential victory. Through Cermak's and later Kelly's efforts black voters were also incorporated into the Democratic machine.67 Cermak and Kelly were responsible for creating the rigidly hierarchical machine that remained the hallmark of Chicago politics

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until the death of Richard J. Daley in 1976.68 The structure of neighborhood politics with ward committeemen and aldermen acting as liaisons between the individual and city government was put into place by Cermak. Cermak reaffirmed the important role of the party in electing public officials and securing municipal employment. Most important, he consolidated control over all the state, county, city, and special district patronage jobs. Although Chicago had a complex structure of ancillary governments, the mayor could assert control over all these units of governance by controlling appointments, patronage jobs, and the budget process. Cermak firmly established the tradition in Chicago which associated party politics with governance. The machine became inseparable from the service delivery bureaucracy. Cermak's legacy, a powerful Democratic machine, was the instrument used by subsequent mayors to consolidate control over the city's fiscal policy process and over interest group demands.69 Two important questions remain in light of these differences between Chicago and New York. First, why did New York City's machine lose power during its fiscal crisis while Chicago's machine was strengthened? Second, why is it important to the fiscal policy process whether party discipline is lost or maintained? The casual political observer would expect reform government to bring efficiency and fiscal stability and the machine to provoke precisely the opposite outcome. The importance of a strong party organization in the fiscal policy process is directly related to interest group activity. New York was a city with strong and diverse interest groups before the fiscal crisis. The political activities and the power of these groups were even apparent during the crisis itself. The municipal employees' demands for pay increases were among the sparks that ignited the crisis. Even when the city was being forced by the banks to retrench, the last cuts came from municipal employee salaries and jobs. Admittedly, municipal employees were a significant part of the machine patronage operation, but their own organizations made them more independent from party control. Other interest group activity came from the business and real estate interests and in the area of social welfare. Private sector unions and civic groups demanded that the city provide relief and unemployment programs for the victims of the Depression. The city actually floated its own revenue bonds expressly to raise money for relief. During the fiscal crisis, financial and real estate groups successfully lobbied the state legislature to prevent the imposition of taxes that were adverse to their interests. Significantly, these groups were organized to make their demands on city government. During the fiscal crisis all

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of these groups were forced to make some concessions, but they were only temporary. La Guardia gained control of New York City's political apparatus by crippling the Democratic party organizations, especially Tammany. The result was increased power for organized interest groups. La Guardia's twelve years of rule as a strong antimachine mayor left New York City's already fragmented Democratic party unable to recoup control. New York's decentralized budget process remained after the crisis, but mayors were left without the party to discipline the borough presidents, who had their own constituents and power to obstruct the mayor's policies as members of the Board of Estimate. Chicago's machine was strengthened during the fiscal crisis for several reasons. Chicago did not have the interest group structure in 1930 that existed in New York. When Chicago's fiscal problems were discovered by the banking community, the first group to be affected was municipal employees. City workers not only received paycuts but went without salaries for months. By the end of 1932 the city owed its employees $40 million in back pay. Relief for the victims of the Depression was not a city function. It was provided by private charities, and even the state offered little assistance. The only effective organized interests in the city were the real estate taxpayers and the bankers. Since Chicago was a two-party city at the beginning of the Depression, reformers had a choice of supporting the incumbent Republicans or allying themselves with the party out of power. During the fiscal crisis they chose to work independently of both party organizations. Cermak, despite his Democratic machine background, gained the confidence and support of reformers and the business community, which broke with B E T , the real estate group that organized the taxpayers' strike. More important, as Gosnell has explained, business and social leaders in Chicago did not care "to mingle in the rough and tumble of urban politics."70As long as the Democratic machine could control labor disputes and hunger riots during the Depression, it was able to maintain the support of the business community. By the time reformers became disenchanted with the Democratic machine, an important working relationship had been established with the downtown business and banking interests. Civic reformers were left "whistling" in the windy city, with no Republican party and no serious economic base of support. By providing a formal channel for the demands of different groups in the city, the machine discouraged, if not prevented, the development of organized groups. The post-fiscal crisis period was critical because it was the turning point for the party's power in both cities. As Lowi has explained, "When New York was losing its last machine and

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entering into the new era of permanent reform, Chicago's machine politics was just beginning to consolidate."71By weakening the party, reformers ultimately strengthened interest groups and left New York mayors without the means to control the fiscal policy process. In Chicago, mayors were able to control the fiscal policy process because of the strong machine legacy left by Cermak. Although both cities made budget cuts during the crisis, the similarity ended there. New York mayors became dependent on the support of interest groups for winning reelection and continued to follow the precedent established before the 1932 fiscal crisis of resolving political conflict by spending. As a consequence, New York's budgets simply grew to accommodate new pressure groups and had no mechanism for cutting programs back once they were established. In Chicago, mayors relied on the machine to control the demands of interest groups and were thus capable of cutting the budget when changes in the city's economic base warranted retrenchment. Formal-legal arrangements and intergovernmental relations in the fiscal policy process. The second part of the 1930s post-fiscal crisis legacy concerns the transformation of intergovernmental relations and the ability of the city to share the cost of service delivery with other jurisdictions. New York and Chicago shared two problems in intergovernmental relations during their fiscal crises. First, despite requests by both cities, the federal government took no direct action to alleviate their problems; second, their state governments would get involved only after the situation had reached a crisis level and the banking community urged a state legislative remedy. This, however, is where the similarities between the two cities ended. Before the 1930 fiscal crisis, Chicago's government structure was completely decentralized. Overlapping authorities, the county and the city shared responsibility for service delivery. Police, fire, and health services as well as the cleaning, paving, and lighting of streets were provided by the city corporate government. There was a special board that had jurisdiction over tubercular hospitals. The city courts also had an independent budget process. A semi-independent agency controlled the election machinery. The public libraries were controlled by a board with separate taxing authority, and the school board had full authority over its own finances. The county board, which provided a public hospital and most welfare services, was also independent of the city municipality. The disposal of city sewage was entrusted to yet another government jurisdiction. The principal public parks were maintained by three boards, one for each section of the city, and each was a government in itself; within them there were

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nineteen park districts. Each of these independent jurisdictions could float bonds, each had taxing authority, and some could order special tax levies for stipulated purposes. These government structures were coordinated informally through the party. When there was a split in the party, as was the case in 1930, the ancillary governments were independently controlled by different factions of the party and sometimes different parties. The mayor did not have legal control over any government other than the city corporation, and any coordination came at the pleasure of the machine. This decentralized government structure allowed for much waste and duplication of administration. During prosperity the party was strengthened by these formal-legal arrangements, but as the Depression set in, the inefficiency and waste could not be tolerated by bankers concerned with debt repayment and taxpayers who could no longer afford the cost of mismanaged government. This atomized government structure also created a particularly complex situation when property taxes were reassessed, since all of these jurisdictions were largely dependent on the property tax for their operating revenues. Fiscal crisis occurred in virtually all these jurisdictions, and as a consequence they were also targeted for reorganization and consolidation by the reformers. Cermak's influence extended to the state legislature, where he was able to gain support to consolidate many of the 438 taxing bodies in Chicago and Cook County for better management and gain authority for the city over the appointments and spending in the special districts. The strengthened machine gave Chicago's mayor control over the ancillary governments but no legal responsibility in the city budget for the costs of their services. The restructuring of government in Chicago retained the fiscal advantages of special districts and county governments without their disadvantages. The city remained legally responsible for providing only basic housekeeping services and could rely on the broader taxing and bonding authority of the special districts and county to decrease the strain on the city budget of providing the more costly redistributive services. For example, Chicago established a pattern of county and state payment for most public welfare services during the Depression and a special authority was responsible for the provision of costly mass transit services. New York City maintained precisely the opposite pattern of intergovernmental relations. New York's unitary form of government provided every conceivable service through its own corporate budget, including public welfare and education. Even at the height of the Depression the state provided minimal assistance to the city's relief programs. Nearly bankrupt private subway lines were also taken

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over and consolidated with the city's system at great cost to local taxpayers. At the time of its fiscal crisis the city charter gave the mayor weak formal powers over the budget. The Board of Estimate and Apportionment, composed of five borough presidents, the comptroller, the president of the city council, and the mayor, prepared the expense budget and was responsible for approving all appropriations. Each borough president also had control over his own territory, particularly patronagejobs. A strong party was also essential in New York for coordinated government operations. Although Tammany Democrats controlled city hall, they were constantly struggling with different factions of the party that were based in the other boroughs and wielded their power in the Board of Estimate. The board, in practice, delegated its fiscal authority to the budget director, who was a mayoral appointee. The fiscal crisis demonstrated just how dependent the mayor's budget authority was on the political allegiance of the board members. In 1932 the board actually rescinded its delegation of power to Acting Mayor McKee and reasserted its exclusive role in preparing the budget. During the fiscal crisis several proposals were made to the state legislature to reorganize and consolidate New York government. Former governor Alfred E. Smith's reorganization plan included elimination of county officials, handing over part of their function to the city government; obliteration of the borough system; the creation of two city chambers in the legislative branch; and more reliance on state and federal financing of city services. The purpose of this proposal was to give the mayor more direct control over the budget, reduce inefficiency, and reduce the city's burden in paying for costly services. Despite the obvious need to make these structural changes, they were rejected by the state legislature. Mayor O'Brien did succeed in getting the Municipal Assembly to amend the City Charter in 1933. The amendments established the Bureau of the Budget, headed by the director of the budget, as an agency under direct control of the mayor. The budget director was given responsibility for preparing the executive budget and the capital budget. While these changes had important managerial consequences and did enhance the mayor's power in the budget process, the Board of Estimate still had to authorize each capital project separately. The final budget appropriations also required the approval of both the Board of Estimate and the Board of Aldermen. New York's fiscal problems were not simply the result of a decentralized budget process. State-mandated spending was a serious fiscal burden for New York even in the 1930s.The CBC acknowledged

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that "a substantial part of the cost of municipal government was beyond the control of the city administration because of laws passed by the state legislature."72If debt service was combined with the mandatory costs for municipal employee pensions granted by the state legislature, then the city actually controlled only 26.8 percent of its $631 million budget in 1932. During the crisis period La Guardia gained control over municipal employee salaries and pensions but only for a two-year period. Once the crisis was resolved, the mayor lost the legal authority to control these costs and was vulnerable to the demands of organized city employees, who could circumvent his policies by lobbying the state legislature directly. Even during the 1932 fiscal crisis the state provided the city with minimal fiscal relief. There was no permanent takeover of costly city services, and even control over municipal employee salaries was temporary. In January of 1933, Governor Lehman actually considered reducing education aid to the city. The state helped the city restructure its debt, but that assistance was specifically designed to have only a short-term impact and did not reduce the city's total debt burden. The remedies for New York's 1932 fiscal crisis were merely cosmetic. When the failure of the state to make any permanent changes in the city's fiscal policy process is combined with the decline of New York City's machine, one conclusion emerges. A renewed national recession could precipitate another fiscal crisis in New York City. This is precisely what happened in 1975. Chicago did not confront these same fiscal problems, because its city government was restructured in the 1930s and the mayor's power was enhanced, albeit through a strengthened machine. In New York the political interactions which fostered deficit spending and high levels of debt in the years before the Depression era urban fiscal crises reasserted themselves once the crisis was resolved. In the next section New York's 1975 crisis is examined for its similarities with the 1930s crises. Since Chicago did not experience a fiscal crisis in the 1970s, there is no parallel discussion.

The 1975 New York City Fiscal Crisis: The More Things Change, the More They Remain the Same The chronicles of New York City's 1975 fiscal crisis are instructive because they bear a striking resemblance to the Depression era fiscal crises in both New York and Chicago. New York was deeply enmeshed in a fiscal crisis that began in the early spring of 1975,but through most of that year the public remained skeptical that a crisis was really occurring. This skepticism was the

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product ofwhat had become a yearly budget ritual of politicians claimingrevenue shortfalls,threatening serious service cuts, and thenfinding the funds to restore services and balance the budget. After years of deficit "wolf crying" the city's elected officials had virtually exhausted their credibility with the public. Deficits had also accumulated for years before the 1930s crises in both Chicago and New York, with the two city's mayors constantly threateningbudget cuts which were never implemented. New York's mayor, Abraham Beame, was actually aware of the banking community's growing concern over the city's mounting debt when he first took office in 1974. In anticipation of Beame's first budget for fiscal year 1975,the city issued $8.3 billionin short-term notes, the highest in its history, and $900 million in long-term bonds.73 While the volume of city debt was extraordinary, the banks had been profitingfrom the city's debt "habit" for decades. This patternof steadily rising short-term and long-term debt, as well as deficit spending, was reminiscent of the 1930s in both New York and Chicago. In October and November of 1974, the city's creditors had one real concern, the tightening money market. Continuing to lend New York money at the rate and pace to which the city had become accustomed simply posed too great a financial risk for the bankers and brokerage houses. As early as December of 1974, New York commercial banks reported problems marketing their share of the city's bond offering, with underwriters claiming actual losses.74 Mayor Beame was sufficiently concerned with the situation to meet with representatives of the city's major banks, including Chase Manhattan, Morgan, Chemical, and Citibank, and formed what was later called the Financial Community Liaison Group (FCLG). While Beame saw FCLG as a booster group whose purpose was to "sell" New York to the banking community, the bankers had other ideas. In reality this group's formation, headed by Elmore Paterson of Morgan, marked the beginning of the city's fiscal crisis, with the banking community initiating its informal consideration of the city's fiscal policy process and stipulating "reforms" for reopening the credit market to the city. Strawn's Citizens' Committee in Chicago and Grimm's Citizens Budget Commission in New York provided a similar avenue for banker influence during the 1930s. The proverbial handwriting was on the wall when the city's comptroller, Harrison Goldin, could find no buyers for New York shortterm bond offerings in February and again in March. Finally, in May, the banks publicly refused to market city securities. The city's cash flow problem intensified, and Beame was left with no choice but to go public with the city's fiscal plight. This sequence of events echoed the

1930s. Once the banks refused to buy city bonds, a fiscal crisis was formally under way. Beame argued, as mayors Walker and Thompson did in the 1930s at the beginning of their fiscal crises, that New York City's finances were basically sound and the banks were responsible for "denigrating" the city's fiscal integrity. Nevertheless, he would implement an austerity budget for the next fiscal year and request increased state aid to balance the budget. The key to his list of mayoral disclaimers was blaming the banks for creating the crisis. Beame's rhetoric was no different from that of mayors Walker and Thompson, who also faced losing their political power as the result of a fiscal crisis. In his May 1975 budget address, carried live by all the city's TV stations, Beame proclaimed, "The very institutions which were supposed to be promoting our securities have been out in the street poisoning our wells."75 The public airing of the crisis paved the way for a state response, but the response was not exactly what Mayor Beame had envisioned. The state legislature and Governor Hugh Carey bypassed the mayor and acted in concert with the city's banking and business elites to create first the Municipal Assistance Corporation (MAC) in June of 1975 and then, in September of that same year, the Emergency Financial Control Board (EFCB) and a special deputy comptroller for New York City in the Office of the State Comptroller. All of these institutional changes were designed to placate the concerns of the banking community by removing politics from the city's fiscal policy process. This, in effect, meant that a state and business partnership would assume control of New York City's government. In the 1930s the fiscal crises in New York and Chicago were resolved with a similar temporary takeover of city government by the business and banking community. MAC'S first order of business was to restructure the city's debt and restore lender confidence in the city's ability to manage its finances. Since there was no market for city bonds, MAC was authorized, as a borrowing agent for the city, to issue long-term debt which the city could use to repay its burgeoning short-term debt. To promote confidence in MAC bond issues, revenue from the stock transfer tax and the city's sales tax was set aside to guarantee the payment of MAC'S debt service. In order to carry out these changes MAC was given the power to review the city's budget (expenses and revenue estimation), approve short-term borrowing, and redesign the city's accounting procedures. Since members of MAC were appointed by the governor and included no elected city officials, its creation was tantamount to a state takeover of city g0vernment.~6 However, MAC proved to be without sufficient legal authority to

DfPRfSSION-ERA FISCAL CRISES

force the types of political changes on the city that the banking community desired: cutbacks in spending and a reduction of the city's work force. By the summer, the city appeared hopelessly out of control. There was a full strike by sanitation workers, a wildcat strike by firefighters, and police were blocking traffic in protest of layoffs.77 Moreover, as soon as the legislature pledged (not authorized) some funds to the city, Beame began rehiring laid off workers. These actions fueled the financial community's deep suspicions that Beame's resolve to implement their austerity program was weak, especially when it came to controlling the municipal employee unions. By July, Beame had developed a long-range fiscal plan, but it was not what the financial community wanted. MAC had its own plan that included a three-year ceiling on taxes and spending. Beame's failure to keep in step with banker interests resulted in further deterioration of the city's position in the credit market. Consequently, a successful MAC bond issue in August did not bring the city reassurance of future support from the banks. Instead, a letter to Governor Carey was written by the chairman of MAC, William Ellinghaus, which would effectively end the mayor's role in resolving the fiscal crisis: The message from the marketplace is clear. The investing public apparently lacks confidence in the City's management and its ability to regain its solvency. There is a pervasive perception that City efforts at fiscal and management reform are not credible. For these reasons the cash necessary to meet the maturing obligations of the city and the operating expense requirements for September and beyond cannot be raised through the sale of MAC bonds. Default is now an imminent prospect that must be faced with utmost urgency and s e r i o u ~ n e s s . ~ ~

With the threat of default looming perilously close, the role of the banking community in the city's fiscal policy process could once again expand without much protest. This time, with the passage of the Financial Emergency Act in September, the bankers would accomplish their goaL79 The similarity between the Financial Emergency Act and the Bankers Agreement in 1933 has been noted on many occasions. Chicago was assisted by state legislation in a similar way in 1930 and 1932. This legislation, engineered by Governor Hugh Carey and financial wizard Felix Rohatyn, a member of the MAC board, created the EFCB, which was given the legal authority to develop and approve a financial plan for the city, approve all city borrowing, administer a freeze on city employee wages, and set up the EFCB Fund as a depository for all city revenue.80 The Financial Emergency Act also appro-

priated $750 million of state revenue to the city, with the stipulation that other forms of financial assistance would be made available to the city from its pension funds and the banks; authorized direct purchase of MAC bonds by the state employee pension funds and the State Insurance Fund; froze city employee wages; and directed the appointment of a special deputy comptroller for New York City. The Emergency Financial Control Board was composed of seven members: the governor, mayor, state comptroller Arthur Levitt, city comptroller Harrison Goldin, and three businessmen appointed by the governor, Felix Rohatyn, William Ellinghaus, and David Margolis, president of Colt Industries. By making the EFCB trustee of all city revenue, with authority to control all investment and spending decisions in the city, and by ensuring minority representation of city politicians on the board, the governor effectively removed control of the city's fiscal policy process from its elected officials. But the bankers were not satisfied with the control they had gained over New York City's government. They also wanted to reduce their own financial risk, which could best be accomplished with a federal government guarantee of MAC securities. Of course, it was also in the interest of the city to have federal guarantees attached to MAC bonds. President Gerald Ford, whose support was crucial in obtaining any federal guarantee, was a serious obstacle. He had refused to provide any assistance to New York all through the early stages of the crisis, preferring instead to criticize New York's liberal spending policies, a strategy he was sure would "play well in Peoria." But the situation had changed since the beginning of the year. Not only had the state invested heavily in reorganizing New York City's finances but the city had implemented an austerity budget, it had laid off more than twenty thousand workers, and its unions had purchased MAC bonds with their pension funds. Yet Ford continued his posturing, showing little interest in New York or understanding of how its fiscal condition was affecting other municipalities or the potential impact that a New York default would have on the money market. Cities across the country were already confronting increased interest rates on their securities. October 17 provided a preview of what a New York City default could do to the international financial markets. On that day, with the prospect of actual default quite real, prices declined sharply in the stock market and trading in bonds virtually stopped, currency trading in Europe almost stopped, and world gold prices rose. When default was averted that same day, early losses were erased.81 In October, when the Senate Committee on Banking, Housing and Urban Affairs finally took up the issue of federal loan guarantees for

DEPRESSION-ERA FISCAL CRISES

MAC bonds, there was still no support from the Ford administration. In a speech before the National Press Club in Washington, Ford blamed the city's problems on bad financial management and insisted that "the people of the United States will not be asked to assume a burden that is not of their own making."82 He stated emphatically, "I can tell you-and tell you now-that I am prepared to veto any bill that has as its purpose a federal bailout of New York to prevent default ."83 The alternative legislation Ford sent to the Hill would simply have enabled the city to file for bankruptcy when it ran out of funds. The sheer demagoguery of Ford's speech went unmatched during the city's fiscal crisis period and was captured appropriately in the Daily News headline (see chap. 1).Ford's callousness toward New York actually became a national issue during the November elections, particularly for the Democrats. Governor Carey understood the need to mobilize favorable public opinion toward New York and seized the opportunity to go on a national lobbying mission, during which he successfullyportrayed New York City's plight as the plight of urban America. In the middle of November, Carey made a speech on state-wide radio and Beame made one to the National Press Club that appeared to turn sentiment in Congress in favor of New York City. Republicans began to view Ford's position as simply callous and a potential albatross for the presidential election that was approaching. With support growing among congressional leaders and the public, negotiations began with the White House through Felix Rohatyn. Ford agreed to support the New York Seasonal Financing Act after the state agreed to pass a new city tax package and issue a moratorium on city notes, offering investors the opportunity to trade them for MAC bonds at higher interest rates. This bill provided for federal short-term loans to the city of up to $2.3 billion bearing interest at a rate 1percent higher than the Treasury borrowing rate. In other words, New York did not receive any direct aid from the federal government but was merely given the opportunity to borrow funds at what might be characterized as "loan s h a r k interest rates. Moreover, the city's federal revenue-sharing funds were segregated against the repayment of the debt. Not only did the federal government make money on New York's fiscal crisis but the " a i d package to the city was actually much less than the Chrysler Corporation bailout and aid given to many Third World nations. After the legislation was passed, Ford continued to deny that it was a bailout of the city, giving Carey the opportunity to take credit for New York City's recovery on the national political scene. With federal guarantees in place the bankers ended their threats of closing the city

CHAPTER THREE

out of the bond market, effectively eliminating the danger of default. In contrast to the 1975 debacle, in the early stages of the Depression era fiscal crises, both New York's and Chicago's mayors had also sought assistance from Washington but were rebuffed. However, when Roosevelt became president, federal aid was funneled into both cities in the form of capital projects and relief programs. This new source of revenue was a significant factor in allowing cities to balance their budgets during the Depression period. In 1973 Beame had won the mayoralty running on the slogan "he knows the b u c k on the basis of his experience as comptroller. The irony was not missed by New York's electorate, and Beame was defeated in the 1977 Democratic primary by Edward Koch. Koch ran as a reformer and fiscal conservative and became the city's next mayor. During the Depression era fiscal crises the incumbents in both New York and Chicago were also replaced by "reformers" in the next mayoral election. It was not until 1979 that New York reentered the bond market with a city offering, and it was not until fiscal 1981 that the city's budget was balanced. To get to this stage of fiscal stability, New York went through a period of austerity, significantly cutting its labor force, postponing capital improvements, and reducing basic as well as redistributive services.84The city also implemented some fiscal management improvements, including an integrated financial management system, four-year financial planning, and a ten-year capital construction plan. The EFCB ended its formal control over the city budget in 1978. A Financial Control Board (FCB) would remain in place until 2008 as an advisory agency, whose full powers would be restored if the city ended a fiscal year with an operating deficit of more than $100 million. During the 1980s,while the city's economy grew, the FCB seemed to be little more than a relic of the city's fiscal crisis. Since the election of David Dinkins in 1990, however, a decline in the city's economy has created serious revenue shortfalls, igniting fears that the city will end fiscal 1991with a deficit and the FCB would be legally obligated to assume control of the city's finances, effectivelytaking power from the city's first black mayor. Most of the structural changes made to resolve the 1975fiscal crisis were temporary. The city was left with a disproportionate burden of redistributive services to pay for from its own budget, and the dominant role of interest groups in the fiscal policy process remained. The only significant structural change was creation of the FOB, which has, ironically, limited mayoral discretion in the fiscal policy process.

DEPRESSION-ERA FISCAL CRISES

The remainder of this book examines more fully the individual political components of the fiscal policy-making process in New York and Chicago before and after 1975. These long-term political interactions explain why New York repeated its past fiscal crisis experience in 1975 and Chicago did not. It also considers the current situation in both cities and their prospects for retaining fiscal stability. The first element of the fiscal policy process to be examined is long-term budget trends.

CITY BUDGETS AND THE URBAN FISCAL CONDITION: TRENDS IN EXPENDITURES

City Budgets a n d the Fiscal Policy Process

A city's budget is key to explaining why some cities retain fiscal stability and others do not. This and the following chapter examine how, using the cases of New York and Chicago, long-term trends in expenditure, revenue, and debt contribute to the development and persistence of a structure of decision making that promotes or undermines a city's fiscal stability. Past budgetary decisions are not independent determinants of a city's ability to maintain fiscal stability but interact with other political components of the city's fiscal policy process. Simply put, if a city is to retain fiscal stability, then the mayor must be capable of adjusting spending to the availability of revenue. Moreover, budget decisions have an impact on a city's fiscal condition both cumulatively and individually, creating a political environment which encourages or discourages fiscal responsibility. Cases in which long-term trends reveal variations in revenue, expenditure, or debt policy indicate that individual mayors have considerable flexibility in implementing fiscal policies. However, when a long-term trend in spending, taxation, or borrowing is maintained, it is unlikely that any individual mayor's budgetary decisions will deviate from the established trend unless there is external pressurefrom the federal or state government-which forces the mayor to implement fiscal changes. In the case of a fiscal crisis the state usually limits the mayor's legal authority over the budget and directs a caretaker executive to change fiscal policy. The federal government can also indirectly force cities to change their fiscal policies through pressures from a national war economy, which divert both revenue and personnel from the city budget. In both cases, mayors do not voluntarily change fiscal policy. As reflected in the budget, the mayor's basic fiscal policy decisions are: how much to spend, how much to tax, and how much to borrow.

TRENDS IN EXPENDITURES

Spending decisions determine how well services are funded, what services are cut, and what, if any, new services are added to the city's budget. Taxing and borrowing decisions are alternatives for raising revenue but are independent indicators of fiscal policy. Taxing decisions (e.g., property taxes, sales taxes, a city income tax, user fees) and levels of intergovernmental aid determine the mix of revenue for funding city services; borrowing decisions determine the level and type of debt a city incurs. This chapter and the one that follows demonstrate that it is not simply how much a city spends, taxes, or borrows at any one point in time but, rather, the type of spending, the type of revenue dependency, and the amount a city can afford to borrow, all over the longterm, that affect its fiscal well-being. There is a logic to urban fiscal crisis that demands attention to historical developments.1Blaming New York's 1975 fiscal crisis, for example, on Abe Beame's or even John Lindsay's policies is simplistic, particularly since other cities such as Cleveland, Detroit, Boston, and Providence experienced problems similar to those that occurred in New York. Certainly, the performance of New York's mayors could not have been repeated across the country, nor could the conditions that existed in New York have been contagious enough to spread to other cities within only months. Moreover, the 1980s now provide ample evidence that even the growth cities of the 1970s, such as Houston, Dallas and Tulsa, are also susceptible to fiscal problems. As chapter 3 argues, it is necessary to begin with the Depression period to explain the development of urban fiscal policy for the rest of the century. In the early 1930s,both New York and Chicago, like most other major cities, had fiscal crises during which political relations in the fiscal policy process were markedly different from both cities' noncrisis, or "normal," periods. Cutbacks in spending helped resolve the immediate crisis in both cities, but their long-term impact on fiscal decision making depended upon each city's ability to make structural changes in the fiscal policy process. The budget trend during the postcrisis period is crucial, since it provides evidence that the cutbacks that occurred during the crisis resulted from permanent changes in the fiscal policy-making structure in Chicago but not in New York. The patterns of spending, revenue, and debt that emerged in the 1930s, then, differed in New York and Chicago, and affected the cities' fiscal conditions in the 1970s. What do the budget trends reveal about the fiscal policy process in New York and Chicago in the post-1975 period? The decline in spending and borrowing that occurred during New York's 1975 crisis was similar to what had occurred during its earlier crisis. However, New

CHAPTER FOUR

York's post-1930s expenditure, revenue, and debt trends reasserted themselves during the 1980s in the wake of balanced budgets and a healthy local economy. The New York of the 1980s provides further evidence that no permanent structural changes were made in the city's fiscal policy process as a result of the 1975 crisis. Chicago's expenditure trend during the 1980s was more erratic than during previous decades; however, the revenue and debt trends remained constant. The expenditure trend reflects the city's political instability during this period, but any negative impact on the city's fiscal condition appears to have been short-term. The 1980s budget trend does not indicate a structural change in Chicago's fiscal policy process. A historical perspective provides insight into the structural basis of fiscal policy decisions.

Alternative Explanations of Fiscal Outcomes In analyzing the impact of long-term expenditure trends on local fiscal conditions, one must also consider competing theories of budgeting. These include the role of national and local economic cycles in determining fiscal outcomes; the incrementalist theory of budgeting; and the impact of the political/business cycle on spending decisions.

National and Local Economic Conditions Can changes in the economy best account for local fiscal policy decisions, and what is the relationship between national economic cycles, local economies, and a city's fiscal condition? After New York's 1975 fiscal crisis it was popular to argue that New York, like other older cities of the nation's frostbelt, were victims of national economic cycles (see chap. 2). Simply put, cities tend to be fiscally stable during times of national prosperity and to develop fiscal problems as a result of national economic recessions. If economic cycles were the driving force behind urban fiscal policy choices, then cities would never experience fiscal problems let alone fiscal crises. Cities would simply increase their spending during national or local prosperity and cut back during national or local recessions. In reality, the picture is more complicated and the state of the national and local economy might better be used as a contextual variable in explaining urban fiscal policy. The extent to which any city takes into account local or national economic conditions in its fiscal policy decisions is determined by the political interactions in that city's fiscal policy process. In other words, fiscally responsible city governments must save some revenue during periods of pros-

TRENDS IN EXPENDITURES

perity and reduce their spending during periods of scarce resources. Chicago did this, but New York did not.

Incrementalism How useful is the incrementalist theory of budgeting in explaining local fiscal policy choices and a city's fiscal condition? Proponents of incrementalist decision making argue that the best predictor of any one year's budget allocations is the previous year's allocations. Since budgets are not actively reviewed in total, last year's budget becomes the basis for a narrow range of increases or decreases in the new budget.2 While incrementalism may be useful in explaining why budgets do not change significantly in the short term, incrementalism alone certainly cannot account for the long-term development of fiscal problems in some cities but not others. If all budget decisions were incremental, then all cities would have similar fiscal conditions. More important, incrementalism cannot account for dramatic changes in city spending priorities, expenditure cutbacks, or the introduction into the budget of new service responsibilities which could adversely affect fiscal conditions. Contrary to the assumptions of incrementalist theory, long-term trends show that there are critical periods during which some city governments commit themselves to spending in particular functional areas in which interests develop that become entrenched, making such commitments virtually immune to budget cuts. Long-term trends can also reveal whether a city has been capable of cutting its total expenditures. The longer a spending or debt pattern is maintained, the more difficult it may be to cut it back. The extent to which a purely incremental model dominates fiscal policy choices is determined by a city's fiscal policy process. Expenditures in both New York and Chicago have not merely increased incrementally. In the period between its two fiscal crises, New York experienced critical periods of expansion within its overall pattern of growth while Chicago had critical periods of expansion and retrenchment.3

The Political-Business Cycle There is an electoral-economic model of national fiscal policy which links economic policy decisions concerning inflation and recession to presidential elections.4 According to this model, presidents increase spending during election years in order to create favorable economic conditions. A local political-business cycle linking growth in city

CHAPTER FOUR

spending to mayoral elections can be extrapolated from this theory of national policy. Unlike the president, who has considerable control over a wide range of economic policy options, the mayor has an impact on the local economy that comes primarily from spending decisions.5 If the electoral-economic model has any relevance to local politics, then mayors should increase their budgets during election years. Spending during an election year can enhance a mayor's reelection possibilities in two ways. First, targeting budget allocations toward the demands of particular interest groups may help bolster support for his reelection effort. Second, general preelection spending can provide the public with a positive image of the mayor as someone who "gets things done." The electoral-business cycle model may be useful for predicting spending trends, but its impact on the city's fiscal condition is determined by the political interactions in the local fiscal policy process. In cities with a high degree of interest group competition and weak party organizations, electoral coalitions can be particularly volatile. In order to put together a winning coalition, mayors seeking reelection will tend to increase spending during election years. In cities with strong political parties, this "bargaining" process is less likely to be tied to preelection necessity. Very few cities have party organizations strong enough to impose sanctions on groups which do not support their candidates in local elections. This old style machine politics has not been sustained in the age of civil service, strong municipal employee unions, electoral reform, and media campaigning. However, when interest groups are weak and parties still play a significant role in city elections, spending may be used with greater discretion by an incumbent mayor to repay the party faithful. Thus, in such cities the budget might expand in the first year of a mayor's administration. If a mayor is not seeking reelection, he may increase spending in the election-year budget, while incumbent mayors must, out of necessity, still worry about balancing the budget during their next term of office. Lame-duck mayors have no such constraint and are more likely to spend on programs without worrying about future costs to the city. Before 1975 the relationship between expenditure levels and mayoral elections shows different fiscal policy processes at work in Chicago and New York.6 During noncrisis periods, New York's incumbent mayors consistently increased spending during the last year of their terms (election years) whereas Chicago's incumbents were more likely to do so in their first year of office (after their reelection). After

TRENDS IN EXPENDITURES

La Guardia's reform victory in 1933, New York was left with a weak and fragmented Democratic party organization, forcing mayors to forge winning electoral coalitions on their own. Although some electoral victories were more costly than others, all New York mayors who were not hampered by regulations imposed during fiscal crises "bought" political allegiance from organized groups like municipal employee unions by increasing spending during election years. During the post-fiscal crisis period, incumbent mayor Beame was legally bound to cut spending and lost his bid for reelection to Ed Koch in 1977. Once the crisis was over, this pattern reasserted itself during Koch's second and third terms. In contrast, Chicago's mayors, from Ed Kelly in 1933 through Michael Bilandic in 1977, could count on the Democratic party machine and significant numbers of party loyalists to ensure electoral victory, and consequently they were less concerned about losing the support of key interest groups. This control over political competition gave mayors in Chicago greater flexibility in their spending decisions than their counterparts had in New York. Chicago's electoral business cycle did not begin to resemble the model found in New York until after Harold Washington's 1983victory. While Washington showed signs of establishing his own "machine" before his untimely death in 1987,7it remains to be seen whether a Democratic party organization capable of delivering votes to a strong mayor has been permanently dismantled in Chicago or whether a new one will emerge under the leadership of Richard M. Daley. In both cities, then, mayoral elections affected fiscal policy decisions, but during noncrisis periods the imperatives of New York's electoral process were more likely than Chicago's to result in irresponsible fiscal policy decisions.

City Budgets: Expenditure The remainder of this chapter focuses on the expenditure side of city budgets and its relationship to city fiscal conditions. Expenditures in New York and Chicago are analyzed by mayoral administration for the period between New York's two twentieth-century fiscal crises (FY1929-FY1975) and for the post-1975 fiscal crisis period (FY1976FY1989).8 The specific categories of spending analyzed include total expenditures, "common function" expenditures and their subset of public safety expenditures, "non-commonfunction" expenditures and their subset of public welfare expenditures, municipal employee expenditures, capital expenditures, and interest on debt.

CHAPTER FOUR

Total Expenditures The category total expenditures includes all city corporation operating and capital expenditures9 and does not take into account differences in functional responsibilities, as is done later. The magnitude and rate of growth in total expenditures can affect fiscal stability. Expenditure trends that show constant growth with no periods of retrenchment indicate that mayors are locked into spending decisions over which they have little control and which will ultimately create fiscal problems for the city. Periods of retrenchment in spending indicate greater mayoral control over fiscal policy decisions and an increased probability that fiscal stability can be maintained.

Common and Non-Common Function Expenditures The accepted methodology for dealing with the problem of service delivery variability among cities and overtime is to divide city expenditures into common and non-common function categories.10 This section considers the impact of common and non-common function expenditures, and their subsets of safety and social welfare expenditure, on the fiscal conditions of New York and Chicago. In comparing trends in common and non-common function expendituresll for New York and Chicago, per capita expenditures in constant dollars and expenditures as a proportion of the total city budget are examined. The differences in how much each mayor increased or decreased total spending and in how the increase or decrease was distributed among different functional areas are also considered. Common function expenditures are for services most often provided by the city's municipal government; these services are governmental control, general government building, finance, police, fire, sanitation, sewage, highways, and recreation. An important subset of common function services is safety, which includes police and fire; hence, expenditures for these services are considered separately. Non-common function expenditures are for those services which other jurisdictions, such as special districts, authorities, the county, or the state, may be providing city residents: health, hospital, welfare, libraries, urban renewal, utilities (mass transit, water), corrections, and education. The subset of non-common function services considered separately is public welfare services, which consist of welfare, health, and hospitals expenditures. Distinguishing between types of functions facilitates intercity and historical comparisons. Common functions provide a basis for comparing the expenditures of cities, even when they provide a different set of services. Once analytically meaningful categories of spending

are created, it can also be determined how different types of spending and changes in a city's spending priorities affect its ability to retain fiscal stability. These distinctions are particularly helpful when examining the effect of functional differences on the fiscal conditions of New York and Chicago. Non-common functions are usually considered "poor people's services,"12 or "redistributive services,"l3and are viewed as a "drain" on the city's resources. The non-common function measure employed here is more inclusive and a better reflection of the formal-legal arrangements in most cities. All those services which are not selfsupporting through user fees and whose beneficiaries come primarily from that sector of the population which is contributing least to the tax base are designated as non-common functions. There are two types of non-common function services: (1)those provided for the exclusive use of low-income city residents and (2) those provided for all income groups but that are also available at an additional cost from the private sector. Public welfare services-health, hospitals, and welfare-provide an unambiguous measure of redistributive services targeted for the low-income sector of the city's population, and are analyzed separately from the total non-common functions.14 Common function services have been classified as "middle-class,"15 "allocational,"16 or "essential" services. The conceptualization used here comes closest to the allocational typology; common function services are provided for all city residents of all income levels and are generally not available through private sector alternatives.17 It is not surprising that most cities have chosen to provide these services through their own corporate budgets. They are the traditional functions of local government-the "housekeeping" services-for which all taxpayers hold city officials responsible. Safety services, a subset of common function services, is used here as a more specific measure of basic city services. How does spending on common and non-common function services affect the city's fiscal condition? Most non-common services are strictly for the use of the city's low-income population. For noncommon services with a mixed-incomeconstituency, it is increasingly the norm that, when a private sector service option is available, those city residents who can afford the added cost will abandon the public sector non-common function service and choose the private sector option. As a result, although non-common function services may have a large constituency in the city, their users are generally less wealthy, less politically active, and less influential in the policy process. Noncommon function services are also generally more costly to provide. Given their constituency and the cost of these services, fiscal stability

CHAPTER FOUR

is more easily maintained when cities limit the direct provision of non-common function services or try to share their costs with a broader taxing authority. Cities which provide most of the noncommon function services through their corporate budgets have found the extra burden to be considerable and as a consequence have had more difficulty balancing their budgets. As to the question of the relationship between spending on common function services and fiscal stability, the argument is quite simple. Efficient common function services, regardless of their cost, keep those individuals and businesses which contribute most to the city's tax base happy. If these taxpayers are happy, then they will not move out of the city and will continue to provide a stable source of revenue that keeps the city fiscally stable. Is there a "right" balance between common and non-common functions that will allow a city to remain fiscally stable? A city that increases spending for non-common function services must trade off with decreases in spending on common function services, unless new revenue sources become available or the city's tax base expands, in order to maintain fiscal stability. With additional revenue, it is possible to increase spending on both common and non-common function services. But once service delivery in a particular functional area is introduced or expanded in the budget, it is difficult to cut back even when revenues decline. In the aggregate, the less a city spends on non-common function services, the better its fiscal condition is. In relative terms, as the percentage of a city's budget spent on non-common functions increases, the greater its chances for fiscal problems. Both hypotheses assume that cities remain subject to unpredictable revenue sources and that fiscal stability is the dominant priority of urban policymakers. The extent to which mayors actually reconsider past spending decisions and restructure priorities within the city-and whether they ignore fiscal realities-is an empirical question that can be answered by evaluating long-term trends in proportionate spending for common and non-common function services. The New York and Chicago cases indicate that local political agendas have varied over time within cities and that fiscal issues were not always a priority for local decision-makers. At this point we are not considering questions of why some cities spend more or less on non-common versus common function services or who benefits when these expenditures are increased and who loses when they are cut back. There is no doubt that redistributive services are important to the survival of America's cities and are valuable beyond their worth to those individuals who receive their benefits. The fiscal question is one of funding, not value. Specifically, does the city

TRENDS IN EXPENDITURES

have revenue to provide these redistributive services from its own base without creating fiscal problems?

Municipal Employee Expenditures and the Size of the Municipal Labor Force It would be difficult if not impossible to discuss seriously the politics of urban fiscal policy without considering expenditures on municipal employees and the size of the municipal labor force.18 The important role played by municipal labor unions in resolving New York's 1975 fiscal crisis put the spotlight on both the positive and the negative impacts that municipal labor can have on fiscal policy. Since 1975much of the cutback management literature has focused on the negative impact of public employee unions on fiscal stability. References to "bloated" municipal payrolls, the burgeoning costs of municipal employee retirement systems, inflexible work rules, and inefficiency attributed to collective bargaining agreements are common in the media as well as in policy studies. There is no question that municipal employees have been a convenient villain for cities facing chronic budget deficits. Hiring freezes and layoffs have become the policies of choice for mayors trying to resolve budget problems. This should not be surprising since expenses related to municipal employees, in the form of salaries, fringe benefits, and contributions to pension funds, dominate most city budgets, generally accounting for over half of a city's general expenditures.19 Yet the relationship between the level of municipal employee expenditures and a city's fiscal condition has not been clearly established.20 The magnitude of the cost is obviously important, but there is an intergovernmental and interest group politics dimension to the relationship between fiscal stability and municipal employee expenditures. Municipal employee unions have become a powerful interest group in the fiscal policy process, especially when they are a critical part of a mayor's electoral coalition (see chap. 7). Through civil service reforms and collective bargaining agreements many cities have lost control over work rules and retirement policies. Cities with strong municipal employee unions have generally paid more for services without gaining an improvement in the quality of the work or the efficiency of the workers. These problems are serious but are not likely to be the prime causes of most cities' fiscal problems. Machine cities also tend to spend high proportions of their budgets on municipal employees, although the mayors of such cities have generally retained control over work rules and pension policies. The fiscal burden of municipal employee costs is strongly related to

the scope of functional performance, which is a matter of intergovernmental relations (see chap. 6). The number of services a city provides obviously affects the level of municipal employee expenditures and the size of the labor force. Cities which are legally responsible for many services generally have a larger labor force and as a result spend more on municipal employees than cities providing fewer services. Cities with responsibility for the delivery of a significant number of non-common function services will have fiscal problems which are invariably related to municipal employee expenditures.

Capital Expenditure and Debt Service Since capital spending patterns are inextricably linked to levels of expenditure on debt service (interest on debt), these two budget items are analyzed together.21 The relationship between expenditures on capital outlay and the city's fiscal condition is complex. Cities borrow in the long-term bond market for capital projects. If a city's fiscal condition is stable and its economic base is healthy, capital spending does not create future fiscal problems. Moreover, it is often necessary for cities to increase capital spending during periods of local economic growth. Public works projects are especially important for cities experiencing rapid population growth and industrial expansion. But cities may commit themselves to capital spending without taking into account the longterm drain this can have on future revenue.22 Once a city's infrastructure is put into place, the spending is not over. Even while new construction is undertaken, cities must also spend to maintain existing buildings, roads, sewer systems, bridges, mass transit networks, and parks, not to mention the latest demands for water pollution control and ecologically sound waste disposal systems. This problem is particularly acute in older cities, which must not only maintain but replace infrastructures that often date back to the turn of the century. Spending on capital outlays is often motivated by political factors as much as strategic planning. Mayors have increased capital spending in order to provide jobs for city residents during national economic recessions and have also neglected infrastructure requirements when they needed a "quick-fix"budget-balancing technique. The Depression is known for great urban public works projects funded by the federal government whereas during its 1975fiscal crisis New York engaged in wholesale deferred maintenance. In this respect capital spending may depend on the availability of intergovernmental revenue and not on actual need. Spending on capital projects is particularly vulnerable to mayoral discretion because there is no one constituency pushing for capital

TRENDS IN EXPENDITURES

spending and the negative consequences of postponing spending usually redound to the next mayor. While it is often viewed as a "public good," the benefits from particular capital projects are often "divisible." For example, improving parks may benefit the entire city but the neighborhood where the park is located is the primary beneficiary of the spending. This is particularly important because the capital needs of cities remain great while their ability to fund worthy projects has diminished. In the end, scarcity dictates that capital projects will be limited. Every neighborhood will not get a new school, regardless of demonstrated need. On the other hand, the city might choose to fund a police station or new sewers and no new schools will be built at all. While the construction industry is a strong voice for all capital spending, the primary constituencies of each city service tend to advocate capital construction for their own areas above other claimants. Moreover, when it comes down to a budgetary trade-off between operating or capital costs, operating costs generally win. The short-term political benefits of increasing municipal employee salaries or increasing the number of police on the streets are usually more attractive politically than earmarking funds for a new water pipe that is much less visible and will not be finished for several years. Capital spending on services like road maintenance, where deterioration can have an immediate impact on city residents, is much more difficult to postpone. In general, however, mayors and their planning commissions have considerable discretion in selecting capital budget priorities and the extent to which fiscal stability is a consideration in capital spending depends upon the fiscal policy process of the city. A long-term perspective is especially important in examining the relationship between capital spending and fiscal instability, since there is likely to be a lag effect. Capital projects generally require long-term commitments of city revenue, which usually requires increasing long-term debt and debt service. As a consequence, the fiscal impact of capital outlays may not be felt until a mayor has already left office. Without large infusions of intergovernmental revenue, fiscally responsible capital spending requires a mayor who is immune to the immediate political pressures of demanding interest groups and has a long-term view of the relationship of capital spending with economic conditions and the costs of debt service. Interest on debt includes the cost of floating long- and short-term bonds. Interest on long-term debt is paid on money borrowed for capital projects while interest on short-term debt is paid on money borrowed for operating costs. The primary component of debt service is generally capital project (long-term) debt. Whatever its purpose, in-

CHAPTER fOUR

terest on debt is a drain on a city's revenue. Increases in debt service expand the budget, causing the total cost of service delivery to increase but without necessarily providing more immediate services or improving the quality of existing services. Therefore, as interest on debt increases as a proportion of the city budget, so do potential fiscal problems. When debt service increases without any growth in capital spending, the city is simply increasing its operating (noncapital) debt, indicating serious fiscal mismanagement. The debt created by capital projects is another matter and tends to generate fiscal problems for cities experiencing economic decline. The data analysis that follows will attempt to identify long-term spending trends or specific mayoral spending decisions that adversely or favorably affected fiscal conditions in Chicago or New York. Specific types of spending will be compared because trends in general expenditures can explain only a part of the fiscal instability problem. The disaggregated budget can show to what extent increases and decreases in spending are evenly distributed across different functional areas and whether some types of spending are more likely than others to cause fiscal problems. Why is it important, then, to determine whether these two cities have different long-term spending trends? Since maintaining fiscal stability requires control over the budgetary process, mayors must be capable of adjusting city spending to the availability of revenue. The trends for New York and Chicago indicate that New York mayors were not capable of cutting their budgets, except during fiscal crises, whereas Chicago mayors successfully made spending adjustments after resolving that city's 1930s fiscal crisis.

Total Expenditure Trends in New York and Chicago Comparing per capita constant dollar total expenditures for New York and Chicago during the 1929-75 period shows staggering differences in spending and in the rate of budgetary expansion (see fig. 1). In 1929, Chicago's Bill Thompson spent $82.98 per capita compared to $193.44 that Michael Bilandic spent in 1975. New York's 1929 budget was $226.82 during Jimmy Walker's administration, while Abe Beame spent $1,070 in 1975. This constituted a 372 percent increase in spending for New York compared to a 142 percent increase for Chicago. Overall real spending increased in both cities, but at a much greater rate in New York than Chicago. Moreover, per capita expenditures have been consistently greater in New York since 1929: even before the Depression, its corporate budget was almost three times that

TRENDS IN EXPENDITURES

29 33 37 41 45 49 53 57 61 65 69 73 77

81 85 89

YEAR

-NEW YORK

Expenditure

- CHICAGO Expenditure

Fig. 1. Total expenditure for New York and Chicago, 1929-89 (constant 1967 dollars per capita).

of Chicago. This trend clearly accelerated; as of 1975, New York was spending 5.5 times more than Chicago. Thus, during the period between 1929 and 1975, New York was not only consistently spending more per capita on public services than Chicago or other cities but also increasing its spending at a much greater rate. Extending this analysis through 1989 indicates that the decline in spending that occurred after New York's 1975fiscal crisis was similar to the decline in spending after its 1932fiscal crisis. Both periods were simply "aberrations" in an otherwise steadily growing city budget. Expenditures for New York between 1929 and 1989 showed a 440 percent increase while Chicago's reveal a 185 percent increase. During the 1975-79 fiscal crisis period, New York decreased spending by 25 percent, but Chicago's spending also declined 2 percent without a crisis to force its cutbacks. Spillover effects from New York's crisis, as well as a decline in the national economy, led many cities to cut their budgets during this period, and Chicago was no exception. Its spending cuts were consistent with earlier periods of retrenchment that the city had endured. Once New York's fiscal crisis was resolved, it reverted back to its earlier spending habits: between 1979 and 1989 New York's budget grew by 52 percent. Chicago's spending during this postcrisis period grew somewhat slower than New York's, increasing by 37 percent. Over the long term New York has been spending much more per capita than Chicago and increasing its spending at a greater rate.

CHAPTER FOUR

New York: Expenditure Trends from Jimmy Walker to Ed Koch Examining changes in total expenditures for New York by political administration reveals several interesting patterns (see fig. 1).First, total expenditures do not seem to be tied to particular mayoral policies. The growth in New York's budget remained largely constant from the end of its 1932 fiscal crisis until 1975, except for the World War I1 years. A political environment which encouraged spending existed in New York before the Depression and was only disturbed by fiscal crises and a world war. The declines in spending that occurred during New York's fiscal crises can be explained as temporary abnormalities which were a consequence of external political control of the city's budget. But what about Mayor La Guardia and the World War I1 period? In truth, any period in New York's history in which spending does not increase is notable. La Guardia's administration (1934-45) was the only time between the city's two fiscal crises during which a New York mayor managed to keep city spending constant; he actually cut spending 20.2 percent during his last term. These findings are best understood when viewed comparatively. La Guardia became mayor in 1934 in the wake of the fiscal crisis and at the height of the Depression, when other cities across the country, including Chicago, were cutting their spending drastically. In contrast, New York's La Guardia managed to maintain spending for services even at the height of the Depression. Compared to the cutbacks in spending made by other cities, New York's policy of keeping spending constant during the Depression years was functionally equivalent to the increases in spending that took place in later periods. Also, La Guardia's final retrenchment looks less dramatic when seen in the context of a war economy and nationwide cutbacks in domestic spending a t every level of government. Like the fiscal crisis periods, World War I1 is another example of serious retrenchment in New York resulting from external political pressure. In 1941the war and the federal government provided the external pressure while in 1932 and 1975 the state served the same purpose. Local political initiatives were never the source of any serious budget cuts. New York mayors seemed only capable of increasing spending. After the war, New York registered nonstop growth in expenditures until the 1975 fiscal crisis. This growth occurred throughout William O'Dwyer's and Vincent Impellitteri's administrations. Spurred by national economic prosperity and increased federal aid, New York led all local governments in spending during the 1960s. The reformer Robert Wagner increased spending during his last two terms (1958-65) by consecutive rates of 19 and 31 percent. The most dramatic increase

TRENDS IN EXPENDITURES

occurred during John Lindsay's first term: 45 percent between 1965 and 1969. The long-term trend was not significantly altered during Lindsay's second term, although growth slowed to 33 percent. After the city's own economic resources had clearly eroded and the national recession had deepened, even Abe Beame continued to increase expenditures, by 8 percent between 1972 and 1976. The fiscal crisis led to cutbacks in spending during the second year of Beame's administration that were mandated by the state-created Emergency Financial Control Board (EFCB). Constant dollar expenditures started to decline the followingfiscal year, 11percent between 1976 and 1977. Koch continued the budget cuts through his second year in office, 1979. By the end of his first term, the budget began growing, although with an increase between 1979 and 1981 of less than 5 percent. Koch was clearly cautious with his first budget increases, still under the careful watch of the EFCB, which limited his legal authority over expenditure decisions. In 1981 the city had its first budget surplus since the fiscal crisis, and Koch's spending policies changed. Expenditures increased by 20 percent during Koch's second term (1981-85) and 21 percent during his third term (198589), indicating that politics as usual had returned to New York.

Chicago: Expenditure Trends from Anton Cermak to Eugene Sawyer Total expenditures for Chicago between 1929 and 1975 reveal a different pattern. Spending fluctuated with changes in the city's political administration (see fig. 2): each mayor established a policy that was sustained throughout his term of office but that did not necessarily affect later mayors' spending policies. Most important, the growth in spending was not constant during this period. Chicago mayors managed to sustain important periods of retrenchment. Chicago was simply not like New York, where unwavering spending growth provided a structural constraint on the mayor's fiscal policy choices. Chicago's per capita expenditures increased from $96.84 in 1929 to $193.44 in 1975, but the growth rate was not constant. Figure 2 shows the numerous examples of retrenchment by Chicago's mayors. Not surprisingly, during the 1930s fiscal crisis Cermak decreased expenses 31 percent (between 1930 and 1934).Ed Kelly became mayor in 1933 following Cermak's untimely death. During Kelly's first full term beginning in 1935, spending increased 43 percent. Kelly then cut spending 28 percent during his second term. Chicago's expenditures increased 46 percent during Richard J. Daley's first term (1955-58), representing the greatest increase for any one mayoral term during the entire period examined. Daley did not sustain this rate of growth,

CHAPTER FOUR

O I ~ I ~ I ~ I I I I ~ I ~ ~ , I I I 1I ' I 1 I1 I I I I I ~ I ~ I I I I I I , I I I I I ~ I , , ~ ~I I I I I , 29 3 3 3 7

41 45 49 53 57

61 65 69 73

77

81 85 89

YEAR Fig. 2. Total expenditure, Chicago, 1929-89 (constant 1967 dollars per capita).

however, cutting spending 10 percent during his third term. This period of declining expenditures was followed by striking growth once again during Daley's fourth term: 40 percent between 1966 and 1970, which was consistent with the national pattern of budgetary expansion during periods of economic prosperity. But after 1970 the growth in spending decreased dramatically and spending levels actually began to decline by 1973. The post-fiscal crisis era in Chicago began with Daley's death, which left Michael Bilandic to usher in the new period of fiscal austerity. The fluctuations in expenditures continued. City expenditures dropped almost 1percent during Bilandic's administration, between 1974 and 1978. While there was a 7 percent overall expenditure increase during Jane Byrne's mayoralty, she cut spending during her last year in office. Harold Washington's budgets also increased spending, 10 percent between 1982 and 1986, but the growth was not constant. Although Washington won reelection in April 1987, he died after serving less than one year of his second term. Between 1986 and 1989 Eugene Sawyer increased spending a modest 9.2 percent and actually reduced spending between 1988 and 1989. Thus, the earlier pattern of fluctuation in expenditures-cutbacks in some years and expansion in others-remained during the post-1975 period in Chicago.

TRENDS IN EXPENDITURES

Common and Non-Common Function Expenditure Trends in New York How do spending trends compare among different types of services? In 1929, New York spent $88.03 per capita constant dollars on common function services, 39 percent of its budget, and by 1975 this amount had increased to $174.94, although this represented only 16 percent of its budget. The decline of common functions as a proportion of total spending is more striking than its constant dollar increase, and comparing it with the growth in non-common function spending helps explain the dramatic expansion in New York's budget since the pre-Depression era. New York spent $90.78 per capita on noncommon function services in 1929, 40 percent of its budget and roughly equivalent to its spending on common function services. By 1975, however, spending for non-common function services had increased by $781.53 to 73 percent of total spending. This long-term trend reveals a staggering change in the city's budget priorities (see figs. 3 and 4). The 1975fiscal crisis was sufficiently severe that no area of the budget was protected from cutbacks, but the non-common functions were hit hardest. Between 1975 and 1979, non-common function expenditures continued to dominate the budget but dropped 30 percent, while common function spending declined 22 percent. Since non-common functions accounted for the lion's share of the city's budget in 1975 and are often characterized as nonessential services, it is not surprising that they were the target of the greatest reductions. But the position of the non-common function services continued to erode even into the post-fiscal crisis period, when overall city spending increased. During the 1979-89 post-fiscal crisis period, common function expenditures increased 71 percent while non-common function expenditures increased only 51 percent. In 1989 non-common function expenditures were $822.56 per capita, 5 percent greater than their 1975 level; common function expenditures grew to $222.02, a 36 percent increase over their 1975 level. Safety and public welfare expenditures provide additional insight into the common and non-common function trends (see figs. 5 and 6). In 1929 New York spent $23.18 per capita constant dollars on safety, 10.2 percent of the total budget, whereas it spent a lower $14.58 per capita on public welfare, 6.4 percent of the budget. The spending in 1929's budget was primarily from local revenue, before the infusion of intergovernmental funds to combat the effects of the Depression. The city's role as public welfare service provider, however, changed dramatically in the 1930s.Before the Depression, the city had functioned

Ill

CHAPTER FOUR

29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89

YEAR Total Expenditure

4

Common Function

+ Non-Common Function

Fig. 3. Total expenditure by functions, New York, 1929-89 (constant 1967 dollars per capita).

minimally in the redistributive arena and spent primarily to maintain roads and public safety. By 1975 New York's spending on safety rose to $64.20per capita, but safety's proportion of the total budget dropped to 6 percent. In sharp contrast, during the same time period spending on public welfare increased to $365.78per capita, 34 percent of the city's total expenditures.

-Common Function

+- Non-Common Function Fig. 4. Common and non-commonfunctions as a percentage of total expenditure,New York. 1929-89.

TRENDS IN EXPENDITURES

29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89

YEAR

-Public Welfare Serv.

Ñ^

Safety Services

Fig. 5. Public welfare and safety expenditure, New York, 1929-89 (constant 1967 dollars per capita).

Expenditures on safety and public welfare during New York's fiscal crisis retrenchment show how and why "fiscal crisis" politics are intrinsically different from politics during fiscally stable periods. Both safety and public welfare expenditures were reduced between 1975 and 1979, safety spending declining 5.9 percent and public welfare spending 34 percent. Fiscal crises allow for drastic budget reductions that would not be tolerated politically during noncrisis periods. Pub-

29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89

YEAR

-Safety Services

+ Public Welfare Serv. Fig. 6 . Safety and public welfare expenditure as a percentage of total expenditure, New York, 1929-89.

CHAPTER FOUR

lie welfare spending, at 34 percent of the budget in 1975, was certainly an obvious target for cuts. That proportionate cuts were not evenly distributed across services during the post-fiscal crisis period corroborates the proposition that the politically weakest groups-the city's welfare population among others-suffer the greatest losses during periods of retrenchment. During the post-fiscal crisis period (1979-89), spending on public welfare increased 29 percent while spending on safety services increased 44 percent. Moreover, $314.53 per capita public welfare spending in 1989 was still 14 percent less than its 1975 level; safety spending ($86.97) was 36 percent greater than its 1975 level.

Common and Non-Common Function Expenditure Trends from Jimmy Walker to Ed Koch The Depression period set new political priorities in New York and consequently changed the public's expectations concerning local government services. The city was no longer a simple provider of housekeeping services; it also protected individuals from the ravages of economic decline. Changes in spending on common functions followed a general trend similar to changes in total city expenditures. However, while common function spending steadily increased, it had significant periods of decline as a proportion of the total budget. The first important ones occurred during La Guardia's second and third terms. Between 1941 and 1945 spending on common functions declined 35 percent. These World War 11-period cutbacks affected all city services, with noncommon function spending also declining 36 percent. Common function expenditures increased immediately after World War 11, the greatest growth occurring during O'Dwyer7s administration and Wagner's first two terms. The Wagner period (1953-65) was the only time since 1930 during which common function spending increased at a greater rate than non-common function spending. Before World War 11, common function spending varied between 28 and 39 percent of the budget whereas afterward, except for the Impellitteri years, these expenditures remained between 25 and 26 percent of the budget with minimal fluctuation. Spending on basic services stagnated under Impellitteri, who shifted city revenue to new capital construction projects. Wagner's first term was clearly an effort to make up for this temporary shift in budget priorities. An important decline in the proportion of the budget spent on common functions had occurred by Wagner's last year, and this trend continued through the 1975 fiscal crisis. New York's budget priorities had clearly changed so that, during Lindsay's first term, from 1965 to

TRENDS IN EXPENDITURES

1969, the proportion spent on common functions declined significantly: only 19 percent by 1969. The decline to 16 percent in Lindsay's last year (1973)was the smallest proportion of any New York budget allocated to common function spending between 1929 and 1975. Beame actually tried to increase the proportion of common function spending, but his attempt came to an abrupt halt in 1975 with the fiscal crisis and state-mandated retrenchment, common functions dropping to 15 percent of the budget in 1976. During the fiscal crisis, spending on common functions actually declined in constant dollars, 10.2 percent by the end of Beame's mayoralty and another 7.6 percent during Koch's first term (197781), while the proportion of the budget spent on common function spending increased. Moreover, during Koch's second term (1981-85) common functions increased 33 percent, the greatest increase since 1929. Not since Wagner's first term (1954-57) had any mayor managed to increase common function spending both in real dollars and as a proportion of the budget, shifting spending priorities and bucking the post-Depression trend. Although common function spending increased another 20 percent during Koch's third term (1985-89), the dramatic growth of his second term was not sustained. But if the proportion of common function spending had declined drastically since the Depression, where did the money go in New York's ever-expanding budget? Mostly to non-common function services. Except for the war years, non-common function spending dramatically increased from the Depression until the 1975 crisis. The most significant growth periods for non-common functions occurred during La Guardia's first term, O'Dwyer7sadministration, Wagner's last term, and Lindsay's first term. Although Walker and O'Brien began expanding the non-common function sector of the budget, it was not until federal welfare aid became an increasingly visible part of the city budget that non-common function spending skyrocketed. This expansion required the political skill of La Guardia, who during the 1933-37 Depression years increased non-common function spending by 45 percent, from $114.63 to $166.61per capita. During his first term, the proportion of the budget spent on non-common functions reached 62 percent. As chapter 3 explained, La Guardia may have been a reformer who was instrumental in resolving New York's Depression-era fiscal crisis but he was not a fiscal conservative in today's terms. When New York's fiscal crisis was resolved, there was a dramatic decline in the city's debt and associated interest, but La Guardia did not reduce overall spending. Rather, he clearly established a new set of spending priorities which would set the parameters for growth in future city

budgets. With the assistance of federal funds, La Guardia expanded spending on redistributive services, because he was determined to bring the city government in as a key actor in maintaining and funding programs to aid the victims of the Depression. New York's tradition of assisting the poor was firmly established in this period. Even during World War 11, spending on non-common functions never dropped below 50 percent of the city budget, and under Lindsay in 1971spending on non-common functions peaked at 74 percent of New York's budget. In contrast, spending on common functions never regained the budgetary position that it lost during the Depression. Even during periods of economic growth, spending on common functions increased, but so did spending on non-common functions. Under O'Dwyer7s administration (1945-49), the post-World War I1 economic boom spurred increases in total spending. Common function spending increased 29 percent but non-common function spending increased 49 percent. Non-common function spending increased during Wagner's first two terms, but he managed to cut its portion of the budget back to 66 percent in his second term. In Wagner's last term, the budget, however, revealed dramatic increases in total and in non-common function spending, of the sort characteristically associated with the Lindsay years. The size of the budget increase during Wagner's final term was greater than that of any previous mayor, and 74 percent of the $127.23 per capita increase went to non-common services. During his first term, the Republican mayor Lindsay broke the records set by La Guardia and O'Dwyer and increased spending on non-common functions by 56 percent. At the end of his first term in 1969,non-common function spending accounted for 74 percent of the budget. Lindsay's spending priorities were clearly defined. At the time of the fiscal crisis in 1975, non-common function spending accounted for 73 percent of total spending. By the end of Beame's administration non-common function expenditures declined 10.6percent and then another 15.1 percent during Koch's first term. Noncommon function spending increased 16 percent during Koch's second term, which resembled Wagner's second term, but was quite low compared with that of other New York mayors. More important, noncommon functions also lost ground as a proportion of total spending, declining to 66 percent of the budget at the end of Koch's second term in 1985. During Koch's third term, spending on non-common functions increased but still accounted for 67 percent of the budget in 1989. There is no doubt that the dominance of expensive (e.g., education,

TRENDS IN EXPENDITURES

welfare, and corrections) and deficit-producing (e.g., mass transit, hospitals, and housing) non-common functions in New York's budget has contributed to its fiscal problems. While important periods of growth in non-common function spending are associated with particular mayoral administrations, the primacy of these services in the city was established during the Depression. This occurred after New York's 1932 fiscal crisis, decades before Lindsay took office. Even Koch did not reverse this trend during the 1980s. This spending became part of the fiscal policy-making structure in New York and was simply reinforced over time, making it extremely difficult for any individual mayor to change it.

Common and Non-Common Function Expenditure Trends in Chicago Chicago's spending trends for different types of services diverged significantly from those of New York and consequently had different implications for the city's fiscal policy process. In 1929, Chicago spent $66.84 per capita constant dollars on common function services, and this increased only 1.6 times to $109.39 by 1975. The 1929 spending accounted for 74 percent of all city expenditures; by 1975this declined to 57 percent. Comparing changes in common function with non-common function spending helps explain Chicago's growth in overall spending. While Chicago spent $15.57 per capita on non-common function services in 1929 (13 percent of the budget), four times this amount was spent on common function services. By 1975, Chicago had increased its spending on non-common function services to $37.19, but its proportion of the budget (19 percent) was not very different from its 1929 proportion. Although this pattern of spending for both common and non-common function services fluctuated between the Depression and 1975, with significant periods of cutbacks and expansions, the proportion of the budget spent on common functions never declined below 40 percent and the non-common functions never surpassed 48 percent, even at the height of the Depression. The city's budget expanded, but spending priorities in Chicago remained constant after the 1930s (see figs. 7 and 8). From 1975 to 1979 (New York's retrenchment period), Chicago cut common function spending by 8.6 percent and increased non-common function spending by a modest 3.1 percent. The post-1979 period, then, appears to indicate a break in Chicago's long-term spending pattern and a change in the distribution of common and non-common functions in the budget. Between 1979 and 1989 non-common func-

CHAPTER FOUR

29 33 37 41 45 49 53 57 61 65 6 9 73 77 81 85 8 9

YEAR

- Total Expenditure

-+

Common Function

+ Non-Common Function

Fig. 7. Total expenditure by functions, Chicago, 1929-89 (constant 1967 dollars per capita).

tion spending increased 29 percent but common function spending increased slightly less, at 27 percent. A careful look at the budgets indicates an overall increase in city expenditures, and in 1989 common functions were 49 percent of the budget while non-common functions were only 19 percent. Even during the post-Richard J. Daley years basic housekeeping services remained dominant in Chicago's corporate budget. Constant dollar per capita spending for public welfare and safety

- Common Function

+

Non-Common Function

Fig. 8. Common and non-common function expenditure as a percentage of total expenditure, Chicago, 1929-89.

TRENDS IN EXPENDITURES

29

33 37

41 45 49 53 57 61 65 69 73 77 81 8 5 89

YEAR

- Public Welfare Serv.

-+- Safety Services Fig. 9. Public welfare and safety expenditure, Chicago, 1930-89 (constant 1967 dollars per capita).

services shows even greater historical consistency in Chicago's budgetary priorities (see figs. 9 and 10).In 1929, Chicago spent $18.48 per capita on safety, 16 percent ofthe budget, and $4.02 on public welfare, 3.2 percent of the budget. By 1975, spending on safety had increased 226 percent to $60.25 per capita, representing 33 percent of total expenditures. These numbers are in stark contrast to public welfare spending, which increased to only $12.18 per capita during the same time period. In 1975 public welfare was still only 6.3 percent of total spending.

29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89

YEAR

- Safety Services

+

Public Welfare

Fig. 10. Safety and public welfare expenditure a s a percentage of total expenditure, Chicago, 1929-89.

CHAPTER FOUR

The post-1975 trends show that the city's political priorities have changed little since the death of Richard J. Daley. Between 1975 and 1979 spending for public welfare declined 0.4 percent while spending for safety increased 1.7 percent. From 1975 to 1989 public welfare spending increased 13 percent but spending for safety also increased 15 percent. Moreover, safety spending was 27 percent of the budget in 1989 while public welfare was only 5.3 percent, a distribution remarkably similar to that in earlier periods.

Common and Non-Common Function Expenditure Trends from Anton Cermak to Eugene Sawyer The key to Chicago's fiscal stability has been its ability to retrench or to divest costly services to jurisdictions outside the city. This can be seen most clearly by examining the changes in spending on common and non-common function services between mayoral administrations. As the previous discussion showed, from 1929 to 1975 changes in common function spending followed a trend similar to that followed by changes in total expenditures. Spending increased, but it was not constant-declining during some mayoral administrations. Most important, since the Depression, the proportion of the budget allocated to common functions remained remarkably stable during all mayoral administrations. The first significant decline in common function spending occurred during Cermak's administration, which cut back expenditures in response to the Depression and the local fiscal crisis. Between 1930 and 1934, common function spending declined 54 percent, from $72.02 to $33.14 per capita. The most dramatic change occurred between 1930 and 1931,when the common function proportion of the corporate budget dropped from 74 percent to 54 percent. The second important decline in common function spending occurred during Kelly's second and third terms, the 1938-46 period. Kelly's second term (1938-42) overlapped with America's entry into World War 11, during which Chicago, like other municipalities, cut back spending. Common function spending declined 16 percent and continued its decline until the end of Kelly's administration (1946). During this period, common function spending steadily increased as a proportion of total city spending, regaining the position of dominance it had had in the budget before the Depression. At the end of Kelly's mayoralty, 58 percent of Chicago's budget went to common function services. During Richard J. Daley's administration, beginning in 1955,there

TRENDS IN EXPENDITURES

was considerable fluctuation in common function spending. Common function services continued to dominate budget priorities, but periods of significant growth were offset by cuts in spending. By the end of Daley's first term in office, common function spending had increased from $50.99 per capita in 1954 to $86.06 in 1958, a 69 percent increase, which constituted the greatest gain during any mayoral term in the period examined. Daley affirmed the importance of spending on basic services, the essential part of the "city that works" image which he gave Chicago, and on municipal employees (as the next section shows), the patronage base of the Democratic party. At the end of Daley's first term in 1958, the 68 percent of the budget spent on common functions was the largest proportion since 1930. Common function spending did not increase consistently throughout Daley's tenure. During his second term, it increased only 5.7 percent, and during his third term (1963-66), most strikingly, it dropped 9.1 percent. During his fourth term (1967-70), Daley increased common function spending again but only by 13 percent, not nearly as much as during his first term. His fourth term showed an expanded budget fueled by increased federal spending targeted toward redistributive programs, much the same as had occurred during the New Deal. Although the rate of common function spending increased, the proportion of the budget represented by common function services dropped from 61 percent to 53 percent. Daley brought this proportion back to 56 percent during his last term, waging a successful battle against domination of the city's corporate budget by noncommon functions. Common function spending during the post- Richard J. Daley years was similar to that during the earlier period. Spending fluctuated and cuts were tied to downturns in the economy. Michael Bilandic (1974-78) reduced common function spending 2.9 percent, and Jane Byrne also reduced spending 9.6 percent. Harold Washington registered the first increase, post-Daley, in common function spending: 11 percent between 1982 and 1986. The trend continued during Sawyer's brief tenure (1986-891, with common function spending increasing 14.3 percent. The most serious erosion in common function spending as a proportion of the city budget occurred under Byrne: in 1982 common functions constituted 46 percent of total spending, the lowest proportion since 1929. Washington actually ended his first term with common functions at 47 percent, a slightly higher proportion of total spending than it had been at the end of Byrne's term. By 1989 common function spending was once again 49 percent of the budget. Another important dimension of fiscal policy is revealed by examin-

CHAPTER fOUR

ing Chicago's expenditures on non-common functions. Chicago generally became involved with non-common function services when noncity revenue was made available to provide them. When these services became too costly, they were often legally divested to a noncity jurisdiction. Consequently, there have been brief periods of growth in the city's non-common functions budget, but over the long term it has represented a relatively small proportion of total spending. As chapter 6 will explain, since the Depression, divested services have included mass transit, welfare, corrections, and courts. Chicago's non-common function budget grew significantly during the early part of the Depression, but its increases were erratic, and it never exceeded 51 percent of the budget. After World War I1 noncommon functions varied from 17-31 percent of total spending. This low proportion of spending on non-common functions helped keep down overall increases in the budget, enabling the city to maintain fiscal stability. The most significant periods of growth and decline in Chicago's non-common function budget occurred during Kelly's first term and during Daley's second and fourth terms. During Kelly's first term (1934-38), at the height of the Depression, non-common function spending increased from $14.46 to $36.37 per capita, mostly as a consequence of increased federal aid for public welfare services. In 1930, Chicago spent only 13 percent of its budget on non-common functions, and by 1938, the proportion had increased to 39 percent. During this period Chicago also cut its common function spending as a result of the Depression and its own fiscal crisis. During his second term, Kelly cut back spending in both the common and non-common function budgets in a fairly evenhanded manner. Common and non-common function services shared an almost equal proportion of the city's budget only when federal aid was specifically targeted for a non-common function service, like welfare or mass transit. A perfect example of Chicago's approach to non-common function spending occurred during Kelly's second term. Chicago's noncommon function budget increased dramatically in 1939 and 1940 as a result of substantial investment in the building of a subway system. Unlike New York, Chicago expended a minimal amount of its own tax revenue for the venture. Subway construction was a WPA-sponsored project, funded primarily by a federal grant and secondarily by two private companies, Chicago City Railway Company and Chicago Railways Company.23 In 1945 Chicago divested itself of all costs related to the operation and construction of its transit system when the state created the independent Chicago Transit Authority (CTA).

TRENDS IN EXPENDITURES

From World War I1 through Daley's first term in office, spending on non-common functions dropped steadily, partly by means of functional divestments. In 1955the city gave up primary responsibility for providing social welfare services to Cook County, and in 1964 the Cook County Unified Court system was created with funding guaranteed by the county and the state. Richard J. Daley was a master of functional divestments, but he used another important technique to retain fiscal stability. Generally, when Daley increased spending in one functional area he also traded off by decreasing spending in another. During his second term non-common function spending increased by a significant 38 percent but common functions increased by only 5.7 percent. Daley's third term coincided with a national recession, and the city's total expenditure was reduced. The burden of the cutback in spending was shared about evenly, with common function spending reduced by 9.1percent and non-common function spending reduced by 8.8 percent. During Daley's tenure three important functional divestments also occurred. First, the Regional Transportation Authority (RTA) was formed and absorbed the Chicago Transit Authority (CTA). Second, the state of Illinois assumed all welfare costs. Third, in 1970 the Illinois state legislature consolidated Chicago's House of Corrections with Cook County's correctional facilities under the jurisdiction of the County Sheriff's Office. In 1974, by the end of Daley's fifth term in office, only 15 percent of Chicago's budget went to non-common functions while 56 percent went to common functions. The post-Daley years are similar to the earlier period in that they show important variations in non-common function spending that can be attributed to specific mayoral administrations. Also, the approach of trading off growth in non-common function spending with cutbacks in common function spending continued. Bilandic reduced non-common function expenditures 1.9percent and also reduced common function expenditures 2.9 percent. Surprisingly, Jane Byrne increased non-common function spending 37 percent between 1978 and 1982, and increased its proportion of the budget to 22 percent. This rate of increase in non-common function spending had not been seen by Chicago since Daley's second term in the early 1960s. At the same time, she cut back spending on common functions by 9.6 percent. When Washington (1982-86) became mayor, non-common function spending changed very little, increasing less than 1 percent, while common functions increased 11percent. The change in proportional spending that began in the Byrne years was not maintained by Washington or his successor, Eugene Sawyer. By 1989 non-common func-

CHAPTER FOUR

tion spending was down to 19 percent of the budget, similar to the proportion spent in the late 1960s, while common function spending was 49 percent, a slight increase over Byrne's administration.

Municipal Employee Expenditure Trends in New York and Chicago Comparing municipal employee expenditure trends for New York and Chicago is complicated by the functional performance issue. There are significant differences in service delivery responsibility between New York and Chicago. Consequently, a simple comparison of absolute municipal employee expenditures would tell us little about the relative impact of these expenditures on each city's fiscal health. Meaningful comparisons can be made by considering the rate of growth in each city's labor force and expenditures, as well as changes in the proportion of each city's budget that goes to labor costs. New York has always maintained a sizable municipal labor force and has always spent more on municipal employees than Chicago, differences that can be attributed largely to differing service delivery responsibilities.24 In 1944 New York spent $110.87 constant dollars per capita on municipal employee salaries while Chicago spent $23. By 1975 New York's expenditures on municipal employees had increased to $423.19 per capita and Chicago's to $124.28 (see figs. 11and 12). Interestingly, however, during this period Chicago's spending on employees grew by 433 percent while New York's grew by 282 percent. This disparity in aggregate spending is highlighted in the municipal employee labor force data. In 1947 New York employed 35 workers per 1,000 residents while Chicago employed 8 workers. In 1975 New York's labor force grew to 48 workers per 1,000 residents while Chicago's grew to 15 (see figs. 13 and 14).During this period the rate of growth in Chicago's municipal labor force was 84 percent while New York's was only 37 percent. Certainly the size of New York's municipal labor force and the sheer magnitude of the expenditure affected the city's ability to retain fiscal stability. However, the comparative data indicate that the contribution of labor costs to New York's fiscal problems in 1975 was in large measure due to the functional responsibility issue and not to exorbitant salaries received by municipal workers. The average expenditure per municipal employee was quite similar in New York and Chicago during the pre-fiscal crisis period. In 1947 Chicago spent an average of $4,937.94 constant dollars per employee while New York spent $4,687.85. By 1975 New York's expenditure per employee had increased 81 percent to $8,466.15 while Chicago's had increased 70 percent to $8,375.42.

o ~ l l l l ~ l l l l ~ l l l l ~ l l , l ~ l l l , ~ l l l l ~ l , l l ~ , , l l ; l l l l ~ l l l l ; l l l l i l l l l ~ o

29

34

39

44

49

54

59

64

69

74

79

84

89

YEAR

-

+ Exp. per Employee Exp. per Capita Fig. 11. Municipal employee expenditure per capita and per employee in thousands, New York, 1941-89 (constant 1967 dollars).

New York began cutting its labor force and labor expenditures before the fiscal crisis peaked. New York's municipal work force increased steadily during the post-World War I1 years and reached its apex in 1974 a t 447,504 employees. By 1976 over one hundred thousand workers (27 percent) had been dropped from the city's employment rolls and salary costs had also declined 23 percent. Chicago's municipal work force also grew steadily in the post-World War I1 years and peaked in 1971 at 50,451 employees. Without the pressure of a fiscal crisis, the city's work force was cut by over six thousand (13 percent) by 1973. Expenditures on municipal employees also declined

140 p

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29

34

39

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49

54

59

64

69

74

79

84

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YEAR +Exp.

per Employee

-Exp. per Capita

Fig. 12. Municipal employee expenditure per capita and per employee in thousands, Chicago, 1944-89 (constant 1967 dollars).

CHAPTER FOUR

29

34

39

44

49

54

59

64

69

74

79

84

89

YEAR Fig. 13. Number of municipal employees, New York, 1947-89 (per 1,000 residents).

3.5 percent but for only one year (1971-72). After 1972labor costs fluctuated, declining in some years and increasing in others. Despite the dramatic reductions in New York's municipal labor force and expenditures, the city could not avoid a fiscal crisis. Indeed, once the crisis peaked, the city was forced to make deeper cuts in its work force and labor costs. Chicago made modest reductions in its labor costs, which helped the city retain fiscal stability during the 1970s economic recession. However, reducing the labor force was not a ma-

29

34

39

44

49

54

59

64

69

74

79

84

i 89

YEAR Fig. 14. Number of municipal employees, Chicago, 1944-89 (per 1,000 residents).

TRENDS IN EXPENDITURES

jor part of the city's overall fiscal policy agenda. It is not surprising that Chicago's labor force was maintained and that expenditures on municipal employees rarely declined, since during this period city workers were the patronage base of Chicago's machine. Cutbacks in New York's work force and labor costs were clearly temporary measures, forced on the city by the fiscal crisis. Once the crisis was resolved, the earlier spending trend resumed. Between 1979 and 1989 per capita constant dollar municipal employee expenditures increased 44 percent, the number of employees per 1,000 residents increased 13 percent, and expenditures per employee increased 16 percent. In Chicago, the decline of the machine changed the city's attitude toward municipal employees. During the same period expenditures on Chicago's municipal labor force increased only 10 percent and the trend was not constant, the number of employees per 1,000 residents declined 8 percent, and expenditures per employee increased 20 percent. Ironically, since 1975 Chicago's municipal employee expenditure policies have improved its long-term fiscal condition while New York has returned to the policies which contributed to its earlier fiscal difficulties.

New York: Municipal Employee Expenditure Trends from Fiorello La Guardia to Ed Koch During La Guardia's last term (1941-45) per capita constant dollar municipal employee expenditures declined 13 percent. This period coincided with World War 11, when municipal labor forces and budgets dropped across the nation in order to provide funds and manpower for the war effort. By 1944 municipal employee expenditure began to increase and continued its upward climb until 1974, the start of Beame's administration. The trend was strikingly consistent across mayoral administrations. O'Dwyer (1955-49) increased municipal employee expenditures 25 percent while Impelletteri slowed the rate of growth to only 8 percent. Wagner's three terms showed the most dramatic increases in spending, but the size of the work force increased only moderately. During Wagner's third term (1961-65) municipal employee expenditures increased 35 percent, the greatest increase during any one mayoral administration for the time period under consideration. This trend reflected the political relationship established between Wagner and the newly empowered municipal employee unions. Lindsay continued expanding the city's work force, as well as the level of expenditures. During his second term (1969-73) expenditures on employee salaries increased 26 percent. By 1973the number of employees per 1,000 residents was 55.7, the highest in the city's history,

CHAPTER FOUR

and the average per employee constant dollar expenditure also peaked at $8,821.54. During Beame's term (1973-77) expenditures on municipal employees dropped 25 percent and the number of employees per 1,000 residents declined 21 percent as a consequence of fiscal crisis retrenchment policies. Interestingly, average constant dollar expenditures per employee also dropped 8 percent, indicating a real loss in earnings for some city workers during this period. These cuts were short-lived, and by the end of Koch's first term, salary expenditures had started to increase once again. During Koch's second (1981-85) and third (1985-89) terms increases in municipal employee expenditures of 17 percent and 12 percent, respectively, resembled those of the pre-fiscal crisis period. By 1989 the size of the labor force per 1,000 residents had also grown to 53.3 workers, almost returning to its 1974 level of 56.7 workers.

Chicago: Municipal Employee Expenditure Trends from Ed Kelly to Eugene Sawyer In 1946, during Ed Kelly's final term, Chicago's municipal employee expenditures began their post-World War I1 rise, with a brief interruption during Kennelly's first term. The upward trend peaked in 1973 during Richard J. Daley's final term. However, the rate of growth was not constant across all mayoral administrations. Kennelly, elected as a reformer, reduced municipal employee expenditures 6 percent during his first term (1946-50). The size of the work force actually increased 11percent while constant dollar per employee expenditures dropped 10 percent. However, reform could last only briefly as long as patronage jobs remained the soul of Chicago's Democratic machine. During Kennelly's second term (1950-54) municipal employee expenditures increased 28 percent and the size of the work force grew 5 percent. Kennelly, in an effort to "correct" the policies of his first term, increased constant dollar per employee expenditures 23 percent. While Richard J. Daley clearly increased municipal employee expenditures and the size of the city's work force during his five-term mayoralty, his policies varied more than one might have expected given his role as boss of Chicago's machine. During Daley's first and second terms municipal employee expenditures increased 22 percent and 24 percent, respectively. Not surprisingly, the municipal work force increased by 16 percent during his first term. Between 1962 and 1966, during Daley's third term, with total expenditures declining 10 percent, municipal employee expenditures increased 9 percent. It seems that, even when Daley was cutting spending to balance the

TRENDS IN EXPENDITURES

city's budget, the work force remained intact. Yet the modest increase during this period of fiscal austerity also means that Daley did not sacrifice the city's long-term fiscal stability to a simple patronage strategy. Once the economy had improved and revenues had increased, Daley made sure that city workers were well paid. During his fourth term (1966-70) municipal employee expenditures increased 39 percent, representing the greatest increase in any one mayor's term for the period under consideration, and expenditures per employee also increased 21 percent. During Daley's last term the city's expenditures on municipal employees declined for the first time since the Kennelly mayoralty. This 3 percent drop in spending signaled the end of the post-World War I1 growth trend. Spending increases during the post-Daley years were relatively modest. Bilandic (1974-78) and Byrne (1978-82) increased municipal employee spending 2 percent and 3 percent, respectively. Washington (1982-86) increased spending 4 percent, and municipal employee expenditures dropped during Sawyer's term (1986-89) 7 percent. This trend reflects the diminished role of the machine in padding the municipal payroll with patronage jobs and the hardline position the city's mayors have taken toward the newly empowered municipal employee unions.

Capital Expenditure and Debt Service Trends in New York Since capital spending patterns are inextricably linked to levels of expenditure on debt service (interest on debt), these two budget items are analyzed together.25 Capital outlay expenditures in New York increased 137 percent between 1929 and 1975. During the same period debt service increased 51 percent. More important, the growth in both capital spending and debt service was not constant and actually decreased as a proportion of total city spending. In 1929 capital spending accounted for 22 percent of New York's budget while in 1975 it was 11percent. Interest on debt was 16 percent of city spending in 1929 while in 1975 it was only 5.2 percent (see figs. 15 and 16). Capital spending grew in New York in the periods before both its 1930s and its 1975 fiscal crises, while debt service grew during the post-crisis retrenchment periods. This pattern has been a common one among American cities and reveals an inherent problem in city financing. It appears that cities do not have the local revenue capacity to finance their capital needs. While they are permitted to engage in long-term borrowing, the cost of this borrowing can translate into an unmanageable debt burden. As a consequence, interest on debt tends to be the only item that increases during a post-fiscal crisis retrench-

CHAPTER FOUR

29 3 3 37

41 45 4 9

53 57

61 65 69 7 3 77

81 85 89

YEAR Capital Outlay ++ Exp. on Debt Service Fig. 15. Debt service and capital outlay expenditure, New York, 1929-89 (constant 1967 dollars per capita). &

ment period while capital spending is usually cut. The cutbacks in maintenance and the increased debt burden are a kind of punishment for cities which have spent beyond their means. After New York's 1975 crisis (1975-791, capital spending dropped 71 percent while interest on debt increased 48 percent. The dynamic during the 1930s fiscal crisis was somewhat different. Capital spending dropped in 1933 at the height of the fiscal crisis, and interest costs rose; but for the remainder of the 1930s capital spending and interest

29 3 3 37

41 45 49 5 3 57

61 65 69 7 3 77

81 85 89

YEAR

-Capital Outlay

+Interest on Debt Fig. 16. Capital outlay and debt service a s a percentage oftotal expenditure, New York, 1929-89.

TRENDS IN EXPENDllURES

costs both stayed high. These different spending patterns are directly related to the role of intergovernmental aid in both periods. During the Depression the federal government pumped money into capital projects, while after New York's 1975 crisis federal assistance actually declined. In both periods the need to balance the budget became critical as a result of a fiscal crisis, but in 1975 without federal funds a dramatic cut in capital spending was not simply an option but an imperative. Surprisingly, as a proportion of total spending, New York spends less now in its capital budget than it did in the 1930s while its needs have certainly increased. In 1932,21percent of its expenditures went to capital programs while in 1989 it was 10.7 percent.

Capital Expenditure and Debt Service Trends from Jimmy Walker to Ed Koch Although capital spending in New York varied considerably in the period between its two fiscal crises, its mayors had consistent policies within each of their administrations. As capital spending increased, so did the city's expenditure on debt service, but one or two mayoral terms later. In general, New York mayors paid little attention to the relationship between expanding the capital budget and future growth in debt service. Since spiraling debt service is a good indicator of fiscal problems, this lack of attention surely contributed to the development of New York's fiscal problems over the long term. During the Depression years, New York established a clear relationship between growth in capital spending and growth in the cost of servicing its debt, reflecting an ambivalence toward fiscal restraint even during its crisis. Between 1929 and 1933, at the onset of the fiscal crisis, Walker cut capital spending 48 percent in an effort to placate the city's banking community. Nevertheless, the high cost of debt service contributed to the city's continued fiscal problems. During this same period, debt service fluctuated between 12 percent and 16 percent of total expenditures and did not drop significantly until 1937. Once the fiscal crisis was resolved to the satisfaction of the bankers and the state legislature, La Guardia increased the capital budget again, mainly with great infusions of federal dollars. By the end of his first term, in 1937,capital spending had already increased 40 percent. La Guardia was anxious to implement his own political agenda, and despite his early success in bringing NewYorkout ofits fiscal crisis, his capital spending policies indicate little interest with fiscal issues over the long term. La Guardia expanded public works projects with bond issues floated for the express purpose of creating jobs for the unemployed. One of La Guardia's most important capital projects was the expansion of the subway system, which began in 1940. This cost was

CHAPTER FOUR

reflected in both the city's capital budget and its non-common function spending. Subway operating deficits and public welfare costs have become a permanent drain on city revenues and have remained a significant proportion ofthe city's non-common function expenditures. The relationship between capital spending and La Guardia's employment policy is highlighted in his third term. America's involvement in World War I1 resolved much of the nation's unemployment problems, including those in New York, and as a consequence the need forjob creation through capital spending was alleviated. Federal funding of capital projects was dramatically reduced, as reflected in the 86 percent drop in capital spending between 1941and 1945. Nevertheless, debt service increased 113 percent due to the delayed impact of the earlier expansion in the capital budget. Although there was a temporary cutback in capital spending during World War 11, the economic prosperity that followed provided impetus for another significant expansion in the capital budget. The growth in capital spending resumed in 1945, when O'Dwyer increased spending from $3.54 per capita to $20.73, 485 percent. Impellitteri followed by increasing the capital budget 176 percent. While O'Dwyer increased spending in every conceivable functional area, Impellitteri expanded the city budget primarily to pay for new capital projects. There was a modest increase in the availability of intergovernmental revenue during both administrations, but nothing so great that it could have fueled the dramatic growth in capital spending. The growth in capital spending that occurred during Impellitteri's mayoralty is less surprising when Robert Moses, the most important individual builder of bridges, tunnels, and highways in the entire country, is identified as his chief policymaker. Impellitteri, with the assistance of Moses, neglected basic service delivery, expanded the capital budget, and consequently left Wagner with complicated budget problems. During Wagner's first term (1953-571, the city's debt service increased 121 percent and capital spending continued to increase, but only by 23 percent. As mentioned earlier, Wagner increased spending in all service delivery areas but he especially targeted increases to compensate for the previous administration's neglect of basic services. Although capital spending declined during Wagner's second term by 13 percent, his last term showed a 21.3 percent increase. Most important, Wagner brought the debt service under control, reducing it during his second term 37 percent. The level of growth in debt service a t the end of Impellitteri's administration and during Wagner's first term could have triggered a fiscal crisis. Instead, the financial community gave Wagner the opportunity to find new revenue and resolve the debt problem.

TRENDS IN EXPENDITURES

Lindsay followed with a 13 percent reduction in the capital budget during his first administration only to increase it by 71 percent in his second term. During this same period, Lindsay also faced a 103 percent rise in debt service expenditures, a sure indicator of serious fiscal problems. Capital expenditures peaked in 1974, during Beame's first year as mayor, at $132.21per capita, and only dropped below the 1951level after the 1975 fiscal crisis. Capital spending was cut dramatically to help balance the budget during the fiscal crisis. Beame (1973-77) reduced capital costs 73 percent; however, interest on debt increased 36 percent. Once the crisis was resolved, capital spending resumed. A 97 percent increase in the capital budget during Koch's first term was an attempt to address the vast problems of deferred maintenance brought on by the spending cuts during the fiscal crisis. During Koch's second term, capital spending grew by 33 percent; during his third term it surged again with a 70 percent increase. Expenditure on debt service was modest during Koch's first two terms, reflecting the earlier cuts in the capital budget. During Koch's first term, debt service expenditure actually declined 46 percent. However, during his last term (1985-89) debt service jumped 111percent, reflecting earlier increases in the capital budget and presenting a serious fiscal problem for Koch's successor,David Dinkins. After the 1975crisis was resolved, trends in New York's capital budget and debt burden looked remarkably like those in the pre-fiscal crisis period.

Capital Expenditure and Debt Service Trends in Chicago Chicago's capital expenditures and associated spending on debt service are necessarily lower than New York's, because Chicago is simply not legally responsible for the cost of capital projects for noncommon function services. Moreover, the city's capital expenditures for common function services declined with the creation.of the Public Building Commission (PBC) in 1956.26 Reduced capital expenditure responsibilities have contributed significantly to Chicago's ability to retain fiscal stability. However, Chicago also established a long-term pattern which began during its 1930s fiscal crisis and remained through the 1970s, of reducing capital expenditures in response to economic recession and keeping debt service remarkably low. This, too, contributed to its ability to retain long-term fiscal stability. Between 1929 and 1975 Chicago decreased capital outlay expenditures 10 percent and increased debt service costs 72 percent. The debt service increases were not constant; they varied with each political administration and remained a relatively small proportion of the city's budget, regardless of the increases in capital spending (see figs. 17 and 18).

CHAPTER FOUR

29 3 3 37 41 45 49 53 57 61 65 69 7 3 77 81 85 89

YEAR

-Capital Outlay

-t-

Exp. on Debt Service

Fig. 17. Debt service and capital outlay expenditure, Chicago, 1929-89 (constant 1967 dollars per capita).

During the 1975-79 economic recession Chicago continued its longterm trend and reduced both capital spending and debt service, 39 percent and 48 percent, respectively. Capital spending grew 197 percent and debt also grew 320 percent in the postretrenchment period (1979-89) which followed. Despite these large increases, in 1989 debt service still accounted for only 7.7 percent of Chicago's budget while 18 percent went for capital outlays.

100 1

ÑÃ

29 33 37

41 45 49 53 57

61 65 69 73 77

81 85 89

YEAR

-Capital Outlay

+

Interest on Debt

Fig. 18. Capital outlay and debt service as a percentage of total expenditure, Chicago, 1929-89.

TRENDS IN EXPENDITURES

Capital Expenditure and Debt Service Trends from Anton Cermak to Eugene Sawyer Capital spending in Chicago divides into four historical periods. First, the Depression and World War I1 period (1930-46) showed a steady decline in city spending on capital projects, except for subway construction costs in 1939. Second, the period immediately following World War I1 through 1958 showed a rapid expansion of the city's capital budget. Third, from early 1960 through 1979 capital spending declined, except during Mayor Daley's fourth term (1967-70). Finally, from 1979 to 1989 capital spending fluctuated but showed some dramatic yearly increases. Expenditures on debt service followed a similar pattern, except that growth occurred several years later. Not surprisingly, interest on debt was at its peak in Chicago during Cermak's administration (1931-33) as a consequence of the city's fiscal crisis, but dropped significantly immediately after those problems were resolved. Chicago's capital budgets have been fiscally prudent since its fiscal crisis, declining almost consistently from 1930 until 1946. The most significant drop, 83 percent, occurred in the beginning of the Depression and at the height of the city's fiscal crisis (1930-34), reducing capital spending proportions of the budget from 44 percent to 11percent. During World War 11, capital spending dropped even more so that by 1946 Chicago was spending $2.41 per capita on capital projects, only 3.8 percent of total expenditures. The fiscal crisis had caused expenditure on debt to nearly triple in the early 1930s, but this was a short-lived problem because of the consistent reduction in capital spending for the sixteen years that followed. The reduction in capital spending during Cermak's administration enabled Kelly to reduce interest costs 36 percent during his first term (1935-38). Capital spending was also reduced during the Kelly years and was reflected in debt service reductions that continued through Kennelly's first term (1947-50). After its 1930s crisis Chicago's debt service remained between 1.2 percent and 6 percent of total spending. Significant growth in Chicago's capital budget did not occur until the period of economic prosperity that immediately followed World War 11. Kennelly increased capital spending from $2.41 per capita in 1946 to $13.86 in 1950,475 percent. Growth in capital spending was maintained through Daley's first term in office, and in 1958 it accounted for 43 percent of spending. Growth in interest on debt expenditures lagged one mayoral term behind the growth in capital spending. Beginning with Kennelly's first term, interest on debt in-

CHAPTER FOUR

creased 73.5 percent, but by the end of Daley's first term, in 1958, it was still only 3.8 percent of the budget. The pattern of increasing capital outlays and increasing debt service came to an abrupt end during Daley's second term. Between 1958 and 1962 capital outlay costs dropped 27.3 percent and debt service declined 1.5 percent. Direct costs for capital projects were reduced by the creation of the PBC, not necessarily by cutbacks in spending. The PBC took over the bonding and funding of many capital projects in Chicago, Cook County, and several of the state's special districts. This is another critical example of reducing costs that would drain the city budget by spinning off the service to a noncity jurisdiction. This important change in the formal-legal arrangements gave Daley sufficient flexibility to increase capital spending during his fourth term (1967-70), but this was also a time when federal revenues were made available for such projects. During his fourth and fifth terms, interest on debt also increased substantially, reflecting the standard relationship between rising capital costs and debt service. Daley reduced capital spending during his last term (1970-74) 27 percent. This fiscally prudent decision, during a period of national recession, was later reflected in the 23 percent debt service reduction during Bilandic's administration (1975-78). The post-Daley years show a varied approach to capital spending in many ways similar to the earlier period. Bilandic reduced capital spending 27 percent by the end of his administration in 1978. Byrne changed capital spending policies during the middle of her mayoralty, and by 1982 capital spending was up 32 percent. The city's debt burden during Byrne's mayoralty increased only 11 percent, reflecting the capital spending policies of Bilandic. Washington increased the capital budget just as Byrne had, but during the last year of his administration. Between 1982 and 1986 capital spending grew by 52 percent and at the same time the debt burden jumped 92 percent, mostly reflecting the growth in capital spending during the Byrne years. In 1989 debt costs peaked for the period under consideration but still remained only 7.7 percent of spending, considerably lower than the Depression years. Washington's and Sawyer's capital spending policies were both supported by local economic growth, but relative to Chicago's earlier budgets, capital expenditures and debt burden were high.

Summary of Findings: City Expenditures and Fiscal Policy What was the impact of long-term expenditure trends on the fiscal conditions of New York and Chicago? A long-term trend in total expenditures was established in New York which constrained the fiscal

TRENDS IN EXPENDITURES

policy choices of mayors and adversely affected the city's fiscal condition. In Chicago, however, the long-term total expenditures trend was not constant, indicating more flexibility in the fiscal policy choices afforded the city's mayors, which had a positive impact on the city's fiscal condition. In New York, a long-term trend of increasing spending was apparent since before the Depression and individual mayors had little impact on the city's constant rate of budgetary growth. In effect, increased spending became part of the structure of fiscal decisionmaking in New York, reinforced over time and more difficult to change with each passing budget. Retrenchment occurred only during crises, and, once a crisis was resolved, the pattern of growth in spending reasserted itself. In Chicago, the decline in spending that occurred during its 1930s fiscal crisis signaled a structural change in the fiscal policy process, which is suggested by periods of growth in general expenditures interrupted by periods of retrenchment. There were fluctuations in spending even during the post-1975 period, indicating that Chicago's fiscal policy process has remained surprisingly flexible. These trends in total expenditure only explain a part of the fiscal instability problem. The spending trends for capital projects, debt service, municipal employees, and common and non-common functions indicate a fundamental change in the structure of fiscal policymaking in New York and Chicago that began during the Depression. A comparison of capital spending and debt service expenditure trends for New York and Chicago from 1929 to 1975 provides more evidence for the existence of serious differences in their fiscal policy processes (see figs. 19 and 20). Chicago's capital spending and debt service trends contributed to long-term fiscal stability; New York's did not. Since the Depression, Chicago has shown much more consistency than New York in keeping down capital spending, especially in periods of economic decline. Moreover, in Chicago, increases in capital spending were generally followed by significant cutbacks, and the same is true for interest on debt. Chicago's capital spending declined almost consistently for the entire Depression period and through 1946, grew dramatically during the postwar prosperity, and declined for the 1960s recession. Despite fluctuations in New York's capital budget, a very different pattern from Chicago's is discernible. Since the Depression, occasional cutbacks in New York's capital budget have never come close to the increases that invariably followed them. For example, during World War 11, New York had its most significant reduction in capital

CHAPTER FOUR

29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89

YEAR

- Capital Outlay, N Y

+

Capital Outlay, CH

Fig. 19. Capital outlay as a percentage of total expenditure, Chicago and New York, 1929-89.

spending, but the increase that followed during O'Dwyer's administration was more than five and a half times greater than the previous decline. The growth in New York's debt service also contributed to its longterm fiscal problems while in Chicago long periods of decline in capital spending allowed the city to keep its debt service low, which contributed to long-term fiscal stability. More important, after its 1930s fiscal crisis, New York established a tendency of ignoring expanded debt service. Major debt service expansion occurred approximately every fifteen years from the Depression until its 1975 fiscal crisis. 100

P e

80 60

e

n t

40

g

20 0 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89

YEAR

-Debt Service, CH

+ Debt

Service, N Y

Fig. 20. Debt service as a percentage of total expenditure, Chicago and New York, 1929-89.

TRENDS IN EXPENDITURES

Large increases in New York's debt service occurred during La Guardia's third term, during Wagner's first term, and during Lindsay's last term. Each time accumulated increases in capital spending eventually affected the debt. The 103 percent increase in debt service during Lindsay's last term partly reflected this pattern. Capital expenditures were cut during the fiscal crisis retrenchment, but interest costs increased when the city's debt was completely restructured by the state-run MAC. Interest costs did not significantly decline until 1979. In Chicago interest on debt peaked during its 1930s fiscal crisis and dropped significantly after the crisis-driven restructuring of the debt. After World War 11, Chicago's debt grew, but at a moderate rate, and showed significant periods of decline. Since the Depression New York's capital budget has been closely linked to the city's political agenda, often growing to provide jobs during downturns in the national or local economy. The consequent increases in debt service were ignored together with the potential negative long-term effects on the city's fiscal condition. The common wisdom would expect that, in Chicago's patronage-based political system, the link between fiscal problems and capital spending would be stronger than New York's. After all, capital projects generate jobs and increasing jobs would surely increase patronage opportunities for political machines. But capital costs for the expensive non-common function services like education, mass transit, and hospitals were not part of the city's corporate budget and, through changes in the formal-legal arrangements after 1956, many of Chicago's capital construction costs for other services were absorbed by the PBC, a noncity jurisdiction. Creation of the PBC allowed the city to reduce its corporate budget commitment to capital projects significantly and also alleviated the city's burden of interest costs from the capital debt. Construction continued, and jobs were created which the mayor controlled, but the city of Chicago did not spend much of its own revenues to generate the growth. This pattern began during the Depression, when Chicago cut its capital budget and primarily funded PWA projects with revenues from the federal government, the state, and private companies. Chicago's capital spending was kept low during all subsequent recessions, including the 1970s. In the post-fiscal crisis period both capital and debt expenditures increased in New York and Chicago. Between 1979 and 1989 capital spending grew in New York 271 percent and in Chicago 197 percent. During this same period interest on debt grew 320 percent in Chicago and only 113 percent in New York. Despite the advantages of its formal-legal arrangements, during the post-fiscal crisis period Chicago's capital and debt expenditures came as close as they ever

CHAPTIR FOUR

have to resembling New York's. However, in 1989 New York's per capita constant dollar capital budget was still nearly three times that of Chicago while its debt service was over three times Chicago's level of spending. It has become increasingly difficult for cities to pursue fiscally responsible capital spending policies and efficiently manage or strategically plan for their long-term capital needs. The periodic cuts in capital spending that are often used by politicians to balance the city's budget or at least to reduce the rate of growth in overall spending contribute to the deterioration of the city's capital plant and generally increase the cost of future maintenance. Moreover, the cost of long-term borrowing has also increased dramatically for municipal governments since the Depression. Rather than paying 4 percent interest on their bonds, cities can now expect to pay interest rates of 810 percent. Surprisingly, capital spending has accounted for increasingly smaller proportions of most budgets in both New York and Chicago, while their capital needs have undoubtedly increased. As urban infrastructure needs increase across the nation, it will become increasingly difficult for any city which chooses to meet those needs with local revenues to engage in fiscally responsible capital spending. The fiscal impact of capital spending and debt service trends is better understood when viewed in the context of the functional performance issue. During the Depression New York expanded the scope of the services it provided from its corporate budget, primarily in the costly non-common functions like mass transit, housing, corrections, education, health, hospitals, and public welfare. This policy was maintained until its 1975 fiscal crisis. During the same period, New York increased spending across all services, making little effort to compensate for increases in one functional area with cuts in another. The combination of changing the primary function of New York City's government from housekeeping to redistributive and other deficitproducing services, with extraordinary increases in spending across all services, put an unmanageable fiscal burden on the city. The distribution of services in Chicago's budget also changed significantly during the Depression. Chicago initially increased its spending on social welfare services, housing, and mass transit. However, much of the funding came from the federal government, and fiscal responsibility for these services was eventually divested to noncity jurisdictions. Since the Depression, housekeeping services have retained their dominant position in Chicago's budget. Moreover, the rate of growth in spending on Chicago's non-common functions

TRENDS IN EXPENDITURES

and common functions was much less than New York City's, contributing to Chicago's ability to retain fiscal stability. How did this transformation in budget priorities occur? Before the Depression both New York and Chicago, like other cities across the country, were primarily involved in providing basic housekeeping services, but some critical differences in functional responsibility were already apparent. In 1929, New York was already spending a larger proportion of its budget on non-common function services than Chicago but both cities were spending similar proportions of their budget on public welfare. Even before the Depression and its fiscal crisis, Chicago relied on Cook County and a complicated structure of special district governments to provide services like education and parks. In contrast, New York's total budgetary responsibilities and added welfare burden already included a broad range of services considered great drains on the local tax base. Moreover, before the two cities experienced their Depression era fiscal crises, the amount of spending they did on comparable functions was strikingly similar. However, New York was already spending six times as much as Chicago on non-common functions in 1929 and over three times as much on public welfare (see fig. 21). Both cities responded to their 1930s fiscal crises by cutting spending, but New York's concern with its own fiscal stability was shortlived. The differences in spending priorities between New York and Chicago became even greater in their post-fiscal crisis periods, as the Depression deepened. During Walker's second term and La Guardia's first term, at the height of the Depression, New York's spending pri-

29 3 3 37

41 45 49 53 57

61 6 5 69 7 3 77

81 85 89

YEAR

-Non-Common Fun. CH

+ Non-Common Fun. N Y Fig. 21. Non-common function expenditure as a percentage of total expenditure, Chicago and New York, 1929-89.

CHAPTER FOUR

29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89

YEAR

-Common Function CH

Common Function NY Fig. 22. Common function expenditure as a percentage of total expenditure, Chicago and New York, 1929-89. +

orities shifted dramatically. From 1929 to 1933non-common function spending increased by 26 percent and public welfare spending increased by 155 percent. Between 1933 and 1937, La Guardia continued this trend and increased non-common function spending by 46 percent and public welfare spending by 73 percent. During this period neither mayor made significant adjustments in spending on common function services to balance the growth in non-common function spending (see fig. 22). Chicago responded to the Depression and its own fiscal crisis with budget cuts, in marked contrast to New York. During Cermak's administration, the city cut spending on common function services by 54 percent and increased spending on non-common functions by only 13 percent. Safety services actually increased by 2.7 percent, but public welfare spending only increased by 6.3 percent. During the Depression years and until World War 11,Chicago's expenditures on both the common and non-common function services fluctuated. Major increases in spending on redistributive services occurred during Kelly's first term, but they were directly linked to the availability of nonlocal, mostly federal, funds. During World War 11, both cities cut spending. The pressures of the war economy provided a temporary respite from growing city budgets. Yet the underlying differences in fiscal policy remained. In the immediate postwar years, the spiral of growth began again, but each city's spending reflected the distinctive patterns it had established during the Depression. From 1946 to 1949, New York's O'Dwyer increased non-common function spending 46 percent and common func-

TRENDS IN EXPFNDITURES

tion spending 29 percent. The public welfare budget alone increased 69 percent. In Chicago the rate of growth in total spending was only slightly less than in New York during this period, but it was largely in the common function sector. While Richard J. Daley expanded Chicago's budget, primarily for basic services, Robert Wagner did the same for New York. There are two critical differences between the Wagner and Daley budgets in the period between 1954 and 1965. First, Wagner increased total spending at a much greater rate than Daley without any significant cutback. Second, Wagner expanded both common and non-common functions without any serious attempt to trade off spending increases. The pre-1960 budget data for New York are especially interesting because they belie the commonly held assumption that Lindsay caused the 1975 fiscal crisis by increasing the city's commitment to spend on public welfare services. Lindsay accelerated its rate of growth 121 percent during his first term, but this increase is not as dramatic when viewed historically and as a consequence of increased federal aid. Rather than an aberration in the city's history, Lindsay's spending policies were grounded firmly in a tradition established by La Guardia-maintain spending on redistributive services, and increase that spending significantly when federal funds are available. In contrast, Daley's mayoralty, which spanned the Wagner-Lindsay years, showed a much greater concern with issues of scarcity and fiscal stability, but also followed the pattern of spending set earlier. Daley kept redistributive services down to a minimal proportion of the city budget and reduced or traded off spending among functional areas during scarcity periods. The Daley period was particularly important for preventing the growth of city-funded non-common services by divesting functions like mass transit, welfare, and corrections to noncity jurisdictions. Daley, like Kelly and Cermak, was not one to turn down federal revenue. The expanded city budget during Daley's fourth term reflected an increased availability of federal aid. Welfare spending increased in Chicago by 29 percent, but safety spending also increased 46 percent. Even at the height of the Great Society, with its infusion of federal dollars for poverty programs in the inner cities, Chicago's budget was still dominated by common function spending. More important from a fiscal policy perspective and in direct contrast to New York, as the national recession set in and the rate of growth in federal aid slowed down in the early 1970s, Daley cut the budget accordingly. During this same period, New York's Lindsay managed to slow down the rate of growth in city spending, but in the context of the na-

CHAPTER FOUR

tional recession and a slowdown in the rate of growth in federal aid, this policy was inadequate to balance the budget. By 1975, at the height of the fiscal crisis, New York City was spending $781.53 per capita, or 73 percent of its total budget, on noncommon functions; $365.78 per capita was for public welfare services alone, 34.2 percent of total spending. At the same time, $174.94 per capita was spent for common functions, 16 percent of total spending, and $64.20 per capita, 6 percent of the budget, was spent on safety services. A comparison with Chicago reveals the root of New York City's fiscal problems. In 1975 Chicago spent $37.19 per capita, 19 percent of its budget, on non-common functions and only $12.18 per capita, 6.2 percent, on public welfare. In contrast, $109.39 per capita was spent on common functions, 57 percent of Chicago's budget, and $60.25 per capita, 31 percent of the budget, on safety services. Although New York has historically spent more on every functional area than Chicago, per capita constant dollar spending for comparable functions like safety services was almost the same. Although the data on municipal employee expenditure begin in the post-World War I1 years, they support the argument that there are important structural differences in the fiscal policy processes of New York and Chicago. Ironically, the proportion of the budget spent on municipal employees has generally been higher in Chicago than New York. At the time of New York's fiscal crisis in 1975,40 percent of city expenditures went to salaries while in Chicago it was 64 percent (see fig. 23). Even when pension costs are included in the 1975 proportions, the disparity remains: municipal employee expenditures accounted for 70 percent of Chicago's budget and only 47 percent of New York's.27 How could Chicago spend so much more of its budget on salaries and pensions and still have been in better fiscal shape than New York in 1975? There are two explanations. First, as the mayoral administration data indicate, the growth in municipal employee expenditures was constant in New York during the pre- and post-fiscal crisis periods, reflecting the long-term political influence of the unions and the inability of mayors to reduce this type of spending except during times of fiscal crisis. In Chicago, municipal employee expenditures grew, but the rate of growth was not constant, indicating more mayoral control over municipal employee expenditure decisions. From a fiscal policy perspective, Chicago has been able to afford its level of expenditure on municipal employees and New York has not. Second, and most important, New York has been at a fiscal disadvantage because its budget has been dominated by services such as education, social welfare, hospitals, and corrections that are not Chicago's legal responsibility. These services are expensive and require large num-

TRENDS IN EXPENDITURES

+ Expenditure,

CH

-Expenditure, N Y

Fig. 23. Municipal employee expenditure as a percentage of total expenditure, Chicago and New York, 1941-89.

bers of workers, and the costs are added to New York's budget but not to Chicago's. The differences in functional responsibilities have had the most profound effect on the two cities' fiscal conditions. New York's budget has been dominated since the Depression by deficit-producing noncommon function services. From 1929 to 1975, spending on common functions increased 99 percent but non-common function spending increased 761 percent. The city's budget grew consistently, ignoring fiscal realities by failing to cut spending during recessionary periods or to trade off costs between functional areas. Efforts to spin off deficit-producing services to noncity jurisdictions for the most part were also unsuccessful. In Chicago common function spending increased 64 percent from 1929 to 1975 while non-common function spending increased 139 percent. Chicago's budget also grew, but its mayors were able to retain fiscal stability by divesting the city of responsibility for funding and administering the costly non-common functions to other jurisdictions and by cutting back on spending during national recessions. The dominant position of non-common function spending in New York's budgets since the Depression and Chicago's ability to keep housekeeping services as the primary responsibility of the city's corporate budget are critical factors in explaining the differing fiscal conditions of both cities in 1975. The fiscal crisis forced both Beame and Koch to cut spending and balance New York's budget, much as Walker and La Guardia did during the 1930s. Between 1975 and 1979, non-common function spending declined by 30 percent while common function spending declined

CHAPTER FOUR

by 26 percent. But permanent changes in New York's fiscal policy process did not take hold during the retrenchment period. Much like the New York mayors before him, Koch increased spending as soon as the crisis was resolved, but there was also a marked effort to change political priorities. Between 1979 and 1989, spending increased for common and non-common function services by 71 percent and 51 percent, respectively. The contrast between safety service spending and public welfare spending for this period is even more dramatic. By 1989 public welfare spending was still 14 percent less than its 1975 level while safety spending was 36 percent greater. However, the structural constraints of a fifty-year trend made the prospect for reversing the city's functional priorities unlikely, even for Koch. In 1989,non-common functions still accounted for 67 percent of the city's budget while common functions accounted for 18 percent. During the 1975-79 period, mayors in Chicago initiated budget cuts in all service delivery sectors, even without the pressure of a fiscal crisis. Common function spending declined by 8.6 percent while non-common function spending increased by only 3.1 percent. The more specific functional categories show that safety spending actually increased by 1.7 percent while public welfare declined by 0.4 percent. Like New York, Chicago's budget grew across functional categories between 1979 and 1989, with Byrne's administration responsible for the greatest increase in non-common function spending since Daley's second term in the early 1960s. But Washington reversed the trend and brought the common and non-common function budgets back to their traditional balance. By 1989 common functions accounted for 49 percent of Chicago's budget while non-common functions accounted for 19 percent. Any effort Chicago's post-Daley mayors may have been engaging in to reorder the city's political priorities hasn't manifested itself in the budget. The expenditure trends indicate that in both New York and Chicago the fiscal policy-making structures that emerged during the Depression have held firm. In New York a functional imbalance remains, as the budget continues to be dominated by deficit-producing non-common function services, which increases the size of the city's work force and fuels its capital costs and its debt service. These expenditures have made it more difficult to balance New York's budget. In Chicago, on the other hand, basic housekeeping services still absorb the lion's share of its expenditures, which has allowed for greater flexibility in the budget process. In the next chapter, revenue and debt trends are examined in order to complete the explanation of how long-term budget trends have affected the fiscal conditions of New York and Chicago.

FIVE CITY BUDGETS AND THE URBAN FISCAL CONDITION: TRENDS IN REVENUE AND DEBT

City Budgets and the Fiscal Policy Process: The Revenue and Debt Side of the Balance Sheet

A city's fiscal condition cannot be understood fully without considering the revenue in addition to the expenditure side of its budget. After all, the ability to adjust spending to available revenues is the foundation of responsible fiscal policy. Revenue decisions, like their expenditure counterparts, must be considered over the long term, because balancing a budget at any one point in time does not tell us much about a city's prospects for balancing its budget in the future. This chapter examines the impact of long-term revenue and debt1patterns on the fiscal conditions of Chicago and New York, taking into account the important correlation with the long-term expenditure patterns discussed in chapter 4. Each year, mayors must worry anew about where they will get the funds to balance their budgets. Revenue decisions like spending decisions are political, but with one substantial difference. While spending involves distributing political benefits, revenue decisions usually involve dividing up political burdens. Whether a mayor chooses to expand or reduce the city's budget or maintain it at last year's level, the availability of revenue will constrain his decision. If a mayor chooses to expand the budget, then his revenue options appear numerous: increasing local taxes, federal aid, or state aid; spinning off a city function to another jurisdiction; borrowing in the municipal bond market; or carrying a budget deficit. But revenue policy is not simply a question of finding new sources of funds, since the old ones do not remain constant. In fact, when mayors choose to cut back spending, it is usually in response to reductions in the availability of nonlocal revenues or a decline in the city's own revenue base. Under these conditions mayors7options are severely limited. How do mayors determine revenue policy? The first thing to realize

is that the fiscally responsible goal of balancing spending with available revenue is not as simple as it sounds when placed in the context of city politics. Mayors do not have complete control over available revenue sources; their policy options are limited by both their state legislatures and other political actors in the fiscal policy process. A mayor may choose to raise local property taxes, but the state legislature often must approve proposed rate changes. In some states taxpayer groups have actually limited local property tax increases through legislative initiatives. Among the most notorious of these taxpayer initiatives were Proposition 13 in California and Proposition 2% in Massachusetts, both passed in the early 1980s.A city may decide that it wishes to diversify its tax base and initiate an income tax or user's fee for services like the public library. But most cities require state approval for any changes in the local tax structure. A mayor may choose to be more aggressive in pursuit of federal and state aid, but success will more than likely depend on the political orientation of federal and state policymakers. Cities often have considerable discretion in their borrowing policy, but this, too, is affected by state laws which put a ceiling on borrowing and often require voter approval for long-term bond issues. Public authorities and special districts are important options which enable cities to share the costs of services, such as mass transit, with neighboring jurisdictions. These service delivery consortiums allow cities to divest themselves of legal responsibility for a particular function, but require state legislative approval or the approval of the other jurisdictions involved. What about budget deficits? Although some cities find themselves operating with a deficit, this is actually illegal in most states. The particular strategies a mayor chooses for raising revenue and the legal limitations on local policy options clearly affect a city's fiscal condition.2 Budget proposals are based on projections of anticipated revenues, and when revenue sources have been relatively stable for long periods of time they are expected to remain stable. As a consequence, if the city's revenue structure is not diversified, then longterm dependency can develop on one revenue source, increasing the city's vulnerability to fiscal problems if that source should be reduced. To better understand how revenue policy affects a city's fiscal condition, we consider separately the different types of revenue, including intergovernmental revenue, revenue from a city's own sources, revenue from property taxes, and the balance between revenues and expenditures (deficits).The basic relationship between total expenditures and revenue is considered, since a city with insufficient revenue to fund its own budget is obviously fiscally unstable, regardless of the source of its revenue deficiency.

TRENDS IN RNENUE AND DEBT

Revenue Diversification and the Fiscal Policy Process: Intergovernmental Revenue, Local Revenue, and Property Tax Revenue The relationship between the revenue side of the budget and a city's fiscal condition is better understood when total revenue is disaggregated by its funding sources. The types of revenue specifically considered in this analysis are intergovernmental revenue, revenue from a city's own sources (local revenue), and property tax revenue.3 Longterm trends in per capita revenues in constant dollars and types of revenues as a proportion of total city revenue sources are compared. The amount of intergovernmental revenue indicates the availability of funds from nonlocal sources, particularly the federal and state governments. The extent to which mayors diversify the city's revenue base and substitute intergovernmental revenues for local funds rather than expand total spending affects a city's ability to retain fiscal stability. When certain long-term trends in revenue policy are maintained, mayors are not likely to change that policy unless a crisis forces them to do so. At the same time, the longer a city relies on a particular source of revenue, the greater that city's dependency on it and the more vulnerable its fiscal health, should that source contract. The absolute amount of intergovernmental revenue in a city's budget has a complex relationship to fiscal policy. By increasing the amount of intergovernmental revenue it uses, a city can decrease the burden of service delivery costs to the local taxpayer, which is considered sound fiscal policy. However, intergovernmental revenue is often an unpredictable source of funds and is easily overestimated when mayors consider future spending commitments. As a consequence, a city can become too dependent on intergovernmental revenue, spending more than their local tax base can support. In some cases, city budgets have expanded substantially with the availability of intergovernmental revenue. Local constituencies have developed around many of the services provided with these funds, particularly in the social welfare sector. Intergovernmental revenues have also been substituted for local revenues in some cities for maintaining basic services such as police, fire, and sanitation. When a city becomes too dependent on intergovernmental revenue for any service, it is left vulnerable to intergovernmental revenue reductions. In cities with a weak local tax base, substituting local revenue for the lost aid is virtually impossible. Services which are dependent on intergovernmental funding tend to build up strong constituency support, making it politically difficult for mayors to cut back their budgets. In either case, the loss of revenue contributes to the development of serious fiscal problems.

Before New York's 1975 fiscal crisis, cities generally tried to maximize their share of intergovernmental revenue. This was an intelligent fiscal strategy as long as it appeared unlikely that Washington or state governments would reduce their role in funding local governments. But when Ronald Reagan's New Federalism ushered in an age of federal budget deficits and antiurban administrations in Washington, cities were forced to monitor federal intergovernmental revenue much more carefully. In the early 1980s some states stepped in and provided the aid cities lost when the federal government cut back its assistance, but this policy varied with the political proclivities of particular state governments and with the clout individual cities had in their state legislatures. Moreover, as state governments enter the 1990swith their own economic and fiscal problems, they have reduced aid to their localities.4 Despite these uncertainties, no one would reasonably argue that cities should reject intergovernmental revenue when it is made available to them, and most analysts would encourage cities to pursue these revenues vigorously. Unfortunately, intergovernmental revenues can contribute to sound fiscal policy only when the amounts are predictable and are not essential for balancing the budget. If the availability of intergovernmental revenue is not really subject to local discretion, then how can individual mayoral administrations regulate their city's dependency on this type of revenue? Although individual mayors may have little control over the availability of intergovernmental revenue, the magnitude of funds cities receive has often been linked to mayors' effectiveness in dealing with Washington and their state capitals. Moreover, it is the long-term trend of dependency that reduces the individual mayor's flexibility in deciding revenue policy and increases the city's vulnerability to cutbacks in these external sources of funds. Once the city expands its budget using intergovernmental funds, it is very difficult to reduce spending even when those funds are cut back. The revenue a city raises from its own tax base produces the inverse of the intergovernmental revenue dilemma for fiscal stability. Cities can relieve the burden of service delivery costs to local taxpayers by obtaining revenue from nonlocal sources. As a result, the need for revenue from local sources should decrease when intergovernmental revenue increases. But many cities expand their total budgets when intergovernmental revenue is made available rather than using it to replace local revenues. It is not surprising that fiscal problems are likely to develop when intergovernmental revenues are cut and local revenues must be raised for a budget which has become dependent on these external funds. In this case the city's spending level cannot

TRENDS IN RNENUE AND DEBT

really be supported by the local tax base, a sure recipe for fiscal problems. Nevertheless, cities which depend primarily on their own tax base for revenues and do not pursue the intergovernmental revenue option when it is available are pursuing a conservative but not necessarily intelligent fiscal policy. When intergovernmental revenues are substituted for local revenues and the total budget is not expanded, fiscal stability can be maintained even when intergovernmental revenues are cut. Revenue from a city's own sources includes a wide variety of local taxes and user fees. In general, municipal budget analysts are convinced that cities which have diversified their revenue base are more likely to maintain fiscal stability.5 The property tax is one of the most important sources of local revenue, and as such it is considered a separate indicator of a city's fiscal well-being. Property tax revenues provide a better indicator than the tax rate itself because this revenue is based upon the assessed value of taxable property and the tax rate. The assessed value of taxable property is set by the state legislature as a proportion of the market value. The system of valuating property for the purposes of taxation, however, is highly political: property owners and real estate interests have successfully lobbied their state legislatures to keep the taxable value of their property down, regardless of its market value. Since American cities have generally relied primarily on property taxes for their local revenue, they have been particularly vulnerable to swings in the local economic cycle, especially as it affects commercial development and construction. During recessionary periods property values in the central city tend to decrease and so do revenues from property taxes. Short-term problems are created by delinquent property taxpayers, and long-term problems develop when economic recessions persist and property tax revenue is consistently overestimated by city officials. As a result, fiscal problems are likely to develop when a city's revenue base is overly dependent upon property taxes.

Total Revenue Trends in New York and Chicago Comparing per capita total revenue (see fig. 24) and expenditures (see fig. 1)in constant dollars for New York and Chicago from 1929 to 1975 shows that the differences between the two cities in revenues closely mirror their differences in expenditures. In 1929,Chicago's total revenue was $45.73 per capita as compared to $216.72 in 1975. New York's revenue in 1929 was $225.96 per capita, compared to $1,101.16 in 1975, amounting to a 387 percent increase in revenue for New York versus a 374 percent increase for Chicago. New York simply

CHAPTER FIVE

29 3 3 3 7 41 45 49 5 3 57 61 65 69 73 77 81 8 5 89

YEAR

-Revenue, Chicago

+Revenue, N Y

Fig. 24. Total revenue, Chicago and New York, 1929-89 (constant 1967 dollars per capita).

had to raise more revenue to support a much larger corporate budget than Chicago. In 1929 New York needed over twice the revenue Chicago needed to match its expenditures; by 1975 New York needed more than five times Chicago's revenue to support its vastly expanded budget. A basic prerequisite of fiscal stability is a balanced budget. In order to avoid persistent deficits, available revenue must keep up with expenditures over the long term. For this forty-six-year period, Chicago's revenues generally grew faster than its expenditures while, in contrast, New York's revenues rarely kept pace with its expenditures. New York's chronic problem of balancing its budget is deeply rooted in its fiscal policy process. In Chicago, mayors generally responded to declines in revenue by cutting back on city spending; growth in revenues did not automatically trigger budget expansion to absorb new funds. Like most other cities, Chicago showed a decline in its revenue during the Depression, with a brief respite in the mid-1930s due to the influx of intergovernmental aid, after which the decline continued until the end of World War 11. The magnitude of revenue loss during the Depression was masked by the property tax revolt that began several years earlier. After the war Chicago's revenue exhibited relatively constant growth. Chicago's budgets over the long term were part of a fiscal policy process which enabled it to show a revenue surplus at the same time that New York City was experiencing its 1975 crisis. New York's fiscal crisis retrenchment period (1975-79) did not simply result in a 25 percent reduction in expenditures; revenues also

TRENDS IN RNENUE AND DEBT

contracted 17 percent. Once the fiscal crisis was resolved, New York's budget expanded again and expenditures generally grew faster than revenues. Between 1979 and 1989 expenditures grew 52 percent while revenues grew only 31 percent, indicating that New York had clearly reverted to its pre-fiscal crisis habits. Chicago's budget showed a consistent pattern. In the 1975-79 period expenditures declined 2 percent and revenues increased 5.1 percent. During the 1979-89 expansion period revenues increased by 23 percent while expenditures increased 37 percent. Chicago's revenue policies are consistent with earlier trends, but its expenditures grew at a greater rate. Recurrent deficits certainly indicate fiscal problems, but fiscal stability is not simply a question of deficits, even over the long term. More important for determining a city's fiscal health is how that city copes with those revenue shortfalls which cause the deficits. The key to responsible fiscal policy is the ability to balance the budget not simply by increasing revenues but also by reducing spending. For the period between its two fiscal crises, New York balanced its budgets by increasing revenues whereas Chicago periodically cut spending.

Total Revenue Trends in New York: The Deficit Issue The revenue available for New York's budgets varied considerably by political administration. While revenues and expenditures grew, not every mayor ensured enough revenue to meet all costs. More often than not, shortfalls in revenue were carried over from one mayoral administration to the next. The only time in the period between the two fiscal crises that revenues actually declined was during La Guardia's second and third terms (1938-45), part of which coincided with World War 11. The ratios of expenditures to revenue indicate that there were surprisingly few periods in which New York mayors consistently balanced the budget.6 Moreover, budget gaps were closed by increasing revenues and not by cutting expenditures, even when the local economy was declining (see fig. 25). In 1932, at the height of New York's fiscal crisis, fiscal mismanagement and the failure to collect property taxes culminated in a budget imbalance (percentage of expenditures exceeding revenues) of 15 percent. In the postcrisis period, the budget was gradually brought back into balance by La Guardia, but in 1940 expenditures were allowed to exceed revenues by 45 percent in order to build the new subway. Even La Guardia, the reform mayor who guided New York out of its Depression era fiscal crisis, allowed other policy concerns to take precedence over fiscal prudence. After World War I1 (1945-49), the city's revenues grew 26 percent with the improved economy. Despite this growth, O'Dwyer still had 153

CHAPTER flVC

29 33 37

41

45 49 53 57

61 65 69 73 77

81

85 89

YEAR Deficit, Chicago

+ Deficit,

New York

Fig. 25. Deficit: ratio of expenditure to revenue, Chicago and New York, 1929-89.

small revenue shortfalls for two of the four years he was in office. Impellitteri's administration (1950-53) showed consistent imbalances in the budget. This is not a surprising outcome for a mayor who increased expenditures by 39 percent while increasing revenues by only 10 percent. When Wagner took office, he made every effort to balance the budget with substantial and steady revenue growth. During Wagner's last term, revenues increased by 31 percent. Wagner's efforts virtually eliminated the city's budget deficit, yet his policies actually served to temporarily mask some of the city's more serious fiscal problems. Lindsay increased revenues by 49 percent during his first term, facilitating expenditure growth but keeping the budget balanced. By the beginning of Lindsay's second term in 1970, the national recession had reduced city revenues, making it difficult to sustain the rate of growth in expenditures established during his first term. Since expenditures were not reduced, a deficit returned to the city's budget, varying between 1percent and 9 percent of revenues and appearing each year from 1970 until the fiscal crisis. New York's budget remained balanced for the entire postfiscal crisis period until 1989, when expenditures exceeded revenues by 2 percent. In most cities persistent deficits are a glaring warning signal that fiscal problems are developing. New York's mayors allowed deficits to remain despite a state law mandating the city to balance its budget at the end of the fiscal year. Even so, the magnitude of New York's fiscal problems cannot really be measured by the deficit. When the city chose to close its budget gaps in the period between fiscal crises, it

TRENDS IN RNENUE AND DEBT

consistently chose a policy of increasing revenue rather than decreasing expenditures. This type of policy was pursued despite declines in the local economy and the negative impact that constant budget growth in a shrinking revenue environment has on a city's long-term fiscal health. These "artificially" balanced budgets helped to camouflage the city's real fiscal problems, which are revealed clearly in the data on debt. Since its 1975fiscal crisis, New York has been complying with strict financial management procedures. As a consequence, a budget imbalance would now be a more reliable indicator of fiscal problems.

Total Revenue Trends in Chicago: The Deficit Issue After the 1930 fiscal crisis, Chicago mayors showed a remarkable consistency in their efforts to balance the city's budget. In 1929, during Thompson's administration and before its fiscal crisis, Chicago's expenditures were nearly twice its revenues. As explained in chapter 3, a scandal over the city's property tax assessment procedures erupted and the city fell behind in collecting property taxes. The city's fiscal problems developed into a full-scale crisis, and the budget was not balanced until 1932. During Cermak's administration city revenues were stabilized while expenditures were cut by 31 percent. By the time Kelly became mayor, the Depression had devastated the city's ability to raise its own revenue but intergovernmental assistance boosted city revenues, producing a 39 percent revenue increase between 1934and 1938and a corresponding increase in expenditures. During Kelly's second term (1938-42) revenues dropped 24 percentthe greatest revenue decline in the 1929-89 period. Revenues continued declining until Kennelly took office. City revenues per capita were $118.80 in 1939, bottoming out in 1947 at $59.39. While the Depression took its toll on Chicago's declining revenue base, expenditures were cut back and the budgets were balanced (see fig. 25). Chicago's revenues gradually expanded as the nation entered a period of economic prosperity after World War 11. During Kennelly's first term revenues increased only 4.5 percent, but during his second term (1950-54) there was a substantial 29 percent increase. Kennelly's second term marked the beginning of a twelve-year cycle of both revenue and expenditure growth that ended with Richard J. Daley's second term in 1962. During this period of prosperity, expenditures exceeded revenues almost every year, and the cycle peaked in 1961with a 28 percent budget imbalance. During Daley's third term revenues continued to grow but expenditures were reduced so that the city balanced its budget throughout the 1960s. By paying attention to the revenue as well as the expendi-

CHAPTER FIVE

ture side of the budget and by making the appropriate adjustments during economic recessions, Daley avoided expanding the city's budget to the point where expenditures could not be sustained by the available revenues. In the post-Daley years, the city's revenues continued to grow but at a much slower rate than in earlier periods. Initially, expenditures followed a similar pattern. During Bilandic's term (1974-78) revenues increased 5 percent while spending declined almost 1percent. Expenditure growth outpaced revenue growth, but only modestly, during both Byrne's and Washington's administrations. Byrne did have a 2 percent deficit in 1981which contributed to the city's fiscal problems (see chap. 1).Washington kept the city's budget balanced while Sawyer had some difficulties. In general, Chicago's deficit problems have remained minor, posing no real threat to the city's long-term fiscal stability.

Trends in Types of Revenues for New York and Chicago Long-term trends in revenue policy are especially important to consider since intergovernmental fiscal relations have changed dramatically over the past fifty years. The Depression brought for the first time direct federal intervention in city policy by funding local relief programs and capital construction projects. Some states also expanded their financial assistance to the cities during this period. This increased intergovernmental aid to cities was maintained after the Depression, though with some fluctuations in its rate of growth; it never returned to anywhere near its pre-Depression low even during the austere Reagan years. The data on city revenue sources show just how dramatic the change in intergovernmental relations has really been in terms of its long-term impact on the fiscal condition of city governments. The data also reveal important differences between New York and Chicago. In the period between its two fiscal crises, New York's revenues increased in tandem with expenditures to pay for the city's expanded budget, but its revenue sources shifted considerably. This shift was comparable in scope to the shift in budget priorities from common to non-common functions: New York became increasingly dependent on intergovernmental revenue to balance its budget, but it also diversified its local revenue base, reducing the city's reliance on the property tax (see figs. 26 and 27). This shift in the city's revenue source mix is starkly revealed by comparing proportions over time.7 In 1929,5.8 percent of New York's revenues came from intergovernmental sources while the remaining

TRENDS IN RNENUEAND DEBT

800 600 400 200 0 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89

YEAR -Total

Revenue

+C i t y

Revenue

+ Inter-govt.

Revenue

Fig. 26. Total, city, and intergovernmental revenue, New York, 1929-89 (constant 1967 dollars per capita).

94.2 percent was raised locally. In contrast, by 1975, 49.8 percent of city revenues came from intergovernmental sources, leaving only 50.2 percent to be raised locally. Also in 1929, property tax revenue accounted for 67 percent of the city's total revenue, while in 1975, its proportion decreased to 19.7 percent. The availability and active solicitation of intergovernmental revenue cannot be underestimated in considering the factors that account for New York's growth in spending during this forty-six-year period. From 1929to 1975,constant dollar intergovernmental aid increased over 4,000 percent. Like New York, Chicago's revenues increased from 1929to 1975 and kept up with the city's expanded budget. Like New York, there was a

29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89

YEAR

-Inter-govt. Rev.

+ C i t y Revenue

^- P r o p e r t y Tax

Fig. 27. Intergovernmental, city, and property tax revenue as a percentage of total revenue, New York, 1929-89.

CHAPTER FIVE

29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89

YEAR

-Total Revenue

+C i t y

Revenue

+Inter-govt.

Revenue

Fig. 28. Total, city, and intergovernmental revenue, Chicago, 1929-89 (constant 1967 dollars per capita).

considerable shift away from property taxes, a more diversified local tax base, and an increased reliance on intergovernmental revenue. The important difference between New York and Chicago is the extent of dependency on intergovernmental aid to balance the budget (see figs. 28 and 29). The proportional changes in Chicago's revenue sources since 1929 provides a sharp contrast with New York. In 1929 less than 1percent of Chicago's revenues came from intergovernmental sources while the remaining 99.7 percent was raised locally. By 1975,29 percent of city revenue came from intergovernmental sources and 71 percent was still raised locally. The average proportion of revenues from property

- Inter-govt. Rev.

+ City Revenue

-^Ã

Property Tax

Fig. 29. Intergovernmental, city, and property tax revenue as a percentage of total revenue, Chicago, 1929-89.

TRENDS IN REVENUE AND DEBT

taxes during the 1930s was 49 percent.8 By 1975 this proportion had declined to 27 percent. Chicago's reliance on intergovernmental revenues, particularly since the 1960s recession, was considerably less than New York's. This was a critical factor in Chicago's ability to avoid fiscal problems in the 1970s. Since 1975the intergovernmental component of the budgets in New York and Chicago has changed dramatically, adding a serious fiscal burden on both cities. Between 1975 and 1989intergovernmental revenue dropped 23 percent in New York and 6.2 percent in Chicago. Both cities were hurt by cutbacks in direct federal assistance-New York's aid declined 23 percent and Chicago's 26 percent. However, in this same period, state aid increased 36 percent in Chicago and 24 percent in New York. New York received less assistance from its state capital than Chicago in making up the needed funds. The proportion of revenue coming from intergovernmental sources and property taxes declined in both cities during the post-fiscal crisis period. Intergovernmental revenue accounted for 29 percent of Chicago's total revenue in 1975, dropping to 23 percent by 1989. The comparable figures for New York are 50 percent in 1975 and 35 percent by 1989. Both cities suffered from the loss, but New York's revenue problems were far greater than Chicago's. Since spending increased in both cities during this period, the loss of intergovernmental funds had to be made up for from local sources. Neither city pursued the traditional property tax option, not wanting to alienate its business community or middle-class home owners. The 1980s was the decade of Proposition 13 and property tax abatements for business development. As a consequence, between 1975 and 1989 property taxes dropped from 27 percent to 18 percent of total revenue in Chicago. Property taxes had only accounted for 20 percent of total revenue in New York in 1975, and they remained at 19 percent in 1989. Both cities enter the 1990s with revenue problems; however, Chicago still has the fiscal advantage in raising revenue. Chicago has decreased its reliance on intergovernmental aid and the property tax, and assistance from its state government seems stable. New York, on the other hand, has remained dependent (less than it was in 1975)on intergovernmental assistance in a period when the federal government has demonstrated no interest in maintaining direct revenue assistance to cities and when its own state government has also threatened funding cuts.

CHAPTER FIVE

Trends in Types of Revenues for New York from Jimmy Walker to Ed Koch Between 1929 and 1975, intergovernmental revenues increased during every mayoral administration in New York, with one exception: La Guardia's third term (1941-45), which occurred at the height of American involvement in World War 11. While increases in the availability of federal and state aid were virtually constant during this period, the rate of growth varied between mayoral administrations. Comparing expenditure trends with intergovernmental revenue trends reveals a most interesting relationship between the two. The periods of greatest expansion and contraction in New York budgets parallel the fluctuations in the availability of intergovernmental revenue (see figs. 26 and 27). The first important contribution from federal and state sources to New York's budget occurred at the end of Walker's second administration, when the impact of the Depression was being felt in cities across the country. Between 1929 and 1933 intergovernmental revenue increased 202 percent; its proportion of total revenues increased from 5.8 percent to 15.9 percent. Throughout the Depression years until World War 11, intergovernmental revenues provided a constant proportion of funds for city programs. When intergovernmental revenues declined 20 percent during the war (1941-45), the city's expenditures declined by 19 percent as well. The earlier growth trend returned during the post-World War I1 years. Intergovernmental revenues grew by 24 percent during O'Dwyer's administration. They were $53.32 per capita in 1954, Wagner's first year as mayor, and by the end of his administration had increased to $127.11 per capita. The 48.5 percent increase during Wagner's last term was at that time the greatest rate of increase since the Depression. By 1965, intergovernmental revenues accounted for 24 percent of the city's total revenues. While the city's dependence on federal and state funds grew and contributed to New York's budget expansion, the most dramatic change did not occur until Lindsay's first term in office. Between 1965 and 1969 intergovernmental revenues increased from $127.11 to $345.90 per capita-a stunning 172 percent. By 1969 intergovernmental revenues accounted for 43 percent of total revenues. This increased reliance on nonlocal revenue is significant because of its magnitude and its substantial deviation from earlier trends. The difference between Lindsay's revenue situation and that of the mayors who preceded him is readily apparent. Before Lindsay's first term most new revenues which financed New York's budget expansion were raised through local taxes and fees. For example, when

1RENDS IN RNENUEAND DEBT

O'Dwyer increased city revenues by $54.52 per capita between 1945 and 1949, only 17 percent of this increase came from intergovernmental revenues. A similar pattern occurred for all of New York's postwar mayors. The trend culminated during Wagner's final term, when revenues increased by $122.59 per capita, but even at this point only 33.9 percent of this increase came from intergovernmental revenue sources. By contrast, during Lindsay's first term, revenues increased by $264.77 per capita and a staggering 82.6 percent of this increase came from intergovernmental revenues. In one term the proportion of revenues from nonlocal sources nearly tripled. Intergovernmental revenues during Lindsay's first term contributed significantly to the 45.3 percent growth rate in total spending. If Lindsay had used the experience from his first term in office to forecast revenues, this dramatic increase in intergovernmental aid from both state and federal sources would have skewed future revenue projections. In a sense, Lindsay was encouraged to increase spending because of the great increases in the availability of nonlocal revenues. During Lindsay's second term, intergovernmental revenues continued to grow but by only 35 percent. Federal aid actually grew 263 percent, but state aid, which had always accounted for a larger proportion of the city's total revenue, only grew by 27 percent. New York's budget expanded during the Lindsay years, but intergovernmental revenues did not keep pace with it. This short period of extreme reliance on intergovernmental aid increased New York's vulnerability to future declines in its overall revenue base. The relationship between fiscal stability and tax base diversity is also highlighted in the data on New York's property tax revenue. The proportion of revenue New York raised from property taxes has been declining since its fiscal crisis in the 1930s,with occasional temporary increases. In 1931, during Walker's second term, property tax revenue peaked at 71 percent of total revenues, reflecting a post-fiscal crisis recovery of previously uncollected taxes. The city remained dependent on the property tax for more than half its total revenues until World War 11. From 1947,this proportion declined at a fairly constant rate. Moreover, as total city revenues increased followingWorld War 11, approximately 30 percent of all new revenue came from property taxes during any given mayoral term. Property tax revenue in New York was as high as $178.79 per capita in 1934, and by 1950 it had dropped to $92.56. Although the proportion of city revenues raised from the property tax has declined since the Depression, the amount of money the city raised from property taxes has increased steadily since the beginning of Impellitteri's administration in 1950. The greatest increase

(25 percent) in the amount of revenue raised from property taxes occurred during Wagner's first term, between 1953 and 1957, due primarily to an increase in the property tax rate. Beginning in 1969, at the end of Lindsay's first term, the value of taxable property showed its first decline since the Impellitteri years. During his first term, taxable property values declined by a rate of 3.7 percent, and during his second term, the decline nearly doubled to a 6.2 percent rate. The problems for Lindsay were made more acute as they followed a period of economic growth and increased revenues. During Wagner's last term in office (1961-65) taxable property value increased 13 percent, property tax revenues increased 18.6 percent, and intergovernmental aid grew by 58 percent.9 Wagner's budgets expanded to absorb this new revenue. As a consequence, it was difficult for the next mayor to anticipate a decline in revenue following such an extraordinary period of growth. If the Lindsay administration was making revenue projections using only post-1954 data, there was no reason to have assumed that property values and all forms of revenue would not continue to increase. Had anyone bothered to look at the pre-1954 data, they would have seen serious periods of decline in New York City's taxable property value. To a significant extent, the fiscal problems that developed during the Lindsay years came as a result of not predicting the decline in local revenue sources and the slowdown in the rate of growth of intergovernmental revenue. Lindsay's timing was unfortunate, but his fiscal policies resembled those of other post-Depression New York mayors: he increased expenditures regardless of the availability of revenue. Ironically, during the height of the fiscal crisis, Beame did not receive much intergovernmental revenue assistance to balance the city's budget. Between 1973 and 1977 total intergovernmental aid grew only 5 percent while state aid actually declined slightly (.06 percent). Koch's position was even worse than his predecessor's. Between 1977 and 1981, as the city continued its struggle to regain fiscal equilibrium, intergovernmental assistance dropped a staggering 25 percent. During Koch's second term (1981-85) there was a respite in this trend, as total intergovernmental revenue increased 12 percent. Not surprisingly, expenditures also increased 20 percent. President Reagan's New Federalism took its greatest toll during Koch's final term (1985-89), when federal aid to New York dropped 38 percent. Of equal importance, state assistance only increased 11percent, replacing little of the lost federal funds.

TRENDS IN REVENUE AM DEBT

Trends in Types of Revenue for Chicago from Anton Cermak to Eugene Sawyer Chicago's long-term revenue mix was quite different from New York's. The growth and decline of Chicago's intergovernmental revenue was closely linked to national economic cycles, and the periods of greatest growth in intergovernmental revenue did not parallel the periods of expansion in total city expenditures, in marked contrast to New York (see figs. 28 and 29). Chicago was better able to maintain fiscal stability partly because revenues did not fuel budget growth. Although the amount of intergovernmental aid to Chicago was directly affected by the functional performances issue710when considered as a proportion of total spending, it is nevertheless a meaningful measure of revenue diversification and level of reliance on nonlocal revenue sources. Intergovernmental aid began increasing in Chicago during the Depression. Although aid increased 327 percent between 1930 and 1934, the amount was still only $0.84 in constant dollars per capita at the end of Cermak's term. By the end of Kelly's first term, intergovernmental revenue increased substantially for the first time, to $23.91 per capita. During this same period (1934-38) the proportion of total revenues from intergovernmental sources increased from 1.2 percent to 24 percent, reflecting Kelly's success at bringing WPA money to Chicago. This level of intergovernmental assistance was sustained in Chicago through the early part of Kelly's second term and dropped during the entire World War I1 period, as did all other sources of revenue. Intergovernmental revenue increased again after the war, but at a rate that was not constant. During Kennelly's first term (1946-50), which marked the end of the war years, there was a 138 percent increase in intergovernmental revenue. During Daley's first term, intergovernmental revenue actually dropped 8.4 percent to $13.97 per capita. At the same time the city was experiencing its greatest budget expansion, which was clearly not fueled by the availability of federal or state aid. In 1958,at the end of Daley's first term, intergovernmental revenue accounted for only 12.5 percent of the city's total revenue. During Daley's second term, intergovernmental revenues gradually increased both in constant dollars and as a proportion of total revenue. Chicago, like other cities during the 1 9 6 0 was ~ ~ a benefactor of federal funds through the Great Society programs. Between 1966 and 1970, during Daley's fourth term, total intergovernmental aid increased 44 percent, but federal aid alone increased 169 percent. During this same period Chicago's expenditures also grew by 40 percent and intergovernmental revenue

CHAPTER FIVE

actually accounted for 47 percent of all new revenue growth, an extremely high proportion for Chicago. The most telling fact about the revenue side of Chicago's budget was that even in 1970 only 22 percent of its total revenues came from intergovernmental sources. Chicago never became seriously dependent on federal aid to balance its budget in the post-World War I1 years. During Daley's final term, intergovernmental revenue increased by 71 percent but expenditures only increased by 7.3 percent. Chicago was capable of weathering the national recession and cutbacks in the rate of growth in intergovernmental aid by contracting its budget. The property tax proportion of city revenues peaked in 1933 at 61 percent and then declined until 1951.Yet, for the entire World War I1 period, Chicago depended on property taxes for over half its available revenues. Chicago's dependency on property tax revenues was substantially reduced after World War 11, but the trend was not continuous. Under Kennelly and during Daley's first term the proportionate decline was steady while the amount of revenue collected from property taxes generally increased. During Kennelly's second term (1950-54) property tax revenue increased 28 percent, the greatest increase in this period. Yet Daley's first term followed with only a 4.3 percent increase. The erratic trend in property tax revenue can best be understood by examining the changes in the city's tax base that occurred during Daley's second term (1958-62).11 Between 1960 and 1961 intergovernmental revenues dropped 23 percent and taxable property values declined 5 percent. Daley responded to the changes in Chicago's revenue base with a dramatic 14 percent increase in the property tax rate, which increased the proportion of city revenue coming from property taxes to 41 percent. After 1961 taxable property values in the city continued their decline while intergovernmental revenues increased, although erratically. Daley, unlike other mayors of this period, was attentive to the revenue as well as the expenditure side of the budget. While other sources of local revenues were found, Daley also reduced spending during his third term (1962-66) by 10 percent. During Daley's fourth term (1966-70) Chicago's total intergovernmental revenue increased by 44 percent; state intergovernmental revenue actually declined 6 percent, but this was more than made up for by a 169 percent increase in federal intergovernmental aid. At the same time, property tax revenues also increased but only 3.4 percent. The tremendous increase in federal aid showed up in a 40 percent growth in city expenditures during Daley's fourth term. During Daley's fifth term (1970-74)' federal intergovernmental aid still increased in constant dollars but only by 55 percent, and the

TRENDS IN RNENUE AND DEBT

city's taxable property value declined by 24 percent. Daley responded to the economic downturn by increasing property taxes 12 percent and increasing the budget a modest 7.3 percent. Also, state aid increased by 95 percent, which assured that the total intergovernmental aid package was sufficiently high to balance the city's trimmed budget. Long-term revenue policies contributed to Chicago's fiscal stability in 1975,just as New York was experiencing its crisis. The recessionary economy hit hardest during Bilandic's administration (1974-78), when property tax revenues declined 28 percent. The city weathered this period much as it had in previous yearsexpenditures declined (1.6 percent), and intergovernmental revenues increased (34percent). However, Byrne was then confronted with some serious budget difficulties as the Bilandic mayoralty ended, with 38 percent of the city's budget reliant on intergovernmental revenues, the highest proportion in the city's history. Moreover, property tax revenues declined another 15 percent during her term (1978-82) so they could not compensate for the eventual loss in federal intergovernmental aid. A combination of property tax increases, a 46 percent increase in state aid, and a modest 7 percent increase in expenditures kept Chicago's budget in balance by the end of Byrne's administration. Washington also had some serious difficulties on the revenue side, for, although property tax revenues increased by 5 percent due to growth in the local economy, federal aid dropped by 45 percent and state aid increased only 8 percent from 1982 to 1986. The city's budget remained balanced during Washington's administration despite a 10 percent expenditure increase. Federal aid continued to drop, 31 percent under Sawyer's administration (1986-89), and state aid grew only 8.6 percent. Like all cities during the 1980s, Chicago had to learn to live with substantially less federal revenue. By sustaining the trend of revenue diversification it had established in the pre-1975 period and only modestly increasing expenditures, Chicago has maintained fiscal stability as it enters the 1990s.

City Budgets and the Fiscal Policy Process: The Debt Side of the Balance Sheet The final budgetary issue that must be considered when evaluating any city's fiscal policy is the amount of debt per capita in constant dollars that the city owes in outstanding bonds, notes, and warrants at the end of the fiscal year. Long-term trends in per capita constant dollars gross (total) debt, long-term debt, and short-term debt for New York City and Chicago12 are examined in this section. Gross debt is the sum total of all city debt, including both shortterm and long-term borrowing. The relationship of a city's total debt

CHAPTER fNE

burden to its fiscal condition is relatively simple. Cities must borrow in order to function on a day-to-day basis, since revenues are not collected until the end of each fiscal year. Fiscally stable cities are permitted to borrow at the lowest interest rates. As was mentioned earlier, the cost of debt service is a drain on the city budget; it is, therefore, in the city's long-term fiscal interest to keep its debt as low as possible. In general, excessive and persistent increases in the rate of total debt are the best indicators of future city fiscal problems. What about the relationship of short-term debt to fiscal stability? Short-term debt is designed to allow cities to pay for current operating expenses before all tax revenues are collected. Sound fiscal policy suggests that cities not spend more than they expect to receive from future tax revenues, fees, and intergovernmental aid. Although most cities are legally prohibited from carrying short-term debt over to the next fiscal year, when deficits in current operations cannot be funded by available revenue, mayors have sometimes chosen to ignore fiscal prudence, as well as the law. This occurred in Chicago and New York during and before their 1930s crises, and in New York before and during the 1975 fiscal crisis. Short-term debt was routinely "rolled over" to the following fiscal year or converted into long-term debt. Recurring and excessive short-term debt clearly indicates fiscal mismanagement. Long-term debt has a separate relationship to the city's fiscal condition. Long-term debt, which is used to finance capital projects, tends to be much higher than short-term debt. In growing cities there are legitimate needs for long-term debt, which is viewed as an investment in future economic development. However, consistently high long-term debt presents a serious fiscal problem for any city and is particularly harmful for those cities with declining economies. When long-term debt is growing at an unusually rapid rate, it is also important to consider the possibility that short-term debt has been refinanced as part of the long-term debt burden. Long-term debt policies are key to explaining a city's fiscal condition. Not only are long-term debt policies particularly difficult for any one mayor to change but there are often political imperatives which encourage mayors to pursue a fiscal policy that increases the city's debt burden. An individual mayor's decision to increase the city debt has few negative consequences during that mayor's term of office. Borrowing money is a way to increase city revenues while avoiding the politically difficult decision to raise taxes, impose users' fees on services, or cut spending. The negative long-term fiscal consequences of increasing debt were not perceived or were ignored by many New York mayors in the period between the Depression and the 1975 crisis.

TRENDS IN REVENUE AND DEBT

As a result of shortsighted decisions, mayors often risked mortgaging the city's future for the immediate political benefits they could reap by borrowing money. Fiscal crises, then, have in part been the result of long-term and politically expedient borrowing policies.

Trends in Gross Debt for New York and Chicago Long-term trends in debt are less meaningful than long-term trends in revenues and expenditures, since debt can fluctuate erratically from year to year. However, the differences in constant dollar per capita gross debt between New York and Chicago from 1929 to 1989 are so striking that it is worth considering these trends (see figs. 30 and 31). In 1930, at the height of the Depression, Chicago had $179.05 per capita in gross debt outstanding while New York had $868.26 per capita, almost five times more than Chicago. Both cities were experiencing fiscal problems, but the magnitude of the problem, as reflected in the debt, was much greater in New York. In 1975,before New York debt was restructured by the Municipal Assistance Corporation (MAC),gross debt per capita outstanding was $1,200.15,only 38 percent greater than its 1930 level. The increase in New York's debt level from 1930 to 1975 seems particularly insignificant when compared to the 455 percent increase in city expenditures during this same period. Debt levels in New York City have always been high, but during periods of fiscal instability they have been particularly high, even using a New York City standard.

1200 1000 800 600 400 200 0 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85

YEAR

-Gross D e b t

+Long-term

Debt

+Short-term

Debt

Fig. 30. Gross debt, long-term debt, and short-term debt, New York, 1929-89 (constant 1967 dollars per capita).

CHAPTER FNE

29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89

YEAR G r o s s Debt

A

Long-term D e b t

-^- Short-term Debt

Fig. 31. Gross debt, long-term debt, and short-term debt, Chicago, 1929-89 (constant 1967 dollars per capita).

New York's post-fiscal crisis debt burden has been low compared to earlier periods. The 1989 per capita constant dollar gross debt was actually 8.4 percent lower than in 1929 and 26 percent lower than in 1975. Chicago's debt picture was quite different. Debt increased 34 percent from 1930 to 1975 in Chicago, but Chicago's level of debt was markedly lower than New York's. At the height of its fiscal crisis (1975),New York's debt was $1,200.15 per capita while Chicago's was only $240.34 per capita, almost one-fifth the size of New York's. Also, the rate of growth in Chicago's debt seems more in line with the growth in the city's total expenditures, which increased during this period by 102 percent. Chicago's 1989 per capita constant dollar gross debt burden has increased a modest 36 percent since 1975 and 72 percent since 1929. There is no question that the level of New York's debt as compared to Chicago's increased New York's general vulnerability to fiscal problems.

Trends in Types of Debt for New York from Jimmy Walker to Ed Koch Since levels of city debt can vary from year to year, discernible patterns may show up between different political administrations. Any periods showing a sharp increase in the city debt are of greatest interest, for this is an indicator of fiscal problems (see fig. 30). During the period between its two fiscal crises, New York exhibited

TRENDS IN REVENUE AND DEBT

a cyclical trend in its debt growth, but growth in debt led to fiscal crisis only in periods during which there was a simultaneous loss in revenue. Growth in the city's debt burden was also more likely to lead to serious fiscal problems when the short-term debt burden contributed most to the expansion of the total debt burden. During Walker's administration the level of gross city debt was extremely high, marking the beginning of New York's first fiscal crisis. In 1929 gross debt was $971.33 per capita and remained at that level through 1933. However, the magnitude of New York's fiscal problems is reflected more clearly in the city's short-term debt, which increased 141 percent, from $52.48 per capita in 1929 to $126.35 in 1933. New York's debt did not drop seriously until the fiscal crisis was resolved. La Guardia's concerted efforts and the restructuring of the debt burden brought the city's debt levels under control. Between 1933 and 1937 gross debt dropped 60 percent, with similar declines for both the long-term and short-term debt burdens. By the end of La Guardia's second term and throughout most of his third term, gross debt dramatically increased, reflecting La Guardia's commitment to massive capital construction projects. While gross debt remained high during this period, an average of $795 per capita (1941-46), the city's short-term debt steadily declined after the Depression fiscal crisis years. From 1929 until the end of World War 11, short-term debt reached a high in 1933 of $126.35 per capita and a low of $8.34 in 1946. Gross debt was down during O'Dwyer's administration due to the national decline in capital programs induced by World War 11. After the war, however, a pattern of incremental increases in the city's shortterm debt began that culminated in the 1975 fiscal crisis. These increments were not constant, however, and varied in magnitude, exhibiting clear periods of fiscal instability before the city's second fiscal crisis. In the post-1946 period, in the middle of O'Dwyer's administration, gross debt began increasing, but the average debt during this period remained lower than the debt during La Guardia's last term, the World War I1 years. Impellitteri (1949-53) expanded the gross debt 23 percent, but most important, the short-term debt increased by 172 percent, the greatest increase in short-term debt for any mayoral term from 1929 to 1989. While in office, Impellitteri was actually accused of mismanaging city finances, but the city did not experience a fiscal crisis comparable to the crises in 1932 or 1975. Since the city's debt increase did not occur in a period of revenue decline, fiscal mismanagement was not transformed by the business and banking community into a full-blown crisis. Wagner's first term began with slowed-down growth in the city debt

but no reduction in the debt burden. During Wagner's first term (1953-57) gross debt increased 12 percent and short-term debt increased 44 percent, indicating some serious fiscal problems. During his second term, gross debt continued to grow by 13 percent while short-term debt briefly stabilized. Significantly, during Wagner's last term gross debt increased again by 14 percent while short-term debt increased by an alarming 79 percent. By 1965 gross debt in New York was $1,014.30 per capita and short-term debt was $121.84, remarkably close to the levels of debt during the 1930s fiscal crisis. The city was saved from fiscal crisis during this period by new revenue in the form of intergovernmental aid, and a prosperous national economy. Fiscal management issues actually dominated when Lindsay first took office; gross debt declined 8 percent, and short-term debt declined 15 percent, its first real decline since the La Guardia mayoralty. The debt statistics indicate that serious fiscal problems had developed by Lindsay's second term (1969-73). Not only was the level of debt high but it began increasing at an even more dramatic rate than in previous years: gross debt increased 20 percent to $1,125.09 per capita, and, most important, short-term debt increased 156 percent to $264.12. The city's gross debt and short-term debt did not decline until after the 1975fiscal crisis forced a restructuring of the debt burden. During Beame's administration (1973-77) gross debt declined 4.7 percent and, most important, short-term debt dropped 63 percent. The fiscal crisis continued to affect debt policy during Koch's first term (1978-81); gross debt declined 52 percent, which included a 50 percent and a 69 percent drop in long-term and short-term debts, respectively. However, fiscal crisis debt policy was short-lived, and Koch's second term (1981-85) started to resemble pre-fiscal crisis trends; gross debt increased only 11percent, but short-term debt increased 53 percent. By the end of Koch's third term (1985-89) gross debt had climbed 57 percent, with a 59 percent increase in long-term and a 31 percent increase in short-term debt. Trends i n Types of Debt for Chicago from Anton Cermak to Eugene Sawyer In Chicago there was also considerable variation in debt levels from one political administration to the next and, very importantly, the rate of growth in the city's debt was not constant.13 Chicago's 1930s fiscal crisis began during Thompson's administration and was brought under control by Cermak and Kelly. Between 1930 and 1934 gross debt grew 22 percent, peaking in 1933 at $233.87 constant dollars per capita. Chicago's 1930 fiscal crisis was similar to the crisis in

TRENDS IN REVENUE AND DEBT

New York, because the debt problem was worsened by shortfalls in local revenue. As chapter 3 explained, property tax revenues precipitously declined after the widespread refusal by individuals to pay their taxes. These local revenue problems occurred while the Depression was also ravaging the city's tax base. The combination of growing debt and declining revenues, as in New York, precipitated Chicago's 1930s fiscal crisis (see fig. 31). Chicago's debt burden declined with the resolution of its fiscal crisis. During Cermak's last year in office, 1933, Chicago's debt burden began to decline and continued to do so through 1947,the beginning of Kennelly's first term. Chicago's gross debt declined during the entire Kelly administration, averaging a 30 percent reduction in the debt burden every term. By 1947 Chicago's gross debt was $71.43 per capita, as compared to its 1933 level of $233.87. Chicago's short-term debt was also kept under control in this period, with a decline in all forms of debt even during World War 11. Chicago's gross debt began growing in 1947, increasing a year later 27 percent. This post-World War I1 debt burden was the result of a surge in capital construction, reflected in a 41 percent increase in long-term debt during Kennelly's first term (1946-50) and a 24 percent decline in short-term debt. The most important period of debt expansion occurred during Daley's first and second terms. Between 1954 and 1958 Daley expanded Chicago's total debt 63 percent, from $114.57 per capita to $186.82. Again, most of this growth was due to the increase in capital construction, which was visible in a 76 percent rise in the city's longterm debt burden, while short-term debt grew by a modest 8.5 percent. The city's total debt continued to grow through Daley's second term (1958-62), increasing 53 percent, but short-term debt actually grew 47 percent between 1959 and 1960. After this dramatic rise, short-term debt stabilized for a ten-year period. Importantly, debt grew in Chicago at the same time that city revenues were increasing. By Daley's third term total debt had actually dropped 1.9percent, registering declines in both short-term and longterm debt. This pattern of decline in the city's total debt is particularly significant since it coincided with a period of revenue loss. Chicago avoided fiscal problems in 1975-in part, because it managed to sustain periods of stabilization and decline in its debt. The city's short-term debt was kept at reasonable levels, and mayors responded quickly to control the debt before a recessionary economy created an unmanageable local fiscal burden. In the post-Daley years Chicago's mayors continued to effectively manage the city's debt burden. Total debt dropped 27 percent during

CHAPTER fNE

Bilandic's mayoralty (1974-78) and 33 percent during Byrne's administration (1978-82). Washington increased Chicago's gross debt 120 percent to $293.83 per capita constant dollars, the highest level in Chicago's history. However, this increased debt was used for capital programs (especially airport expansion) and came, appropriately, during a time of economic prosperity. Between 1986 and 1989 longterm debt grew only 15 percent. Significantly, short-term debt generally declined through the 1980s.

Summary of Findings: City Revenues, Debt, and Fiscal Policy How does the question of revenues enter into a city's fiscal policy choices, and have there been any important changes in the revenue side of the budget since the Depression fiscal crises? Mayors make spending decisions in anticipation of future revenues. Therefore, mayors who worry about fiscal health are also interested in maintaining a stable revenue base. Since the Depression, forecasting revenue has become increasingly sophisticated. Mayors can now rely on computer simulation models developed by their budget experts. It is also more difficult for mayors to politicize revenue projections by intentionally overestimating or underestimating the city's revenue capacity, since budget data have become more accessible to the public. Bond-rating services, citizen watchdog groups, private consultants, and city councils are now capable of challenging city hall's statistics. The fiscal crises in both cities during the Depression era occurred in conjunction with a national depression and shortfalls in local property tax revenue. Yet in each case mayors were overestimating local revenues for years before the actual crisis. Current city fiscal policy and New York's crisis in 1975 have an intergovernmental revenue dimension that did not affect the mayors of the Depression period. The fiscal condition of cities and their ability to forecast revenue are complicated by an increasing vulnerability to the policy preferences of decision-makers in Washington and the state capitals. The long-term revenue trends for New York and Chicago indicate that, since their 1930s fiscal crises, Chicago's budgets have generally been balanced while New York's have shown chronic deficits until 1975. The fiscal crisis forced New York to cut expenditures and balance its budget, a policy which lasted until 1979. During the 1980s New York's budget resumed its earlier trend of growth; however, new revenues came primarily from a robust local economy, and budgets remained balanced until 1989. Chicago mayors had some budgetbalancing problems in the 1980swhich were quickly resolved, and the

TRENDS IN REVENUE AND DEBT

29 33 37 41 45 49 53 57 61 6 5 69 73 77 81 8 5 8 9

YEAR

-

Inter-gov. Rev. CH -+ Inter-gov. Rev. N Y Fig. 32. Intergovernmental revenue as a percentage oftotal revenue, Chicago and New York, 1929-89.

city's budget grew but at a slower rate than New York's. The long-term trend indicates that Chicago mayors have had more flexibility than mayors in New York to manipulate both the expenditure and the revenue sides of their budgets, contributing to the city's basic fiscal stability. Beginning in the Depression, New York developed a greater reliance on intergovernmental revenue than Chicago (see fig. 32).14 Chicago, like New York, was successful in soliciting intergovernmental aid, but there was one striking difference between the two cities. Since the Depression, local revenues have remained the dominant proportion of Chicago's funds, making the city less vulnerable to the policies of decision-makers in Washington and Springfield. Chicago has remained more dependent than New York on its property tax, but this proportion dropped steadily during the period under consideration, indicating a successful effort by the city to diversify its tax base and prevent dependency on any one revenue source (see fig. 33). When intergovernmental aid was available, the property tax proportion of the budget was reduced, but when intergovernmental revenue was cut, either expenditures were cut or other forms of local revenue were substituted, preventing the relentless long-term budget growth revealed in the New York trends. The intergovernmental revenue dimension of the fiscal stability puzzle is also complicated by the functional performance issue. Chicago, not having legal responsibility for most redistributive services, did not need intergovernmental aid to fund them. Welfare spending, with its dependency on federal aid, was taken over by the

CHAPTER FIVE

29 3 3 37

41 45 49 53 57

61 65 69 7 3 77

81 8 5 89

YEAR

-Proptax, Chicago

+

Proptax, New York

Fig. 33. Property tax as a percentage o f total revenue, Chicago and New York, 192989.

state of Illinois in 1972, and education, with its dependency on state aid, is provided for by a special district and has never been part of Chicago's budget, to mention just two examples. The year 1960 was clearly a turning point for Chicago (see fig. 33). The proportion of the city budget dependent on property taxes changed, but as a response to trends in the local economy and the availability of other revenue sources. Most important, the mayor responded to changes in the city's economy and political arena with changes in local taxation and expenditure policies. During Daley's fifth term, Chicago experienced revenue problems similar to those in New York. Federal intergovernmental aid, while still increasing in constant dollars, slowed down, but Daley was able to trade off between revenue sources and virtually halt growth in expenditures. This was roughly the same period during which Lindsay was mayor of New York. Intergovernmental revenue growth did not expand Chicago's budget the same way it did in New York. New York's fiscal crisis in some sense was the culmination of alongterm spiraling of expenditures fueled by tremendous growth in nonlocal revenue sources whose rate of growth abruptly declined during a period when the city's own revenue base was already declining. Lindsay did what other mayors in New York routinely had done: increase spending regardless of revenue availability. From a fiscal policy perspective, Lindsay's spending policies were more appropriate for a period of economic prosperity. But mayors in New York had never been greatly concerned with fiscal stability, except during times of fiscal crisis. There was no reason to expect Lindsay to deviate from this historical pattern.

TRENDS IN REVENUE AND DEBT

Both cities were hit hard by the loss of intergovernmental revenue during the post-fiscal crisis period, but the long-term problem of replacing lost revenues will be more difficult for New York. Between 1975 and 1989 intergovernmental revenue declined 23 percent in New York and only 6 percent in Chicago. During this same period federal assistance declined 23 percent in New York and 26 percent in Chicago, while state aid declined 24 percent in New York and increased 68 percent in Chicago. Despite the loss of intergovernmental revenues both cities expanded their budgets, which meant that revenue had to be replaced from local sources. Increased assistance from Springfield, however, gave Chicago a fiscal advantage in coping with the lost federal revenue. Ironically, during the post-fiscal crisis period there was no longer spiraling growth in intergovernmental revenue to fuel New York's budget; yet it continued to grow, 52 percent between 1979 and 1989. Chicago's budget grew but by 36 percent. The long-term trends in revenue during the post-fiscal crisis period reveal a greater potential for fiscal problems in New York than in Chicago. When Beame took office in 1974, intergovernmental revenue accounted for 45 percent of New York's total revenues; by 1989 it accounted for 35 percent. Interestingly, in 1974 state intergovernmental revenue constituted 40 percent of total revenue and the federal share of total revenue was 5 percent. By 1989 state aid had dropped to 31percent of total revenue and federal aid had dropped to 4 percent. In contrast, intergovernmental revenue accounted for 30 percent of Chicago's total revenue in 1974: 16.5percent of total revenues came from federal aid, and 11percent came from state aid. By 1989 intergovernmental revenue had dropped to 23 percent of Chicago's total revenue. Only 9 percent of total revenues were federal while 18 percent were state. Since its fiscal crisis, New York has had to rely increasingly on its own local revenues to balance its budget. Moreover, New York's service delivery responsibilities have made it more vulnerable than Chicago to losses in intergovernmental funds. Chicago has had to increase its reliance on local revenues as well, but its state government has been more generous than New York's in making up for the lost federal aid. While both federal and state aid are unreliable sources of revenue, over the long term Chicago has managed to assess the political risks involved by shifting between these two forms of assistance. From a historical vantage point, New York and Chicago began with similar debt problems. Both cities experienced fiscal crises in the 1930s precipitated by a spiraling debt and shortfalls in local revenue, and they both significantly reduced their debt burdens in the years immediately following their crises. Nevertheless, there were two glaring differences between New York and Chicago over the long

CHAPTER FIVE

29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89

YEAR

-Gross Debt, Chicago

Ñ+ Gross Debt, N Y Fig. 34. Gross debt, Chicago and New York, 1929-89 (constant 1967 dollars per capita).

term. First, the magnitude of Chicago's debt never came close to New York's; second, New York's debt grew without the crucial periods of stabilization that occurred in Chicago. The enormous disparity in debt levels is due in part to the differences in functional responsibility for services in New York and Chicago. The gross debt burden in Chicago has clearly been reduced by the county and special districts, which have legal authority to float their own bonds for capital construction, much of which benefits the city. Yet, even when each city's debt burden is evaluated using a cityspecific standard based on its own past debt levels, Chicago has shown considerably more fiscal prudence than New York when it comes to debt policy (see fig. 34). Like New York, Chicago had periods of growth in total debt, but these periods have always been followed by periods of stabilization. The difference between the two cities was most apparent during the periods of stabilization. New York managed occasionallyto reduce its debt or slow down its growth, but only for very brief periods; the levels of increase in the next period would always be greater than the period before the stabilization. Chicago sustained longer periods of decline in its debt, and it also began the postwar period with much less debt than New York. This is especially important as both cities increased their debt substantially during the period of national economic growth which followed the war. Chicago's debt in 1946 was only $74.94 constant dollars per capita while New York's was $672.19nine times greater than Chicago's. There were sharp increases in

TRENDS IN REVENUE AM DEB1

New York's debt during the Impelletteri years due to fiscal mismanagement, but there was no fiscal crisis. New York's debt also rose sharply during Wagner's administration, but he was saved from fiscal disaster by great infusions of intergovernmental revenue. As a national recession set in, both cities decreased their debt, but Chicago started its cutback in 1964 while New York did not begin until 1968. In effect, New York continued increasing its debt even while revenues were declining. In contrast, Chicago managed to control its debt burden so as not to be caught in a cycle of falling revenues, increasing expenditures, and growing debt. Chicago and New York exhibited considerably different behavior in the area of short-term debt, as well. While both cities began the postwar years with similar short-term burdens, this situation rapidly changed. In 1946 Chicago's short-term debt was $22.39 per capita while New York's was a lower $8.34. Chicago's short-term debt remained relatively stable through the volatile 1960s,peaking at $67.11 per capita in 1970. By 1970 New York's short-term debt was $157.25 per capita, more than twice that of Chicago, and it continued growing until 1975, when it peaked at $396.22. The pattern of debt growth and revenue decline that precipitated New York's fiscal crisis in 1932 was duplicated in the postwar years, merely reerupting in 1975. When a city's debt has been growing for decades while its revenue base has been declining, as was the case in New York, the passage of time diminishes the mayor's capacity to reduce the debt burden, creating conditions which invariably lead to fiscal crisis. The key to fiscal crisis, then, is not political corruption, as some have argued,15 but an inability to cut spending when periods of economic growth are followed by recession and a decline in city revenue. The O'Dwyer and Koch administrations provide good examples of how political corruption is not a sufficient condition for creating a fiscal crisis. The groups which have power to trigger an actual crisis, namely, the financial and banking community, can tolerate political corruption that results in fiscal mismanagement as long as the city can maintain its revenues. In the period between the 1932 and 1975 crises, New York and Chicago responded differently to national recession, as well as to the decline in their local economies. This can be seen in their expenditure trends. Both cities increased their spending during the two important growth periods in the national economy, post-World War I1 and the late 1960s. The post-World War I1 period was a fiscally sensible time for expanding city budgets, because national economic growth was also producing local prosperity. However, by the 1960s both New York and Chicago were experiencing a decline in their tax bases. Eco-

CHAPTER FIVE

nomic growth had moved to the suburbs and the sunbelt. Spending in both cities was fueled in the 1960s by increases in federal grants-inaid and continued through the early 1970s. The critical difference between New York and Chicago came in the periods of national recession. New York did not cut its budget during the Depression, or in the recessions of the early 1960s and early 1970s. Politics in New York functioned without considering changes in the national economy or changes in its own tax base. In fact, public officials in New York used local spending to compensate for economic hardships created by the Depression, national recessions, and cutbacks in federal aid. Chicago's response to national recessions contrasted markedly with New York's. It cut spending during the Depression, the early 1960s, and the early 1970s. In effect, a crisis was required in New York to stop the spiraling spending and debt. Both cities increased their budgets and debt burdens during the 1980s, a period of national and local economic growth. Between 1980 and 1989 New York's budget grew 45 percent and its gross debt burden grew 46 percent. During the same period Chicago's budget grew a modest 17 percent; however, its gross debt grew 126 percent. Revenues did not keep up with expenditures, contributing to shortfalls in both cities' budgets in 1989. But New York has remained more vulnerable than Chicago to downturns in the economy because of its continued reliance on politically sensitive intergovernmental and property tax revenues to balance its budgets. The long-term trends in expenditure, revenue, and debt are components of the contrasting fiscal policy processes in New York and Chicago. They are important individual indicators of fiscal outcomes and have also, in part, shaped the fiscal policy choices made by each mayor. The next two chapters provide the political explanation for the development of these different budget trends by considering further the role of intergovernmental relations, legal arrangements, parties, and interest groups in the fiscal policy process of these two cities.

SIX INTERGOVERNME M RELATIONS, LEGAL ARRANGEMENTS, AND THE URBAN FISCAL POLICY PROCESS

Since the founding of the Republic, American intergovernmental relations have been characterized by ambivalence. This ambivalence derives, in part, from the misguided view that federal, state, and local government functions were meant to be autonomous. Despite much of the current political rhetoric, "The history of the American governments is a history of shared functions," as Grodzin points out.1 However, in fiscal terms, the "sharing" of functions has left cities in a weak and vulnerable position compared to the state and federal governments. This chapter examines the role of intergovernmental relations in the fiscal policy processes in New York and Chicago and generally considers its impact on the American city's ability to retain fiscal stability. While chapters 4 and 5 determined that New York and Chicago developed different revenue and expenditure patterns, these patterns did not emerge from a historical vacuum. They can be explained in part by differences between the two cities' intergovernmental relations. Intergovernmental relations as they affect questions of urban fiscal policy involve the relationships between city governments and state, federal, county, and special district governments. Relations of the state with the city are examined as they affect city fiscal policy by mandating expenditures, allocating financial assistance to costly city services, controlling the creation of regional authorities and special districts, and controlling city taxing authority. State constraints are the primary focus of this discussion, since state assistance was already discussed in chapter 5 . Federal-city relations in the fiscal policy process are considered in terms of expenditure mandates, tax and debt policy, and intergovernmental revenue assistance. The impact of changes in federal aid is the central concern of this section, since expenditure mandates did not play a significant role in federal-city fiscal relations before 1975.

CHAPTER SIX

Of special significance to fiscal policy decisions is the city's budget process. This chapter considers who has legal authority over the budget, both statutory and constitutional. Considered in particular are the relations of the mayor with other appointed and elected local officials like city council members, the controller, board members of overlapping government jurisdictions, and the state. There are obviously informal interactions in the budget process which include interest groups and the party organization. These are considered in more detail in chapter 7. Intergovernmental relations are crucial in determining whether a city is capable of retaining fiscal stability in that they affect the mayor's capacity to control the budget and the city's ability to share the burden of providing expensive non-common function services with jurisdictions outside the city.

City-state Relations and the Fiscal Policy Process The federal system made cities and their mayors legal creatures of state government. The impact of the city-state relationship is particularly profound in the fiscal policy process. City relations with state governments are important in determining how much local autonomy the city will have in fiscal matters, how much state revenue will be made available for city programs, and how much jurisdictional responsibility the city will have for service delivery. The state's role in formulating local fiscal policy limits the city's authority and discretion over its own revenue and expenditure policy. This relationship of the state to the city is based on a legal doctrine that gives the state supremacy over its political subdivisions. Known as Dillon's Rule (Ultra Vires Rule), this doctrine dates back to 1868 when the Iowa State Supreme Court ruled that local governments were creatures of the state and, as such, could be modified or abolished at the state's will.2 Since the inception of Dillon's Rule, municipalities have attempted to increase their authority through state constitutional grants of home rule and statutory grants of increased local discretion. The adversarial relationship between the state and the city has been particularly vociferous in the struggle for local control over budgetary matters. Even where cities have been granted home rule, the state government still retains significant control over the city's fiscal policy choices. The type of fiscal relationship a city developed with its state government depended, in part, on where it was located and when it was incorporated. For example, older northeastern cities were less likely than midwestern cities to create overlapping municipal government jurisdictions for the delivery of services. Existing units of government

LEGAL MIUHGEMENlS, INTERGOWRNMENTMRELATIONS

in the Northeast generally expanded the scope of their functional responsibility as the demand for new services grew. The frontier areas of the Midwest, however, without a history of town or strong centralized local governments, were more likely to develop regional governments before cities were incorporated.3 Moreover, demographic conditions, particularly the urban versus rural split in the state legislature, often dictated the early political arrangement of the municipality. Cities have certainly not retained the same relations with states that they had at their time of incorporation. Functional responsibility for service delivery has changed, but these changes have not necessarily improved the central city's fiscal capacity. In many states, the early rural antipathy toward the city was adopted by the rapidly growing suburban populations. As a consequence, when cities have only a minority of the representatives in the state legislature, their fiscal interests are often ignored, if not significantly undermined. State Supervision of City Finance What role did state governments generally play in supervising municipal finances before 1975? Although state regulatory activities expanded dramatically between the Depression and New York City's crisis, considerable variation remained among states. Some states had an agency actively involved in supervising or assisting municipal financial management. The function of this agency ranged from being responsible for a simple review of the city's budget to having legal authority to require substantive changes in budgetary allocations. Some states had legal authority to audit city budgets every year and could also require a uniform system of accounting for submission of budgets. Short-term and long-term borrowing is also supervised and limited in some states.4 In Illinois, before 1975, a Department of Local Government Affairs assisted cities in preparing budgets and assisted in fiscal management upon request of a municipality. The State Auditor's Office received and reviewed certified audits on uniform reporting forms and published a summary of the audits every two years. Illinois provided no administrative controls over short-term municipal operating debt.5 In New York state, before 1975, cities filed annual budgets and financial reports with the Division of Municipal Affairs in the Office of the State Comptroller. Budgets were reviewed for substance and legality. Financial reports were desk audited and compiled annually in comparative form. The state also compared actual reported expenditures with the budgets during periodic field examinations. New York

CHAPTER SIX

state's laws prohibited its local government units from engaging in deficit financing. City deficits could only be validated by state legislative enactments. Short-term municipal operating debt was only permitted in anticipation of actual taxes or revenues, and for budget notes under specified conditions. Municipal budgeting, accounting, and financial reporting were uniformly regulated and controlled by the state comptroller.6 Comparing the financial management controls in Illinois and New York before 1975 reveals a disparity that is ironic. Though New York state engaged in much more active and stringent supervision of local finances than Illinois, this did not prevent New York City's 1975 fiscal crisis. Chicago, on the other hand, managed to retain fiscal stability without extensive state supervision. In fact, in 1972 the New York state comptroller's audit of the city's finances revealed extensive fiscal problems. The findings of this audit were not merely ignored but disputed by the city's comptroller. Since its 1975 crisis New York has been subject to stringent fiscal oversight by the Financial Control Board and the special deputy comptroller for New York City, appointed by the state comptroller; yet it faced severe fiscal problems in 1990-91. Financial management controls are certainly important, but they cannot provide sufficient safeguards against the political pressures that compel a mayor to increase expenditures without carefully considering the availability of revenues. Most municipalities advocate noninterference by the state in the day-to-day management of their finances. Extensive review of local revenue and expenditure policy by state authorities is viewed by municipal finance experts as an impediment to effective local administration. State governments have tended to place too much emphasis on routine paperwork and have often been inadequately prepared to make qualified judgments regarding municipal budget priorities. Since budget policy is not merely the result of management decisions, in situations where states have strict authority over local budgets it is likely that state political considerations will dominate local fiscal policy mandates. Since states and cities do not usually share the same fiscal policy interests, a city's fiscal stability is not necessarily ensured by this procedure. State government can play its most effective role in local financial management when it mandates a balanced budget that conforms to generally accepted accounting principles, requires a yearly independent or state-supervised audit of the city's financial reports, and reviews the city's debt policy. The ACIR argues that these procedures would "protect local officials from the political temptations of lax fi-

LEGAL ARRANGEMMJS, INTERGOVERNMENTAL RELATIONS

nancial management."7 However, there is ample historical evidence that the constraints which state governments designed to ensure sound local fiscal policy have been routinely ignored. Even before the Depression, most states placed statutory limitations on their cities' debt level based upon the assessed valuation of property, and mandatory requirements for a balanced budget made it illegal to roll over short-term debt from one budget period to the next. Yet, during the Depression, these laws did not prevent many cities from running up huge deficits and short-term debt contributing to eventual fiscal crisis. In fact, between 1929 and 1937 the Municipal Bond Buyer recorded 1,434 actual loan defaults by incorporated municipalities.8 The experiences of New York City and Chicago also demonstrate that state administrative constraints on city fiscal policy cannot provide sufficient safeguards against the political pressures that compel fiscally irresponsible mayoral decisions.

State Mandates on City Expenditures, Taxing Authority, and Debt State mandates are the constitutional, statutory, or administrative actions that either limit or place requirements on local governments. Mandates are imposed either as direct orders or as conditions of aid.9 State mandates affect both the expenditure and revenue sides of a city's budget. On the expenditure side, state mandates usually result from the desire for statewide uniformity in the provision of a service. This type of mandate usually occurs in the areas of health, education, welfare, and transportation. The state can also mandate extensively in the policy area of personnel benefits by setting salaries, wage levels, working conditions, and retirement benefits for appointed municipal officials.10 The state mandates which result in the greatest burden to the municipality are laws which are imposed without state funds to pay for their implementation. Not only must cities pay for some programs which they do not choose, but they are also limited in their ability to raise revenue for these "uncontrollable" budgetary expenditures. On the revenue side, the city is severely limited by state regulation of its taxing and borrowing authority. States can remove certain properties from the local property tax base, restrict the level of local sales or income taxes, and restrict the type of taxes cities can levy. States can also limit the amount and type of debt cities can incur. By limiting mayoral discretion in the city's budget process, state mandates generally have a negative affect on fiscal stability. Taxing authority mandates. State restrictions on local taxing authority are intended to promote fiscal stability by holding down local

CHAPTER SIX

expenditures. State governments have assumed that regulating a city's revenue-raising capacity also regulates spending. Most states mandate restrictions on the use of local property, sales, and income taxes. The most extensive of these mandates developed in the area of property tax and dates back to the late nineteenth century. Most property tax mandates were enacted to limit the growth of local government during this critical period of industrialization and to protect taxpayers during the Panic of 1870. Early tax limits were generally tied to the limits on local borrowing but were not considered very effective in restraining local revenue growth. During the Depression real estate groups were effective in lobbying state governments for reductions in local property taxes over the objections of local policymakers.11 While the revenue base of most city governments has become increasingly diverse since the Depression, it still relies primarily on the property tax. In 1929, municipal governments obtained 65 percent of their general revenue from property tax. Dependency on the property tax dropped to 22 percent by 1975 but increased to 22.5 percent in 1989.12 The 1989 data indicate that the earlier trend of decline in the proportion of general revenues cities received from property taxes has ended. Local governments feeling the effects of state and federal policies under the New Federalism have returned to property taxes to substitute for the lost intergovernmental revenue. A 1962 ACIR study found that property tax rate limits adversely affect local government's ability to finance public services.13The movement away from property taxes has increased state involvement in local fiscal policy, since most other municipal taxes cannot be enacted without state enabling legislation. These mandates have ultimately reduced mayoral choices in revenue policy and as a consequence have contributed to the fiscal problems of many American cities, especially during times of economic scarcity. How did Chicago fare with respect to state restrictions on its taxing authority before 1975? In 1970 Illinois adopted a new state constitution which allowed any home rule unit to levy differential taxes within its own boundaries. Before this change was adopted, it was mandatory that all property be taxed at a uniform rate. The home rule provision in the new state constitution increased the city's taxing flexibility. Property tax rates were limited by state statutory authority except for home rule units, which could exceed the limit by local ordinance. Cook County, which is responsible for Chicago property tax assessment and collection, is considered a home rule unit. Until 1971, real property in Illinois was assessed at 100 percent valuation. At that time the legislature reduced the assessed valuation to 50 per-

LEGAL ARRAHGEMENlS, lNlERGOVIRNMENTAl RELATIONS

cent market value and further reduced it to 33.5 percent in 1975. Cook County was also allowed to adopt its own property classification scheme in 1974. The Illinois Department of Local Government Affairs is responsible for adjusting county average assessments so that the assessed value of all property in the state will be, on average, at the same percentage of the full value of property. In actual practice, equalization has not occurred and local assessor discretion still has an independent impact on property tax revenue. Under the 1970 state constitution, Chicago, as a home rule unit, also has the right to impose new taxes, but authorization by the state legislature is still required for new licensing, income taxes, and occupation taxes. Other sources of tax revenue in Chicago come from sales, income, and motor fuel taxes which are imposed by the state and shared with municipalities. These funds appear as state aid and not as local tax revenue. Home rule units like Chicago also impose fees for services, licenses, and special assessments. Some of the other taxes imposed by Chicago include a municipal utilities tax, a cigarette tax, and a municipal retailers occupational tax.14 In 1975,27 percent of Chicago's total revenue came from the property tax and in 1989, 17.6 percent.15 A combination of selective and general sales taxes replaced property taxes as the main source of city dollars. How did New York City fare before 1975 with respect to state restrictions on its taxing authority? The state of New York has constitutional limitations on municipal taxing with specific rate limitations for New York City. In 1975, the rate limit for New York City property taxes of 2.5 percent was based upon the average full value of real estate for the preceding five years minus any amounts required to pay principal and interest on certain short-term debt. This limit applied to the amount of money the city could raise from real estate taxes for operating purposes. However, the city was also authorized to levy an unlimited real estate tax to cover the principal and interest on all city debt.16 New York City has always assessed real property at less than market value. The State Board of Equalization and Assessment determines the full value of city real estate and calculates the equalization ratio. A significant proportion of real estate in New York City is also owned by public and private nontaxed institutions. In 1975, 37 percent of the total assessed value on all real estate was exempt from taxes.17 New York City, like Chicago, significantly reduced its dependency on the property tax by constantly increasing the number of nonproperty taxes it levied. The city's sales tax was first adopted in 1934 as a temporary relief measure for the unemployed. In 1975,it was the

CHAPTER SIX

chief local revenue producer following the property tax. In 1975, New York City residents paid a 4 percent sales tax administered and collected by the State Department of Taxation and Finance, in addition to a 4 percent state sales tax. Other major taxes in New York City before the fiscal crisis included a personal income tax on the net income of its residents, an earnings tax on nonresidents, a corporate income tax, and a financial corporation tax on banks doing business within city limits. Revenues were also collected from licenses, permits, franchises, and fees. Some of the "nuisance" taxes developed over the years were on cigarettes, beer, liquor, and automobile use. The state legislature authorized these taxes and did not limit their use. However, new types of taxes require state enabling legislation. In 1975, 20 percent of New York's revenue came from property taxes and by 1989,19 percent, actually a smaller proportion than in Chicago.18 Clearly, New York state created a much more restrictive tax structure for its cities than Illinois. While property tax limits are intended to hold down local expenditures, they did not do so in New York City or Chicago. New York City diversified its revenue base with sales taxes, an income tax, and intergovernmental revenue but continued increasing its property tax. Chicago also diversified its revenue base but used new taxes to keep down the rate of growth in the property tax. As chapter 5 demonstrated, New York continued expanding its budget, willing to use any revenue source that was politically viable, while Chicago had periods of retrenchment. State limitations on taxes had no fiscal benefit for either city and perhaps even worked against rational planning on the revenue side of the budget. While both cities continue their search for new forms of tax revenue, this state-city relationship has remained essentially the same since 1975. Debt mandates. State mandates on city debt are intended to promote fiscally responsible policy by limiting city borrowing to an affordable level. They are the most widespread and varied form of state control over local finances. Debt mandates can impose limitations concerning the type of debt, the ceiling on the amount that can be outstanding and the term for which debt can be issued, requirements for reserve funds to repay the debt, the maximum amount of tax levies that can be devoted to debt service, the maximum interest rates which may be paid, and requirements for voter approval.19 Most states still restrict municipal debt to a proportion of assessed property values, and some require local borrowing referenda. In 1975,the debt structure of New York City was extremely complex and was affected by a wide range of state constitutional limitations. New York state had no statutory interest rate ceiling on municipal long-term debt and no referendum requirement for approval of the

LEGAL ARRANGEMEME, IN~ERGOVfRNMENrALRELATIONS

debt. However, general obligation (G.O.) bonds were limited to a percentage of the taxable property value by the state constitution and there were no provisions for exceeding this limit. Under the state constitution, New York City is authorized to levy a real estate tax upon all taxable property without any limit on the rate or amount in order to provide revenues to pay back city debt. However, as 1975 demonstrated, increasing property taxes was neither a feasible economic nor a feasible political option when New York City's debt became too large to manage. The New York state constitution also requires the city to make an annual appropriation for the payment of interest on all city debt. In 1975, constitutional limitations did restrict New York City's shortterm and funded debt to 10 percent of the average full value of taxable property in the city for the most recent five years. Certain types of debt on public improvements could exceed the limit including debt incurred for water supply, sewage treatment plants, rapid transit facilities, schools, and hospitals. New York City issued several different types of short-term bonds: tax anticipation notes (TAN),revenue anticipation notes (RAN), urban renewal notes (URN), and budget notes. If these obligations were retired within five years of their original issuance, they were exempted from the constitutional limitations on the amount of funded and short-term debt. There were other categories of debt which were limited to 2 percent of the average assessed valuation of taxable property for the most recent five years. This included debt on low-rent housing, nursing homes for lowincome people, and urban renewal projects, which could be incurred above the 10 percent general debt limit. Also, city indebtedness to aid self-supporting programs could be excluded from the debt limit if approved by the state comptroller.20 In 1975, Illinois had a statutory interest rate ceiling on municipal long-term debt, a referendum was required for the approval of G.O. long-term debt, and G.O.bonds were limited to a percentage of the taxable property value with no provisions for exceeding this limit.21 Until 1970,the Illinois constitution imposed a limit on the bonded indebtedness of taxing jurisdictions to 5 percent of the assessed valuation of its taxable property. This restriction was often circumvented through the creation of special districts. The 1970 constitution eliminated the 5 percent debt limit, but statutory restrictions on debt levels remained in effect for home rule counties. Since 1970, Illinois has given Chicago, as a home rule unit, the authority to issue general obligation bonds without referendum for an amount equal to 3 percent of the assessed value of its taxable property, maturing by forty years from the time of issuance. Debt existing

CHAPTER SIX

before 1971, debt authorized by referenda, or debt assessed from another local unit of government was exempt from this limit. A threefifths vote of the legislature was required to limit debt payable from other than property taxes. Chicago also has the authority to issue Tax Anticipation Notes (TANS)for up to 85 percent of the taxes levied for a specific purpose for the year during which the notes were issued. There has been no fixed limit on revenue bonds.22 While Illinois had more stringent control over city debt limits than New York state, such control has been a relatively unimportant factor in maintaining Chicago's fiscal stability. State limitations on debt are basically management policies and, as such, can be easily circumvented. The plethora of special districts in Illinois has allowed Chicago to circumvent these restrictions, as the discussion of the Public Building Commission will show. Despite state restrictions, the fiscal crises in New York City were both triggered by the accumulation of an extraordinary amount of short-term and long-term debt, indicating that state limitations had little deterrent value. As a condition of the 1975 bailout, the state imposed additional restrictions on New York City's debt authority. For example, TANScannot exceed 90 percent of the available tax levy and cannot mature later than the last day of the fiscal year in which they were issued. RANs cannot be issued in excess of an amount which would cause the principal amount of RANs outstanding to exceed 90 percent of available revenues and cannot mature later than one year subsequent to the last day of the fiscal year they were issued. As mentioned earlier, MAC was authorized by the state during New York City's fiscal crisis to issue bonds and notes. MAC has since provided financial assistance by using its funds to help the city meet its seasonal borrowing needs and paying for capital budget items. While MAC has provided the city with another means of raising revenue, it has no taxing authority and its debt must be paid directly from a state sales tax imposed within the city, from a stock transfer tax, and from the city's portion of state aid, if necessary.23 Ironically these debt restrictions contributed to New York City's 1990-91 fiscal problems. Although the interest on MAC bonds is paid by the city, the mayor does not control MAC funds and the MAC board refused his request to use their revenues to alleviate the city's budget problems. Also, post-1975 limits on the city's debt options have forced the mayor to handle recession-related revenue shortfalls by cutting the budget and increasing taxes, policies which will hurt the city's fiscal condition over the long-term. Expenditure mandates. Revenue and debt mandates merely limit a

city's access to new revenues while the expenditure mandates can be fiscally devastating because they create fixed costs that local authorities cannot reduce even during times of economic scarcity. Special interest groups, as chapter 7 explains, have been effective in creating mandated expenditures for cities by appealing to the state legislature when local public officials turn down their demands for increased spending. Municipal employee unions have been particularly successful in using the state legislature to ensure their share of the city budget for salaries and benefits, regardless of fiscal impacts. Moreover, state reimbursement of mandated local costs is rare. A 1977 ACIR survey reported that only six states required state compensation for certain types of mandates, and these states did not include Illinois or New York. Also, New York was found to be the state with the most mandates.24 What were the important differences between New York and Illinois in state expenditure mandates, and how did these differences affect the fiscal conditions of New York City and Chicago before 1975? State-mandated municipal personnel policy has had considerable impact on local fiscal conditions. New York state and Illinois both had a significant number of mandates governing municipal employees. The two states had similar mandates governing the retirement of local personnel, leaving minimal discretion to the localities regarding pension levels and eligibility. As a result, both New York and Chicago had minimal autonomy in this arena, but there were considerable differences in the level of benefits municipal employees extracted from their respective state legislatures. In 1975, New York City was contributing 7 percent of its budget to its municipal employee pension funds while Chicago's contribution was 5.6 percent.25 Chicago officials were more successful than their New York counterparts in influencing state legislative policy toward municipal employees. Another important difference between Illinois and New York state concerned salary and working condition mandates for city employees. New York state mandated collective bargaining with all municipal employee organizations including police, fire, and education. Police and fire employees were also entitled to compulsory binding arbitration of impasses in the collective bargaining process. Illinois had no collective bargaining mandate for any of its municipal employees in 1975.26 In New York City, police, fire, and teacher unions were particularly effective in negotiating with the state legislature for mandates governing employee work hours, working conditions, and fringe benefits. Municipal employee residency requirements are another area of personnel policy that Chicago has managed to control while New York

CHAPlER SIX

has not. While permitting city workers to live in the suburbs has no direct fiscal cost to the city government, proponents have argued that residency requirements contribute to maintaining a stable city tax base.27 Chicago passed its residency requirement law with state enabling legislation in 1901,but it was not enforced. In May 1976 Mayor Richard J. Daley announced that city employees who were not residents of Chicago had until August 2 of that same year to show proof that they were selling their suburban homes or they would lose their jobs. Daley simply initiated enforcement of the city's residency requirement law and defeated its opponents in court.28 In contrast, New York passed a residency requirement for city employees in 1937,known as the Lyons Law. Its sponsor, James J. Lyons, Bronx borough president during the Depression, advocated "hometown jobs for hometown boys." Mayor Wagner repealed the law in March 1962, one month after Lyons had retired from office. By this time approximately 70 percent of all city employees had been exempted, including teachers and most uniformed workers.29 During New York's fiscal crisis there were renewed efforts to pass a residency law, but neither Mayor Beame nor Mayor Koch could get support in the state legislature, primarily due to union opposition. Koch initially issued a mayoral directive requiring all municipal employees to live in the city, but workers covered by the State Residency Requirement law were exempted. Currently all police, fire, corrections, and sanitation uniformed workers; employees of boards and authorities (i.e., teachers and school employees); and all employees in the district attorneys' offices and probation department are exempted by state law from the 1986 local law requiring municipal employees to live in the city. Mayor Dinkins has supported state legislation that would require all new municipal employees to live in the city but, like his predecessors, has had no success even after dropping the demand for retroactivity. The lack of state mandates in critical areas of personnel policy gave Chicago mayors considerable budgetary discretion and leverage in controlling the demands of municipal employee groups for increased wages and benefits. Control over the salaries of nonunionized personnel also contributed to the longevity of Chicago's machine. The net result of increased mayoral control was an increased capacity to retain fiscal stability. New York City, on the other hand, was burdened with personnel expenditures mandated in Albany which the city had to pay for without regard to other budgetary imperatives. This reduced the mayor's discretion in budget decisions, thereby increasing the likelihood of fiscal problems during times of economic scarcity. Social services is the second area of state expenditure mandating

LEGAL ARRANGEMENTS, INTERGOVERNMEN~AIRELATIONS

where New York City and Chicago had considerably different fiscal burdens. In 1975, New York state mandated a 50 percent local share of nonfederal AFDC (Aid to Families with Dependent Children) payments and administrative costs, and a 50 percent local share of Medicaid program and administrative costs, while Illinois paid the entire cost of the program. New York state also provided additional aid to the elderly and the disabled under the federal SSI program. Localities were mandated to contribute 50 percent of these additional payments. Similar differences existed concerning state environmental protection mandates. New York state demanded local enforcement of air, water, and waste quality standards; comprehensive solid waste planning; regulation of wetlands use; and environmental impact statements on local projects. Illinois had none of these regulations.30 There is no doubt that the added expense of providing statemandated programs contributed to New York City's fiscal problems. Where New York City had fixed costs in the areas of personnel, welfare, and environmental protection, Chicago was allowed greater flexibility in its budget decisions. State mandates were a central part of the reform agenda discussed during New York's fiscal crisis. Some significant changes included a state takeover of the noncapital costs of local courts and total state assumption of the responsibility for capital and operating expenses of the City University system. In addition, state assumption of the mandated share of local funding for long-term Medicaid services was reduced to 10 percent, and the 50 percent local contribution to statemandated SSI payments to the elderly and disabled was completely eliminated. Despite these changes, New York state's contribution to combined transportation and public welfare expenditures is the lowest in the country.31 Also, New York City is the only city in the country that is required by its state government to finance 50 percent of the nonfederal portion of AF'DC. On the big ticket spending mandates Chicago's relationship with the state has remained relatively constant since 1975. In the area of personnel policy mandates, however, Chicago's situation has seriously changed. Since 1984 the entire municipal labor force has been covered by collective bargaining agreements.32 As the machine's hold over the Cook County legislative delegation weakens and as the strength of the city's municipal employee union lobbyists grows in the state legislature, Chicago too will be more vulnerable to increases in state-mandated pension costs and benefits. The changes were already apparent in 1989 when New York contributed 5.6 percent of its budget to employee retirement funds while Chicago contributed 7 percent.33New York's situation has barely improved since

CHAPTER SIX

1975, and the city remains captive to state mandates regulating personnel policy. Some high-profile examples include the city's continuing inability to pass a teacher and uniformed employee residency requirement that would only affect new hires. New York mayors have also been unable to repeal the 1970 Heart Law, which presumes that every heart ailment of retiring police or fire department employees is job related, entitling them to a tax-free disability pension at threequarters ~ a y . 3 ~ While Chicago continues to have a significant fiscal advantage over New York in the area of state mandates, both cities have vulnerabilities. Neither state has adopted a comprehensive policy for dealing with the fiscal burden of state mandates on its local governments. The California legislature's progressive law offers a model. It provides funding when increased services or new programs are mandated (legislative programs enacted prior to 1975), it assesses the fiscal impact of mandates before mandates are passed, and it establishes a commission on state mandates to hear local governments' claims for reimbursable state-mandated costs.35 State Assignment of Functional Responsibility and the Special District Option Another important aspect of state-city relations in the fiscal policy process involves the assignment of functional responsibility, which was briefly discussed in chapters 2 and 4. Overlapping jurisdictions in the form of special districts,36 authorities, commissions, and county governments often provide services which would otherwise remain the city's obligation. Also, in some cases the state government itself has taken over full responsibility for services which in other states are provided by the municipalities. Functional consolidation-shifting the legal burden of a function to a higher level of government-depends on state constitutional or statutory authority. The state legislatures, often acting on gubernatorial initiative, play the critical role in changing the relationship between governmental units by either mandating or facilitating functional transfers. The state response to functional consolidation has varied considerably. The cities that successfully influenced their state legislatures to create special districts or assume direct responsibility for particularly costly city services have been in a better position to retain fiscal stability than cities that have not. Sharing the burden of service delivery for the more expensive noncommon function services like health, education, welfare, and transportation has definite fiscal advantages for the city. An ACIR survey found that, between 1965 and 1975, 79 percent of cities with popula-

LEGAL ARRANGEMENTS, INTERGOVERNMENTAL RELATIONS

tions over five hundred thousand had transferred at least 1function to another governmental jurisdiction, and the average number of functions transferred was 4.2. In many instances the state itself assumed these functions, including health and welfare, municipal courts, and environmental protection.37 Local governments have not traditionally surrendered authority for service delivery, since doing so tends to limit the policy options and political power of local decision-makers. Yet the trend revealed in the ACIR survey is clear and the explanation relates directly to the need to minimize expenses at the city level. When asked why the city had decided to shift responsibility for these functions, 75 percent of the respondents in this same group of cities listed fiscal rsstraints among the three most important reasons for the shift.38 Research supports the local policymakers' belief that creating special districts is an efficacious strategy for relieving municipal fiscal pressures. MacManus's study of southern states found that the creation of special districts between 1972 and 1977 helped keep down city property taxes and city expenditures.39 As chapter 4 demonstrated, Chicago policymakers have benefited from the fiscal advantages of "spinning off services since the turn of the century while New York mayors have tried to do so but without much success. The functional scope of city government is considered the single most important determinant of municipal taxing and spending.40 Clark et al. showed that differences in functional responsibility do not determine a city's fiscal condition but, rather, contribute to a more complex set of political interactions which in turn affect a city's fiscal policy choices. The analysis of d a r k et al. showed that cities responsible for more functions spend more per capita on service delivery (394 correlation). Comparing New York and Chicago using the d a r k et al. index for measuring the range of functional performance shows an enormous disparity between the two cities, which is consistent with the data presented in chapter 4. New York's functional performance score was 583.07, the highest in the sixty-two-city sample, while Chicago's was a distant 98.49.41 One popular option for divesting city governments of particularly costly services is the creation of a special district. Special districts are generally unincorporated taxing bodies controlled by elected local officials. Their services are supported by property taxes, user fees, or special assessments. Special districts are important in this discussion of fiscal policy because they allow cities to spread the cost of service delivery outside their legal boundaries and to circumvent state restrictions on local revenue policy. Mayors have also used special districts to consolidate their own authority over fiscal policy.

CHAPTER SIX

Not surprisingly, Chicago and New York differed significantly in their effective utilization of special districts. Special districts are created for several reasons that offer fiscal advantages to the city. First, local governments' capacity to raise revenue is restricted by state statutory and constitutional limitations. If a city wants to circumvent state restrictions, it can establish a special district within its own boundaries which has separate borrowing and taxing power. Second, under strict interpretation of the Dillon Rule, local governments are only authorized by state law to provide specific services. Special districts may offer the best legal option for providing a service not authorized in the state constitution. Third, if a city provides a service that is available only in part of its jurisdiction, it may want those residents to pay for the costs of the service. State law can require local governments to apply taxes uniformly. If a special district provides the service, the state can also assess an additional tax on the residents of the area receiving the service. The same principle is applied when a suburban fringe area lacks its own resources for providing a specific service. A special district can be created which overlaps parts of both jurisdictions. The South Cook County Mosquito Abatement District was created for this purpose. Fourth, special districts enable contiguous legal jurisdictions to cooperate on service delivery. The advantages of this approach are both administrative and financial in that area-wide districts can achieve economies of scale. The Regional Transportation Authority (RTA), which services Chicago's greater metropolitan area, and the Metropolitan Transportation Authority (MTA), which does the same for New York and its suburbs, are examples of this type of special district. Finally, there may be political reasons for creating special districts. In many cities referenda are required for bond issues or taxes related to new services. Special districts are intentionally created in some cases to circumvent this need for public approval. Faced with a referendum that will increase their tax burden, voters will often disapprove. Special districts are a gray area in government which citizens do not completely comprehend and which are therefore accepted more readily than a direct cost increase in the form of higher city taxes.42 The assignment of functional responsibility is a significant factor in the fiscal policy processes of New York and Chicago. The enormous difference between these two cities is highlighted by considering that, at the time of its 1975 fiscal crisis, New York was spending 72 percent of its budget on non-common functions while Chicago was only spending 16 percent.43 As chapter 4 noted, Chicago managed to spin off most of its costly non-common function services to other jurisdictions or simply chose not to provide them at all. In New York the opposite was true.

LEGAL ARRANGEMENTS, INTERGOVERNMENTALRELATIONS

Functional responsibility in Chicago. How has functional responsibility affectedChicago's fiscal condition? Overlapping government jurisdictions in the form of special districts, commissions, and county government have been a standard feature of the political geography of Illinois since the turn of the century, but their positive effect on Chicago's fiscal conditions was only apparent after its Depression fiscal crisis.44 The 1870 Illinois state constitution limited local debt to no more than 5 percent of the assessed valuation of property. As a consequence, when a city or county reached its debt limit, special districts with their own bonding and taxing authority were created. This process was particularly prevalent in Cook County at the turn of the century, when the transformation from a rural to urban society produced demands for additional services that could not be met by existing governments. The state legislature preferred to pass enabling legislation for single-service special districts rather than to liberalize the restrictions on local tax and revenue policies. It was not simply fiscal management issues that motivated the Illinois state legislature to pursue this policy. Patronage politics also made Republican state legislatures reluctant to increase the formal authority of city governments, which were often dominated by Democratic machines. As chapter 3 explained, before Chicago's 1930s fiscal crisis, fragmented government authority enabled factions from both parties to retain political strongholds in the various legal jurisdictions that governed the city. Special districts were also initially preferred by local citizen groups as a way of maintaining greater control over service delivery. In 1975, ten local government jurisdictions, directly supported by the city's taxpayers, provided services to Chicago. The city corporation, the Chicago Board of Education, the Chicago Park District, and the Community College District had boundaries which were coterminous with the city. The Mosquito Abatement District was in the southern part of the city, and the Chicago Urban Transportation District was in the Loop and near north areas. Cook County, the Cook County Health and Hospital Governing Commission, and the Forest Preserve District were within the county boundaries, which extended beyond the city. The Metropolitan Sanitary District of Greater Chicago was in an area larger than the city but smaller than the county. Taxes for all these districts were collected by the county, but each had an independent property tax levy, received an allocation of the personal property replacement tax, had the legal capacity to issue debt obligations, and maintained its own financial records and accounts. Other public bodies providing services to city residents were the Chicago Transit Authority (CTA), the Regional Transportation Au-

CHAPTER SIX

thority (RTA), and the Public Building Commission (PBC). The CTA operated the mass transit network in metropolitan Cook County but could not levy any taxes. The RTA provided public transportation for the six counties in northeastern Illinois and purchased its services from other public and private agencies including the CTA. The RTA received its revenues from a 5 percent state tax on motor fuels but had no power to levy property taxes. Two other important service delivery providers in Chicago, which were municipal not-for-profit corporations, were the Chicago Housing Authority (CHA) and the Chicago Regional Port District. The CHA built and administered low-income public housing with revenues provided by the federal, state, and city governments. The Port District, created for the development of port facilities, could issue revenue bonds which were paid for from fees collected by users of its facilities. These special districts allowed mayors of Chicago to share the burden of service delivery with jurisdictions outside the city and also reduced the city's corporate budget with the creation of separate taxing and bonding authorities. Also, special districts for deficit-prone redistributive services insulated the city's own credit rating in the municipal bond market. It is especially important to note that mayors retained control over the policies of special districts through appointment and budget authority. For example, the Park District was governed by five commissioners who were appointed by the mayor with the approval of the City Council and served without pay for staggered five-year terms. The governing body of the RTA was a nine-member board of directors; four were appointed by the mayor of Chicago, four were appointed by suburban county board members, and the chair was elected by the eight members. In any regional service delivery arrangement, Chicago mayors made sure that the city retained majority control on the appointed boards. Even in Cook County, which is governed by an elected board of commissioners, ten were elected at large from the city and six from the suburbs. This arrangement has not changed despite the movement of population from the city to the suburbs since the 1960s. It was thought that removing the 5 percent limitation on indebtedness for localities in the 1970 Illinois state constitution would discourage further development of special districts. This has not been the case. The fiscal advantages of special districts are so striking that the consolidation of three large and nineteen small park districts in Chicago in 1934 is the only example in Cook County of such a consolidation.45 Moreover, parks were not taken over by the city after its fiscal crisis but were simply consolidated into a more efficient single special district. Many older special districts have expanded their

LEGAL ARRANGEMENlS, INTERGOVERNMENTAL RELATIONS

functions while new regional authorities continue to be created. For example, the Metropolitan Sanitary District was first organized in 1889,the Forest Preserve District in 1915,the Suburban Cook County Tuberculosis Sanitarium District in 1949, the PBC in 1956, and the RTA in 1974. All of these districts remain operative, and many have brought about functional cooperation among separate government jurisdictions. As chapter 4 demonstrated, this pattern of reducing direct costs for service delivery by the city government enhanced Chicago's capacity to maintain fiscal stability. Since 1975, Chicago has continued to benefit from its fiscal relationship with special district governments. In response to fiscal problems at the school board, the state legislature created the Chicago Public School Finance Authority in 1979. The authority was given broad powers to manage the board's finances including budgetary authority and the authority to sell long-term bonds. Two of its five members are appointed by the mayor and two by the governor; the chair is jointly appointed. By creating this authority, the state insulated Chicago from the school board's fiscal problems. In 1987 the Illinois Sports Facilities Authority was created by state law to build and maintain a sports stadium. The area of the authority is coterminous with the city. Its property is tax-exempt, it can issue bonds, and it can levy a 2 percent tax on operators of Chicago hotels in addition to the tax already levied on hotels. As of 1988 the authority was receiving $5 million a year from the state tax on hotel operators and $5 million a year from Chicago's share of the state income tax. As a consequence of this arrangement, the costs of this stadium are not part of the city's corporate or capital budget. The Chicago Regional Port District, created in 1951, changed its name in 1986 to the Illinois International Port District, retaining its original mandate to stimulate commerce through Calumet Harbor. When it was first created its revenue bonds were to be financed through user fees, but in 1986 the state appropriated over $5 million from general revenue funds to establish an escrow account to repay bonds due in 1995. In 1989 the Metropolitan Sanitary District of Greater Chicago changed its name to the Metropolitan Water Reclamation District of Greater Chicago.46 Not only has Chicago been successful at spinning off services to special districts and the county, but also the state has taken over the funding and administration of some of the more costly redistributive, non-common function services. Welfare and public aid were traditionally a function of Cook County, but Chicago also had its own Department of Public Welfare which contributed funds to public assistance programs. In 1958, Chicago's Department of Public Wel-

CHAPTIR SIX

fare merged with Cook County's Department of Public Aid. The administration ofAid to Families with Dependent Children (AFDC),Aid to Blind, Disabled and Aged, and General Assistance became Cook County's responsibility, significantly reducing the city's share of the cost. Realizing that Chicago taxpayers were still bearing a disproportionate share of the Cook County welfare burden, Mayor Richard J. Daley was instrumental in gaining approval from the state legislature for the transfer of the Department of Public Aid from Cook County to the state. As of 1974, the Illinois Department of Public Aid has had full responsibility for administering AF'DC, Medical Assistance, State Supplemental Payments to Supplemental Security Income (SSI), Aid to the Medically Indigent, AFDC for unemployed fathers, and General Assistance. As a consequence, Chicago provides minimal services through its own government for welfare and unemployment assistance, which is a significant savings to the city budget and has had a long-term fiscal benefit. Chicago's public health services, another costly redistributive service, have also been the primary responsibility of the county and the state. The municipal hospital in Chicago was always funded and operated by the county, the Tuberculosis Sanitarium District provided cost-free care for tuberculosis complications, and in 1975 several federally funded neighborhood health clinics were established. The city's Board of Health was the sole health service funded from the corporate budget. All responsibility for low-income housing in Chicago remains with the Chicago Housing Authority (CHA),established in 1937. The CHA has no taxing authority and operates primarily from rents and federal subsidies. Before 1975, city and state contributions averaged up to 3 percent of the CHA budget.47 Another important and costly function removed from the city's budget was public transportation. The CTA was created in 1943. It purchased Chicago streetcar and elevated lines in 1947 and motorcar lines in 1952. The CTA is a special district without taxing authority. Like most cities which developed mass transit operations in the preWorld War I1 years, Chicago assumed that it could fund mass transit through fare-box revenues. It is now apparent that mass transit systems are a continuing drain on the revenue of the jurisdictions which run them. Chicago avoided fiscal responsibility for this service at its inception, by creating the CTA. Chicago was also extremely effective in gaining federal assistance for the expansion of its rail network by combining rail rapid transit with automobile expressway construction. The DanRyanrapid transit line was built primarily with federal highway funds using the median

LEGAL ARRANGEMENTS, INTERGOVERNMENTAL RELATIONS

strip of the Dan Ryan Expressway for the rail line. In this way, the federal government paid for two-thirds of the construction costs. The Chicago Urban Mass Transit District was created in 1970 with taxing authority to design the Franklin Street subway. Eighty percent of its funding came from the federal government, 13 percent from the state, and the remaining 7 percent from a local real estate tax.48 The most significant fiscal development in mass transportation for Chicago was the creation in 1974 of the RTA. Structured as an umbrella agency, the RTA was given responsibility to integrate mass transit in a six-county area which included Cook County. It purchased services from existing public and private transportation agencies and had a 5 percent state motor fuel tax earmarked to support operating deficits within its service jurisdiction. Chicago mass transit users benefited substantially from this funding scheme. As costs increased for capital improvements and operations and the number of riders declined, the subsidies from the RTA to the CTA increased. In 1978, only 58 percent of the CTA budget was funded through fares.49 In 1983the state legislature restructured the RTA giving it the power to levy a sales tax (1percent in Cook County and .025 percent in the other five counties) and to sell revenue bonds for capital improvements. The governing board was increased to thirteen members, and Chicago's control was weakened. One final example illustrates the important fiscal relationship between the city and county in service delivery. In 1970, Chicago's House of Corrections was combined with the county's correctional facilities. As a consequence, the city's entire court and corrections system is operated by the county and funded from both state aid and the countywide tax base. Chicago was most successful in using these legal arrangements to spread the cost of service delivery outside its boundaries and to circumvent state restrictions on local control over revenues. Chicago's mayors also used special districts to consolidate their own authority over fiscal policy. Spinning off costly functions to special districts also provided a latent fiscal benefit to the city. Services like education, transportation, and health were not the city of Chicago's legal responsibility in 1975. If they produced a deficit, as they so often did, the fiscal problems remained within the legal jurisdiction of the special district and the city's credit rating in the bond market was protected. Special district government also has political consequences. Without any form of legal control over the special districts, mayors of Chicago could avoid political and fiscal responsibility for the services provided by the special districts. When it came time to determine their budget allocations, special district service constituencies had

CHAPTER SIX

difficulty focusing their demands on a single elected official or recognizable government. While Chicago mayors had informal control over the budgets of these special districts, in times of crisis they could easily fall back on their limited legal authority over the commissions which formally govern the special districts. The school board crisis was a case in point. Chicago mayors could effectively remove special district services from citywide policy debates, politically isolating their constituencies. Political accountability is weak in this type of system, but fiscal control is enhanced because interest groups simply have less influence over the budget. The case ofthe Chicago PBC will illustrate how this process worked in Chicago. The Chicago Public Building Commission (PBC). The PBC is an especially interesting example of how special districts have favorably affected the mayor's capacity to retain fiscal stability in Chicago: for its sheer fiscal genius it merits some discussion. The PBC50 was created in June 1955 with the passage of the state legislature's Public Building Commission Act. The act enabled any county or municipality whose population was greater than three thousand to organize a public building commission with the power to issue revenue bonds for the construction of government facilities. The Chicago PBC was a joint creation of the city of Chicago, Cook County, the Board of Education, the Park District, the Sanitary District, and the Forest Preserve District. There were eleven places on the commission's board-six for the city and one for each of the other governments. The PBC is a complex administrative and political creation, a special district "once removed" that simultaneously serves other special districts, the city, and the county. The Chicago PBC was given legal authority to issue revenue bonds for financing construction in any jurisdiction it served. These bonds must be retired within twenty years from rentals paid to the commission, after which the building would belong to the agent government. The PBC's original purpose was to free the city government from the 1870 state constitutional restrictions on its borrowing power. Support for its creation in the state legislature came from lobbyists for the Fort Dearborn Project, a 1955 public-private development plan in Chicago. Ironically, the PBC legislation succeeded while plans for the Fort Dearborn Project were dropped. Richard J. Daley, who conveniently retained mayoral power to appoint the city members of the PBC, appointed himself to the PBC's first board and was promptly elected its chairman. Despite the failure of the Fort Dearborn Project, Daley found other uses for the PBC. The creation of the PBC was a testament to Mayor Daley's fiscal talents.

LEGAL ARRANGEMENTS, INTERGOVERNMENTALRELATIONS

Although the PBC was structurally separate from the city, Daley retained complete control over its operations by legally requiring a majority of the board members to be appointed by the mayor. Mayoral control was sufficiently institutionalized so that, when Daley died in 1975, his successor, Michael Bilandic, retained control of the PBC board. Instead of appointing himself, Bilandic appointed George Dunne, who was elected chairman of the PBC by its members in 1977. George Dunne was also president of the Cook County Board of Commissioners and chairman of the Cook County Democratic Committee, ensuring the party's involvement in this important aspect of city governance. Dunne was not replaced as chairman of the PBC until May 1986, when Mayor Washington decided to take over the position. Mayors Sawyer and Richard M. Daley assumed the chairmanship at the outset of their administrations. In 1963, the PBC undertook its first project. By selling $87 million worth of revenue bonds, it financed the construction of the Civic Center. Between 1960 and 1970, the PBC issued $175 million in revenue bonds for the Civic Center, the remodeling of city hall, and the construction of schools and facilities for the parks. Since 1970, the PBC has been involved in an extensive program of public works, which has included the building or remodeling of police, health, fire, sanitation, library, recreation, parking, and education facilities. Community college facilities have been a major part of its building program. The Chicago PBC is a clear case of manipulating legal arrangements to circumvent state-imposed financial restrictions on the city. Although it is a separate government structure, Chicago mayors retained control over its financing and policy decisions. Most important, the PBC removed capital construction costs from the city budget, reducing the city corporation's long-term debt liability and making the city's own bonds more attractive to investors. Defenders of the PBC argue that it is a means to get needed facilities at a longrun savings to the taxpayer. Critics of the PBC maintain that centralization of mayoral control over capital finances through the PBC served to deprive the public of its right to approve bond issues through referenda. Also, the rent paid for leasing PBC facilities must be raised locally through real estate taxes, but the county had been the only jurisdiction which reported how much it levied in taxes each year to pay the PBC. The Civic Federation severely criticized the PBC for undertaking major building programs without public approval and for not reporting the costs to the taxpayers in its annual budget. In 1962, voters turned down a $66 million bond issue in a citywide referendum. Daley decided to finance the package without voter approval through the PBC.

CHAPTER SIX

The 1970 state constitution has since given Chicago home rule powers to levy new taxes without state approval and the right to unlimited borrowing with voter approval. The costs of leasing arrangements are now clearly reported in the bond prospectus produced by the PBC. It is no longer necessary for Chicago to use the PBC to circumvent state law, but the mayor can still use it to remove capital programs from the city's budget. In recent years Chicago mayors have not used the PBC extensively for city capital projects. However, controlling the board has given them an opportunity to influence the capital programs of PBC-affiliated special districts and the county. It is not likely that the PBC will be dismantled while it still serves the fiscal interests of the city. Functional responsibility in New York City. Unlike Chicago, and as was described in chapters 2 and 4, New York did not develop an effective network of special districts nor was it particularly successful in spinning off costly services to the state before its 1975fiscal crisis. The final report of the 1966 Temporary Commission on City Finances found the most important issue affecting city finances to be the range of services the city provided. The report stated that New York had a "pronounced taste for public services which the city is reluctant to finance from charges paid by users"51 and that New York City provided a range of unusual and expensive services not offered by other cities. The commission concluded that, even though New York tended to grant more state aid than most states, that aid was insufficient to offset the relatively heavy responsibilities initially assigned to local governments. This position was later echoed in the final report of the mayor's Temporary Commission on City Finances issued in 1977 in response to the fiscal crisis. The negative impact of functional responsibility on New York's fiscal condition is now widely accepted. Before the 1975fiscal crisis, New York City provided a broader range of services than any other city in the country, particularly in the costly areas of social welfare and mass transit, and it still does today. A brief discussion of the historical development of service delivery in New York City demonstrates how the unrelenting expansion of city services adversely affected the city's fiscal condition.52 As chapter 7 will explain, interest group politics made it virtually impossible for the city to eliminate services once they were provided, except in periods of fiscal crisis. In addition, the state also limited the city's ability to shift financial burdens to higher levels of government. The history of politics in New York City is, in effect, the history of service delivery expansion for the needs of the city's diverse population. New York's functional responsibilities have been growing since

LEGAL ARRANGEMENTS, INTERGOVERNMENTAL RELATIONS

the city's consolidation in 1898,but even before consolidation the city had already developed programs not provided by most other city governments in the areas of health inspections, poorhouses, public education, and its own university and hospital systems. The consolidation of five counties (Brooklyn was actually a city) into one city government in 1898 also required expansion of all basic services and the assumption by the city of what were normally county responsibilities for courts and corrections. The loss by New York City of true county government has had a devastating impact on the funding of criminal justice services. New York City funds five independent district attorneys with minimal assistance from the state. Courts have also been a burden on the city budget. While the state has carried the full cost of court administration, the city has paid for maintenance, construction, and security of its court facilities. Since 1972, New York state has mandated that localities provide defense counsel to all indigent defendants. This is a county function except in New York City, which funds this service primarily through a contract with the Legal Aid Society. Probation and corrections have been shared functions. The state has absorbed 46.5 percent of the city's probation costs since 1974. The city's Department of Correction has operated and funded jails while the state's Department of Correctional Services has maintained prisons for convicted felons serving terms that exceed one year. Corrections has been an extremely costly function for the city with no funding relief in sight.53 New York City continued its preconsolidation practice of providing nontraditional services. In 1905 New York began its first subway system (IND), and by 1939 all subway services had been taken over by the city.54 In 1915 a district health plan was established, and in 1929 a Department of Hospitals. During the Depression, New York City began a Home Relief Program which provided cash payments to the poor. The cost of this welfare program was shared by the city and the state. In 1934 the city created its elaborate system of parks, and in 1940 the subway system was expanded. When the federal government for the first time mandated public assistance programs through the 1935 Social Security Act, the city assumed the costs of one-third of the AFDC program and one-half of the programs for the aged and the blind. New York state followed the pattern it had set during the Depression for home relief and shared the remainder of the costs for these federal programs with the localities. Other states with no precedent in sharing costs assumed all or a greater portion of the costs of these federally mandated programs.55 In the area of social welfare, the state gave New York City an extraordinary fiscal burden. At the time of the fiscal crisis, New York state

CHAPTER SIX

required a 50 percent contribution from the city for the nonfederal share of AFDC and Medicaid payments, as well as a contribution for SSI and general assistance. Not only was the city mandated a 50 percent contribution to a program most states funded completely, but New York state also established the highest benefit levels in the nation for the AFDC program and provided supplements to the federal SSI program. Even when the state of New York passed legislation permitting the city to create public benefit corporations-New York's version of the public authority-they remained fiscal burdens on the city. Public benefit corporations are permitted to float bonds, but unlike the special districts in Chicago, the city generally must guarantee the funds for repayment of the debt. Also, public benefit authorities cannot levy their own taxes and are often expected to produce sufficient operating revenue from the service they provide. Most of these authorities receive revenue from the state or federal government, but the city has always been obligated to make a substantial contribution from its own tax base for either operating expenses or debt burden. Examples of this type of arrangement are the New York City Housing Development Corporation (HDC),the City University Construction Fund, the New York City Housing Authority, the New York State Urban Development Corporation (UDC),56 the New York City Education Construction Fund, the New York City Transit Authority (NYCTA) and the Battery Park City Authority.57 Transportation services are another good example of the city's failure to gain fiscal advantage from the creation of authorities. Mayor La Guardia developed New York's first major airport during the 1930s with the assistance of W A funds, and in the 1940she began construction of a second airport (Kennedy International). As a result of shortterm financial difficulties, O'Dwyer, when he became mayor, shifted fiscal responsibility for both airports to the Port Authority of New York and New Jersey.58 As a consequence, most of New York City's profitable transportation services are now part of this independent authority while the deficit-producing subway systems remain a drain on the city's corporate and capital budget. The NYCTA was created in 1953under the state Public Authorities Law as a public benefit corporation to operate transit facilities formerly operated by the city. It has the power to issue short-term debt to meet operating deficits, and its revenue sources are fare-box receipts and federal, state, and city operating assistance. The city is still obligated to pay interest and principal on Transit Authority promissory notes and was obligated from 1962 to 1988 to pay the Transit Authority $515 million annually for the purchase of subway

LEGAL ARRANGEMEHTS, INTERGOVERNMENTALRELATIONS

cars. The city also reimbursed the NYCTA for the full cost of Transit Authority police and for student and senior citizen fare reductions, while the state mandated that the city match its contribution to transit expenses or lose the state subsidy.59 The MTA was created in 1968 to unify mass transit policy for New York City and seven suburban counties, but unlike Chicago's RTA, each agency under the MTA umbrella was allowed to maintain its own operating and legal identity. Also, New York state law does not allow authorities to levy their own taxes and they can only issue bonds if their operations show a profit. The MTA includes the profitproducing Triborough Bridge and Tunnel Authority (TBTA), and through this administrative gimmick all agencies under the MTA umbrella including the NYCTA can continue floating bonds. The board of the MTA is appointed by the governor, and in 1975 the mayor was authorized to recommend only three of the eleven board members. The appointment process changed in 1978 to improve the geographic representation of board members.60 The financial structure of the MTA has benefited the city, but not nearly enough. The city still carries a substantial fiscal burden for mass transit services, and the mayor has lost considerable administrative control over mass transit spending in the city. As a consequence, the mayor has fixed costs in the budget which have produced a long-term fiscal burden for the city. In 1953, New York was one of the first cities in the nation to establish its own Air Pollution Control Department, and it continued to spend locally on a broader range of environmental protection programs through the establishment of its own Department of Environmental Protection in 1968. The important point remains that, while all of these services expanded, they also remained part of the city's budgetary responsibility. Federal and state aid provided a substantial part of the city's revenue, but, as explained in chapter 5 , intergovernmental aid is not always constant or predictable. In fact, by 1975 an increasing number of state and federally mandated programs required that the city provide a portion of their cost through its own tax levy. The intergovernmental exchange was not always in the city's fiscal interest. At the time of the fiscal crisis, New York City was also funding nearly 40 percent of the expense budget for the Board of Higher Education, which operates the City University system. New York's network of ten senior colleges, eight community colleges, a graduate center, and an affiliated medical school is the largest system of higher education run by any city in the country. Until the fiscal crisis, admission to the colleges was free for city residents. In 1970,an open admissions policy was instituted which guaranteed admission to any city

CHAPTER SIX

high school graduate to a city-run higher education facility, increasing the enrollment in the colleges by 90 percent. The city's 129-year history of financing free higher education resulted in gross inequities when it came to state assistance for its university system. A gradual increase in state assistance occurred in the post-World War I1 years, but the city's share in funding the City University remained higher than the state's until after the fiscal crisis. The bias was even more dramatic when compared with state assistance to the State University of New York. The state government funded senior colleges of the State University system at a rate three times higher than at the City University.61 After the fiscal crisis, tuition was imposed by the City University and the state assumed half of its operating costs, but the city was still responsible for the debt service on senior college bond issues. By 1982 the state took over all operating costs for the City University system. The fiscal ramifications of New York City's spending on local (elementary and secondary) education, public hospitals, health, welfare, public housing, and mass transit are significant. Even though some services were provided by quasi-city agencies, the city's subsidies made up one-fourth of the operating revenue of the NYCTA, onefourth of the operating revenue of the Health and Hospitals Corporation, and a smaller but growing share of the New York City Housing Authority. The final report of the Temporary Commission on City Finances argued that in the areas of public hospitals, public housing, and mass transit, in particular, the city had a broad public service role which exceeded its fiscal ~apacity.6~ New York City's fiscal burden goes beyond the expense of funding these redistributive services. Without a county jurisdiction and an effective special district network, the city is fiscally burdened even by the costs of basic services. The state determines this legal distribution of services and could have offset the burden with grants in aid. Yet, as chapter 5 demonstrated, New York state simply provided insufficient financial assistance to counterbalance the city's constantly growing service delivery needs. As mentioned earlier, the state assumed some of the city's service delivery burden after the fiscal crisis, but the city's functional responsibilities have remained basically the same. New York still requires its local governments to finance a larger share of state and local government spending than any other state.63New York City has had limited success creating authorities since the fiscal crisis. In 1984 the New York City Municipal Water Finance Authority was created to issue revenue bonds to finance capital projects for New York's water and sewer system, and in 1988the New York City School Construction

LEGAL ARRANGEMENTS, INTERGOVERNMENTAL RELATIONS

Authority (SCA)was created to build new public schools and renovate and repair old school buildings. The mayor controls the appointments of the majority of members on the governing boards of these two authorities. The Municipal Water Authority has a contractual arrangement with the New York City Water Board, which was also created in 1984to collect fees for city water and sewage services. Neither authority has taxing power, and only the Water Authority can float its own bonds. The SCA was exempted from the city's cumbersome land use review and approval process and was given a five-year capital budget cycle. However, unlike other authorities, the SCA does not control its budget but relies on the Board of Education's planning directives, which further fragments legal authority over the city's capital construction budget. Moreover, the city is still responsible for the longterm debt that funds the SCA's capital program, although it has received some revenues from MAC. Three other authorities, the Transportation Finance Authority, the Waste Disposal Authority, and the Bridge Authority, have been proposed to the state legislature but have not yet been approved.

Federal-City Relations and the Fiscal Policy Process Federal policy affects the urban fiscal condition through revenue assistance, through tax and debt policy, and through mandating city expenditures. Federal Mandates, Tax Policy, and Debt Policy State governments are not alone in using mandates to affect urban fiscal policy. The federal government also has the legal authority to mandate local government activity. Federal mandates did not have a significant impact on city fiscal policy at the time of New York's 1975 crisis. Early mandates like those found in the Water Quality Act of 1965 and the Air Quality Act of 1967 were directed at state governments. The states in turn decided whether they alone would bear the cost of compliance or whether the burden would be shared with their local governments. Not surprisingly, since 1980 federal mandates have had an increasingly negative impact on the fiscal condition of cities. During the Reagan era, Congress approved significant federal tax subsidies which affected city government's ability to raise revenue. The Tax Reform Act of 1986 eliminated the deduction for state and local sales taxes paid by those who itemize on their federal income tax returns and increased constraints on the ability of city governments to issue debt. Unlike cuts in federal aid, which had an obvious and

CHAPTER SIX

direct impact on city fiscal capacity, these two tax law changes have indirectly affected localities and were not the subject of much discussion until they were enacted. How have these changes affected city fiscal capacity? It is generally understood that there is a threshold level of taxes which cannot be crossed if an elected official values his political future. The sales tax deduction allowed state and local officials more latitude in setting their sales tax rates. Cities like New York and Chicago which had increased their reliance on the sales tax have been especially hurt by this change. City revenue raising capacities have also been damaged by the antitax ideology marked by the passage of Proposition 13 in 1978. The public antipathy toward taxes has been exploited by the Republicans in elections at every level of government. As a consequence, it has become difficult for mayors and other elected officials to raise taxes, even when fiscal prudence warrants an increase. The federal government also sets limits on the total dollar amount of private activity bonds that states and localities can issue in the course of a year. These tax-exempt bonds are used by cities to finance infrastructure and economic development projects. The limit was lowered significantly by the Tax Reform Act of 1986, and the power to allocate private-activity bonds was taken from local governments and given to the states. These changes had a negative impact on all local governments' capacity to raise revenue for much needed development projects. The federal government also created a new form of off-budget financing: government-sponsored enterprises that had legal authority to issue bonds to meet federal needs. These bonds were not guaranteed by the federal government but were exempt from municipal taxation.64 This federal equivalent of "junk bonds" provided tax-exempt status to businesses which would otherwise have been contributing needed revenue to city budget coffers. City debt policy was seriously affected by the 1988 Supreme Court decision in South Carolina v. Baker, Secretary of Treasury, which made municipal bond law a matter of statutory preference rather than constitutional principle, thus giving Congress the right not only to regulate municipal bonds but to tax them as well. For many investors the appeal of municipal bonds has been their tax-exempt status. If this changes, cities will have greater difficulty borrowing money and interest costs will certainly increase. The fiscal consequences would simply be devastating. Federal mandates also increased during the Reagan years. In Garcia v. San Antonio Metropolitan Transit Authority (1985) the Court

affirmed that Congress can legislate the wages and hours of state and local employees. Since 1980 the federal government has also imposed environmental, public health, and safety mandates; handicap access to public transportation regulations; a tax on municipalities for failure to meet new nondiscrimination tests for employees; and a federal tax and rebate program on the municipal purchase of gas. The fiscal problem for cities does not arise from the mandates but from the cost of unfunded mandated programs. Compliance with mandates for clean air and water and bilingual education has been made more difficult as federal aid to these programs has declined.65 These mandates and tax and debt policies have a quite simple impact: they restrict the city's ability to raise revenue and to choose expenditure priorities, making fiscal stability more difficult to maintain. Federal Intergovernmental Assistance and the Fiscal Policy Process Intergovernmental relations have not merely constrained urban fiscal policy; the state and federal governments have also assisted in the provision of city services through direct revenue assistance. As a consequence of this aid, some city expenditures are not a drain on the local taxpayer. By acquiring revenue from nonlocal sources, city governments can provide services and reduce their direct share of the cost. As a consequence, most cities aggressively seek intergovernmental aid from both the state and the federal governments. As chapter 5 explained, direct intergovernmental assistance to city governments is relatively recent. Until the Depression cities were preoccupied with their fight for home rule, which involved legal efforts to limit state control of their politics and finances. State-city relations involved restrictions on cities' fiscal authority, rarely enlightened assistance in the provision of services. Any interaction that cities might have had with the federal government was intentionally left for the states to mediate. The failure of state governments to alleviate urban unemployment and social welfare problems brought about by the Depression changed both the attitude of mayors and federal policy. New York's mayor Fiorello La Guardia articulated this change in testimony before a congressional committee. "I want to come to Washington to do business. I do not want to go to Albany to do business, and I do not think that my colleague, Mayor Kelly of Chicago, wants to go to Springfield."66 It was Roosevelt's New Deal that established the direct fiscal link between city governments and Washington, a link with extremely sig-

CHAPTER SIX

Table 15 Intergovernmental Aid to Local Governments, 1927-88 (in millions of dollars) - -

State Aid Real $

Constant $

Direct Federal Aid Real $

Constant $

Sources: Aid data: ACIR, table 6, January 1989. CPI data: Economic Report of the President Transmitted to the Congress in February, 1988, table B-58, BLS NY Regional Office, 1927 and 1988.

nificant implications for city fiscal strategies. In 1927 total direct federal aid to local governments was $17.3 million constant dollars; by 1940 it had increased to $661.9 million, or 3,724 percent (see table 15).In short, federal aid became a substantial and dependable part of the cities' revenue pie. Federal urban policy really began with such New Deal programs as the Federal Emergency Relief Administration (FERA); the Works Progress Administration (WPA),with half its money spent in the fifty largest cities;67 the Public Works Administration (PWA), with more than half the money it spent between 1933 and 1939 going to urban areas;68 and the U.S. Housing Authority (USHA).Each president after Roosevelt enacted at least one signature piece of legislation which helped cities meet their growing service delivery and consequent revenue needs. Much of Truman's Fair Deal was stymied by congressional opposition, but in 1949 the Housing Act was approved. It provided for construction of eight hundred ten thousand low-cost housing units and loans and grants to cities for slum clearance.69 Eisenhower shared responsibility for the Interstate Highway Act of 1956, which provided 90 percent federal and 10 percent state funding for a national highway system. Fifteen billion dollars of the $27 billion spent during the subsequent decade on this program went to urban areas, some of it to build five thousand miles of urban freeways. Federal aid also remained stable, reaching $406.9 million (constant dollars) in 1957.

LEGAL ARRANGEMENB, INTERGOVERNMENTALREIATIONS

Johnson's Great Society, of course, was pro-urban by design, and it provided the greatest infusion of federal funds to the cities since the New Deal. Much of this assistance was earmarked directly to city governments, circumventing the states entirely. Between 1957 and 1967 constant dollar federal aid grew by 331 percent. The seminal Great Society programs included the Model Cities Program, the Community Action Program, Head Start, the Economic Opportunity Act, Mass Transit Aid, Educational Aid for the Disadvantaged (Title I), and the Manpower Development Training Act. Johnson also created the cabinet-level Department of Housing and Urban Development. Nixon's efforts to restructure the federal grants system resulted in significant urban legislation. He initiated General Revenue Sharingin 1972, the 1974 Community Development Block Grants, and the Comprehensive Employment Training Act of 1973.Nixon also doubled U.S. cities' percentage offederal intergovernmental assistance,which grew from 12 percent in 1968 to 29 percent by 1977, reinforcing the direct fiscal link between the city and the federal government. Constant dollar aid increased 354 percent from 1967 to 1976 (see table 15). Like Truman, Carter did not have much success in Congress with his urban agenda, but he did pass the Urban Development Action Grant (UDAG) program in 1977 designed to stimulate investment in urban economies. Direct federal assistance peaked in 1978, during Carter's presidency. The Reagan years marked a radical departure from this earlier trend, with the New Federalism fundamentally changing the fiscal relations between the federal, state, and city governments. The major piece of pro-city legislation passed during the Reagan presidency was a 1988amendment to the federal municipal bankruptcy code allowing cities to declare bankruptcy without jeopardizing their tax-exempt municipal bonds. Ironically, because cities understood that their fiscal vulnerability had increased during Reagan's tenure, this change was welcome. Yet what continued to hurt the fiscal capacity of city governments was not simply the failure to pass pro-city legislation during the 1980s but the all-out assault on existing urban programs. Between 1978 and 1988 federal aid to localities dropped 51 percent in constant dollars. The legislation that effected this change was the Omnibus Budget Reconciliation Act of 1981, the Economic Recovery and Tax Act of 1981, the Gramm-Rudman-Hollings Act of 1985, and the elimination of General Revenue Sharing in 1986. It is estimated that by 1987 the federal government had lost $294 billion as a result of the 1981 tax cut. Since overall federal spending continued to rise, especially for the military, the deficit grew dramatically in the wake of this

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legislation.70 The reduction in revenue-raising potential as a consequence of the 1981tax act along with Gramm-Rudman's requirement to reduce the federal deficit combined to make any discretionary spending a prime target for budget cuts. In retrospect, it is not surprising that a Republican president who twice won election without the support of the large cities would consider this constituency an expendable 0ne.7~ The Omnibus Budget Reconciliation Act cut domestic spending by $35 billion, eliminated fifty-nine grant programs, and consolidated nearly eighty categorical grant programs into nine broad-based block grants. Most important, many of the eliminated grants were direct aid to local governments while the new block grants were all to the states. Not only did this legislation erode the federal-city policy link while enhancing the state role, but the overall level of federal intergovernmental aid was reduced. The elimination of General Revenue Sharing for states in 1980 and local governments in 1986 was the final fiscal assault on local governments. In some fiscally distressed cities revenue-sharing funds constituted as much as 23 percent of total revenue.72 Also, revenue sharing, because of its no-strings-attached approach to aid, was an especially important tool for city budget balancing. Its loss has forced cities to find other revenues from their local tax base, to prevail on their state governments to increase aid, or simply to reduce services. Ironically, several studies conducted during Reagan's first term argued that his intergovernmental policies did not adversely affect the fiscal conditions of cities. That cities were generally doing a better job at balancing their budgets in the 1980s than they had been in the 1970s was interpreted by some analysts as an indicator that their fiscal health was a direct consequence of federal policy.73 In fact, during the 1980s there was a resurgence of local economic growth in cities that had suffered most during the previous decade and it provided a boon to local revenues. Once the growth period ended in 1989,the impact of lost federal revenues began to be felt. Cities across the country, including New York, have been experiencing fiscal problems since then. This favorable view of federal policy not only was shortsighted but also did not take into account how cities were balancing their budgets-what services were being cut and which populations were suffering. Moreover, some of this early optimism came from expectations that states would substitute for the lost federal aid.74 But in the limited number of states like Massachusetts and California in which this did in fact occur, it was done only sporadically. Both Reagan and Bush tried to eliminate Urban Development Ac-

LEGAL ARRANGEMENE, INlERGOVERNMENJAi RELIlIONS

tion Grants (UDAG),and although an authorization was made for the funding of UDAG during FY1990, no money was actually appropriated. Bush has continued Reagan's policy of urban disengagement: reducing federal aid, proposing no new programs, and finally succeeding in eliminating UDAG. As chapter 5 demonstrated, both New York and Chicago have been extremely successful in garnering their share of federal aid when it has been available. Chicago's special relationship with Washington began in 1933 when Ed Kelly became mayor. Roosevelt gave Kelly control of the Illinois WPA, which employed nearly two hundred thousand people. Major capital construction projects including the completion of Lake Shore Drive, the opening of the State Street subway, and the improvement of the municipal airport, housing, and schools were undertaken primarily with federal revenues. As chapter 3 notes, during the Depression the federal government also provided millions of dollars in direct relief assistance, allowing Chicago to save its own revenues for basic services. From July 1933to December 1935 it is estimated that the federal government provided 87.6 percent of Chicago's emergency relief funds, the state 11percent, and the city 1.4 percent.75 New York's mayor Fiorello La Guardia also had great success with Roosevelt during the Depression. He helped plan the Civil Works Administration (CWA)in Washington and was later given direct control of New York City's WPA program, which by 1936 employed nearly two hundred forty thousand people. New York City was actually treated as a "forty-ninth state" within the WPA and received one-seventh of the WPA's total national expenditures. PWA grants and loans for public projects amounted to $250 million, and WPA funds came into the city at a rate of $145 million per year from 1935 to 1938. Capital projects funded by these programs included health centers, sewage plants, covered municipal markets, new piers, public housing, an extensive renovation and expansion of the park system, a court building, airport expansion, and six hospitals.76 Chapter 5 documented the intergovernmental revenue patterns for both cities, which have been consistent for New York and Chicago since the Depression. Before the 1975 crisis, both cities were aggressive in recruiting federal and state assistance to pay for local programs. But the critical difference between Chicago and New York was in the magnitude of intergovernmental assistance and in the control of its distribution. By 1975 New York relied on outside revenues for 50 percent of its budget while Chicago's intergovernmental revenue accounted for only 29 percent.77During the post-1975 period, problems continued for both cities. By 1989 intergovernmental revenue

CHAPlER SIX

had dropped to 23 percent of Chicago's total revenues and 35 percent of New York's.78 Both cities were hurt by the loss of aid. Some programs were cut or eliminated, but the two cities tried to make up for the lost federal funds with local revenue and state aid. As explained in chapter 5, Chicago fared better in Springfield than New York did in Albany. Chicago's greater independence from intergovernmental aid, due partially to the complex legal arrangements for service delivery that existed in that city, made it less vulnerable than New York to fluctuations in federal and state aid. Centralized control over fiscal decision making also enabled the mayor of Chicago to control the flow of funds to federally financed local programs and keep the city contribution at a minimum.

The Mayor, the Budget Process, and Fiscal Policy The final issue to consider in this chapter is the mayor's ability to control the city's budget process and its impact on the city's fiscal condition. Formal-legal arrangements determined by the city charter as well as state government are important in the fiscal policy process because they affect the mayor's capacity to centralize and control the city's budgetary process. The power to plan, create, and administer the budget is particularly important in determining which branch of government controls fiscal policy decisions. In most large cities, the only serious competition with the mayor for control over the budget is the legislature.79 A city council's capacity for serious involvement in the budgetary process depends on its formal power to introduce appropriation bills and on the expertise and resources available to members for independent policy formulation. When the executive branch has a monopoly on expert fiscal information, the council can offer little independent legislation bearing citywide significance.80 The mayor's control over the city council also affects relations with interest groups. When representatives are not independent of the mayor, they provide no alternative route for interest group influence that is likely to circumvent executive authority. In Chicago, before 1975, the mayor secured general control over budget formulation in the city while minimizing City Council and interest group involvement in the process. In New York City, although the council posed no serious threat for control over the budget, a Board of Estimate created formal fragmentation of the budget-making authority. The mayor was forced to share power with the comptroller, the City Council president, and the borough presidents who made up the board. The mayor's struggle for control over the Board of Estimate also contributed to significant interest group involvement in the city's budget process. 214

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Fiscal Outcomes and the Budget Process in Chicago It is surprising that politics in Chicago before the election of Harold Washington as mayor was characterized by a strong council/weak mayor form of government.gl The City Council was originally given broad policy-making powers as well as certain administrative responsibilities. Over a thirty-year period, and particularly during Richard J. Daley's tenure, the council colluded in the erosion of its own formal authority in exchange for a personalized politics that focused on ward-based rewards. The City Council members (aldermen) participated minimally in governing the city but chose instead to be ombudsmen for the individual problems in their wards. The less the council chose involvement in citywide policy issues, the more executive control and council acquiescence became institutionalized. An important change in the legal relation between the council and the executive specifically involved fiscal decision-making authority. In 1955, the executive branch was strengthened by a legislative act which transferred the power to plan, create, and administer the city's budget from the council to the mayor. The mayor was also given item veto power in appropriation bills and veto power over ordinances. The council retained its power to override a mayoral veto by a two-thirds vote. State law also required the council to hold one public hearing before approving the budget. The council retained its right to approve bond issues and to levy taxes. Yet the formal role of the council in the budget process was reduced to that of a rubber stamp and the legislative branch was ultimately inhibited from any serious influence in long-term fiscal policy formulation by its lack of resources and the domination of the Democratic party organization over council members. Until the election of Harold Washington, all expert information on fiscal matters was kept in the mayor's office under the supervision of the budget director. The city treasurer was elected but was part of the Department of Finance, which coordinated all fiscal policy. The Department of Finance was administered by the comptroller, who was appointed by the mayor. There was no comparable office of budget specialists available to the council. Individual aldermen had no allowance for a research staff and were dependent on an underfinanced and understaffed Legislative Reference Bureau for policy advice. The city clerk also assisted in the drafting of ordinances but provided no independence from executive control. It was not even required that the aldermen be informed of the content of a proposed ordinance before voting on it. Ordinances were not numbered, making it difficult for an individual alderman to keep up with all the legislation coming from the executive office.82 The council functioned ostensibly by a committee system, but the 215

CHAPTER SIX

Finance Committee served as a clearinghouse for all important legislation and had the only available budgetary expert assigned to the council. The Finance Committee's chief administrator served as a liaison between council members and the Finance Department while its chairman was always the "mayor's man" in the council. Executive control of the council was institutionalized in the operations of the Finance Committee. Daley's successor, Bilandic, was in fact chairman of the Finance Committee before becoming mayor. Control of the Finance Committee was tantamount to control of the council. The Finance Committee was also responsible for holding hearings on the budget with each department head. On the basis of these hearings and the one public hearing mandated by state law, the council was expected to offer amendments to the executive budget. Since budget approval was required one week after the public hearing, the council could have minimal impact on the budget process. At this final stage of the fiscal policy-making process participation from outside the executive office was kept at a minimum. The formal channels for input were designed to insure executive control over budget policy. Absolute mayoral domination of the budget process remained intact through Bilandic's mayoralty. In 1976, a reform alderman proposed a motion that aldermen who were not members of the Finance Committee be allowed to question the witnesses appearing at the Finance Committee budget hearings, to make statements regarding the budget, and to propose amendments to the city budget. The motion was promptly defeated. Participation from aldermen not allied with the administration at this final stage of fiscal policy-makingwas kept at a minimum, even after Daley's death. From the election of Anton Cermak in 1931 until Harold Washington's election in 1983,the mayor also controlled the budget process through the Democratic party domination of council elections. Until 1983, the regular Democratic organization never controlled fewer than forty-five of the fifty aldermanic seats. Control of the vote and patronage jobs tied the aldermen closely to the party organization. The relationship between the party and the council reinforced the passive role of the council in citywide policy formulation. Rakove estimates that in the 1970s there were thirty thousand patronage jobs, approximately five hundred to six hundred available per ward.83 Many aldermen were ward bosses, several were county commissioners, and others held jobs in the city administration.84 This personnel overlap reinforced the interdependence of the party and the working government. Not only did the party control the council's budgetary role, but it also controlled interest group influence on the budget process. Since

LEGAL ARRANGEMENTS, INTERGOVERNMENTAL REUllONS

interest group activity could be just as much a threat to the alderman at the ward level as it was to the mayor at the city level, it was mutually advantageous to support policies which discouraged permanent interest group formation. If a problem was serious enough to bring about community organization, then the party attempted to use its influence in the administration to diffuse the issue and disperse the group. This strategy was employed in 1978 to counter the Alinskystyle organizing efforts of the Metropolitan Area Housing Alliance (MAHA). The machine sent precinct captains to meetings offering help and in the process effectively absorbed potential opposition.85 Much of the machine's electoral strength came from its claim that the city provided effective service delivery. Groups organized to protest the city's failure to deliver services, as was the case with MAHA, were particularly threatening to the party's local base of support. It was in the interest of the mayor and aldermen to see these groups coopted or destroyed. Without a formal organizational capacity most interest groups concerned with the budget had little capacity for influence. From 1955to 1976,Richard J. Daley was both mayor of Chicago and chairman of the Cook County Democratic Committee. His control in the council was reinforced by his control of the party organization. As Yates points out, "In the case of Richard Daley's Chicago, the political and administrative systems of the city become mutually reinforcing-indeed become a seamless web."86 Daley centralized and controlled the fiscal decision-making process with little opposition from and the tacit approval of the council. The party organization served as the critical link in this symbiotic relationship. Chicago's highly centralized, mayor-dominated budget process was not simply the product of Richard J. Daley's labor. He had built on the legacy of the Depression era mayors, Anton Cermak and Ed Kelly. The greatest impact on Chicago's budget process came, not from any legal redistribution of authority but, rather, from the fracturing of the Democratic organization. Jane Byrne's election in 1979 was a struggle for control, but she soon made peace with the machine's old guard in the City Council. Byrne, however, implemented a change in the city's accounting system which had important implications for mayoral discretion in the budget process. The city's revenues had always been separated into several funds. The two major operating funds were the Corporate Fund and the Internal Service Funds (also called "revolving funds"). The Corporate Fund was the city's general operating fund. The departments of Police, Fire, and Streets and Sanitation accounted for approximately 70 percent of its expenditures.87 The Internal Service Funds were used for the financing of goods and services provided be-

CHAPlER SIX

tween city departments on a cost reimbursement basis. As explained earlier, Byrne claimed that this fund had a significant deficit when she took office. As part of her efforts to show the financial community that she was a fiscally responsible mayor, Byrne eliminated the deficit and merged the Internal Service Funds into the Corporate Fund. There is no doubt that the revolving funds were a gray area in the budget that the financial community was pleased to see eliminated. However, it was precisely the murky quality of the revolving funds that gave Chicago's earlier mayors some added flexibility in the budget-balancing process. When Harold Washington was elected the city's first black mayor in 1983with the support of white reformers and the black electorate, the so-called Council Wars erupted. Washington lost every vote in the council twenty-nine to twenty-one until he was able to win over a majority of aldermen.88 Washington significantly changed the budget process, opening it to greater public scrutiny. Since 1983 the city's budget director has prepared a Preliminary Budget Estimate for public comment and encouraged increased interest group involvement. The Executive Budget is submitted to the City Council by October 15, giving it a month and a half to hold hearings and deliberate before the legal approval deadline. Ironically, the council did not take control of the fiscal policy process when it had the opportunity but merely obstructed the mayor's agenda and divided budget authority between the Finance Committee and a Budget Committee. Dick Simpson, political scientist and former Chicago alderman, described the difference between the two periods best: "The City Council has swung between two bad practices. It has either acted as a rubber stamp to mayors like Daley, or it has been a council of gray wolves-older aldermen who divide up the spoils in the back room."89 Washington effectively destroyed the monolithic Democratic machine, but the majority of the council does not seem to have noticed the change. Constituency service remains the major priority of Chicago's aldermen, and under Rich Daley's mayoralty the council continues to show little interest in being an active partner in the budget process.

Fiscal Outcomes and the Budget Process in New York In 1975, New York City's budgetary process reflected the fragmentation of decision-making authority that more generally characterized the city's politics.90 The destruction of the machine and the rise of interest group politics have been significant factors in creating a political process in which each new proposal for budgetary reform seems designed to undo the reforms implemented by previous administra-

LEGAL ARRANGEMENTS, INTERGOVERNMENTAL REIAriONS

tions. At the heart of this conflict has been a contradiction in the goals of New York City's reform movement. The reformers concerned with public management have maintained that a certain degree of centralization of authority in the mayor's office is required for the efficient delivery of services. At the same time, good-government reformers have worried that too much power concentrated in the hands of the mayor will breed unresponsive government and even political corruption. This conflict has played itself out in the budget process by reinforcing the formal fragmentation of political authority. Interest groups have also had a stake in maintaining a political system which fragments power and prevents the mayor from solely determining the budgetary agenda. Since a mayor's preferences cannot always be predicted, a system which allows for many points of access to the budget process has been the preferred one for maintaining interest group influence. The historical evolution of New York City's budget process since the 1930s reflects the conflict between the desire for efficient management and the fear of concentrated power. At the time of New York City's 1932 fiscal crisis, it had a bicameral Municipal Assembly. The Board of Estimate and Apportionment, the upper house, had legal responsibility for proposing the budget. It was composed of eight members. The mayor, the comptroller, and the president of the city council each had three votes, the borough presidents of Manhattan and Brooklyn had two votes, and the other three borough presidents each had one vote. A majority of the Board of Estimate was required to approve the budget before it was sent to the Board ofAldermen, the lower house, where a majority vote was necessary for final passage of the budget. It was during the 1930s that reformers supported the revisions in the city's charter which changed the structure of the legislature, increased the mayor's formal authority over the bureaucracy, and gave the mayor a more important role in formulating the budget. The city's functions had expanded dramatically, and the fiscal crisis revealed just how unmanageable the city's bureaucracy had become. Yet the legacy of machine corruption and the desire for open government made reformers wary of concentrating too much power in the hands of the mayor.91 Amendments to the City Charter in 1933 and revisions made in 1938,1963,1977,and 1989 reflected this contradiction. In 1933, budgetary reforms introduced by the CBC and supported by Mayor O'Brien passed in the Municipal Assembly. Their purpose was to centralize responsibility for budget preparation and to rationalize capital planning. While the city's fiscal crisis was deepening, the Board of Estimate actually reclaimed power from then acting mayor McKee and reasserted its exclusive role in budget preparation. This

CHAPTER SIX

political struggle highlighted a serious weakness in the city's budget process and left the city without mayoral leadership during a crisis. The 1933 City Charter amendments addressed this problem by establishing the Bureau of the Budget, an agency under the direct control of the mayor. The director of the budget was responsible for preparing an executive budget that brought together revenue and expenditures in one document so as to prevent deficit financing. The budget director was also given the authority to cut operations in all departments to eliminate waste and duplication. This provided the groundwork for a centralized system of management and cost control and eventually established the budget director as one of the most powerful offices in the city.92 The lack of comprehensive capital planning was another problem addressed by the 1933 City Charter amendments. Projects were started and left incomplete for lack of funds. The Board of Estimate and Apportionment was provided for the first time all the information it needed to make rational choices between projects (e.g., project costs, maintenance charges, the city's debt-incurring ability, and the relationship of all projects to a city master plan). For the first time responsibility for the capital budget was centralized in the Board of Estimate. As a safeguard, inclusion of any project in the budget did not constitute authorization to proceed. The board had to authorize each project separately. Key roles in preparing the capital budget were assigned to the director of the budget and the chief engineer of the board, and submission of the budget was the mayor's responsibility.93 These changes in the city's financial management structure did not resolve the 1932-33 fiscal crisis and continued to reflect the ambivalence of reformers toward strong mayors. The 1938 City Charter revision replaced the Municipal Assembly with a single legislative body, the City Council. The Board of Estimate ("Apportionment7'was dropped) lost its legislative status and became a board of executives. Despite this change the Board of Estimate remained a significant player in the city's budget process. The mayor was given legal authority to prepare the expense budget, but the Board of Estimate was still required to approve it before the budget was sent for final approval by a majority of the newly created City Council. The City Planning Commissionwas also given responsibility for formulating a separate capital budget, and the mayor had the authority to appoint six of its seven members. The board could delete or modify the capital budget, but a three-fourths vote was needed to add items to this budget. Each capital expenditure still required board approval before it could be implemented. The City Council could also delete items from the capital budget, but it could not make additions.

LEGAL ARRANGEMENTS, INTERGOVERNMENTAL RELATIONS

The Board of Estimate retained some other important budget-related powers. It set salaries, authorized the sale or lease of property, approved each capital expenditure, approved franchises, and could override any zoning change made by the City Planning Commission with a three-fourths vote. Finally the 1938 charter revision gave the Board of Estimate, not the mayor, residual powers of the city-powers not expressly granted to any other branch of government or prohibited by state or federal law. The 1963 City Charter revision was intended to increase mayoral and City Council power and to reduce the influence of the Board of Estimate. In the budget process, capital budget responsibilities were taken from the Planning Commission and given to the mayor through his newly acquired authority to appoint its chairman. The mayor was also given authority to transfer funds between agencies but required both Board of Estimate and City Council approval. The Board of Estimate was given formal power to review and change the mayor's proposed budget, power which would legally be the same as the council's. The charter did not provide any legal requirements that each body adopt the same budget. The borough presidents were also given authority to appoint members of community planning boards and chair borough improvement boards. Residual powers of the city were given to the mayor. Since the board retained its power to approve the budget and zoning regulations, the net effect of these revisions in the budget process was to increase both the mayor's and the Board of Estimate's power. How did New York's formal budget process work at the time of its 1975 fiscal crisis? New York was known as a strong mayorlweak council form of government with several unique features, among them the Board of Estimate and the borough presidents. The mayor had most of the formal powers for budget making and administering the city's bureaucracy. The mayor appointed deputy mayors and the heads of most departments, subject to City Council approval. The mayor held formal responsibility for planning the expense budget and did so with the assistance of his department heads, the Office of Operations, and the budget director in the Office of Management and Budget (OMB). The City Planning Commission, another mayoral agency, prepared the capital budget to cover construction projects and the financing of major equipment purchases recommended by the mayor. The council was a weak participant in the budget process. It had the usual power to propose spending increases and to approve the budget, but the mayor could veto any budget increases and an override of a mayoral veto required a two-thirds vote. The council also had the sole authority to approve the mayor's revenue-raising proposals.

CHAPTER SIX

However, most of the city's taxing authority came from the state legislature, leaving to the city partial control of property tax levies. The unusual component in the New York budget process was the Board of Estimate, composed of the mayor, the comptroller, the president of the City Council, and the five borough presidents. The mayor formally proposed the budget to the Board of Estimate, in which he, the comptroller, and the president of the City Council each had two votes and the borough presidents each had one. The budget also had to pass the Board of Estimate by majority approval. Any override of a mayoral veto also needed majority approval by the board. As a result of this political arrangement, the council had minimal influence on the budget process and most activity took place in the Board of Estimate. Without a citywide machine, the mayor did not control the Board of Estimate and had to bargain for the support of each member during the budget process. The Board of Estimate and a borough president system impeded the mayor's ability to actually control the budget. Despite the attempts to strengthen the mayor's formal authority through charter revisions, the institutionalized fragmentation created in large part by the Board of Estimate remained. As a result, mayors in New York City, from consolidation in 1898through the 1975 fiscal crisis, have had a difficult time integrating the demands of politics with fiscal prudence. During the two fiscal crises, control over the budget was centralized but only temporarily. Since the 1975 fiscal crisis this equivocation concerning mayoral power in New York has remained. There have been two more formal efforts to change the City Charter, the 1977 and the recently implemented 1989 charter revisions, both with the intended goal of reducing mayoral power and increasing public accountability. The charter revisions of 1977 were adopted as a consequence of the recommendations of a state Charter Revision Commission. The commission's main purpose was to strengthen citizen participation and create a system of community involvement in city government. There were also changes that clearly related to the 1975 fiscal crisis. The charter mandated that the mayor submit his preliminary budget to the Board of Estimate and the City Council with enough lead time for more extensive review. Although the mayor remained a member of the Board of Estimate, he could no longer vote on the budget and could not veto reductions made in the expense budget by either the Board of Estimate or the City Council. The mayor could still veto any increase approved by these bodies by a two-thirds majority of either body, and a majority of the other body could override the veto. Both the board and the council were required to approve transfers of funds from one program to another. The audit responsibilities of the comp-

LEGAL ARRANGEMENTS, INTERGOVERNMENTAL RELITIONS

troller were also increased. The new city charter also required a balanced budget. Since balanced budgets were already mandated by state law, the inclusion of this regulation in the charter was probably intended to make it more difficult for city officials to "forget" the balanced budget law as they had, so often, in the past. Increasing information available to the council and the board to facilitate responsible budget oversight was another objective of the revisions. To this end, the mayor was required to submit a management report to the board and the council outlining service delivery goals and agency performance. The City Council and the Board of Estimate were also provided a Legislative Office of Budget Review to offer the expertise necessary to make them equal partners with the mayor in the budget process. The charter also formally required the council and the board to adopt a single budget. The fifty-nine community boards, which were created during the Wagner era, were given budgets to support local community offices and a full-time district manager. They were also given authority to review land use and development proposals, monitor the delivery of essential services, and make budget need statements to the mayor reflecting their geographic areas. The 1977 charter revisions came at a strange time in New York's political history. The long battle over decentralization and the push for neighborhood government had been interrupted by the fiscal crisis. Between 1975 and 1978, the city lost its formal power over budgetary and financial transactions to the state-created Emergency Financial Control Board. The mayor's authority was especially diminished. It seemed ludicrous to worry about increasing community power at a time when the city was still reeling from its near default. Yet these revisions demonstrate how difficult it has been in New York to derail organized citywide interest groups from achieving their objectives. The 1977 charter revisions had a dual and perhaps competing purpose: to move ahead on decentralization and to make the mayor more fiscally accountable. In the final analysis, the mayor's formal authority was not affected by the largely advisory role given to the community boards in the budget process; however, creation of these boards opened up to the neighborhoods a formal avenue for increased interest group participation. As for the Legislative Office of Budget Review, which had the potential to seriously involve the City Council in the budget process, it was eliminated in 1981because the council did not demonstrate any particular interest in this added responsibility. New York City was forced to restructure its government dramatically as a result of a district court's ruling in Morris v. Board ofEsti-

CHAFTIR SIX

mate in 1986, which was affirmed by the Supreme Court in 1989. The Court found the Board of Estimate unconstitutional because its procedure of giving each borough representative one vote despite differences in borough population violated the one person, one vote provision that had been read into the Fourteenth Amendment of the Constitution by the federal court since its enactment. The 1989 charter revision was partially implemented in 1990 with its main goal once again to reduce mayoral power and to create a responsible legislative body in New York City. The Charter Revision Commission's proposal, which had to be approved by referenda, was largely the product of interest group politics. The commission tried to include something for groups or individuals they perceived to be important political players. For example, although the commission decided to eliminate the Board of Estimate, it did not eliminate the borough presidents or the City Council president but instead created minor functions for these anachronistic public officials. The council was increased from thirty-five to fifty-one members in order to increase minority representation. In the budget process, the mayor kept his powers of estimating city revenues and proposing the budget and now he must also consult with the borough presidents. The mayor is legally bound to approve or veto the council's actions on the budget. The mayor cannot veto council reductions in the expense budget. The council must also be notified of mayoral decisions to impound money they have approved. The mayor now approves contracts through city agencies and awards citywide contracts, both formerly responsibilities of the Board of Estimate. The mayor's Office of Management and Budget (OMB) is required to explain its methods for estimating revenues, and the director of finance is required to issue an annual report on the costs and benefits of all discretionary tax abatements and exemptions. The city's expense budget must now include a clear description of city agency contractual spending. The Department of City Planning and the OMB are required to issue a joint report every second year outlining a ten-year capital strategy for the city. The Board of Estimate's functions were given primarily to the City Council. The council was given the sole authority to approve or modify the mayor's proposed budget and can override mayoral budget vetoes with a two-thirds majority. The council must also review and approve mid-year budget modifications requested by the mayor. The new charter also established an Independent Budget Office (IBO) to provide expert information on city finances to the City Council and the comptroller. Borough president budget recommendations now con-

LEGAL ARRANGEMENTS, INTERGOVERNMENTAL RELATIONS

stitute 5 percent of the city's capital budget and 5 percent of the nonmandated increases in the expense budget. Any other borough president budget recommendations can be proposed to the council and considered as formal amendments to the budget as long as they are offset by spending cuts in that borough or proposed revenue increases. The comptroller's audit powers were increased, with a requirement to report to the council annually on major audits and to analyze the mayor's proposed budget and report on the state of the city's economy and finances. The City Council president no longer has a role in the budget process. Community boards continue to consult with city agencies and provide budget need statements to the mayor. No elected official may simultaneously be a district leader, county leader, or state committee member of a political party, further reducing the party's role in influencing the city's budget priorities. It is too soon to fully assess the impact of the new charter on the city's budget process; however, there is no question that the council has become a significant player. Will the council use its enhanced legal authority to become a responsible citywide voice on budget issues, or will it simply protect parochial interests and even obstruct the mayor's agenda? There is now more time for public hearings, greater access to technical information through the IBO, and a more elaborate committee system. But evidence from New York's and Chicago's political history indicates that city councils have trouble acting as responsible and independent legislative bodies. Council members assure their reelections by responding to narrow constituency-based interests and as a consequence find few if any political rewards in establishing policies on citywide issues. The council leadership negotiates for its members with the mayor and tends to avoid public discussions of divisive issues. A strong mayor will be able to control New York's council, but a politically weak mayor will have problems creating the consensus he needs to pass the budget. New York's Mayor Dinkins has had some trouble getting support from the council for the tax increases and the spending cuts he has proposed in his fiscal 1992 austerity budget. However, a greater threat to his control came unexpectedly from the state Financial Control Board. As mentioned earlier, if the city had an operating deficit of over $100 million at the end of the fiscal year, then the FCB's crisis powers would be restored and the mayor would lose control over the budget. Between a potentially obstructionist City Council and the FCB, at this writing Mayor Dinkins has not been the all-powerful executive that some reformers feared would be the outcome of charter revision.

CHAPTER SIX

Fiscal Policy, Intergovernmental Relations, and the Budget Process The formal fragmentation of budgetary authority that took place at the time of New York City's 1975 fiscal crisis weakened the mayor's control over the process. More important, it gave the bureaucracy and interest groups several different access points through which to influence spending decisions. This was the most important structural distinction between New York and Chicago in 1975. In Chicago the mayor was the center for all political transactions, so party leaders, interest groups, and the bureaucracy had to seek the mayor's support for their policy demands. In New York there were alternative routes to political influence through the independent comptroller, the borough presidents, and the City Council president, despite the weakness of the City Council. Mayors made the final budget decisions in both cities, but these decisions were the result of a different set of political influences. The degree of mayoral control over the process is reflected in the spending decisions documented in chapter 4. In New York mayors had less control over fiscal policy and were more likely than in Chicago to resolve political conflicts through spending. What do the historical changes in the New York and Chicago budget processes tell us about mayoral control? The omnipotent mayor who controls the budget has all along been an illusion in New York. Yet the century-long struggle between those who would weaken the mayor and those who would strengthen his authority in the budget process has remained the central dynamic in charter revisions. Despite New York's fiscal crisis and the obvious need for a strong executive role in the budget process, the new charter once again targeted mayoral authority. By eliminating the Board of Estimate and giving the council its formal authority over the budget, the 1989 charter revision has changed the structure of New York's fiscal policy process. However, it remains to be seen whether the council will exercise this authority and serve as a real balance to mayoral power. The last century of New York budgetary politics indicates that the council will be incapable of exercising the kind of responsible power that the Charter Revision Commission has given it. The Council Wars in Chicago also demonstrate that, given the chance to exercise formal authority over the budget, a city council will be obstructionist rather than responsible. Mayors in Chicago have learned that without a strong party organization they have to spend at least the early part of their administration accommodating parochial City Council interests until they can

LEGAL ARRANGEMENE, INTERGOVERNMENTAL RELATIONS

neutralize the role of these interests by controlling the council leadership. In New York mayors will have a harder time controlling the budget process because, besides the council, the five borough presidents and an independently elected City Council president remain in office, but without any real purpose. Lacking any serious involvement in the budget process, their demands will become more parochial and more fiscally irresponsible than they were during the days of the Board of Estimate. The mayor will make some accommodations in order to minimize their public criticisms. It is ironic that a charter revision commission whose expressed goal was to provide a real check on mayoral authority will more than likely achievejust the opposite. In the 1990s the budget processes in New York and Chicago may converge. In Chicago, the decline of the machine has reduced the mayor's informal control over the council and interest groups, but he remains the key player. In New York, the mayor no longer has to contend with a Board of Estimate that provided another avenue of influence for interest group politics. It is also likely that New York's council will eventually resemble the parochial Chicago model. The comparison between New York and Chicago also demonstrates the importance of functional responsibilities in the fiscal policy process. In 1975, Chicago had been much more successful than New York in spreading the burden of service delivery outside the city through the creation of public authorities and by the state and county assumption of costly non-common function services. Even when New York created public authorities with the power to float bonds, most have not had the power to raise their own revenue through taxes. Consequently, New York has had to pay interest on their debt from its general revenue base. Most of Chicago's special districts have their own property tax authority, and their tax base usually includes some of the wealthier suburbanjurisdictions. The creation of special districts should allow cities to shift part of the burden of service delivery to jurisdictions outside the city boundaries and to insulate the city from the fiscal problems related to spending on what usually are deficitproducing services. New York's configuration of special districts realized neither positive objective. It merely allowed the city to circumvent the state limits on the city's long-term debt burden. The public management experts who have argued that varied governmental arrangements fragment local authority, particularly in the area of fiscal policy, have missed an important point. The number of jurisdictions providing city services is not the significant determinant of fiscal outcomes. The critical variable in the special district arrangement is the mayor's capacity to control policy decisions. Mayors can use special districts to consolidate their personal authority over

CHAPTER SIX

fiscal policy by retaining the power to appoint board members, recommending party workers for jobs, and imposing legal requirements that the mayor or City Council must approve the special districts' budgets. As Bowman points out, "Unitary government provides local jurisdiction but it does not provide local control."94 In 1975, Chicago had one of the most complex public service delivery systems of any major city in the country; yet it managed to successfully spread out the financial burdens of local administration. New York, on the other hand, had a government structure which provided almost all services. Chicago mayors clearly had the advantage in the fiscal policy process. Since 1975 Chicago has retained its fiscally beneficial service delivery arrangement while New York has improved its situation only marginally. The formal fragmentation of Chicago's city government also served to insulate mayors from the demands of interest groups.95 Responsibility for the performance of the non-common function services can be deflected by the mayor because of legal decentralization. In cities where all non-common functions are the legal responsibility of the city, the mayor is more accountable to the public and special interest groups. From a fiscal policy perspective, the provision oflocal services by noncity jurisdictions impedes the development of strong interest groups demanding spending for that service. It is simply more difficult to organize people without a central political figure on whom to focus attention. Both state and federal mandates have had a profound impact on urban fiscal capacities. New York City has been fiscally hamstrung by state mandates while Chicago has retained greater flexibility. However, it is clear from the two case cities that the number of mandates is not as important as the type of mandate and its impact on the mayor's ability to control fiscal decisions. State-mandated programs without revenue assistance create long-term fixed costs and are most detrimental to the city's fiscal condition. In the post-1975 period, mandates have created an added fiscal burden on all cities. New York, not surprisingly, has remained worse off than Chicago. Changes in intergovernmental assistance have also had clear fiscal consequences for America's cities. As chapter 5 demonstrated, in 1975 New York was more dependent on intergovernmental aid than Chicago, but the unpredictability of intergovernmental aid has made it both a benefit and a liability when cities try to develop sound fiscal policy. Federal and state revenues certainly benefit the local taxpayer by increasing revenue from nonlocal sources, in effect spreading the burden of service delivery outside the city. At the same time, a high level of reliance on these funds makes a city vulnerable to fiscal prob-

LEGAI ARRAHGEMENJS, INTERGOVERNMENTAL RELITIONS

lems when a new administration in Washington or its state capital decides to reduce the level of assistance. The irony of this dilemma is that cities which have experienced the greatest weakening of their own local tax bases are likely to become the most reliant on intergovernmental funds and, as a result, the most vulnerable to future fiscal problems. In most cases, it is not simply the magnitude of federal funds that a city receives which can adversely affect its fiscal condition, but control over their distribution. As the cases of New York and Chicago demonstrate, a mayor who has centralized the fiscal policy process will be less vulnerable to fluctuations in federal and state aid because he will be capable of making the necessary cutbacks when aid is reduced. Since 1980there has been a dramatic decline in federal aid to all cities and a weakening commitment by state governments to replace the lost revenue. Both New York and Chicago have been especially hurt by the decline in federal aid. Nevertheless, New York has remained more vulnerable to fiscal problems than Chicago because of its greater reliance on this aid to balance its budget and the mayor's incapacity to cut spending. There is one last political facet of the fiscal policy process that requires discussion. The next chapter examines how interest groups and the party organization affect the city's capacity to retain fiscal stability.

INrEREsr GROUPS, rnE PourlcAL PARry, AND THE URBAN FISCAL POLICY PROCESS

The exercise of power or control in any political setting is dependent on informal relationships as well as legal authority. In the urban fiscal policy process the most important of these informal interactions involves the mayor, the party organization, and interest groups; the strong, disciplined party can be an instrument of mayoral control while interest group demands are generally the object of control. These informal political interactions take place within the parameters set by the legal system and together explain the expenditure, revenue, and debt trends identified in chapters 4 and 5 . Cities are most likely to retain fiscal stability when the mayor is able to centralize and control the budgetary process, when he can limit interest group demands for increased spending, and when he makes fiscal stability a dominant policy objective. This chapter examines the relationship between the mayor, the local party organization, and interest groups in the city's fiscal policy process and how their interactions specifically affected the fiscal conditions of New York and Chicago. The first section considers the general role of interest groups and parties in the American political system and distinguishes national- from city-level politics. Once their relationship in city politics is clarified, the second section considers the role of interest groups and parties as it affects urban fiscal outcomes. The third section specifically considers the role of interest groups and parties in the fiscal policy processes of New York and Chicago, using the Community Action Program to illustrate this process.

The Relationship between Interest Groups and the Political Party: The City versus the Nation As the idea of "city limits" becomes increasingly accepted by the academic and policy community, the notion that cities are distinctive po-

IHTUEST GROUPS, THE POllTICAl PARTY

litical entities-different from state and federal governments-is no longer controversial. Certainly, the earlier discussion of intergovernmental relations supports this contention. Yet analyses of party and interest group activity in the city's policy process tend to borrow heavily from theories grounded in national politics. This chapter argues that the form and function of urban parties and interest groups do not always mirror those of their sisters in the national political arena. This particular difference is important for understanding urban fiscal policy. Rather than the competitive two-party system that characterizes American national politics, most American cities with partisan elections have a weak two-party system. Since the New Deal these cities, especially in the Northeast, are increasingly becoming single-party cities usually dominated by the Democratic party. Single-party cities, as New York and Chicago reveal, are not ensured a strong political party. Weak urban parties are not surprising, given the same trend in national politics. But what accounts for the difference in party competition at the city as opposed to the national level? In part it is differences in the historical development of the role of the local party, and in part it is the important differences in the relationship between the party and interest groups. While national parties are generally viewed as instruments for offering the public choices between individuals representing competing policy positions, the urban party has evolved into an entirely different institution. Historically, the strong urban party was never about choice but about control. Not all cities had strong local party organizations even during the peak period for their formation, the nineteenth through the early twentieth centuries. Mayhew points out that city machines tended to be concentrated in the Middle Atlantic states and the Ohio and Mississippi valleys.1 Nevertheless, in the period 1890-1940 cities as diverse as Rochester, Omaha, Kansas City, San Francisco, and Baltimore experienced machine politics.2 In cities where a strong party thrived, its objective was to control government through control of its elected officials and suppression or cooptation of organized interest groups. Several of the classic functional definitions of parties and interest groups provide the basis for distinguishing between the national and local party systems. Eldersveld describes the party as "a structural system seeking to translate or convert social and economic interests into political power."3 The party, he continues, bargains with subgroups of the population, enters into a coalition agreement, and then moves toward the achievement of an agreed-upon preference scheme. Sorauf and Beck describe the party in terms of its ability to simplify

CHAPTER SNEN

and channel political choice and as a force for unification in the divided American political ~ y s t e mThe . ~ relationship between the national political parties and interest groups is clearly based on compromise and accommodation. The early development of the political party at the city level shows almost the opposite relationship with interest groups. Local party organizations were successful when they suppressed the development of organized interest groups. The result was an antagonistic relationship between strong local parties and interest group activity. Strong local party organizations were called machines, and they achieved electoral successes by offering their members material incentives for participation.5 Banfield and Wilson describe the classic machine as "a party organization that depends crucially upon inducements that are both specific and material."6 Its electoral support depends on a citywide organization that links the individual voter to the political process at the neighborhood level. The machine in the past depended upon individuals willing to exchange their vote for "jobs, favors, or friendship."7 The primary inducement for machine support was patronage. Patronage was important because it is a particularistic or separable good, which means it can be offered to individuals while it is withheld from the rest of the community.8 The classic machine worked effectively by responding to the needs of the low-income and immigrant voters in exchange for party loyalty during elections. The machine legitimated a political exchange relationship. The rewards provided by the machine, especially patronage jobs, concerned individuals and neighborhoods, not groups organized around policy issues. As a result, the machine's survival depended on controlling the organization of permanent citywide groups with specific policy objectives. The successful local party developed into an institution that acted not merely as a broker or a bargaining agent but, rather, as an instrument of control.9 Control also came from the nature of the bargain. With a monopoly over the distribution of political rewards, the successful party weakened its competition and made it unattractive to anyone with practical needs. The machine's major competitor for political influence was the interest group which could organize around citywide issues. The machine depended upon a neighborhood-based politics which allowed for the citywide agenda to come from one source, city hall. The machine functioned most effectively when there was only one articulator of the "public" interest, with no competition from other organizations with a citywide constituency. Schattschneider's argument, that in American politics the scope of the conflict determines the outcome, is particularly relevant to urban

INTEREST GROUPS, THE POllTlC4l PARTY

political decision making.10 The machine was organized to limit the scope of political conflict, particularly through its integrative function, which stressed order and acquiescence. Organized groups were absorbed so as to limit their potential for challenge and innovation. According to Przeworski, the very process of channeling political participation through established institutions and into the electoral arena controls participatory activity and is likely to limit its disruptive effects." The machine functioned precisely in this manner until the ghetto violence of the 1960s. Black rage did not distinguish the machine from the reform city. The failure of cities to control their discontented populations brought a response from the federal government in the form of increased revenue assistance. The Great Society programs provided a ten-year reprieve for the ailing machines by increasing services for the urban poor and supplying a new source of patronage for the machine mayors to dispense.12 Finally, the decline of federal aid, the expansion of civil service, public employee unions, and competitive bidding for city contracts made extensive patronage networks all but impossible to sustain. The few machines which survived broadened their base of support, no longer depending solely on the exchange of individualistic material rewards for support. In Chicago, for example, Richard J. Daley changed his strategy from simple patronage-based electoral politics to one which depended on the provision of efficient basic services and low property taxes.13 At present, machines remain no more hospitable to interest group politics than in their heyday. Politics in machine cities continues to be organized at the neighborhood level, and citywide coalitions advocating specific policies are discouraged. The machine's ability to survive still depends on its capacity to suppress the formation of potentially competitive groups and to control the demands of those groups which already exist, but it must do it with a shrinking patronage base. This capacity has dramatically diminished among urban party organizations, making genuine party machines scarce. Without the machine, it would be reasonable to assume that cities would develop a two-party system closer to the national model, but that has not happened. Cities sharing the legacy of machine politics tend to remain one-party cities. These weak urban parties can do little else but endorse candidates and pretend they have votes to deliver on election day. They play virtually no role in setting the city's political agendas. Urban party organizations have become like any other interest group advocating for its constituents. In single-party cities, there is often strenuous competition for elected offices, but the competition occurs during the primary. By controlling access to the ballot, local party organizations can

CHAPTER SNEN

still play an important role in the nomination of city officials. Complex election laws and the burdensome task of gathering signatures on nominating petitions have assured many party-backed local officials an advantage at the early stages of the campaign process. This has been especially important in judicial elections. New York City primaries are especially noteworthy for the extraordinary number of lawsuits that are brought concerning the validity of petitions.14 In New York City, candidates have actually been knocked off the ballot for failing to use nominating petitions that are all the right color. It is doubtful whether arcane election laws promote democracy, but they are often the last bastion of party influence in elections that are increasingly dominated by the media, paid political consultants, and municipal employee unions. Just as strong local party organizations inhibit the development of interest groups, cities with weak party organizations are likely to develop strong and diverse interest group activity. According to Key, pressure groups are "private associations. . .[which] promote their interests by attempting to influence government rather than by nominating candidates and seeking responsibility for the management of governrnent."l5In their relationship with the formal governing structure, interest groups seek to influence decision-makers and at the same time retain a position which completely protects them from the responsibility of governing. While political parties and their representatives in public office are accountable to the public at least through the electoral process, interest groups provide no such formal mechanism for accountability to a broad-based constituency. One of the most serious problems in interest group activity is explained by Schattschneider and is clearly visible in city politics. Interest groups do not organize spontaneously. There are costs to organizing; as a result, private groups, such as business associations, with superior resources are favored. Most important, by the time a group develops the kind of interest that leads to organizing, it has also developed a political bias. As Schattschneider explains, "Organization is itself a mobilization of bias in preparation for action."16 The scope of the conflict-that is, who can get into the political fight and who is excluded-is part of the same dynamic as the mobilization of bias. Consequently, interest groups are only the political instrument of a segment of society and can never be a means for articulating a public interest. According to Truman, the primary task of the group is to achieve unity, because, if a group is not cohesive, it cannot be effective.17 This need to achieve unity essentially encourages groups to form on the basis of narrow interests to maximize their chances for successful action. Broadening their appeal will more than likely re-

INTERESTGROUPS, THE P O l I T l U I PARTY

duce their strength so that association with competing groups is discouraged. The successful urban political party followed an antithetical organizational imperative. The positive legacy of urban machines came as they acted as an antidote to the worst aspects of interest group politics. Strong parties not only suppress opposition but also can encourage diverse and potentially antagonistic groups to realize the commonality of their interests. The party must constantly broaden its base of support to remain strong. Also, parties must articulate a long-term interest for the city and thus cannot afford to link themselves with the transient political passions that are often the foundation of interest group activity. Unlike interest groups, the party can set the agenda for citywide political discussion. The party's desire to win elections also requires a capacity for large-scale organizing of the public and for emphasizing shared political interests.18 Clarifying the relationship between the party and interest groups in local politics generally makes it easier to understand the importance of this dynamic in the fiscal policy process of twentieth-century American cities.

Interest Groups and the Party Organization in the Fiscal Policy Process Interest Groups Interest group involvement in the budgetary process, often crucial for representing a variety of public concerns, can contribute to the development of fiscal problems. Demands from interest groups, whether neighborhood groups, municipal employees, blacks, ethnic groups, civic organizations, or business associations, usually translate into city costs. The irony is a simple one: while interest group pluralism is highly valued in a political democracy, it is often disruptive and detrimental to policies which promote local fiscal stability. Interest groups have their greatest influence over fiscal policy outcomes when the fiscal policy structure is fragmented. As chapter 6 explained, the fragmentation allows many points of access, and leaves the mayor politically overwhelmed by too many participants and incapable of controlling final fiscal policy choices. Organized interests with significant resources have an advantage in this process because of their capacity to affect the public debate and the continuous and predictable participation of their membership in electoral politics. When the mayor loses control of the fiscal policy process, demands for increased spending by one group are accommodated without increasing the available revenues or cutting costs from other programs.

CHAPTER SNEN

The obvious result is an imbalance between revenues and expenditures. The longer a city maintains the imbalance, the more serious its fiscal problems become. The power of interest groups is cumulative and particularly detrimental to fiscal stability when the mayor has no leverage-say, a strong party organization-for controlling demands for increased spending. Admittedly, there are also organized groups who are not interested in increasing spending; some have actually advocated cuts in the city budget. These groups are generally organized by the business community, and they too have very particular interests. Business groups usually advocate cutting business-related taxes and reducing city spending through cost-effective management techniques. Civic groups, or "good-government"groups, as they are sometimes called, like the Citizens Budget Commission in New York and the Civic Federation in Chicago, all generally dominated by the city's business elite, propose tax policies and budget priorities which reflect business's political agenda. In recent years, mass-based tax reduction movements have also developed. The most conspicuous among them was the California homeowner group which succeeded in passing Proposition 13 in 1978. While these groups have demanded lower taxes rather than increased spending, their impact on municipal fiscal policy has been similar. Because they expected service delivery levels to be maintained while taxes were reduced, the net effect of their proposals was to increase the disparity between governmental revenues and expenditures, and, unfortunately, they offered no proposals for making up the difference. In the wake of New York's.1975 fiscal crisis, management experts convinced many city officials that there were large sums of money to be saved by improving efficiency and eliminating waste. The fixed costs of service delivery in most cities have made these efficiency savings much more difficult to achieve and much smaller than originally expected. Cities which have been saddled with state tax cut propositions have found reductions in service delivery, especially deferred capital expenditures, raising non-property tax revenues, and deficit spending their only fiscal policy options, all undesirable if long-term fiscal stability is a policy objective.19 The role of interest groups during a fiscal crisis and the subsequent retrenchment period is different than it is during political periods characterized by economic growth. The norm for nonausterity political periods is groups which organize in order to improve or expand government services. Both objectives generally require increased city spending. If budget cuts must be made in a policy environment that has always had varied and continuous interest group participation,

INTEREST GROUPS, THE POllTICAl PARTY

the groups with the most resources are likely to dominate. Business groups and good-government groups tend to be vocal and most influential during austerity periods, like the Depression and the late 1970s. When the mayor does not control the fiscal policy process, the struggle for scarce resources generally devastates the weakest, least organized groups. A public consensus that the city should match spending priorities with need does not magically emerge as a result of the crisis. Retrenchment periods closely resemble P. Peterson's policy-making model in that development interests acquire a newfound legitimacy and groups which contribute least to the tax base are most likely to be ignored.20 Mayors justify their alliance with the business community in fiscal terms: business provides the tax dollars which fund the services that benefit the entire city. As long as the public shares the political leadership's view that their city is experiencing economic scarcity or fiscal stress, business interests will dominate the fiscal policy agenda. Fiscal stability is usually restored, but it is at the expense of the poor and less organized groups. Their interests can reemerge, but only after prosperity appears to have returned to the city.

The Party Organization There is an impressive and extensive literature which focuses on the role of the party in urban politics. McDonald has correctly argued that too many of these studies are preoccupied with the machinereform dynamic and fail to look more broadly at the public policy process.21Yet many of those who have chosen to study urban policy have ignored the party's impact or have lost it in misspecified quantified measures. The complex role of parties in urban governance must be reconsidered. In the fiscal policy arena, the party's relationship with interest groups provides the appropriate focus. There is a historical basis for arguing that parties can play a responsible role in the urban fiscal policy process.22 Not only can the mayor use the party organization to control interest group demands for increased spending, but also the party can be used by the mayor to control the city council and limit its involvement in final fiscal policy decisions. Chapter 6 showed that opposition to the mayor's budget is unlikely to develop in the city council when the mayor controls a strong party organization whose members dominate in the council. When the party is strong, patronage and the ability to mobilize voters guarantee that the mayor and his legislature will have a similar political agenda. The party organization can also have an important impact on intergovernmental fiscal relations. The two critical factors in this relationship are the party's capacity to deliver the vote during elections

CHAPTER SEVEN

and its ability to control its legislative delegation. A strong party organization with leadership that can guarantee votes during a gubernatorial or presidential election gives the city leverage in bargaining for city policy demands after their candidate is elected. A cohesive legislative delegation can act in a similar fashion, "logrolling" in Congress or the state legislature, exchanging their block of votes for legislation favorable to the city. It is not enough for the party organization to deliver votes or for the legislative delegations to be cohesive; the party leadership must also be responsive to the mayor's policy agenda, and the mayor's agenda must be attentive to fiscal issues. For example, a cohesive city delegation in the state legislature which supports state mandates for increasing municipal employee pensions but pays no attention to the long-term fiscal burden this might place on the city is of no help to a mayor concerned with responsible fiscal policy.

The Interactive Relationship between Parties and Interest Groups The reciprocal relationship between local parties and interest groups is key in explaining the urban fiscal policy process. According to McConnell, interest groups are strong when parties are weak and vice versa.23 Therefore, when local parties decline, interest groups generally flourish to fill the political vacuum. When the party can no longer function to aggregate interests, it becomes more difficult to form the necessary coalition to govern. McConnell's argument concerning the impact of weak parties on state politics is especially relevant to the city.24 In cities where the party is weak, government must exert considerable energy in "co-optingthe scattered centers of power." The lack of coordination that occurs in weak-party cities results in a considerable waste of resources that is clearly visible in the fiscal policy process. The relationship between budget policy and mayoral elections was demonstrated in chapter 4. In weak-party cities, the mayor is particularly susceptible to interest group demands in the period before elections and these demands generally translate into spending preferences. Mayors respond not merely to the individual voter, as the Downsian model of electoral politics suggests, but to the need to reconstitute free-floating interest group coalitions for electoral victory.25 In the weak-party city, the mayor must favor the narrow interest groups with substantial financial resources and those groups which can guarantee and produce a significant vote on election day. The demands of these groups can only be ignored at the risk of losing their electoral support. Without a strong party organization to act as a con-

INTEREST GROUPS, THE POllTICAl PARTY

duit for demands and to guarantee votes, mayors are extremely vulnerable to the spending preferences of organized groups. Individuals who are not members of organized groups also have no formal access to elected officials, making it unlikely that their preferences will be heard in periods between elections. Influence over fiscal policy in weak-party cities thus depends on the ability to organize. According to Lowi, the most important difference between the two national parties is in the interest groups with which they identify.26 This again reveals an important difference between the local interest group-party relationship and its national counterpart. Urban parties are not readily distinguished according to the interest groups they represent. Whether it be a weak or strong single-party city or a city with vibrant competitive parties, one striking factor is shared in all urban political systems: Since the Depression, there have been no urban parties with platforms that are either antibusiness or antilabor. This means that, in non-fiscal crisis periods, spending priorities usually favor the interests of business and municipal labor unions. During fiscal crises, municipal unions can become scapegoats but business interests increase their influence. While P. Peterson's position regarding the dominant role of business interests in urban policy-making is extreme, there is no doubt that city governments wishing to thrive or merely survive must create a pro-business environment.27 The federal system as well as the need of cities to compete for business to maintain their tax bases is a contributing factor, but a pro-business urban policy bias became apparent in the post-fiscal crisis 1980s.28 The union's enhanced status in urban politics is in direct contrast to its declining influence in national politics. While the unionized work force is becoming an increasingly smaller proportion of the nation's population, the municipal labor force is unionized in most cities and growing relative to the private sector labor force. Private sector union membership peaked in 1970 and in 1989 constituted only 12 percent of the private nonfarm workers. In 1989, 37 percent of the public sector work force was unionized, indicating almost constant growth in membership since 1955.29 More important for city fiscal politics is the city worker's role in elections. City workers are generally a significant part of the voting population, and as a consequence overt antilabor policies are not usually a part of local election platforms. Of course, there is a wide variety of fiscal policies that cities can pursue to accommodate business and labor interests, as is clearly apparent in the differences between New York and Chicago. But the relationship between interest groups and the national parties posed by Lowi does not work at the local level; local parties cannot be distin-

CHAPTER SNEN

guished according to their relationship with interest groups. Labor interests and business interests, or, as they are currently labeled, development interests, are dominant forces in local political decisionmaking regardless of whether the Democrats or Republicans control city hall. The relevant differences among local parties relate to their ability to control the proliferation of interest groups and their consequent demands for spending. In city politics, strong party organizations exist only at the expense of strong interest groups. Cities which are characterized by a high degree of interest group activity are also more likely to have a large number of organized groups among the poor and groups advocating poor people's interests. How do these groups affect fiscal policy, and can differences be attributed to the interest groupparty relationship? While the political access available to groups organized in behalf of the poor increases in strong interest group cities, these groups are still likely to lose the competition for influence over fiscal policy. Their lack of resources relative to other city groups puts poor people's groups at a disadvantage in the political competition for budget dollars. Ironically, because poor people's groups have greater access in strong interest group cities, the inequality in political competition is more easily ignored. Yet, in cities with little overt interest group activity and a strong local party, poor people's organizations have generally been successfully suppressed. Lowi and Truman argue that, on the national level, interest group politics has the capacity for self-correction.30The nature of group conflict at the city level makes self-correction highly unlikely because business interests are insulated from the political competition for scarce resources. The 1960s provide a good example of why urban interest group politics fails to self-correct. During this period, interest group politics was at its peak and poor people's organizations flourished. In New York City, political confrontations proliferated. There were the battles between the United Federation of Teachers (UFT) and minority neighborhood organizations31 and disputes over the budgetary demands of poor people's groups and the municipal employee unions.32 Conspicuously absent were any confrontations between business and poor people's groups. This failure of business groups to appear in the public debate over spending indicates that their interests were being attended to behind closed doors and that political power in the city was not going to be permanently redistributed. During prosperity, poor people's groups may fare better in interest group cities as opposed to machine cities, but the reverse is likely to be the case during scarcity and retrenchment. The motivations of politi-

INTEREST GROUPS, THE POllTICAl PARTY

cal leaders aside, the Depression period and the 1970s recession provide examples of machine cities advocatingfor the economic interests of their impoverished populations.33 The influence of poor people's groups in strong interest group cities is one that can be more easily eroded because the groups are generally transient and have adversarial relationships with other groups which are more important to the economic base of the city. Groups with the least amount of resources at their disposal are likely to lose when the struggle is over a shrinking pie and the party organization is not strong enough or willing to protect them. Ultimately, the success of poor people's groups in machine cities during periods of economic scarcity has depended on their status in the party's electoral coalition and the policy preferences of the mayor. The demands of poor people for redistributive services are a separate problem from demands for basic services, since they are complicated by intergovernmental relations, as the previous chapter explained. The interests of the poor were important items on the urban political agenda in the 1930s and the 1960s. In both periods the political efficacy of the city's poor was a function more of the availability of federal aid targeted toward social welfare problems than of a permanent redistribution of power in the central cities. An important question that should be considered when analyzing city responsiveness to the demands of the poor in weak- versus strong-party cities is whether the poor are receiving the same quality of basic municipal services as other residents of the city. The experiences of New York and Chicago in the pre-1975 fiscal crisis period indicate that minorities did poorly in both cities. Yet service delivery in general seemed more efficient and public satisfaction was greater in the machine city than in the weak-party city. Despite the general perception that New York was a more hospitable city for blacks and minorities during the 1960s and 1970s,representation in the municipal labor force was another matter. In 1973, during Daley's last term, 23 percent of Chicago's employees were minorities while, during Lindsay's administration, minority representation among New York's public employees was 14.3p e r ~ e n t . 3 ~ Are poor people, then, likely to fare better when the mayor creating city priorities is insulated from group pressures by a strong party? Not really. The public interest, as articulated by most elected officials in American cities, is directly linked to business interests so that any agenda set by a mayor, even one insulated from group pressure, is likely to respond to business interests first. There is one caveat. The strong political party which depends on a popular base to support its activities in the period between, as well as during, elections must re-

CHAPTER SNEN

spond to the majority interest or lose power. In strong-party cities, the public's approval is likely to be linked to a conception of the public good that is based on the efficient delivery of citywide services.35 Under this system, poor people and minorities can increase in importance a s their numbers grow in proportion to the total city population. Even poor people cannot be ignored indefinitely when they are a significant part of a machine's electoral coalition. Most strong local party organizations did not survive the 1960s. While there is no consensus on why effectivelocal parties have all but disappeared,36 their demise could not have been more unfortunate for the poor populations of America's inner cities, for it occurred just when poor and minority populations would have become the dominant electoral force in machine politics by virtue of their numbers.

Interest Group Fragmentation in New York City and Machine Dominance in Chicago This section considers the general relationship between interest groups and the party in the fiscal policy processes in New York City and Chicago. New York City Whether New York politics is described as "street fighting pluralism" or "pluralism run wild," there is no question that interest groups have become a dominant force while the political party has declined in its influence.37 Sayre and Kaufman first identified this important relationship in their seminal work Governing New York City,38 and its consequences were succinctly explained by Sayre in a later article entitled "The Mayor." "The extensive and deep-seated pluralism of New York City's political and governmental system is accompanied by no effective compensating forces that serve to aggregate either sufficient power to govern the city or to develop a stable and coherent oppositi0n."~9 Sayre's general description of city politics provides the basis for the analysis presented here of the fiscal policy process in New York, where interest groups have grown in importance while the party has declined. However, this is not a defense of the "wishful thinking" pluralism that has characterized many studies of decision making in American cities. Rather, this approach to fiscal policy-making actually reveals the limits of the arguments made by early pluralist theorists. Power is not evenly distributed in the fiscal policy arena, and even when a city has a high degree of interest group activity, like New York, groups do not have equal access to the process.

INTEREST GROUPS, THE POLITICAL PARTY

Bear in mind that this study's modified interest group model of the fiscal policy process is best applied to "normal" political periods in New York and not to politics during fiscal crisis or retrenchment periods. After 1975,many analysts wrongfully dismissed Sayre and Kaufman's portrayal as "dated" and no longer relevant to post-fiscal crisis New York,40 sounding the death knell for interest group pluralism. These proved to be shortsighted criticisms that did not recognize the temporary nature of the retrenchment reforms. The striking feature of New York politics in the 1980s was a reemergence of demanding and contentious interest group activity. The retrenchment period of the 1970s, like its counterpart in the 1930s, was an aberration in the city's political history. Interest group activity was controlled by the mayor and business interests governed supreme, but only as long as the crisis atmosphere in the city was maintained. Beginning in 1981, as the city registered one budget surplus after another and the local economy thrived, organized groups once again emerged to challenge the dominance of development interests and to demand their share of the budget pie. Even as Mayor Dinkins confronted a recession and budget shortfalls in 1990-91, the demands of the city's organized interests continued undiminished. To create sound fiscal policy, a mayor must be capable of controlling the budget process. This involves controlling the day-to-day functioning of the city bureaucracy, but more important, the mayor must be capable of making and implementing long-term fiscal policy. Careful attention must be paid to both the expenditure and the revenue side of the budget. Yet, as chapter 4 demonstrated, New York's mayors have done this only in times of fiscal crisis. The mayor's control over the budget process has been weakened by the growth of interest group politics as the citywide party has all but disappeared. Chapter 3 argued that a fiscal policy structure has been developing since the Depression within which the mayor must constantly deal with competing demands to spend while lacking the necessary political mechanism to keep together his winning electoral coalition. The majority coalitions which elect mayors in New York tend to revert to their preelection conformation of competing, antagonistic special interest groups once the election is over. Sayre explains that New York mayors were effectively released from "the grip of political party organizations whose leaders were perceived to have great powers and base motives."41 As a latent consequence, New York mayors also lost the most important institutional mechanism for controlling the city's fiscal decision-making process, the party organization. Under these conditions, long-term fiscal policy planning has been invariably sacrificed to satisfy the spending demands of groups in the mayor's ephemeral electoral coalition.

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Beginning in the 1930s,reformers in New York thought that adding to the mayor's formal powers by revising the City Charter would compensate for the loss of informal power that came from the demise of the machine. Ultimately, the reformers were uncomfortable with the idea of concentrated mayoral authority and, as chapter 6 explained, a fragmented political system remained. As a consequence, a power vacuum was left in the fiscal policy process. As Costikyan explains, the reform movement's bias against autocratic political leadership seemed "more and more against political leadership of any kind."42 It is all too obvious that an effective substitute for the informal aggregating function of a strong citywide party organization has not yet been found. Bureaucratic city agencies and civic associations have certainly not provided this function. New York mayors thus have had inadequate leverage in the bargaining process that produces the budget and more often than not have found that their adversaries include groups which were formerly part of their electoral coalition. The mayor is simply viewed as another partisan player in New York's political game whose policy objectives have no special claim on the public interest. Consequently, New York mayors have reverted to resolving interest group conflict by spending, giving scant attention to the revenue side of their budgets. During economic prosperity, this type of government can be maintained without concern for its negative fiscal consequences. However, during periods of economic scarcity, interest group politics, in which the mayor cannot rely on a strong party to control demands, will contribute to serious fiscal problems. Once fiscal problems are recognized, they are already acute because the process which has caused them is reinforced over time but ignored until scarcity forces the fiscal issue onto the political agenda. Certainly, the long-term expenditure, revenue, and debt trends (see chaps. 4 and 5) indicate that fiscal problems existed in New York for decades before its 1975 crisis. A fragmented political party has been part of New York's political scene since the city's incorporation in 1898. In the early part of the century, when the Democratic party monopolized the mayoralty, its nominee was the product of bargaining among county leaders, and primaries were rare.43 Even in this period, when machine politics thrived, there was no monolithic machine controlling city politics; instead, there were several independent party organizations based on the support of borough (county) populations.44 The party system reflected New York's fragmented government structure, which divided the city into five boroughs. The presidents of these boroughs represented borough interests on the Board of Estimate, which helped reinforce the fragmented party. This county party system, not

INTEREST GROUPS, THE POLITIUI PARTY

surprisingly, favored dealing with the Board of Estimate and, as was explained in chapter 6, weakened the mayor's ability to control the budget process. The interaction between the Board of Estimate and the decentralized party ultimately served to weaken the political party as a citywide aggregator of interests. As early as 1901,when the Board of Estimate was created, the mayor had an institutionalized competitor for budgetary authority. Party and interest group leaders could use the Board of Estimate to circumvent the mayor, contributing directly to the mayor's inability to control the fiscal policy process. A critical transformation in New York's party system occurred during the Depression period. While a fragmented county-based Democratic party had dominated New York politics since the turn of the century, Jimmy Walker was the last Democratic mayor of the city to accept the party constituency as a major part of his coalition. La Guardia's Fusion candidacy in 1933was the significant turning point for the role of the party in governing New York City. La Guardia's reform politics was, by definition, oriented against political leaders, political machines, and political parties.45 La Guardia like the city's other reform mayors won elections on the heels of a political scandal involving the Democratic party. He was elected after New York's 1930s fiscal crisis, but once the short-term problems that led to his election had been resolved, the reform coalition that supported him dispersed. Early reformers did not establish a political organization to ensure their ongoing influence. Inherent in their ideology was an antagonism to party discipline.46 Without loyalty, discipline, and organization, the party's role in city politics was reduced to that of just another interest group. La Guardia's twelveyear tenure as mayor provided more than enough time for New York's already fragmented Democratic party to weaken even further. During La Guardia's three-term mayoralty, the party became a steadily weakened participant in the city's political system. Although La Guardia was a reform mayor, he managed to sustain his electoral coalitions through the creation of his own "machine."47 In effect, by personalizing power, La Guardia played a significant role in weakening, if not destroying, the institutional basis for mayoral power in New York. Even after World War I1 when Democrats recaptured city hall, the party was so divided that its constituency exerted less influence on the mayor than did organized interest groups. Even the famed Tammany Hall was Manhattan based and did not control Democrats in the other four boroughs. Each mayor who followed La Guardia sooner or later experienced a break with Tammany's leadership. 07Dwyerresigned after five years in office as a result of political scandal. Impellitteri, originally a Tammany-backed mayor, was

CHAPTER SEVEN

dumped by his party in 1953 in favor of Robert Wagner. Wagner eventually bowed to the growing strength of reform Democrats and turned on Tammany leaders. While there never was a strong central party organization in postconsolidation New York City, the county party system steadily declined between 1945and 1965. The success of the reform movement particularly within Manhattan's Democratic party was due in part to the change in the city's demography. The ethnic constituency of the machine gradually left Manhattan to a combination of upper-class gentry, low-income blacks and Hispanics, and educated young professionals.48 By 1961the reform takeover of the Manhattan Democratic party was complete, with the ouster of Carmine DeSapio, the fabled county leader. Wagner, it is argued, permitted the Democratic party to crumble beneath him, but it would seem more accurate to say that he simply could not control a process of fragmentation that had begun many years before he became mayor. Lindsay's victory in 1965 on a Republican-Fusion ticket was the final blow to party politics in New York City. Another important development in party politics in New York City was the creation of the American Labor Party (ALP)in 1936 as a political home for anti-Tammany Democrats, liberals, and Communists. The ALP was part of La Guardia's coalition and is significant for giving birth to New York City's Liberal party. The Liberal party has been part of New York City's political scene since 1944,when it was created by anti-Communists in the ALP. It has functioned since then like most third parties by providing or withholding the balance of votes in close elections. In New York City, the Liberal party has either endorsed the Democratic party candidate or run its own candidate as a spoiler. In 1962, the Conservative party was formed as a fourth party in New York state providing the same function for the Republican party as the Liberal party provided for the Democrats. The Republican party has always had minimal influence in New York City politics, and its candidates have only won citywide office as part of a Fusion ticket. Democrats in New York have had a five to one advantage in party registration throughout this century. Some of the confusion about the historical role of parties in New York politics is, in part, the result of a focus on Tammany Hall, the Democratic party's machine in Manhattan. There is little in the way of in-depth analysis of the party organizations in the other four boroughs, but each borough did have its own machine. The extent to which any of these party organizations could deliver votes in elections remains a my~tery.~g Democratic party fragmentation in New York City persists and is

INTEREST GROUPS, THE POllTICAl PARTY

reinforced by the county system and the existence of two minor parties. Parties are considered weak relative to other actors on New York's political stage. As Sayre and Kaufman concluded, "Except for the Election Law, party leaders do not stand out among the multitude of groups taking part in the city's process of public policy formation."50 As a result, mayors in New York cannot rely on the party to assist in the process of governing and have become particularly vulnerable to the demands for spending of organized groups. Party leaders cannot persuade other elected city officials to follow the mayor's lead on budgetary questions, further undermining the mayor's ability to control the fiscal policy process. Haider argued that "New York City's political leaders generally responded with enthusiasm to sharing p0wer.'~5lIwould put it differently: Without a strong, citywide party, mayors in New York have had no choice but to share power. Newspapers still report stories about patronage jobs and corruption in the borough-based party organizations, but such manifestations of machine politics really have an insignificant impact on New York's budget. Parties have completely dissolved as centers of citywide power in New York and have no important role in the fiscal policy process. The dissolution of party influence in New York City occurred concurrently with the expansion of the role of interest groups, especially unionized municipal employees. Interest groups in New York behave as they would in any other political environment. They involve themselves in the governmental process to achieve specific policy objectives. The role of interest groups has changed little since the period that preceded New York's 1930s fiscal crisis. Interest groups have merely increased in number, have become more representative of the variety of constituencies in the city's population, and, in some important policy areas, are better organized. Sayre observed that there are several thousand interest groups in New York, but "durable and effective city-wide coalitions of interest groups are almost nonexistent."52 Consequently, interest groups contribute to the fragmentation of government power and certainly cannot be depended upon by the mayor to sacrifice their particular interests for his conception of the public good, even in times of fiscal crisis. The structure of government in New York City has been particularly accommodating to interest group participation in the budget process. New York's unitary form of government has made it easy for disaffected groups to focus their demands for spending on one individual. As the elected chief executive in a city with legal responsibility

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for virtually every local public service, the mayor is an easy political target to identify. New York is in direct contrast to cities where special districts, authorities, or even the county provide city services which are administered by appointed boards. These boards are insulated from public demands, and their real functions are not usually understood, except by small elite constituencies. Groups were also given an opportunity to present their views at budget hearings before the Board of Estimate and the City Planning Commission. The fragmented government structure allowed knowledgeable interest groups to circumvent the mayor and seek support from members of the Board of Estimate, especially the comptroller and the City Council president. Groups which initiated demands outside the formal process through protest, demonstrations, or strikes found city government to have so many points of access that more often than not even these groups became part of the formal bargaining process. With the 1989 charter revision, the Board of Estimate was eliminated, and it remains to be seen if the City Council will adopt that former body's relationship with interest groups. The oldest organized groups in New York City primarily represent business, corporate, and real estate interests and include the Citizen's Union, the Chamber of Commerce and Industry, the Real Estate Board of New York, and the Citizen's Budget Commission. The rhetoric of these groups has been one of reform and good government, and their influence has tended to be greatest during periods of political corruption or fiscal crisis. They claim to represent a citywide constituency, and thus the city interest. While business interests are not monolithic, their fiscal agenda has generally been to keep down city taxes, and the reforms they have proposed are tied directly to that policy preference.53 These groups have opposed strong political parties, considering them responsible for patronage, corruption, and inefficient government. In light of the findings in this book, these reformers may well have misdirected their energies, for the machine has not been the prime cause of New York's fiscal problems. Organized municipal labor has also been an important voice in New York's fiscal policy process. During the 1930sfiscal crisis municipal employee associations (e.g., the Civil Service Forum) were closely aligned with the party machines. It was not until after World War I1 that New York City workers became part of the nationwide movement to unionize. In 1954 Wagner became the first mayor to officially recognize municipal unions and to certify them as exclusive agents for collective bargaining. Lindsay formalized and "rationalized the city's relationship with its unions by establishing the Office of Collective Bargaining, which ensured that bargaining would involve repre-

INTEREST GROUPS, THE POLITICAL PARTY

sentatives from the city, the unions, and jointly approved impartial negotiators. By the 1975fiscal crisis, unions represented virtually the entire municipal labor force through the American Federation of State, County, and Municipal Employees (AFSCME DC 37); the Patrolmen's Benevolent Association (PEA);the Uniformed Firefighters; Teamsters Local 237; and the Uniformed Sanitationmen's Association. They also had the Municipal Labor Committee (MLC),in place since the 1960s, to coordinate their demands during collective bargaining negotiations and to strengthen their role in the city's fiscal policy process.54 Public employee unions through collective bargaining arrangements developed during the 1970s and civil service laws had effectively reduced the power of the party and the mayor in the fiscal policy process.55 No longer dependent on the party for jobs, the union became the effective broker for the public employees' interests. Since the Wagner years municipal employee unions, by virtue of their numbers and organization, have become more important players in New York electoral politics than parties. Municipal labor leaders control political action committees with sophisticated lobbying, campaign strategies, phone banks, and direct mail operations. Most important, they can deliver votes on election day. In the absence of effective local parties, the unions have become the most reliable part of any New York mayor's electoral coalition. Their influence during elections coupled with the threat of strikes has virtually paralyzed New York's mayors at the bargaining table. Needless to say, there has been a fiscal cost for union support. Just as there was patronage and contracts to trade during the heyday of political machines, unions in New York have demanded reciprocity in the form of higher salaries and pensions, improved fringe benefits, reduced hours of work, and greaterjob security.56 While unions and machines appear to have a similar role in electoral politics, their impact on fiscal policy has been quite different. Where the strong party has provided mayors with an instrument to control demands for spending, the unions are primarily interested in increasing spending. While some have argued that the machine only served the interests of its loyal members, its base of support was necessarily broader than any union's constituency. During the 1975 fiscal crisis, Victor Gotbaum, leader of AFSCME, the city's largest union, was instrumental in saving the city from bankruptcy. Wage increases were deferred, thirty-eight thousand jobs were lost, some work rules were changed, and the unions purchased MAC bonds with funds from their retirement systems. Despite the appearance these actions had of being in the public interest,

CHAPTER SEVEN

the unions have been a strictly partisan voice in the budget process whose goal has been to advance the interests of their membership above competing demands on the city's budget.57 New York mayors have also had difficulty controlling union demands not simply because of the role of unions in electoral politics but because the unions have often circumvented the mayor by taking their case to the state legislature or by bargaining independently with members of the Board of Estimate (see chap. 6). The extent to which salaries and pensions of its municipal employees contributed to New York's fiscal crisis is debatable.58 Indeed, aggregate data presented in chapter 4 indicate that these costs were related to the city's functional performance problem rather than to salary levels. However, since expenditures on municipal employees do constitute almost 50 percent of New York's budget, they necessarily have important fiscal implications. Insofar as the net effect of unionization among municipal workers has been a loss of mayoral control over the fiscal policy process, unionization has negatively affected the city's fiscal condition over the long term.59 The other important groups involved in the formation of the city's fiscal policy have included private sector unions, community groups, and social welfare groups, as well as racial, religious, and ethnic groups. These interest groups have specific service delivery concerns that invariably require increased city expenditures. The groups have been gradually incorporated into the political process and have had the most success with their demands in periods of prosperity. The development of groups independent of the political party can only serve to weaken the influence of the party in governing the city. New York's fiscal problems in 1975 were not simply caused by the absence of a machine that could enable the mayor to centralize control over the budget process. As the analysis of the 1932 fiscal crisis revealed, even at the height of machine politics in American cities, New York's fiscal policy process was essentially decentralized and the mayor was incapable of exercising effective control over interest group demands. Nevertheless, over time, the general impact of interest group politics on New York's fiscal policy process has been to weaken the mayor, make him dependent upon free-floating interest group coalitions for reelection, and make him extremely susceptible to the demands of special interest groups for increased spending. The only time New York mayors have been insulated from interest group demands has been in periods of fiscal crisis or in periods during which the public perceives that a crisis exists.

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Chicago Chicago and New York are at opposite ends of the spectrum when it comes to the role of the party and interest groups in city politics. The image that has dominated all descriptions of Chicago politics is the machine while interest group competition seems virtually absent. Even after Harold Washington won the 1983 mayoral election running as a reformer, Chicago's machine and its demise remained the center of scholarly and journalistic attention. This general characterization of Chicago politics proves to be important for understanding the city's fiscal policy process. The machine has been an important player in Chicago's fiscal policy process and, since the Depression, has contributed to maintaining fiscal stability in the city. Chicago did not develop a strong centralized Democratic party organization until the 1930s. At the turn of the century, political bosses in both the Republican and Democratic parties controlled the city's ethnic neighborhoods through the distribution of patronage jobs and campaign funds.60 During this period there were about a half-dozen party factions whose leaders created temporary coalitions to elect mayors. Because the mayoralty was the center of Chicago's patronage system, unlikely alliances were formed to ensure access to city hall. When it suited their purposes, party bosses would even support reform mayoral candidates, as the Democrats did in the 1923election of William Dever.61 As late as 1931, Chicago had a Republican mayor, Big Bill Thompson. In 1921, reformers supported a redistricting plan that they thought would reduce party influence on city government. The City Council was changed from thirty-five to fifty seats, nonpartisan elections for aldermen were implemented, and a 50 percent share of the vote was required or, alternatively, a runoff election between the top two vote getters. Ironically, increasing representation and nonpartisan aldermanic elections did not prevent the development of one of the strongest and longest lasting urban machines of the twentieth century. Democratic alderman Anton J. Cermak, acting as a reformer, was one of the major architects of Chicago's Fifty-Ward Plan, and it is not surprising that he soon became one of its major beneficiaries. As chapter 3 explained, Cermak's victory in 1931during the Great Depression marked the beginning of the Democratic party's domination of Chicago politics. Republicans have not won a mayoral election in Chicago since 1927. Cermak was responsible for consolidating the power of the fragmented Democratic party under his own leadership and destroying any serious competition from the Republicans. Although Cermak was not an early supporter of Roosevelt, after the

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Democratic convention Cermak quickly joined the Roosevelt enthusiasts and became director of the future president's Illinois campaign. Cermak used the success of Roosevelt's national candidacy to strengthen the position of the Democratic party in city politics, and his own political skill to control the factions in the Democratic party and integrate party politics with city government in Chicago. It was especially significant that Cermak had a thirty-five year history of party activity before becoming mayor, including the presidency of the Cook County Board and the chairmanship of the Cook County Democratic party. His experience in city politics enabled him to garner support from the diverse ethnic groups in the city and to create a strong citywide party organization. Cermak's strategy of retaining the chairmanship of the party while he was mayor was critical in linking the city's politics with its government. Cermak's untimely death at the hands of a would-be presidential assassin did not prevent the leaders of the Democratic party from building on his strengths. Edward Kelly was his worthy successor.As explained in chapter 6, services in Chicago are provided by a complex arrangement among the city, county, and special districts. Control of any one of these separate governments gave party leaders an independent base of support through patronage jobs and contracts. By 1936, under the leadership of Kelly, the Democrats were in complete control of all governments within the city limits.62 The machine became not only the aggregator of political demands but also the mechanism by which the mayor controlled the various governments involved in providing city services. Chicago's machine continued to strengthen its hold on city politics, All those who followed Cermak into the mayoralty also served a significant period of apprenticeship climbing up the ranks of the party organization.63Administrative skill and knowledge of the city's political culture became requisites for the machine's mayoral candidates. The ward-based party organizations responded to ethnic and immigrant interests at the neighborhood level; as a result, the reform groups, which were mobilizing in other cities, had difficulty finding a citywide constituency in Chicago. Most business leaders who might have participated as reform candidates in city politics had moved to the suburbs and found it more profitable to buy political favors from the machine.64 While Kelly consolidated the machine's strength in Chicago after Cermak's death, corruption and political scandal made the party sufficiently vulnerable to reform attacks that after World War I1 Martin Kennelly, a "blue ribbon" candidate, became the machine's standard-bearer for the mayoralty. Kennelly's weak mayoralty was an anathema to the machine, which found itself once again splitting

INTEREST GROUPS, THE P O l l l l U l PARTY

into warring factions. In the primary of 1955 the machine backed Richard J. Daley, the city clerk and committeeman from the Eleventh Ward, against the incumbent mayor. Ward bosses were sufficiently strong that their candidate won and went on to defeat a strong Republican challenger, University of Chicago professor Robert Merriam, in the general election. In fact, the city's three major newspapers endorsed Merriam and Daley won with only 55 percent of the vote.65 Daley, like Cermak, became chairman of the party organization and worked to strengthen the mayor's control over the ward bosses and the special district governments responsible for administering city services. Gosnell, and Meyerson and Banfield best describe how the formal structure of city government in Chicago interacted with the party to create a decision-making process centered around the mayor.66 As chapter 6 explained, Chicago's government is structured in such a way that the mayor has minimal formal authority. Fifty aldermen are elected from fairly homogeneous wards, giving them a localized base of power. The city clerk, treasurer, the county assessor, and state's attorney are all elected and legally have independent authority over their policy areas. The special districts and the county add to the formal decentralization of Chicago's government. Informal control developed over time to centralize authority in the mayor's office, and the party was the instrument of this control. Through party discipline and the ability of the mayor to withhold patronage, the City Council was made impotent and other elected officials remained docile. The mayor also used the party to control the demands of groups at the neighborhood level.67 Rakove explains that the independents (the reformers) failed in Chicago because their programs did not represent the interests of the majority of the city's population: the poor and working class blacks, Hispanics, and ethnic Catholics.68 The party's success in strengthening the machine and retaining control over city politics came from the decision to grant substantive concessions to reformers without changing its ward-based structure. As J. Wilson explains, "The machine would support liberal ends and liberal candidates, but it would not liberalize the party. And there were, of course, limits to the liberal ends it would support."69 The Independent Voters of Illinois (IVI),Chicago's reform organization, remained largely unsuccessful in its attempts to defeat machine candidates. By absorbing much of the reform platform, Daley and the machine were strengthened in their ability to control the demands of dissident groups and contain political conflict. This strategy kept Daley in city hall for five terms, from 1955 until his death in 1976. Chicago's machine had the characteristics of the classic strong-

CHAPTER SEVEN

party organization but with an important twist. In Chicago, the disciplined countywide party organization that could deliver votes was controlled by the mayor and became the only effective channel for participating in politics. The stronger the party became, the weaker interest groups became. The machine used the traditional incentives for support. It is estimated that, as late as the 1970s,the Cook County Democratic party organization controlled between thirty and forty thousand patronage jobs, distributing between five hundred and six hundred jobs in each city ward.70Yet Chicago's machine survived and prospered during a period when the party in other major American cities was declining in importance. Patronage was only part of the explanation for the machine's longevity in Chicago. Daley also expanded the machine's base of support by associating it with the efficient delivery of citywide services and with low property taxes.71 This dual strategy of incentives was a particular impediment to the organization of interest groups. The ability of the machine to satisfy a broad constituency, to control the allegiance of neighborhood leaders through patronage, and to coopt potential competition made interest groups particularly ineffective in the city's political system. Rather than organize around policy concerns, individuals tended to pursue their interests through the party. As a result, while the machine thrived, interest groups rarely developed as potent citywide or even neighborhood-based political forces. The consequence of this type of politics for Chicago's fiscal policy process was to centralize budgetary decisions in the mayor's office. Beginning with Cermak's mayoralty in 1931, Chicago mayors used the machine to consolidate control over the budget process and to control the demands of groups. Daley, who served as both mayor and chairman of the Cook County Democratic party for over twenty years, was especially effective at controlling the budget process. The mayor in Chicago had the power to define the city interest by aggregating demands through the citywide party. Through the sanctions provided by controlling jobs and contracts, the broad-based satisfaction with housekeeping services, the machine's control over the City Council, and the stability of the mayor's electoral coalition, the mayor's authority in fiscal decisions was dominant. This ability of the mayor to say no to interest group demands for increased spending gave Chicago mayors significant flexibility to cut the city's budget in times of economic scarcity, as demonstrated in chapter 4. As a result, the strong citywide party organization was a significant factor in Chicago's ability to retain fiscal stability in the 1970swhen New York City was having its crisis and comparable economically declining cities in the Northeast were also experiencing fiscal problems.

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The importance of the machine in maintaining Chicago's fiscal stability is all the more apparent after its candidate was defeated by Harold Washington in the 1983 mayoral race. The informal power that mayors in Chicago wielded as a result of controlling the party was no longer at Washington's disposal. He ran as a reformer and pledged to implement the Shakman Decree, which made it illegal to use party affiliation as a criterion to hire or fire city or county workers. The Shakman Decree was the outcome of a 1969 lawsuit brought by a disgruntled reformer defeated by a machine candidate in his bid to become a delegate to the Illinois State Constitutional Convention. Michael Shakman contended that the rights of voters and candidates were denied by the patronage system, which forced public employees to work for and contribute funds to machine candidates.72 In 1972, Daley signed a consent judgment (known as Shakman I) that put to an end practices attacked by Shakman; however, Shakman I was never really implemented. Most city jobs remained exempted from civil service and under the mayor's control because they were defined as provisional or administratively necessary.73 The original Shakman ruling was expanded in 1979 to include both patronage hiring and firing (Shakman 11). Byrne, who originally ran as a reformer, also avoided Shakman by establishing a Senior Executive Service and a Departmental Service. All employees hired in these categories were exempt from civil service and could be fired without a hearing. Also, no implementing order came from the courts until 1983. Finally, Washington developed a plan for compliance which went into effect in June 1985 (Shakman 111). It is estimated that there are only about eight hundred Shakman-exempt positions left in Chicago city government.74 Despite some efforts by Washington and Rich Daley to circumvent Shakman, large-scale political firing and hiring are a thing of the past in Chicago.75 Without party loyalty and patronage at his immediate disposal, Washington was forced to spend much of his first term struggling to gain control over city government, especially the City Council. A city council which had previously acted as nothing more than a rubber stamp for the mayor's political agenda became obstructionist. With no experience or facility in developing a real citywide policy agenda of its own, the council simply worked to embarrass the mayor and defeat mayoral policy initiatives at every turn. This conflict had an especially detrimental impact on the city's fiscal policy process and created sufficient distress in the investment community that in March of 1984 the city's bonds were actually downgraded from A to Baal. Washington eventually gained control of the council through the

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1986 court-ordered special aldermanic elections. These elections were the final remedy to a legal dispute involving the 1981remap of council wards, which had actually reduced the number of black aldermen elected to the council. Several white opposition wards were redistricted to create 6 5 and 70 percent black majorities, which gave the edge to Washington-backed candidates. The outcome of these elections resulted in a 25-25 split between Washington supporters and opponents in the City Council. With mayoral authority to cast tiebreaking votes, Washington finally had his majority in the council. With the Council Wars finally over, Washington worked to consolidate his control over city administrative boards and agencies which had remained in the grip of the council opposition block.76 Some especially stubborn machine strongholds had been the Park District, O'Hare Airport, the Chicago Housing Authority, and the Chicago Transit Authority. By the time Washington was ready to run for reelection in 1987,he had reduced the city's work force, eliminated the deficit, and restored the city's bond rating to A. Was he able to achieve fiscal stability without the machine? Some have argued that, at the time of his death in 1987, Washington was well on his way to creating his own machine. Evidence which supports this contention is compelling. Once Washington had gained a majority in the council, he tolerated do-nothing committees and, like his predecessors, used patronage to win the support of aldermen. Although Washington agreed to implement Shakman, some of his critics suggest that he used affirmative action, the Chicago Housing Authority, and the Chicago Transit Authority to give jobs to his supporters (these two authorities were not bound to the Shakman Decree). He also tried to avoid Shakman by reorganizations, layoffs, and reclassifications of personnel. Washington increased the minority contract set-aside program to 25 percent and added a 5 percent set-aside for women, programs which can be viewed as being in the patronage tradition.77 Did all ofthese activities add up to a political machine? The political organization Washington created may not have been a classic machine, but from the perspective of fiscal policy it had the same impact-it gave the mayor the political control he needed to bring fiscal stability back to the city. At the same time, neighborhood groups and municipal employee unions found their voice during Washington's administration, and future mayors will have to deal with them in the absence of a strong party to control their demands for spending. Interestingly, Rich Daley, Chicago's mayor since 1989, cultivated the same reform image as Washington and seems to be using a similar strategy for controlling the fiscal policy process. Daley has worked

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hard to reassure minorities that they will not lose under his administration (he has kept the minority contract set-aside program, for example); he has also brought many of his father's allies back into key decision-making positions in city hall. It has also been suggested that contracting out city services has provided Daley with some patronage lost through the Shakman Decree. While the old machine has not completely disappeared from Chicago politics, its power is fragmented among several politicians. For example, Michael Madigan, speaker of the state assembly, John Stroger, Jr., chair of the City Council Finance Committee and commissioner on the Cook County Board, Wilson Frost, commissioner of the Cook County Board of Tax Appeals and former chair of the City Council Finance Committee, are all considered political brokers because of their control over patronage. However, none of these men controls a citywide organization that can win elections. Daley has not taken any formal position in the Democratic party and has not relied on the party or union leadership for his election victories. Instead, Daley's campaign was run by professional political consultants who mounted a media campaign and a highly organized field operation. Daley has developed his own organization, but his strategy for controlling the fiscal policy process seems to depend primarily on delivering services efficiently to gain support of the people of Chicago, an important lesson that he no doubt learned from his father. The role of interest groups in Chicago's fiscal policy process has also been weakened by the formal fragmentation of city government. The city of Chicago does not have legal responsibility for services like social welfare, transit, and education. All are administered by appointed boards, the county, or the state. In such a system it is difficult for advocacy groups to target the appropriate fiscal decision-makers, especially groups which are not highly organized and have few resources. Interest groups (like business and labor) sophisticated enough to understand the complexities of the process generally realize that they require mayoral support to broker their demands. This type of fiscal policy-making structure discourages the formation of groups and gives the mayor some leverage in controlling the demands of those groups which do form. To say that the machine has dominated Chicago politics for much of the twentieth century is not to say that interest groups never surfaced on the city's political landscape before Washington became mayor. However, concerted interest group involvement in the fiscal policy process had until then been effectively suppressed or coopted by the machine. Municipal employee unions provide an interesting case in point.

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Despite Chicago's reputation as a union town, its municipal employees were among the last to gain collective bargaining agreements. Since the late 1930s Chicago's mayors have worked to accommodate private sector union interests through the Chicago Federation of Labor in order to retain party control over patronage. As part of the long-term informal agreement between labor and the city, skilled craft union members who worked for the city were guaranteed the prevailing wage. The machine did not simply bully organized labor into accepting party control; Chicago's public employees were among the highest paid in the nation even when they did not have contracts. In return for this arrangement, Chicago mayors could count on peace among their labor constituency and on the national unions' expending little effort to organize city white collar employees. The fiscal benefits to the city were substantial. By retaining control over most of the work force through the party and by controlling benefits, work load, and work force size, even of the unionized employees, the city kept down its labor costs.78 The earliest break in this arrangement occurred in 1966 when the Chicago Teachers Union succeeded in achieving a collective bargaining agreement after a threatened strike. Some have argued that Daley risked little by acceding to the teachers' demands for collective bargaining since the teachers were not a part of the machine's patronage system.79 Initially Daley kept an informal role in contract negotiation and lobbied Springfield for the funds to meet teacher wage demands. However, after a teachers' strike in 1969, Daley decided to limit his role in closing the budget gaps that resulted from generous contract settlements. Once collective bargaining rights had been achieved, the school board had little political capacity to deal with a strong union that repeatedly went on strike (1971,1973,and 1975)to increase its members' salaries and benefits. In retrospect, it is not surprising that the school district experienced a fiscal crisis in 1979. Members of the school board did not have the party to control the demands of the unionized teachers, who were protected by collective bargaining agreements and civil service. Moreover, since funding public schooling was a special district responsibility and not a line-item in the city's budget, increasing teachers' salaries did not affect the city's fiscal condition. Without any formal responsibility for school district finances, Chicago mayors had generally supported the teachers' demands for increased spending. The school board fiscal crisis was not resolved until the state created a School Finance Authority with budgetary veto power. Mayor Byrne was directly involved in the final settlement but wisely refused to take on long-term city responsibility for school finances.

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Jane Byrne was Chicago's first mayor to be seriously threatened by labor unrest. Her administration was once characterized as being on "a strike-a-month schedule."80 The transit union went on strike in December 1979,followed by the teachers in January 1980 and the firefighters in February. Ironically, her predicament was in part the result of her own convincing rhetoric. She had won the 1979 Democratic primary as a long-shot reform candidate and had pledged to support collective bargaining rights for all municipal employees. Once in office, Byrne was expected to deliver on her promise, and when she changed her mind, the unions, especially the firefighters, balked. The striking unions thought that Byrne would be an easy target, a weak mayor who had not yet consolidated control over the party or the council. They were wrong. Byrne's mercurial personality is said to have clouded her political judgment, but she understood the fiscal impact of acceding to union wage and benefit demands. Byrne eventually gave the firefighters a contract, but even her critics rated her highly for resisting the unions' challenge. Harold Washington also ran on a platform that supported collective bargaining rights for all public employees. Unlike his predecessor, Washington kept his word and supported state legislation which extended collective bargaining rights to twenty thousand previously uncovered workers. The law went into effect in July of 1984. Its major beneficiaries were white collar city workers, who for the first time were represented in labor negotiations by AFSCME. It is estimated that 90 percent of the city's jobs are now covered by contracts. Washington was a tough bargainer with organized labor, and despite two teacher strikes he was able to negotiate fiscally responsible contracts.81 Rich Daley has followed Washington's lead, but his control over fiscal policy has been limited; collective bargaining and the Shakman Decree have transformed public employee unions into a formidable interest group in Chicago's fiscal policy process. Neighborhood groups have also been part of Chicago's political life. However, they have provided less of a challenge to the city's centralized fiscal policy process than the municipal unions. During the period of machine dominance, the mayor's strategy was to capture existing neighborhood organizations or to simply absorb potential opposition.82 Even Saul Alinsky's legendary Back of the Yards Council, organized during the 1940s to advocate for a poor immigrant South Side neighborhood, was eventually brought under machine control. Several important cases of organized neighborhood opposition to city development plans during the Richard J. Daley years have been chronicled. Meyerson and Banfield studied the role of such interest groups in formulating the city's public housing policy while Banfield

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examined their role in political decisions ranging from the expansion of a county hospital to the building of an exhibition hall in the late 1950s. Especially interesting was Rosen's analysis of the HarrisonHalsted Community Group opposition to the construction of the University of Illinois-Chicago campus in its West Side neighborhood in 1960. Italians, Greeks, blacks and Hispanics joined together in an unusual coalition to save their homes from this preordained project.83 In general, these community organizations failed in their efforts to stop the city's planned development agenda. While all of these studies address themselves to broad questions of development policy, they also provide insight into the role of interest groups in the city's fiscal policy process. During this period of machine dominance, interest group politics was characterized by "turf protection."84All of these neighborhood organizations had one goal in common: to block development in their communities. Interest group conflict was not over spending, for the decision to spend on these projects had already been made without consulting the neighborhood organizations. Controversy was often tolerated and public debate sometimes encouraged, but only after the fiscal issues had already been resolved by the mayor. Profess argues that community conflict was generally uncharacteristic of Chicago's politics and that it would be a mistake to generalize about development policy-making from these cases, which received a lot of media attention.85 Even if it is assumed that neighborhood conflict was prevalent, it occurred at a level which did not threaten the mayor's control of fiscal policy in the arena of development. Ironically, the neighborhood orientation of most of Chicago's interest groups weakened their effectiveness in the fiscal policy arena. Decisions to spend, tax, or borrow require a citywide focus and a citywide base for effective advocacy. These groups were simply too narrow and could not develop the organizational capacity to compete with the party for a citywide constituency.86 Had neighborhood groups succeeded in stopping development, the city's fiscal policy process would have been importantly affected. Development projects greased the machine by providing patronage opportunities and were generally carried out with the approval of organized labor and downtown business interests. In contrast to the role of neighborhood groups in formulating development policy, the business community and civic organizations were brought in at the early stages of decision making.87 In the pre-1975 period, development policy actually reinforced the mayor's control over the city's fiscal policy process. Obviously, the demands for change during Richard J. Daley's may-

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oralty went beyond issues of spending. To argue that Daley controlled interest group demands for spending does not imply that he effectively managed black protests, especially their demands for integrated housing and schools. Ironically, the same instrument that gave the mayor control over the budget process also gave him the capacity to suppress political dissent, especially in the black community. It was not until Washington's administration that the door was partially opened to community involvement in fiscal decisions that could affect neighborhood development policy. Washington had won the mayoralty with the support of a grass roots organization and without the party machine. From a political perspective it made sense to bring these groups more directly into his governing coalition. However, by the time Washington had completed his first term, he too had settled his differences with the business community and supported projects like the new baseball stadium, which had strong neighborhood opposition. Washington did not decentralize the fiscal policy process in Chicago. He understood that it was the mayor's responsibility to determine fiscal priorities and that not every neighborhood group would be satisfied with the outcome. Rich Daley has tried to demonstrate sensitivity to community interests, in a way that his father never did or never had to. However, he has also gone the extra mile to reassure his business constituency that he controls final fiscal policy choices, especially in the arena of economic development.

Fiscal Policy and Poor People's Demands: The Community Action Program The federal antipoverty programs of the 1960s, especially the Community Action Program (CAP), bring to mind questions of economic redistribution, local democracy, and black political power. These programs also had a fiscal policy dimension which has really never been analyzed. This section examines how neighborhood, and especially poor people's, groups participating in the 1960s federal antipoverty programs affected the fiscal policy process in New York and Chicago.88 These programs demonstrate how the local political dynamic differentially affects the fiscal condition of American cities. CAP provides insight into the relationship between interest groups, the political party, and mayoral control of the fiscal policy process.89 In general, mayors must control the fiscal policy process if their city is to remain fiscally stable. How effective were mayors in controlling the federal funds for CAP and the demands of groups which would benefit from these programs?

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In Chicago, Mayor Daley controlled these federal antipoverty programs and used the Democratic machine to ensure that the policy decisions and resource distribution remained in city hall, despite what organized members of the city's black community advocated. By controlling the resources, the mayor of Chicago ultimately could control the demands of these groups. In New York, Mayor Lindsay took the federal government's "maximum feasible participation" guidelines seriously and encouraged citizen involvement in the antipoverty programs. At the same time, the mayor was incapable of coordinating the city's programs, and resources were dispersed among a variety of neighborhood groups with little accountability to city hall. Being incapable of controlling antipoverty funds, the mayor of New York was ultimately incapable of controlling the demands of these groups. The 1960s was the decade of experiments in community control. The federal government's intervention in city politics through the Community Action and Model Cities programs was designed to strengthen city government's ability to deal with the problems of poverty and to encourage citizens to participate in the decision process. Community involvement was fostered through the creation of citizen advisory boards, government contracts with neighborhood groups, the employment of minority residents, little city halls, and neighborhood multiservice centers. Examining these programs leads to two questions about fiscal policy: How much decision-making authority devolved from city hall to neighborhood groups or institutions? And who controlled the distribution of funds to these groups? These questions can be answered by considering whether permanent participatory structures were created at the neighborhood level, who determined the leadership of these institutions, and whether the local leadership controlled the program's budget. The types of programs and services provided in these neighborhood centers and who was involved in programming decisions are also considered. From a fiscal policy perspective, the most important issue is control over the distribution of resources, but type of programming and the extent to which authority was actually decentralized are also significant factors affecting the city's fiscal policy process. As groups gain independence from the mayor, the mayor's ability to control their demands for spending decreases. Decentralization of authority or sharing power with neighborhood groups makes it difficult for the mayor to cut spending when resources decline. Decentralized programs generally require an increase in expenditures.90 As was explained in chapter 6, the federal and state governments rarely pick up the entire cost of mandated programs and, as a result, the fiscal burden on the

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city is increased. The greater the number of decentralized programs, the less control the mayor can exert over the fiscal policy process. Without mayoral control, expenditures are likely to increase even when revenue is decreasing, a state of affairs that will eventually create fiscal problems. An interesting sidelight to the community control debate is the role of city government in central planning. There are bound to be conflicts between special interests or neighborhood interests and what is construed as a citywide interest. Thus, the need for a reconciliation process. In the face of multiple pressures from sectoral interests, the cities seem to have abdicated their responsibility for central planning. The process of reconciliation in Chicago occurred in the mayor's office, while in New York there was virtually no procedure for facilitating reconciliation and no rules for participants in the political game. The Chicago model proved to be better at ensuring fiscal stability, but neither system really provided an effective mechanism for political bargaining and long-term policy-making. Chicago's centralized decision making, with the mayor in control at the top, was too exclusive while New York's completely decentralized system left no one with sufficient power to impose a solution on the conflicting demands of community members.

CAP and Fiscal Policy i n Chicago The mayor's capacity to retain control of federal funds and to control the demands of interest groups is clearly demonstrated by Chicago's CAP and other antipoverty programs of the Great Society. It was not a simple achievement for mayors to retain control of federal antipoverty funds. The community participation guidelines were expected to lead to greater decentralization of policy-making, with neighborhood involvement in decisions over how money would be spent on programs in their communities. What happened to CAP and other antipoverty programs in Chicago? The centralization that characterized Chicago's policy process since the Depression was simply adapted to administering these new programs. Royko provides a clear description of Daley's strategy.91 Contrary to the spirit of the antipoverty legislation, Chicago's program was dominated by city hall. Not a penny of federal money came into Chicago during this period that was not cleared by Mayor Daley. Independent agencies that wanted to share in the federal government's largess had to submit to city hall's rule. The slightest hint of militancy was enough to bar a group from being funded. Daley retained control over the federal funds by simply ignoring CAP'S community participation guidelines and controlling neighbor-

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hood organizations through the party. Eighty percent of the members of the neighborhood boards were appointed by Daley7sneighborhood staff, and the other 20 percent were elected by the 80 percent.92 Greenstone and Peterson describe Chicago's CAP program as the "least participatory" and explain that the mayor originally appointed public officials to the Poverty Council who were almost uniformly dependent upon the Democratic party organization.^ Staff selection was also centrally controlled by city hall or the City Council member whose district was being serviced. The outcome was that party loyalists controlled policy implementation at the neighborhood centers while the local residents employed in the program were involved in very little decision making.94 In Washnis's description of neighborhood programs in Chicago, he makes two important points. First, control over multiservice centers emanated from city hall. The programs7emphasis was on human resources: family counseling, food programs, employment assistance, and complaint referrals. Second, these programs fit neatly into the machine's ward-based framework of particularistic service delivery. Ultimately, city hall could always veto programs or cut off funds and had little interest in encouraging community participation in policymaking.95 Chicago's multiservice centers were started with federal funds from the Office of Economic Opportunity and were designed specifically to serve the city's black and low-income communities. In 1965, Chicago was one of the first cities to use federal funds to develop neighborhood programs. Urban Progress Centers (UPCs) were operated in poor areas by the city's community action agency, the Chicago Commission on Urban Opportunity (CCUO).Chicago was extremely effective at tapping any available federal antipoverty funds and coordinating budgets from the different federal agencies to create integrated local antipoverty programs. Through the creative use of federal funds, the city contributed minimally from their own local resources. The staff and operating budgets for Chicago's multiservice centers came entirely from federal funds.96 By controlling the resources, policy choices, and personnel of the antipoverty programs, Daley initially managed to control the demands of the city's blacks and poor people. Chicago's ghetto riots finally forced Daley to recognize that a serious problem existed in his city. Once he acknowledged the problem, he methodically met with groups to calm the situation, appointed commissions to find solutions, and essentially deflated the urgency of the issue until the opposition could be absorbed. Even with all this activity, the real control over these neighborhood programs came from control over the anti-

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poverty resources. Daley summarized his own role as follows: "It is a mistake for mayors to let go of control of their programs to private groups and individuals. Local government has responsibilities it should not give up."97 How did Daley retain control over the poverty programs, and how could he ignore federal guidelines for implementation? The party organization was critical in providing the mayor with leverage in Washington and control at the neighborhood level. Daley established influence in Washington through his legendary capacity to deliver the Cook County vote in presidential elections and his control over the Chicago congressional delegation.98 Delivering the vote is the prime function of a party organization, and as chairman of the Cook County Democratic Committee, Daley controlled party politics. In the 1960 presidential election his local power was acknowledged nationally when he brought in the state of Illinois for Kennedy by ten thousand votes. Kennedy said that Daley won the election for him." Daley established similar connections with the Johnson White House. In 1966,when an OEO team was sent to review Chicago's antipoverty program, Daley personally greeted its members and said that he expected they would not deal with "irresponsible charges about politics, resident participation, and segregation in schools." The charges were discretely dropped, and a new director of OEO for the Midwest was appointed.100 In 1967, the Office of Education withheld funds because of the city's failure to comply with desegregation rulings. The White House overruled this decision, and Chicago received its funds. Daley's influence extended to the Nixon Republican administration. In exchange for delivering the majority of Illinois's congressional delegation in support of the surtax extension, Daley was assured that citizen participation guidelines would not be enforced in Chicago's Model Cities Program.lO1 As long as Daley could keep Washington out of his city, his control over the party and federal funds would enable him to control the demands of blacks. It is equally significant that the neighborhood poverty programs were administered to complement the services provided by the ward organizations and that the individuals who ran the programs were party loyalists. By retaining control over the poverty funds, all local participation remained channeled through the machine, administering to individual rather than group interests and reinforcing the existing structure of participation and control. Chicago aggressively sought federal aid in the 1960s, as chapter 5 demonstrated, but avoided the fiscal problems associated with dependency on noncity revenue. The explanation for Chicago's success can

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be found in the important connection between fiscal stability and mayoral control of the federal antipoverty programs. Since control of these neighborhood programs remained in the mayor's office, cuts could always be made when funds diminished and fiscal stability could be maintained. Of course, centralizing control also permitted the mayor to choose which programs would be cut.

CAP and Fiscal Policy in New York City New York's CAP closely followed the community participation guidelines of the federal antipoverty legislation. Mayor Lindsay did not control the distribution of federal funds, nor did he control group involvement in these programs. The decentralization that characterized New York City government since the Depression became an integral component of CAP as well as the city's other antipoverty programs of the 1960s. The mayor's vulnerability to interest group demands created a political environment within which control over city spending priorities went to the best organized groups. Several important studies illustrate how this process worked for school politics, housing, and police policy.102 Decentralization and neighborhood involvement in setting citywide political priorities have actually been formal parts of the city's agenda since 1947, when the Citizens' Union, a good-government group, proposed dividing New York into districts. In 1950 the City Planning Commission proposed the creation of sixty-six local planning districts. Local planning boards were established in Manhattan, and districts were developed in the other boroughs. In 1961the City Charter authorized the creation of planning districts and boards, and in 1968 sixty-two districts were created by the City Planning Commission. In some sense, New York politics was tailor-made for the programs proposed by the Great Society. Bell and Held argue that the community revolution was so extensive and explosive in New York because of an already existing receptivity to the idea of decentralization.103 There was also strong ideological support from reformers and the liberal establishment. Foundations like Ford, Taconic, and New World were particularly important because they provided funds directly to neighborhood institutions to implement demonstration projects. The local school boards in Harlem and Ocean HillBrownsville are the most notorious of these foundation-funded experiments in neighborhood control. Finally, Mayor Lindsay at the city level and President Kennedy at the national level were working to solidify a new political base of blacks and the poor. The poverty programs offered an opportunity to put people on the payroll and create a new type of urban machine. Lindsay's commitment to decentralization began in his campaign

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for mayor when he attacked the Wagner administration for its failure to involve the poor in the newly developed, federally sponsored Community Action Programs. Lindsay's public statement provided sufficient pressure on the Wagner administration to formulate a policy that would include community representation in the city's antipoverty programs. When Wagner testified before the House committee considering the Economic Opportunity Act, he favored giving city hall the final say over the allocation of antipoverty funds, hoping to minimize community involvement. Not surprisingly, Daley testified in support of Wagner's position and proceeded to organize large-city mayors in support of minimizing community involvement in the implementation of the federal program.104 Lindsay clearly appealed to a different electoral constituency than Wagner, but Lindsay was no different from the mayors preceding him in that he had to maintain the transient coalition that elected him in order to govern effectively. If the design of New York's CAP developed from political expediency,105 the outcome served to weaken mayoral control over the antipoverty programs. Greenstone and Peterson describe New York's CAP program as providing the broadest participation for the poor.1°Through CAP, a variety of community organizations in neighborhoods throughout the city were funded. The Neighborhood City Halls (NCH),Lindsay's first creation under CAP, existed in five neighborhoods by 1967. The purpose of this program was primarily to handle citizen complaints and improve communication between citizens and city hall. These organizations originally had small operating budgets and were funded by private contributions. The City Council and the Board of Estimate viewed these programs as a front for Lindsay's political ambitions and refused to fund them. By 1970 forty-five Urban Action Task Force (UATF)units had been created, expanding the NCH concept throughout the city.107 Lindsay could not simply implement his neighborhood plan. In order to acquire the necessary funding, he had to create a workable coalition with institutional antagonists and powerful interest groups. The mayor was forced to bargain initially with comptroller Beame, City Council president Sanford Garelik, Albert Shanker and the United Federation of Teachers (UFT), Alex Rose and the Liberal party, David Rockefeller and the banking interests, the uniformed service unions, and the City Council, not to mention the three thousand community groups for which two hundred meetings were held.108 Lindsay did not control the distribution of resources in his own program. In 1970 this program received $5 million, of which $1million came from the city's general funds, $1 million from the Urban Coalition (private sector), and $3 million from the city capital

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budget. The city provided most of the resources for this program from its own budget, and the private sources of funding were not directly controlled by the mayor. Also, UATF remained largely a complaint center, providing fewin-house services. Only six of the UATFs were fully staffed and had formal neighborhood councils with substantive authority, but Lindsay believed that decentralized neighborhood government should be citywide and not merely concentrated in lowincome areas. Bell and Held provide the most striking observation about the citywide community organizations and programs and their relationship to city hall during the Lindsay years. "No where in the city administration is there a single office which keeps track of all the community and neighborhood programs, coordinating information about these programs."109 Not only was Lindsay incapable of controlling the demands of groups; he barely knew what resources were being expended on which poverty programs. The fragmentation in the city's government structure only served to increase the power of organized groups. Bell and Held identified nine community systems operating in the city during the Lindsay years, plus other services with local offices. These included sixty-two Planning Districts, twenty-five Community Corporations,llO thirty-five Urban Renewal Areas, three Model Cities Projects, thirty Health Districts, seventysix Police Precincts, thirty School Districts, 22 UATF groups, five Neighborhood City Halls, fifty-eight Sanitation Districts, fifteen Fire Divisions, forty-two Welfare Centers, and fourteen Offices of the Bureau of Emergency Repairs. These neighborhood agencies were not all involved in antipoverty programs, but the total lack of coordination in neighborhood service delivery contributed to the mayor's inability to control the demands of the neighborhood groups competing for city funding. The UATFs were initially designed to coordinate service delivery at the neighborhood level, but this goal was never achieved. Lindsay also became particularly vulnerable in this period because, through his own support of the participation mandate in federal antipoverty programs, the number of claimants of city resources increased, widening the arena of political competition to include many groups that had previously been excluded. One thousand two hundred welfare organizations were listed in the Directory of Social and Health Agencies for New York City in 1969. Lindsay was extremely successful in getting federal funds for New York, as chapter 5 indicated. However, the expanded interest group arena that developed during his administration increased New York's dependency on this external source of revenue. Lindsay, like the New York mayors who preceded and followed him, found it difficult to cut

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spending when revenues declined, increasing the city's vulnerability to fiscal problems.

Comparing CAP in New York and Chicago Three important issues involved in the antipoverty programs of the 1960s relate to the city's fiscal policy process: first, the issue of how much participation was given to the local community for actual policy planning; second, the issue of what governmental jurisdiction provided funding for the programs; and third, the issue of which public officials or private groups controlled the budgets. These issues may not necessarily relate to the success or failure of these programs in improving services to low-income communities, but they had important consequences for the city's fiscal condition. The differences between New York's and Chicago's neighborhood antipoverty programs are striking. In Chicago, participation by the community was kept to a minimum, while in New York, it was encouraged. In 1969,80 percent of New York's local initiative programs were run by grassroots, nontraditional social service agencies, while in Chicago, it was only 10 percent.ll1 Chicago's city hall had direct control over the budgets and staff appointments of neighborhood programs, while in New York this authority was shared by neighborhood groups, foundations, and the mayor. In Chicago, multiservice centers focused primarily on providing a variety of social welfare services to complement those provided by the local party clubs. In New York, the neighborhood city halls and later the UATF centers were located throughout the city with no ties to the Democratic party. Although their initial purpose was to coordinate neighborhood service delivery, particularly when it came to the extensive network of city antipoverty programs, UATF and NCH never really functioned as more than complaint-referral centers. In Chicago, the city contributed minimally from its own local revenue sources to its antipoverty programs. While New York was very successful in getting federal and private sector assistance for its antipoverty programs, it also contributed substantially from its own budget. For example, in 1970 New York contributed 27 percent to all programs under its Human Resources Administration (HRA)and 53 percent to the Council against Poverty. Chicago's contribution to similar programs was 20 percent, but more important, New York made its contribution in cash while Chicago's contribution was by in-kind services.112 It is not surprising that Lindsay's neighborhood programs attempted to provide a citywide network for citizen involvement in politics. The political party in New York had ceased functioning as a liaison between the individual and city government. Lindsay's NCHs

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were viewed as a replacement for the precinct organization that the machine had formerly provided. The residual benefit of this form of decentralization did not go unnoticed by Lindsay's political opponents. A citywide neighborhood-based organization was seen as a useful way to build a stable coalition for future elections. The need to make New York more "governable" was also an important objective of antipoverty programs. Ironically, Lindsay's strategy served to increase political fragmentation-form prevailed over substance. With all the structural changes created by decentralization,the city could do little more than answer people's telephone calls about service delivery problems while services continued to deteriorate. Daley's neighborhood programs did not require the citywide strategy that Lindsay proposed. Chicago, after all, still maintained a strong neighborhood-based Democratic party. The machine's support in ethnic neighborhoods was at the time unshakable, so the mayor concentrated energy and resources in the areas of the city that were the weakest links in the party organization: black and transitional neighborhoods. Not coincidentally, the black community had the greatest need for the services provided by the UPCs, making these neighborhoods less vulnerable to the grassroots antimachine organizing efforts that were forming there. The impact of the 1960s poverty programs on the fiscal stability of both cities is consistent with the general pattern they had established. In New York, the mayor could not control the fiscal policy process and remained vulnerable to the demands of neighborhood groups even after resources were no longer available to fund the programs. This eventually contributed to the development of New York City's fiscal crisis in 1975. In Chicago, the Democratic machine assisted the mayor in centralizing the fiscal policy process, enabling him to control the demands of neighborhood groups and to cut spending when revenue declined. This ultimately contributed to Chicago's ability to retain fiscal stability when other cities were experiencing problems.

Fiscal Policy, Interest Groups, and the Local Party How does the complex relationship between parties and interest groups in large American cities affect the fiscal policy process and a city's ability to maintain fiscal stability? In strong-party cities, where conflict is controlled through the political party, a stable political environment is likely to develop. In weak party cities, where interest groups proliferate, a substitute for the party must be found to resolve conflict. Mayors in these cities have generally chosen, or are compelled by circumstances, to minimize conflict through spending. Mayors in

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strong-party cities can avoid the wasting of resources that is endemic to the decentralization that develops when interest group demands must be coordinated through local government. Without the instrument of a strong party at their disposal, mayors find it difficult to centralize the fiscal decision-making process and cannot control the demands of interest groups. As a result, cities with strong parties are likely to be more fiscally stable than those with strong interest groups. This examination of interest groups and the party has been concerned with their interaction in the fiscal policy process and ultimately with their impact on a city's ability to retain fiscal stability. Yet it bears directly on the broader question concerning the value of political participation. The debate concerning centralization of decision making is steeped in ideological rhetoric that became particularly vociferous during the community control movement of the 1960s. In order to gain some perspective on the value of political participation, it must be understood first that centralization is not the antithesis of participation and second that the appropriate mix of centralization and participation should be determined by the policy objective. This book argues that cities dominated by interest group politics are likely to develop conditions which contribute to fiscal instability while those with strong party organizations and a minimum of interest group activity are likely to retain fiscal stability. Only the issue of fiscal stability is addressed in this discussion, and the discussion does not suggest that, because it promotes fiscal instability, political participation should be discouraged. Yet this observation reveals one of the more frustrating contradictions in urban politics and policymaking. Encouraging citizens to exercise the political prerogatives of a democratic system in times of scarcity is likely to come into conflict with the fiscal demands of good government. Cities are particularly plagued by this paradox, and the cases of Chicago and New York reveal the costs and benefits of strong-party systems, which control the demands of interest groups, as compared to strong-interest-group systems without a political party capable of coordinating demands. Ironically, machine government in Chicago,even with its patronage commitment, was less costly and in many ways more efficient than interest group government in New York. While the mayor in Chicago was obliged to maintain a patronage work force, his appointments in this arena came directly from one source, the political party, but toplevel appointments tended to include professional administrators drawn from all sectors of the city. Patronage workers served as the mayor's loyal minions during elections while the professional administrators enabled the mayor to avoid the criticisms of reformers. The mayor ofNew York has not had to appoint party loyalists to pat-

CHAPTER SNEN

ronage positions but has been beholden to the groups forming his electoral coalition. The cost of placating these numerous groups have been great. In noncrisis periods New York's extensive civil service and unionized municipal labor force are virtually immune to cutbacks, regardless of performance or budget issues. As we have seen, an inefficient bureaucracy with much duplication of functions is more likely to develop in an interest group as opposed to a party dominated city. Inefficiency became a political imperative in New York and was tolerated by the financial and banking community during prosperity, but during times of economic scarcity it contributed to the overall fiscal problems of the city. The ultimate irony of reform in New York is that it destroyed the machine without creating good government.113 Not only has reform government been unable to make New York more "governable," that is, to improve its service delivery, but also it has been subject to the very abuses associated with political machines. Weak borough-based party organizations have remained in New York, and their leaders have used the party essentially to promote their own special interests. The corruption scandals that plagued Koch's final term involved illegal payoffs to party leaders in the Bronx and Queens, without any benefit to party loyalists in their boroughs. The continual search for coalition partners made even reform mayors like Ed Koch susceptible to manipulation by these party elites. In the final analysis, destroying the grassroots citywide party organization has not cured city governments of patronage abuses or favoritism in contracts. Since 1975, Chicago's machine has succumbed to the Shakman Decree and to collective bargaining agreements with unionized city workers. Machine politics has generally become a subject for urban historians. Yet, is there anything to be gleaned from this analysis of parties and interest groups that is relevant to the current fiscal problems in America's cities? Yes. There are several important lessons. First, mayors need an institutional mechanism to help them centralize control over the fiscal policy process. This in no way suggests that a return to old-style machine politics would cure urban fiscal problems. However, if the party can no longer perform this centralization function, then something must replace it. Second, the mayor can control interest group demands for spending only when he has a clear public mandate to articulate the city's policy priorities. Competitive and responsible parties can help the mayor govern without being captive of the strongest interest groups. This is not to suggest that urban fiscal problems will disappear if mayors are simply given greater authority over the budget process. Certainly without sufficient revenue to address urban service delivery needs, mayors will not be able to make fiscally responsible policy.

CONCLUSION

The politics of large cities in the United States is most often explained in terms of powerful individual personalities. The mythology of New York City politics thrives on the lives of great men like Democratic party boss William Marcy Tweed, reformer Robert Moses, and Mayor Fiorello La Guardia. Chicago too had its share of political heroes, like Democratic party boss Jake Arvey, reformer Robert Merriam, and Mayor Big Bill Thompson. Until his death in 1975, politics in the city of Chicago and in Cook County was generally understood as the bastion of Mayor Richard J. Daley, boss of the last great urban machine. Vilified in the 1960s for his callous approach to Chicago's ghetto violence, Daley became a hero in the 1970s for shrewdly managing the city's finances. In New York, John Lindsay was synonymous with 1960s politics, and his legacy has been the antithesis of Richard Daley's. Lindsay was both the white knight who saved New York's ghettos from burning and the profligate mayor whose spending policies gave rise to New York City's 1975 fiscal crisis. While Daley's reputation over time has risen, Lindsay's has declined: fiscal prudence is now more valued than racial harmony. But in truth, neither mayor is responsible for all that is good or bad in his city. While Daley must be given some credit for maintaining fiscal stability in Chicago and Lindsay must share responsibility for New York's fiscal problems, both men governed in systems constrained by fiscal policy-making structures that had developed decades before they took office. The historical perspective presented in this book avoids the intellectual myopia and incomplete analysis of others about the Daley and Lindsay mayoral administrations, and offers a theoretical framework that can contribute to a deeper understanding of the fiscal conditions of major American cities besides Chicago and New York. New York and Chicago are but two of a larger group of cities whose primary political relationships developed during the Depression and were reinforced during subsequent years. Like an extraordinary

CHAFTER EIGHT

number of America's major cities, New York and Chicago experienced fiscal crises in the 1930s. After the short-term causes of their crises were resolved, however, the fiscal policy-making structures that emerged in the two cities differed substantially. These, in fact, are the differences that make New York and Chicago theoretically interesting cases: They offer a means for identifying the political interactions that are crucial for understanding why some cities experienced fiscal problems during the 1970s while others remained fiscally stable. Moreover, these same political interactions have continued to affect the fiscal conditions of American cities through the 1990s.

Alternative Models of Fiscal Policy-making How did the fiscal policy-making structures in New York and Chicago differ in their development? In the 1930s, policy-making in Chicago began to develop into a cost-conscious,fiscally responsible process in which mayors controlled the budget and promoted a "city interest" by emphasizing the efficient delivery of basic services (police,fire, sanitation) and limited the city's contribution to deficit-producing redistributive services. Cermak ran as a reform mayor in order to gain business support during the city's fiscal crisis. After he was elected, he cut spending, reorganized city government, and began to restore the city's fiscal health; but he was also intent on strengthening and controlling the countywide Democratic party organization. After Cermak's death Kelly continued this strategy, and, using the machine's vote-getting ability beyond city and county elections, Kelly was able to develop important ties to the federal government and a majority coalition in the state legislature. During the Depression, Chicago did not begin spending on welfare relief until federal aid was made available. Kelly's machine was extremely effective in getting WPA assistance for Chicago, and this kind of cooperative relationship with the federal government remained until the Reagan presidency. Moreover, the machine's clout in the state legislature enabled Chicago to institutionalize and expand a system of special districts and county government which spread the fiscal burden of service delivery outside the city. As a result of these structural arrangements, the city avoided any budgetary responsibility for costly services like education, public welfare, hospitals, and transportation. The Public Building Commission, which was created in 1955, also absorbed much of the city's capital costs. Thus, Chicago's mayors were left with the formal responsibility for balancing a city budget comprising a relatively small number of redistributive services and reduced capital expenditures. The mayor used these formal-legal arrangements and the party or-

ganization to consolidate control over the fiscal policy process and to control the demands of potentially competing interest groups. Through its ward-based organization, the machine either suppressed or absorbed most interest group activity in the city. Control of the party also gave mayors a sufficient base of support, especially during elections, so that they could cut spending when economic conditions warranted cutbacks, without committing political suicide. These structural relations in the fiscal policy process remained in place through 1980 and were instrumental in allowing Chicago to avoid the fiscal problems that plagued New York in 1975. In New York during the 1930s, a fiscal policy-making process emerged completely different from Chicago's: the mayor's formal authority over the budget was weakened, the city's service delivery responsibilities were expanded, and political conflicts were resolved through spending. New York did not wait for federal or state programs to assist their Depression-ravaged population. The city began expanding its functional responsibilities and increasing general programmatic spending despite revenue shortages, a spiraling debt, and imminent fiscal crisis. Subways, health care, and public welfare were relatively new items in the city budget, items that would absorb an increasing share of revenues. La Guardia won as a reform mayor on a Fusion ticket, and he cut spending to resolve the city's fiscal crisis. But after the immediate fallout from the fiscal crisis ended, New York City's spending increased across all functional areas. The austerity measures and debt restructuring that relieved the city's fiscal crisis were of short-term value; neither the state nor special districts assumed the cost of the city's expensive, deficit-producing services like education, welfare, hospitals, or the subways, and regional authorities were responsible only for highways and bridges. Most capital projects, even those administered by the public benefit corporations that serviced the city, were funded through city-supported bond issues. La Guardia was genuinely interested in improving the quality of life in New York for all and was especially concerned with providing programs that would assist the city's poor. Between 1933and 1937,La Guardia increased constant dollar spending on public welfare by 73 percent and on capital projects by 40 percent, but he was assisted in his efforts by a dramatic infusion of federal funds. The city, however, continued to bear the burden of raising revenues from its own budget for expensive redistributive services and capital projects even after federal funds started to peter out and the availability of local revenues decreased. Because he had built his own political organization, La Guardia

CHAFTER EIGHT

also crushed, without political cost, the vestiges of the already fragmented Democratic party machine. La Guardia's personal popularity and control over federal aid greased his "machine" and ensured his reelection. New York's Democratic machine never fully recovered from La Guardia's three-term mayoralty, and this had important consequences for fiscal policy-making in the city which remain today. While Tammany Hall may have been inefficient and corrupt, its power was derived from harnessing interest groups-especially municipal employees, the poor, and ethnic minorities. In the 1920s and 1930s the reciprocal relationship between the machine and its constituents led to overspending, but it also gave the mayor informal control over the budget. Thus, when the reform coalition crippled the machine in New York City, it left a political vacuum. Party discipline was gone, which forced New York's mayors to form free-floating coalitions to win elections. The mayors also had little formal authority to control the demands of the large number of competing groups that have always been active in city politics. Consequently, the mayor's control of New York's fiscal policy was weakened, becoming less institutionalized and more dependent upon the mayor's personal resources and leadership qualities. This kind of politics can be tolerated when there is prosperity, but when a recession develops, serious fiscal problems will follow. Reformers in New York City did not, as they promised, create a more efficient, well-managed city government. They too were subject to the demands of political interests, but without the control that the machine was able to provide. If fiscal stability is the desired policy objective, then "bad" machine government appears preferable to "bad" reform government. The disparate policy-making structures that developed in New York City and Chicago during the 1930s provide the basis for understanding the pattern of future policy choices in the two cities. The 1975 fiscal crisis occurred in New York City primarily because the mayor was locked into a structure of political relationships that gave the city legal responsibility for costly redistributive services and capital projects, and that encouraged mayors interested in political survival to resolve political conflicts through more and more spending. Moreover, there was never any effort to cut spending in one functional area to compensate for growth in another, because as spending increased across all functional areas it became increasingly difficult for each subsequent mayor to cut the budget. During periods of scarcity, this kind of fiscal policy-making structure is destined to produce disaster. It is not surprising that an extralegal creation, like the Emergency Financial Control Board in 1975, was necessary to bring about changes the mayor was incapable of implementing.

CONCLUSION

In contrast, Chicago managed to retain fiscal stability because the structure of political relationships that had developed since the 1930s provided the mayor with sufficient flexibility to respond to conditions of economic scarcity and a shrinking local resource base. Since its 1930sfiscal crisis, some Chicago mayors actually cut total spendingor offset increases in one functional area with cuts in another. The machine was used to control interest group demands, and it allowed many mayors the luxury of predictable support on election day. The machine also enabled Chicago mayors to control political delegations in the state legislature, leading to a state or county takeover of responsibility for expensive redistributive services and significant assistance on capital projects. New York City confronted fiscal austerity in 1975with a fragmented policy-making structure which was accustomed to resolving problems by encouraging the participation of diverse interests and spending more on a continually increasing number of locally administered, deficit-producing programs. In Chicago, on the other hand, decisionmakers were able to rely on a structure designed to discourage the demands of potentially competing groups and to minimize the city's direct share of spending on services. Although there have been some changes in both New York's and Chicago's fiscal policy-making structures since 1975,these structures have remained basically different through the 1990s. Despite the decline of the political machine and legal recognition of municipal employee unions, Chica~omayors continue to have a structural advantage in the fiscal policy process, with greater control over the budget and continued shared fiscal responsibility for expensive deficitproducing and redistributive services. In contrast, New York mayors received insufficient fiscal relief after the city's 1975 crisis. The city still pays 50 percent of the nonfederal portion of AFDC costs and 50 percent of home relief, and contributes substantially to mass transit, corrections, and health and hospital services. Moreover, the mayor's authority in the budget process is constantly challenged by business interests, the municipal employee unions, and the newly empowered City Council.

A Political Framework for Responsible Urban Fiscal Policy The cases of New York and Chicago support the theory of urban fiscal policy outlined in chapter 1. The structural characteristics of a city's fiscal policy process that develop can either constrain or enhance the choices available to local decision-makers. Although in most cities the mayor is at the center of the fiscal policy process, his decisions are not merely a reflection of his own policy preferences. As the cases of New

CHAflER EIGHT

York and Chicago demonstrate, the mayor's decisions are affected by the interaction between past budgetary decisions, the local party organization, interest group expectations, intergovernmental relations, and the formal-legal arrangements of city government. Each of these elements contributes to the development of a process which undermines or promotes fiscal stability. The mayor must be able to centralize and control the budgetary process at the final stages of decision making if fiscal problems are to be avoided. By retaining maximum local discretion in fiscal policy decisions?the mayor can affect fiscal stability in two critical ways. First?he can minimize the cost of service delivery to the city by acquiring revenue from nonlocal sources or by having another governmental jurisdiction fund and administer the service. Second, he can control interest group demands on local revenues so that expenses can be kept low or programs and personnel can be cut if the city's resource base shrinks. Each mayoral decision involving fiscal matters can further institutionalize or undermine his control. Thus, the causes and effects of centralization and control of the fiscal policy process are cumulative and mutually reinforcing. The political framework for responsible fiscal policy is not divorced from local and national economic conditions. Strong local economies enabled cities in the past to spend without considering the long-term consequences of their policies or the need for serious long-term budget planning, It is only periods of scarcity which force public officials to reexamine the political process and to ask some basic questions: Where is the money being spent, and who is paying for the operation of government? Fiscal crises can also provide a rare opportunity for a city to revamp seriously its policy structure. But more often than not?the crisis is resolved by external political pressure to cut spending and the city's debt burden. Without structural changes in the city's fiscal policy process, the retrenchment will be temporary and the political conditions that existed before the crisis will resurface and create the potential for another fiscal crisis. In the 1 9 7 0 the ~ ~ frostbelt cities learned that they could not simply depend on economic prosperity to ensure their fiscal stability. But the lesson was only learned in the cities of the industrial Northeast. During this same period, the sunbelt cities seemed insulated from fiscal problems by their thriving local economies. Their insulation, however?was shown to be thin when the 1980s brought economic decline to oil-rich southern cities like Houston7Dallas, and Tulsa, leaving them vulnerable to the same fiscal problems as their snowbelt sisters. As we enter the 1 9 9 0 no ~ ~American city appears to be immune from

downturns in the economy. As a consequence, the success or failure that American cities have in maintaining fiscal stability will ultimately depend on the political interactions in their policy-making processes. Cities cannot control the effects of national or even regional economic trends, but this study shows how local fiscal policy processes can make a difference in cities' fiscal conditions even during periods of economic scarcity.

What3 Different about Urban Politics? Mayors on the Front Lines Politics at the city level, through its formal and informal operations, works to subvert the issues most important to fiscal stabilitycentralized control over fiscal policy and long-term planning. Frank Macchiarola? former superintendent of the New York City public school system and savvy Brooklyn politico, commented at a Columbia University seminar in 1989 that "most politicians live their lives in snapshots.'? This is especially true of mayors who must confront the problems that people are concerned with on a daily basis. These problems, often described as quality-of-life issues, can range from safety in the streets and traffic congestion to unemployment and homelessness. Because local government is the closest direct link that individuals have to the political process, the public wants action from its leader, the mayor, and does not worry about questions of jurisdictional responsibility in the federal system. Under these circumstances?mayors interested in their political futures will attempt to address the public's immediate frustrations, an effort which runs counter to long-term planning. Mayors are rarely given the opportunity to take a long-term cost-benefit approach to fiscal policy and instead pursue spending and tax policies which garner instant public approval and support for the next election. Given these political needs, mayors are most vulnerable to the demands of organized groups for increased spending. Mayors have been able to make policy decisions with a view toward issues of fiscal stability only when they are protected from the vagaries of electoral politics and the demands of special interest groups. The need to win reelection forces the city's chief executive to devote too much attention to short-term problem solving which delivers a tangible political return on his investment. For most mayors, the long-term costs of maintaining and administering programs and projects they initiate are simply never considered. This problem has been exacerbated by the decline of strong party organizations which could assure a predictable vote on election day. Mayors have been left

CHAPTER EIGHT

without an institutional mechanism for aggregating and controlling interest group demands, making them more prone to resolve political conflict through spending. Mayors are also legally bound to balance their city's budget at the end of each fiscal year. Since New York's 1975 crisis, this has become a serious constraint on fiscal policy. Balanced budgets may be a desirable objective from the perspective of the financial community and the bond-rating agencies, but it has also encouraged quick fix strategies for dealing with unpredictable revenue shortfalls. Cities, worried about their bond ratings and the increased interest costs that a downgrading produces, have had to mortgage their futures by cutting services and increasing property taxes in order to meet the arbitrary requirement of a balanced budget. This has been particularly difficult during periods of economic recession, when the demand for services is greater and local revenue sources are likely to decline. A recent study by the Congressional Budget Office concluded that tax increases and spending cuts by state and local governments will make it more difficult for cities to pull out of the 1991recession.1 Moreover, legal responsibility for costly social welfare services and deficit-producing services like mass transit also reduces mayoral control over fiscal policy choices and strains the city's ability to balance its budget. Ironically, mayors have been forced to trade yearly balanced budgets for long-term fiscally responsible planning, a burden that the federal government has not assumed.

The Role of Intergovernmental Aid The growth in intergovernmental aid to cities during the Depression, and particularly the increased federal role in city finances, marked the beginning of a new era in city government and administration. Roosevelt's New Deal recognized that cities could no longer be viewed as economically self-sufficient.As a result, the federal government accepted a new responsibility to ensure the survival of city governments and the welfare of their residents. When prosperity returned to the nation after World War 11, the basic relationship established between the federal government and the cities during the Roosevelt era was not questioned, but the level of aid from Washington did vary with the changes in political administrations. While city government officials might have been wise to consider this uncertainty when they increased their dependence on federal aid, there was no reason to assume that the basic Roosevelt mandate would be threatened. When many cities experienced local economic decline in the 1960s,the consequences of their economic dislocation was offset or postponed by increased federal aid. During this

period cities were able to increase their spending, often without realizing how serious their local economic problems were. Not surprisingly, those cities which experienced the worst economic and fiscal problems in the 1970s relied most heavily on federal funds to balance their budgets. Federal aid to cities did not actually decline in the 1970s, but its rate of growth slowed drastically. During the 1980s, a serious erosion in the federal government's relationship with cities and states took place. The federal government cut back aid to cities so that, for the first time since World War 11, cities registered a real dollar decline in federal aid: during the Reagan-Bush years (1981-911, federal funding of urban programs dropped 68 percent.2 This policy was not a temporary cutback attributable to a downturn in the nation's economy but, rather, an intentional and fundamental reordering of relationships in the federal system which had been established by Roosevelt during the Depression. Reagan's New Federalism publicly took the position that states and localities could better determine their needs without the "interference" of the federal government. In reality, New Federalism meant that states and localities would have to pay for most domestic programs without the assistance of federal funds. It was argued that cities would not lose intergovernmental assistance; states would provide revenue for the programs which were "worthy."3 Not surprisingly, the extent to which state aid was substituted for the lost federal revenue varied. Arkansas and West Virginia were among the states that did little or no substitution. Moreover, states like Massachusetts, New York, and California which initially increased spending have since cut back their assistance, worrying about balancing their own budgets as they enter the 1 9 9 0 In ~~ short, cities are now expected to "do more with less." Another Reagan era policy that would divest the federal government of responsibility for urban problems was privatization. Cities could reduce their costs and improve their services by contracting out to the nonprofit or the private sector. Some city governments already had moderate successes contracting out sanitation and fire services, and it was argued that this model could be applied to everything from education and social services to prisons.5 Recent experiments and common sense suggest that this approach to service delivery is of limited utility, especially in poor areas, where prospects for profits are nonexistent.6 However, as long as privatization remains the central fiscal policy option for cities, the federal government has a convenient excuse for cutting back funding when the option is not exercised.7 While the need for federal funds is greater today than at any time

CHAPTER EIGHT

since the Depression, funds are not likely to appear given President Bush's intention to continue the urban policies of his predecessor. Bush's Domestic Policy Council expressed no interest in changes that were expensive or would create political controversy.8 How is it, then, that a fundamental restructuring of the federal system occurred without any serious debate about its consequences? New York's fiscal crisis was perfectly timed to assist the Republicans in their ideological assault against local redistributive programs and their more far-reaching efforts to divest the federal government of responsibility for urban problems. New York City was judged guilty of creating its own fiscal problems, and most important, its "generous" redistributive programs were seen as the cause. Without much work by the conservative ideologues, the enterprise of providing redistributive services at the local level was completely delegitimized. Moreover, cities like New York which relied on federal funds were labeled "dependent," an undesirable characterization implying that these funds were a gift from a generous relative rather than the sharing of a mutual burden by a political partner. New York City's near default in 1975 instilled the fear of fiscal crisis into virtually every city across the country. Mayors became obsessed with fiscal management issues, and if they did not show that they could balance their budgets and keep their cities' credit ratings high, then their political opponents would surely make this an issue in the next election. Mayors had no choice but to accept responsibility for the fiscal health of their cities, but they failed to realize that in doing so they lost the battle over federal assistance. Once their budgets were balanced it became much more difficult to argue that cities "needed" federal funds. Thus, by accepting the terms of the political debate as it has been posed by the Reagan Republicans, the nation's mayors have unintentionally allowed the threat of fiscal crisis and fiscal instability to obscure the basic economic reality discovered during the Depression: that cities are not economically self-sufficient government units and need federal assistance to provide adequate services for their residents, businesses, work force and visitors.

The "Post-Fiscal Crisis" City At this writing it is sixteen years since New York City experienced its fiscal crisis. What characteristics, then, currently define the postfiscal crisis American city? Is the model of fiscal decision making derived from New York's and Chicago's experiences still relevant to cities' current condition?

CONCLUSION

'Post-fiscal crisis" does not really accurately describe contemporary urban America. Although Boston, Chicago, New York, and many of the o t h ~older r cities hardest hit during the 1960s and 1970s by deindustrialization and middle-class flight to the suburbs experienced a burst of economic activity and fiscal stability between 1979 and 1989, fiscal issues still dominated the urban political agenda. Even during this period of prosperity in which mayors took credit for economic recovery, they continued to warn their constituents that revenue was scarce and overspending could cause the recurrence of serious fiscal problems. Why did local public officials in this post-fiscal crisis period persist in framing policy decisions in terms of impending budget deficits or fiscal disaster while at the same time they were increasing spending? This question can only be answered by considering the role of political rhetoric in determining policy priorities. If Ronald Reagan's presidency has taught us anything, it is that there is a crucial relationship between the language of political discourse and the public's acceptance of policy decisions. The rhetoric of the urban fiscal crisis has involved two separate considerations: fiscal issues and crisis politics. When public officials refer to fiscal problems, they are framing policy decisions in management terms, using the language of public administration and accounting. They know that the public has a limited understanding of fiscal issues and will defer to the "experts" when it comes to technical questions of financial management and efficiency. Framing policy decisions in fiscal terms serves to obscure the political dimension of the decisions and discourages public involvement in setting the political agenda. A crisis atmosphere increases incentives to centralize the policy-making process and to discourage public participation in setting political priorities. In times of impending political crisis the public is more likely to defer to the decisions of political elites in the hope of averting the actual crisis. Since New York's fiscal crisis, many mayors have engaged, for practical reasons, in a subtle manipulation of the public through the rhetoric of fiscal crisis. With limited formal-legal authority over fiscal policy decisions in their own cities, mayors in the United States are weak executives preoccupied with gaining control over the policymaking process and with assuring their reelection. In a federal system like the United States, cities are at the forefront in the public's expression of discontent and in its demands for improved services; yet cities have access to fewer resources than the state or federal governments. Since 1978, reductions in federal aid have worsened the problem of resources, whereas the scope of urban problems has expanded.

CHAPTER EIGHT

Faced with these circumstances, mayors have resorted to the rhetoric of fiscal crisis as a tool for controlling group demands. This rhetoric is simplistic; it perpetuates the myth that fiscal policy is merely a question of balanced budgets and that there is only one policy option for successfully achieving the necessary balanced budget. According to mayors across the country, the only responsible fiscal policy choice available to them is a combination of cutting back spending and encouraging business development through tax incentives. The rhetoric of the urban fiscal crisis is persuasive because it is not divorced from the real fiscal problems confronting American cities. Urban fiscal reality is very much tied to the structure of the American federal system, which forces cities to compete with one another for tax revenue, leaving virtually every local government with insufficient resources to finance needed services. Accepting this picture of fiscal reality does not, however, mean that mayors have only one available policy choice. Moreover, these choices are not simply management decisions but political ones. Without even considering the 'radical7' alternative of restructuring the federal system to reduce what has clearly become dysfunctional competition among American local governments, cutbacks and business incentives are not the only way local officials can balance their budgets. Budgets can also be balanced by increasing revenues, either through changing the local tax structure or by increasing federal or state aid to cities. Cities can also alter the scope of the services they provide, not by simply eliminating them, but by demanding state or federal takeover of their cost and administration. Even when a strategy of decreasing expenditures is chosen, there are an extraordinary number of fiscally responsible alternatives for implementing cutbacks in spending. Rather than fully comparing these alternatives, mayors allowed themselves to become captives of the Reagan administration's urban agenda, accepting reductions in federal aid as well as the idea that the private sector would provide services when government reduced its role. This surprising acquiescence has continued during Bush's presidency. During the 1980s,when city budget surpluses became the norm, the "we have no choice7'languageof the fiscal crisis became less compelling as a justification for retrenchment and pro-growth policies. While hard-pressed to give up what had previously succeeded, mayors attempted to maintain the fiscal crisis atmosphere, at the same time telling their constituents that cutbacks in service delivery were a shared public burden and that their pro-growth policies would ultimately benefit everyone by improving the local tax base and by providing jobs. Business interests were simply equated with the public

CONCLUSION

interest. Thus, the logic of Reagan's supply-side economic policies was brought into the rhetoric of the urban fiscal crisis. The threat of crisis became the functional equivalent of the oldstyle machine in terms of controlling group demands and public sector spending. On the one hand, mayors used the fiscal crisis to rally local political support and to insulate themselves from interest group demands. On the other hand, the specter of crisis has been a convenient demon to conjure up when the public begins to show dissatisfaction with the mayor's policies. During elections, mayors are no longer attacked for being puppets of the machine but, rather, for being incompetent financial managers. It is ironic that machine mayors were at least held accountable for the effective delivery of basic services, like police, fire, and sanitation. The rhetoric of fiscal crisis has had the opposite effect-it has linked the political survival of mayors to their ability to reduce the public's expectations of government for effective services and to minimize citizen involvement in determining needs. Even when budgets are balanced in most cities, the threat of fiscal crisis has remained to deflect attention from the real crisis in services that most cities are now experiencing. The sad reality is that cities can balance their budgets, but basic services have deteriorated. Public suspicion of fiscal crisis rhetoric and organized resistance to the policies it promulgated emerged in cities like New York, Boston, and San Francisco during the late 1980s. It is not surprising that these cities also have a history of active interest group participation in policy-making. In New York, tax abatement policies were changed when it became recognized that businesses no longer needed incentives to build in mid-Manhattan. Community, civic, and environmental groups joined forces and successfully defeated or reduced several massive development projects supported by Mayor Koch (e.g., Westway, an expansion of the Westside Highway, which included landfill in the Hudson River; the Columbus Circle Coliseum project; and in the East River a riverwalk and platforms for commercial and residential development). These groups discounted the rhetoric of the city administration in favor of quality-of-life criteria for determining development policy. In Boston, private developers who build downtown are now obligated to contribute "linkage fees" to a housing fund that subsidizes low- and moderate-income residential units in other parts of the city. In San Francisco, the public passed a proposition limiting the height of new downtown buildings. These policies began to reverse the trend of offering tax incentives-in effect, public subsidies-to businesses for downtown development, and they returned quality-oflife issues to the urban political agenda. The public began to realize that development at any cost is not a necessary condition for responsible fiscal policy.

CHAPTER EIGHT

With the false logic of fiscal crisis rhetoric beginning to crumble in some cities, mayors across the country entered the 1990sonly to face a national economic recession. Cities currently suffering from falling local taxes and lost intergovernmental assistance are disproportionately those cities which had the greatest economic growth in the 1980s. Many of these cities increased spending and cut taxes during the 1980s and are currently facing serious fiscal problems. Philadelphia has been the first major fiscal casualty of the 1990s.It has been on the edge of fiscal collapse since August 1990, when Mayor Wilson Goode reported a $73 million budget deficit for the 1990 fiscal year. Moody's promptly dropped the city's bond rating to Ba, and again in September to B, effectively closing Philadelphia out of the credit market. Despite a $65 million cut from social service programs in 1990, Philadelphia still faced a $193 million shortfall in its $2.16 billion fiscal 1991budget. Goode was not able to get approval on any of his revenue measures from the city council. After much delay, in April 1991 the State Assembly finally passed legislation enacting a 1percent city sales tax and creating a financial oversight board, but the State Senate has held up its final approval. The oversight board would be empowered to sell bonds to eliminate the city's deficit, and the bonds would be repaid from city tax revenue over a ten-year period.9 Philadelphia's long-term revenue problems, however, have not really been addressed. Other cities have not reached the crisis stage but are suffering acute fiscal problems. In 1990, to deal with their budget problems, Washington, D.C. laid off thousands of workers while Louisville closed neighborhood health centers. Confronting a $91 million deficit for 1991, New Orleans has been attempting to get the state to assume part of the costs of its criminal justice system and neighborhood health clinics. The city of Los Angeles is facing its worst fiscal problems since the Depression. An anticipated $52 million deficit in its $3.9 billion budget for fiscal 1992 has prompted the mayor and city council to propose cuts in libraries and parks, the elimination of four hundred police officers, and the suspension of a highly successful after-school program for latchkey children. City taxes on income, real estate transfers, and cable TV have been some of the revenue-raising devices put forward in Los Angeles. Not to be overshadowed by its sister city, San Francisco has been facing chronic budget deficits since Mayor Art Agnos took office in 1988. California's water shortage has left San Francisco with yearly revenue shortfalls ranging between $20 and $40 million due to lost sales of hydroelectric power. San Francisco's mayor has projected a $135.6 million deficit for fiscal 1992's $2.35 billion budget. Proposed budget cuts have been moderate com-

pared to those in other cities and include a wage freeze and the elimination of 358 city jobs.10 New York's Mayor Dinkins, who ran on a platform of improving the quality of life for all New Yorkers, began his first term in 1990 by calling for an austerity budget to fend off an impending budget deficit. Dinkins's fiscal problems continued to escalate as he faced a $732 million shortfall in fiscal 1991's budget and a possible takeover of city finances by the state FCB. His "doomsday" budget for fiscal 1992 included drastic cuts in social services, parks, and libraries, as well twenty thousand municipal employee layoffs. Clearly, the issues on the urban political agenda and the language of political discourse changed dramatically in 1975, when New York City experienced its fiscal crisis. Questions of redistribution and participation which influenced American politics in the 1960s were replaced by the issues of efficiency and financial management. The national recession also contributed to a change in the federal government's urban policy. During the 1980s,federal intergovernmental aid was reduced and the language of government responsibility was replaced by "New Federalism," "public-private partnership," and "safety net." This shift in emphasis from redistribution to cutback management had an important impact in the urban political arena. During the fiscal crisis the direction of policy was determined by the description of the problem. By defining the fiscal crisis as a problem of management the implication was that solutions to the problems of city governments were technical in nature and not open to public debate, nor were they questions of political values. The public was expected to sacrifice, and concessionary bargaining took the place of legitimate demands. The rhetoric of urban fiscal crisis perpetuated the myth that fiscal policy was merely a question of balanced budgets. Cutback management brought a new set of urban policy priorities which corresponded more closely with P. Peterson's unitary model of fiscal policy.11 The rhetoric of fiscal crisis allowed cities to justify the economic development goals of their pro-growth governing coalitions, regardless of the social costs. In a democratic political system, the responsibilities of government are matters for public debate, but as studies by Schattschneider and by Bachrach and Baratz have shown, issues can be excluded from the political agenda without public debate.12 The rhetoric of fiscal crisis brought the art of excluding the public from policy decisions to a level that even Schattschneider did not anticipate. The consequences have been significant. Political debate has generally been stifled, and mayors have increased their power in determining the "public" or

CHAPTER IIGHT

"city" interest. Quite simply, the rhetoric of fiscal crisis has promoted acceptance of the status quo and has helped reduce the public's expectations for services from government. No national movement has emerged to challenge the federal antiurban policy that has been in place for over a decade. Why not? The reason is that the nation's mayors have not realized that acceptance of fiscal crisis politics has reinforced the legitimacy of the existing political arrangement. While mayors cannot be blamed for pursuing policies which enhance their authority and control interest groups' demands in times of declining resources, their strategy has backfired. As mayors continued to balance their budgets with reduced federal and state assistance, their demands for this aid were muted by their own successes. The prospects for urban America in the 1990s are in many ways worse than they were during the Depression era. During the 1930s, cities were supported in their relief efforts by a massive infusion of federal aid, which also went into public works projects. In the 1970s urban fiscal problems were viewed primarily as consequences of mismanagement and of spending on social welfare services. If cities simply became more efficient, abandoned redistributive policies, and focused their resources on improving the business climate, it was argued, they could raise enough money to provide basic services and maintain fiscal stability. By the end of the 1980s,however, the success of this very narrow policy agenda was shown to be dependent on the false prospects of continuing economic growth.13 Many cities as they enter the 1990s are crumbling under an old, rapidly deteriorating infrastructure and have no money to make the necessary repairs. Most cities have already abandoned redistributive programs. Their budget concerns for the 1990s are how to raise money for roads, bridges, and public buildings. Interest costs will take up an incredible proportion of city budgets because the rates for municipal borrowing have tripled since the end of World War 11, as cities must compete with the federal government's insatiable appetite for debt. Basic services like police, fire, sanitation, and education will continue to be inadequate. It is now apparent that the unitary model for urban fiscal policy outlined by P. Peterson in 1981was too optimistic. Cities are not simply limited in their ability to provide redistributive services; they no longer have the revenue base to keep their infrastructure intact or to provide basic housekeeping services effectively. The Depression put an end to the economically self-sufficient city; yet, as a nation, we continue to make policy that ignores this important change.

Rethinking Urban Fiscal Policy The fiscal problems that American cities face are structural. Fiscal instability, a chronic condition for most cities, was generally ignored before 1975. After New York's crisis many cities cut their spending, increased taxes, and improved worker productivity in order to ensure balanced budgets. Just as cities were reaching the limits of their retrenchment strategies, the 1980s came with a surge in the economy which tricked many policymakers into thinking that improved management had cured America's urban fiscal crisis. Fiscal problems in many sunbelt cities during the 1980s should have provided a clue that management was not the central problem; yet the myth that it was has persisted into the 1990s as fiscal problems reemerge in cities all across the nation. The structural problems of urban fiscal policy must be confronted now. At the very least, we need a new definition offiscal responsibility that is not tied to yearly balanced budgets and that reduces the role of the bond-rating agencies in determining city spending priorities. Balancing the budget each year cannot be the only goal of local government to the exclusion of humanitarian, ecological, and basic qualityof-life issues. To balance their budgets, cities have been forced to pursue short-term fiscal strategies which often cause great human suffering and are in the long term inefficient, detrimental to the city's tax base, and fiscally irresponsible. We need a new model of urban fiscal policy that gives mayors the power and resources to provide decent public services without eroding the fiscal stability of their cities. There are several structural changes that would accomplish this goal. First, the tax base that pays for urban service delivery must be expanded. The cities that have generally managed best, such as Chicago, Minneapolis, San Antonio, Dallas, Nashville, Pittsburgh, and Los Angeles, have created some form of metro government or at the very least have relied on the tax base of county or state governments for the provision of expensive redistributive services and deficit-producing services like mass transit. Second, the state and federal governments should not be permitted to mandate city programs without providing the revenue for implementation. Third, the fiscal responsibility for providing social welfare services should be assumed completely by the state and federal governments. Poverty, homelessness, and drug addiction are concentrated in our central cities but were not caused by city taxpayers. In many cases city boundaries are historical artifacts that have simply served to iso-

CHAPTER EIGHT

late the poor from wealthier suburbs and limit their access to quality education, housing, and health care. Fourth, to improve the efficiency of their bureaucracies, cities must be given control over their labor force and work rules. Moreover, where it has proved to be both cost effective and efficient to do so, contracting out and privatizing of services should be considered. Fifth, the creation of a system of responsible and competitive urban parties is badly needed, a system within which mayors can run for office on a platform that clearly articulates a city vision. At a time when loyalty to political parties is at an all-time low and elections have been trivialized, mayors have become captive of the best organized interest groups. These groups trade their electoral support for influence over fiscal policy choices. The point is not to resurrect the repressive machines of Boss Tweed or Richard J. Daley, but to use the party to create consensual politics. Only if parties can provide mayors with a mandate to govern that transcends parochial and special interests can mayors make interest group demands subservient to broader city interests. Finally, mayors must make the case for America's cities to Congress and, most importantly, directly to the American people. Cities need federal revenue to balance their budgets, and the only way to change the current antiurban agenda is to change public opinion. There is a glimmer of hope that the Urban Summit, first convened by thirty-eight big-city mayors in November 1990,will provide the necessary leadership. Urban problems must be understood to be national problems. The reality is that the "urban" problems of crime, drug abuse, inferior public education, pollution, and poverty have been spreading into America's once tranquil suburbs; and declining urban economies mean a decline in the national economy, as well. As the crack epidemic spreads, as more victims of AIDS need health care, and as the homeless increase to unconscionable numbers, no cities will have enough local revenue to deal effectively with these problems, provide basic services, maintain their infrastructures, and balance their budgets. While this book shows what cities can do to retain fiscal stability, without a change in public policy the cost in human suffering will be so high, and the deterioration of the quality of life will be so great, that the very survival of America's cities will be in question. America must ask itself if it is ready to become a nation without great cities. It must ask itself, At what cost urban fiscal stability?

APPENDIX A: MAYORAL ADMINISTRATIONS

Chicago Mayoral Administrations Mayor William Hale Thompsona Anton J. Cermak Frank J. Corrb Edward J. Kellyc Edward J. Kelly Edward J. Kelly Edward J. Kelly Martin H. Kennelly Martin H. Kennelly Richard J. Daley Richard J . Daley Richard J . Daley Richard J. Daley Richard J. Daley Richard J . Daley Michael A. Bilandicc Michael A. Bilandicd Jane M. Byrne Harold Washington Harold Washington Eugene Sawyerb Richard M. Daleyd

Tenure as Mayor April 1927-April 1931 April 1931-1933 March 15-April 13,1933 April 1933-April 1935 April 1935-April 1939 April 1939-April 1943 April 1943-April 1947 April 1947-April 1951 April 1951-April 1955 April 1955-April 1959 April 1959-April 1963 April 1963-April 1967 April 1967-April 1971 April 1971-April 1975 April 1975-Dec. 1976 Dec. 1976-June 1977 J u n e 1977-April 1979 April 1979-April 1983 April 1983-April 1987 April 1987-Nov. 1987 Nov. 1987-April 1989 April 1989-

a ) Thompson served two earlier terms,April1915-April1922. b) Elected by the City Council to be acting mayor. c ) Elected first by t h e City Council and then by the public to a complete term. d) Elected by the public to complete a term.

APPENDIX A

New York Mayoral Administrations Mayor James J. Walker James J. Walker Joseph V. McKeea John P. O'Brien Fiorello H. La Guardia Fiorello H. La Guardia Fiorello H La Guardia William O'Dwyer William O'Dwyer Vincent R. Impellitteria Vincent R. hnpellitteri Robert F. Wagner Robert F. Wagner Robert F. Wagner John V. Lindsay John V. Lindsay Abraham Beame Edward I. Koch Edward I. Koch Edward I. Koch David Dinkins a) Acting mayor.

Tenure as Mayor 1926-1929 1930-Sept. 1932 Sept. 1932-Dec. 1932 1933 1934-1937 1938-1941 1942-1945 1946-1949 Jan. 1950-Sept. 1950 Sept. 1950-Dec. 1950 1951-1953 1954-1957 1958-1961 1962-1965 1966-1969 1970-1973 1974-1977 1978-1981 1982-1985 1986-1989 1990-

APPENDIX B: SOME METHODOLOGICAL ISSUES

Organizing Budget Data Using Mayoral Terms

Budget trends are most useful in considering the role of mayoral decisions in fiscal policy-making when changes can be attributed to specific political administrations. Rather than examining changes over five- or ten-year intervals-intervals which are often arbitrary and chosen for the convenience of the researcher-chapters 4 and 5 examine time periods which coincide with mayoral terms of office. The data are grouped into four-year intervals, with the difference between a mayor's last year in office and the last year of his predecessor providing a measure of the impact of local political decisions on budget priorities. Last year in office is defined as a mayor's last year in full control of both appropriations and spending decisions. The change period is generally noted in the text and corresponds to the last-year differences and not to the actual mayoral terms. New York's current fiscal year begins July 1and ends June 30.Before 1939 New York's fiscal year began January 1and ended December 31. Chicago's fiscal year has remained January 1-December 31. As is the case in presidential politics, mayors too must contend with expenditure, revenue, and debt decisions made by previous administrations. Analyzing differences based on last-year budgets avoids the problem of accountability associated with first-year budgets. The budget during the last year of a mayor's term is thus considered the best indicator of his administration's policies. Differences in last-year budgets indicate the extent of change or continuity in the city's fiscal policy. Mayors do not make budget decisions in a political vacuum with unlimited control over the decision process, nor do budgets reflect a mayor's personal policy preference in a utopian world of unlimited revenues. Rather, budget decisions are considered the closest approximation of the mayor's policy preferences within the limits of the city's

APPENDIX B

fiscal policy-making process, over which mayors have varying degrees of control. The fiscal outcomes of mayoral administrations are thus the "dependent variable" for this study, and not the particular policy preferences of individual mayors. This approach provides a way of determining the impact of longterm budget trends on mayoral fiscal policy choices and ultimately on the city's fiscal condition. It is possible to identify critical periods of expansion or contraction in a city's budget; changes in the functional mix of services, reflected in levels of spending, and the proportion of the budget allocated to each functional area; changes in the city's revenue base and debt burden; and the time points at which these crucial changes occurred. Most important, it can be determined whether budget trends remained constant over time, despite changes in political administrations. Controlling for the Impact of Inflation and Population Size

Another important methodological consideration in analyses of budget data over time is controlling for the impact of both inflation and population size. Inflation has dramatically increased the cost of everything during the past fifty years, including city services, while cities with larger populations have larger budgets, in absolute terms, simply to accommodate their larger populations. Therefore, all data in chapters 4 and 5 were converted into 1967 constant dollars per capita, so that differences and changes in city budgets not attributable to inflation or population size could be evaluated for their impact on local fiscal conditions. Constant dollar conversions were based on national Consumer Price Indices (CPIbase year, 1967).Per capita dollar figures were computed using the decennial Census populations.

APPENDIX C: CENSUS DATA CATEGORIES

The desire to collect and quantify information about people has its roots in ancient ritual. One of the earliest censuses is described in the book of Exodus when God commands Moses, "When thou takest the sum of the children of Israel according to their number, then they shall give every man a ransom for his soul to the Lord. . .that there be no plague among them when thou numberest them" (Exodus 30:12). In this ancient census each person offered half a shekel to the Lord and these coins, rather than the individuals, were counted. This procedure was followed because it was thought that the "evil eye" had power over numbers (Rashi Commentary, Exodus 30:12). I am not sure whether we have improved our census-taking techniques since biblical times. Our methods have become more sophisticated, and our interest in counting has expanded way beyond individuals. Yet it is not at all clear that the accuracy of our reported data has improved. Perhaps the children of Israel had more compelling reasons for participating in their census. The divine spirit may have commanded more respect than the U.S. Bureau of the Census. Or maybe our modern techniques are guilty of failing to heed the early biblical warning that the "evil eye" has power over numbers. My own experience using Census data supports the mystical view. I have managed to untangle what seems to be unnecessarily complicated problems in the City Government Finance data. I can only warn future users that, while the data published in these books look simple, it is precisely this appearance of simplicity that is most deceptive and ultimately extremely frustrating. I intentionally chose census data as the empirical basis for this comparative analysis of New York City and Chicago. Budget data are available from city financial documents, but the problems for comparative historical analysis presented by city data were far greater than those I confronted using census data. City budgets were never designed for public reviewing. In fact, city budget documents seem

APPENDIX C

written intentionally to obfuscate rather than clarify how finances are administered. Debt, revenue, and expenditures are hidden in a multiplicity of special funds; functionally aggregated totals are often not provided, or they are reported without meaningful definitions. The political reasons for obscuring city budget data are obvious. Public officials intentionally hide expenses and pad payrolls in order to comply with state law, to hide patronage, or to make their fiscal condition look better to the financial community and the public. Until the 1975 crisis, even the banking interests and investment houses did not demand that the cities "clean up" their budget reports and conform to standard accounting procedures. The problems presented by city budget documents are compounded when analyzing more than one city and more than one year. Governments do vary in the terms they apply to similar items and in how they classify their transactions. The Census Bureau data present their own set of problems, as we will explain, but they were designed to allow for meaningful comparisons between cities over time. The Classification Manual, Governmental Finances (US. Department of Commerce, Bureau of the Census, 1976:2-5) explains that census statistics are based on the official accounts, records, and reports of state and local governments and on information furnished by public officials from these sources. For cities with populations of over three hundred thousand, Census Bureau representatives compile detailed financial information directly from official accounts and records; certain segments of the data are gathered by mail and from the records of other federal agencies. The Census Bureau has attempted to create a uniform system of classification for city expenditure, debt, and revenue. While it relies on the financial statements and reports of the cities it surveys, when necessary it will recast locally reported data to conform with the its own standardized classification. For this reason census data will not necessarily be the same as data taken directly from city budget documents. The census data are generally more inclusive, drawing on records which are also outside the city's principal finance office. Debt, revenue, and expenditures are often omitted from the central records or principal financial report of a city, but can be found in separately maintained files. These items are included in the census statistics. Clearly, the individual researcher would have a difficult time locating them, especially since there is no way of knowing what is being left out from a city's "comprehensive"financial report. The most important problem resolved by using census data involves the treatment of separate city fund data. City governments administer their finances through control devices called "funds," usu-

CENSUS DATA CATEGORIES

ally set aside to support specific activities. City governments operate through many separate funds, and their financial statements are designed to report the status of each fund. Census statistics are concerned with the operation of city government as a whole. Statistics are consolidated on the basis of characteristics of financial transactions, not fund distinctions, and duplicative transactions between funds are netted out. The official city financial reports do not generally present consolidated totals covering related amounts for all funds. The Census Bureau based its pattern of reporting on a classification scheme which is applicable across cities and is based on broad fields of government activities. Revenue is classified by source; expenditure by purpose or function, and secondarily by character and obligation; debt by term and by nature of the obligation involved (U.S. Department of Commerce, Bureau of the Census, 1965). The Census Bureau emphasizes functional breakdown of expenditure so that its statistics combine expenditures from all funds by all agencies for each of the major functions of government. This is an important difference from local government reports, which emphasize breakdowns by funds. When a single city department has responsibilities related to different functional categories, the Census Bureau also includes in its statistics for city governments the budgets for semiautonomous boards, commissions, or other agencies which are fiscally and administratively dependent on the city. The Census Bureau criteria for dependence have been a source of controversy and do not relate to bonding or taxing authority. Dependent agencies according to the Census (a)are dependent on the city for all or a substantial portion of their revenue, (b) lack their own officers, (c) must submit their budget estimates to the city, which can then lower or raise the estimates, and (d) are controlled in important aspects of their administration by the city (e.g., contract approvals and personnel administration) (U.S. Department of Commerce, Bureau of the Census, 1976%). In general, the income concept of "revenue" and the outgo concept of "expenditure," and the concept of governmental debt, relate to all funds and agencies of the city government, but not to any duplicative transactions between funds or agencies of the same government. Revenue and expenditure amounts are reported as gross with no revenue from or expenditure for a particular function offset against each other to arrive at net amounts (U.S. Department of Commerce, Bureau of the Census, 1976:6). When relating Census Bureau statistics to basic city sources, it is important to keep in mind that different terms are often applied to the same function and that the same term can have several meanings.

APPENDIX C

The objective of the Census Bureau data collection effort is to develop uniform statistics for the purpose of reliable comparative study between cities ( U S . Department of Commerce, Bureau of the Census, 1965). The Census Bureau's approach of creating a uniform classification scheme, its emphasis on functions rather than funds, and its effort to consolidate data from a wide variety of sources make its data more reliable than those of any individual researcher attempting to decode the intentionally obscure and arcane city financial documents. I would emphasize that the Census Bureau data are particularly useful for any study of finances for more than one city and for comparing data over long periods of time. Using Census Bureau data simply increases the chances that you are comparing the same functions in different cities for different historical periods. Since the 1975 New York City fiscal crisis, cities have been forced by the banks and bond-rating institutions to improve their financial reporting techniques. While some progress has been made, city budgets remain political documents. While the advantages of Census Bureau data are clear when compared with city financial document data, there are several serious problems which must be mentioned. The early data collected by the Census Bureau are not as carefully documented as the current data, which presents many complicated problems for ensuring historical comparability. Since the time frame of this book begins in 1929, several important changes have been made in the classification scheme devised by the Census Bureau, and unfortunately the documentation for these changes is often unclear or impossible to locate. Moreover, the Census Bureau's own categories are not all comparable over time. I was extremely sensitive to this problem and did, when necessary, recalculate census data, adding and subtracting functions to create data which are, as best I can tell, comparable over time. ~ c c o r d i to n ~Special Study No. 38 (U.S. Department of Commerce, Bureau of the Census, 1955:4)census data on governmental finances are closely comparable within, but not between, four historical periods: pre-1937,1937 to 1940,1941to 1950, and 1951to the present. The early census reports were extremely detailed. This approach changes during the Depression years with the proliferation of public welfare activities. During the period 1937-41, the functional classifications were substantially modified, decreasing the amount of detail in certain categories and providing a new structure that would better reflect the changes in city governmental activities. One of the most significant changes made in 1941 related to how the Census Bureau reported city finances for overlying governments. Before 1941, all city

CENSUS DATA CATEGORIES

government financial data included computed portions of the finances of overlying governments for cities over three hundred thousand (U.S. Department of Commerce, Bureau of the Census, 1955:5). County data were also included in the statistics. Originally, this "area" concept was included because of the variation in legal responsibilities for service delivery between the city corporation, the county, school districts, and other district governments. The merging of financial data for the city corporations and overlying independent governments was done by a formula. The ratio of that portion of each overlying government's assessed valuation lying within a city's limits to the overlying government's total assessed valuation was used to prorate the overlying government's financial transactions (U.S. Department of Commerce, Bureau of the Census, 1948:2-3). The area method of reporting obscured the functional performance issue, which has since been found to be an important factor in analyses of urban fiscal problems. Since 1941,the Census Bureau has been reporting data based upon city corporate governments, discontinuing the use of this earlier area concept. Fortunately, some documentation on prorating procedures was published by the Census so that comparable data could be created using the pre-1941 reports. For cities with coterminous counties and few special districts, like New York City, the problems were minimal. But for cities where counties and special districts are important providers of local services, like Chicago, some of the problems were insurmountable. It became impossible to disaggregate the statistics for certain subfunctions because the documentation was nonexistent. In certain instances, estimates were computed from available data. Other important changes made by the Census Bureau related to its own classification scheme. After 1937 general government data were separated from enterprises, and after 1941 trust funds and sinking funds were also separated from general government data. The term "general revenue" was also modified to include all the activities reflected in general expenditure. Changes were also made to reflect new sources of revenues and new developments in intergovernmental fiscal relations (U.S. Department of Commerce, Bureau of the Census, 1948:3).In 1951 the final important functional classification change took place. The distinction between general government and utility activities was redefined, eliminating the concept of enterprises (U.S. Department of Commerce, Bureau of the Census, 1955:5). In this data collection effort I chose to recast earlier Census Bureau data to conform with the current category definitions, derived primarily from "City Government Finances," 1980-81 (U.S. Department of Commerce, Bureau of the Census, 1964-91). In the following sec-

APPENDIX C

tion, each of the functional categories used are defined and the calculated changes in the earlier classification for comparisons over time are explained. The changes made for each period and the Census Bureau changes in its own classification scheme are specifically identified. Since over the years there has been some movement of subfunctions between census categories, highly aggregated categories of functions were intentionally used in the comparisons. Further breakdown of functions is possible, but it would be much more difficult, and in some cases impossible, to ensure the reliability of comparisons made between the historical periods when the Census Bureau changed its classification scheme. The aggregated categories I have developed take these problems into account, ensuring their reliability. Yearly data on equalized taxable property value and tax rates were provided by the New York City Finance Department and the Office of the Cook County Clerk Tax Extension Department. In Chicago, Cook County assesses all county property and the city determines its own tax rate, which is separate from the county's. This analysis only reports the city's property value and tax rate. New York had a single tax rate, which applied to all taxable real property through 1982. Starting in 1983, New York created four classes of property with different rates. This analysis uses an average of all four rates for these later years. TOTAL EXPENDITURE = GENERAL EXPENDITURE

+ UTILITY EXPENDITURE

GENERAL EXPENDITURE-All city expenditures (both capital and operating) other than the specifically enumerated kinds of expenditure classified as utility expenditure, liquor store expenditure, and employee-retirement or other trust expenditure. UTILITY E X P E N D I T U R E - E X ~ ~ ~ related ~ ~ ~ U ~ ~toS municipally owned and operated water supply, electric light and power, gas supply, or transit system. Before 1951, utilities were classified as public enterprises and also included housing projects, port facilities, toll bridges, airports, and ferries. In 1951these functions became part of the general expenditure category. Utility expenditures are specifically related to the construction or acquisition of utility facilities or equipment, production and distribution of utility commodities and services, and interest on utility debt. The category does not include expenditures in connection with the administration of utility debt or investments, which are treated as general expenditures, and the cost of providing services to the parent city government, which is treated as expenditures for the function served. The total expenditure variable intentionally combines general ex-

CENSUS DATA CATEGORIES

penditures and utility expenditures for two reasons. First, in many large cities the expenditures which are considered part of the utility category, such as mass transit, have been a substantial cost to the city over time. New York City contributes considerable revenue to the operation of a deficit-producing mass transit system and also operates its own water supply system. Chicago operates its own water supply system, which produces a profit by selling water to noncity jurisdictions. Leaving out utility expenditures and only comparing general expenditures would provide a distorted picture of a city's overall service delivery burden. Knowing this is particularly important when trying to assess the impact of functional performance on a city's fiscal condition. Second, cash payments to the beneficiaries of the cityadministered retirement programs (employee retirement expenditures) are excluded from this category. However, the cost of administering these programs and the city's contributions to both state and city retirement programs are classed under general expenditures. Insurance and trust expenditures involve moneys that city governments are spending as an agent or trustee for other governments or private persons and as such are not included in this category. Third, complications in early Census Bureau category changes makes this aggregated statistic the most accurate for comparisons over time. Early Census Bureau data categories were recast to conform with the above definitions. 1929-1936: GENERAL EXPENDITURE = All Government Cost Payments - Costs of Public Service Enterprise - Receipts from Pension Assessments 1937-1940: GENERAL EXPENDITURE = All Government Cost Payments - Contributions to Public Service Enterprise - Receipts from Pension Assessments 1941-1950: GENERAL EXPENDITURE = General Expenditure - Contributions to Public Service Enterprises + Provision for General Debt Retirement 1951-pre~ent:GENERAL EXPENDITURE 1929-1936: UTILITY EXPENDITURE = Enterprise Operating Costs + Enterprise Outlay Costs 1937-1951: UTILITY EXPENDITURE = Enterprise Operating Costs + Outlay Costs + Interest on Debt 1952-1955: UTILITY EXPENDITURE = Utility Operating Expenses + Interest on Debt + Capital Outlay + Taxes Paid 1956-present: UTILITY EXPENDITURE

APPENDIX C

TOTAL REVENUE = GENERAL REVENUE

+ UTILITY REVENUE

GENERAL REVENUE-Allcity revenue except utility revenue, liquor store revenue, and employee-retirement or other insurance trust revenue. The basis for distinction is not the fund or administrative unit receiving particular amounts but, rather, the nature of the revenue sources concerned. This category includes all tax collections and intergovernmental revenue, even if designated for employee retirement or local utility purposes. UTILITY REVENUE-Revenuefrom sale of utility commodities and services to the public and to other governments. Does not include amounts from sales to the parent city. Also excludes income from utility investments and from other nonoperating properties which are treated as general revenue. Any revenue from taxes, special assessments, and fiscal aid is classified as general revenue, not utility revenue. The total revenue category is similar in scope to the total expenditure category, including both general revenue and utility revenue. Revenue from contributions required of employees to finance cityadministered employee retirement systems, earnings on investments held for these systems, and receipts of state payments for employees covered by municipal systems (employee-retirement revenue) are excluded from this category. However, tax proceeds, donations, and any other revenue not enumerated are classified as general revenue. Insurance and trust revenues involve moneys that a city government is collecting as an agent or trustee for other governments or private persons, such as federal income taxes and social security, and as such are not included in this category.

1929-1936: GENERAL REVENUE = Total Revenue Receipts - Receipts from Earnings of Public Service Enterprises - Receipts from Pension Assessments 1937-1940: GENERAL REVENUE = Total Revenue Receipts - Contributions from Public Service Enterprises - Receipts from Pension Assessments 1941-1950: GENERAL REVENUE = General Revenue from Public Service Enterprises

-

Contributions

1929-1936:

UTILITY REVENUE = Total Enterprise Revenue Receipts

1937-1951:

UTILITY REVENUE = Total Enterprise

1952-1955:

UTILITY REVENUE = Enterprise

1956-present:

UTILITY REVENUE

Revenue Receipts

Operating Revenue

CENSUS DATA CATEGORIES

INTERGOVERNMENTAL REVENUE-Amounts received from other governments as fiscal aid in the form of shared revenues and grantsin-aid, as reimbursements for performances of general government functions and specific services for the paying government, or in lieu of taxes. Excludes amounts received from other governments for sale of property, commodities, and utility services. All intergovernmental revenue is classified as general revenue. Cities receive intergovernmental aid primarily from the state and federal governments. REVENUE FROM OWN SOURCES = TOTAL REVENUE - INTERGOVERNMENTAL REVENUE

REVENUE FROM OWN SOURCES (City Revenue)-All general revenue and utility revenue excluding fiscal aid received from other governments. REVENUE FROM PROPERTY TAXES-Revenue conditioned On taxes obtained from the ownership of property and measured by its value. Includes general property taxes relating to property as a whole, real and personal, tangible or intangible, whether taxed at a single rate or at a classified rate, and taxes on selected types of property, such as motor vehicles and certain or all intangibles. TOTAL (Gross)DEBT-All long-term credit obligations of the city and its agencies whether backed by the city's full faith and credit or nonguaranteed, and all interest-bearing short-term credit obligations. Includes judgments, mortgages, and revenue bonds, as well as general obligation bonds, notes, and interest-bearing warrants. Excludes non-interest-bearing short-term obligations, interfund obligations, amounts owed in a trust or agency capacity, advances and contingent leaves from other governments, and rights of individuals to benefits from city employee retirement funds. LONG-TERM

D E B T - D ~payable ~~ more than one year after date of

issue. SHORT-TERM DEBT-Interest-bearing debt payable within one year from date of issue, such as bond anticipation notes, bank loans, and tax anticipation notes and warrants. Includes obligations having no fixed maturity date if payable from a tax levied for collection in the year of their issuance. INTEREST ON GENERAL DEBT-Expenditure for the use of borrowed money. Does not include interest on utility debt (or public enterprise debt).

1929-1936:

GROSS DEBT = Total General Debt

1937-1940: prise Debt

GROSS DEBT = Total General Debt

+ Public Service Enter-

APPENDIX C

1941-1950: 1951-1954:

+ Public Enterprise Debt GROSS DEBT = General Debt + Utility Debt GROSS DEBT = Gross Debt

1955-present:

GROSS DEBT = Total (General) Debt Outstanding

1929-1950: LONG-TERM DEBT = Long-Term Debt Debt + Revenue Bonds + Notes

+ Funded or Fixed

1929-1950: SHORT-TERM DEBT = Short-Term Debt + Floating Debt + Special Assessments + Warrants COMMON FUNCTION EXPENDITURES-The sum of expenditures on general control, financial administration, general government building, police protection, fire protection, sanitation, sewers, highways, and parks and recreation. This sum includes operating expenditures and capital outlays for these functions. SAFETY EXPENDITURES-The sum of police and fire protection expenditures. Sum of total expendiNON-COMMON FUNCTION EXPENDITURES-The tures on health, hospitals, public welfare, education, libraries, housing and urban renewal, corrections, and utilities. This sum includes operating expenditures and capital outlays for these functions. PUBLIC WELFARE EXPENDITURES-The sum of total health, hospitals, and welfare expenditures. CAPITAL o u ~ ~ A ~ - D i r e expenditure ct for contract or force account construction of buildings, roads, and other improvements and for the purchase of equipment, land, and existing structures. Includes amounts for additions, replacements, and major alterations to fixed works and structures. Expenditures for repairs to such works and structures are classified as current operation expenditure. The following expenditure (operations and outlay) and revenue categories for pre-1941 Census Bureau data were recast for comparability with the post-1941categories. GENERAL CONTROL = General Government - Finance or Judicial and Legal + Other Government Administration FINANCIAL ADMINISTRATION = Finance GENERAL PUBLIC (GOVERNMENT) BUILDING = General City Building PARKS AND RECREATION = General Recreation + Parks + Trees CORRECTIONS = Corrections for Adults + Corrections for Minors + Probation Boards + Officers SANITATION= Sanitation - Sewers or Solid Waste Management HEALTH = Health - Medical for Schools

CENSUS DATA CATEGORiES

+

+ Special + Aid to Special Classes +

HOSPITALS = City Hospitals All Other SOCIAL (PUBLIC) WELFARE =Charities

Miscellaneous Charities + Public Assistance EDUCATION = Schools + Educational Recreation + Medical for Schools TOTAL INTERGOVERNMENTAL REVENUE = Total Receipts from other Civil Divisions CAPITAL OUTLAYS = Outlays HOUSING AND URBAN RENEWAL = Pre-1951 included in Public Service Enterprise MUNICIPAL EMPLOYEE EXPENDITURES = October Monthly payroll * 12. Pre-1951: Total general government

+ public service enterprises.

1940-47: Add school expenditures for New York. 1948-49: Subtract school expenditures for Chicago. NUMBER OF MUNICIPAL

EMPLOYEES= Total Number of Employees.

Pre-1951: Total general government employees.

+ public service enterprises

1940-47: Add school employees for New York. 1948-49: Subtract school employees for Chicago. The data have been taken from U.S. Department of Commerce, Bureau of the Census, Financial Statistics of Cities (pre-19391, "City Government Finances" (post-1940), 'Municipal Employment" (pre-1943),and "City Employment" (post-1944)unless otherwise indicated.

Chapter 1 1. Lasswell 1936. 2. Further research is required to determine the extent to which this book's analysis can be adapted to small cities or localities where city managers, rather than mayors, control the fiscal policy process. 3. While gender-neutral language is employed in this book whenever possible, "he," "him," and "his" occasionally appear. These pronouns are used to avoid awkward locutions and are not intended to perpetuate gender stereotypes. 4. Centralization of decision making is not a new concept. It was used extensively in community power studies to explain policy outputs. As d a r k 1971 notes, however, there are contradictory findings concerning the relationship between centralization and policy output. This is due largely to measurement and research design limitations. These analyses measure centralization by the number of participants and how they cluster in different decision areas. The present study differentiates between participation and control and recognizes the complexities of the decision-making process. 5. This perspective is closest to Skowronek's 1982 theory of state building. Cities are considered states in Skowronek's sense of the term, in that political interactions occur within "preestablished institutional arrangements." Just as fiscal crisis did not occur across all American cities, cities do not share the same political institutions and relationships. 6. McDonald's 1986 important study of San Francisco in the period 18701906convincinglyconfirmsthis proposition. However,his nineteenth-century perspective is of limited relevance to this analysis. The most important political study of New York's 1975 fiscal crisis is that of Shefter 1985, which argues that the political dynamic that led to New York's fiscal crisis originated in the 1960s (see especially page 41). The present book's analysis demonstrates the limits of Shefter's approach. 7. Dahl's 1961discussion of the history of American urban political change posits that the fourth and final period began in the Depression decade. Notwithstanding other differences in their approaches to urban political development, Glaab and Brown 1967, Gelfand 1975, and Monkkonen 1988 endorse this view of the 1930s.

NOTES TO PAGES 4-13

8. See Glaab and Brown 1967,pp. 166-68; and Green 1965, pp. 142-43. 9. Monkkonen 1988, p. 120. 10. Gelfand 1975, pp. 37-38, states that "the decision of municipal officials to look to the federal government marked a turning point in American urban history," and the creation of USCM in 1933 institutionalized this change. 11. Shefter 1985. 12. Important exceptions were Caraley 1977, P. Peterson 1981, Clark and Ferguson 1983, and McDonald 1986. 13. See Ehrbar 1980; Granger and Granger 1980, p. 227; Holli 1987, p. 178; and Williams 1980. 14. Moody's Municipal Credit Report Update 1991states that "the present administration has taken necessary actions to restore fiscal stability." 15. Wall Street Journal, May 15,1991. 16. The Record of Richard M. Daley 1991,p. 25. 17. Ibid., p. 36. 18. See, for example, Fainstein and Fainstein 1982, Bailey 1984, and Pecorella 1987. 19. See chap. 3 for a more complete discussion of the Emergency Financial Control Board. 20. New York Times, January 4,1991. 21. New York Times, March 5,1991. 22. Moody's Public Finance Department, February 11,1991. 23. New York Times, May 9,1991. 24. See, for example, U.S. Advisory Commission on Intergovernmental Relations (hereafter U.S. ACIR) 1973; Moak and Hillhouse 1975; Ott and Yoo 1975; Groves 1980;Dearborn 1977; and Petersen, Spain, and Laffey 1978. 25. U.S. ACIR 1985. 26. See, e.g., Muller 1975, Sternlieb and Hughes 1975, Clark et al. 1976, Shultze et al. 1977, Congressional Budget Office 1975/76,Nathan and Adams 1976, G. Peterson 1976, and Bahl1984. 27. These works were based on O'Connor 1973 and include Castells 1976, Hill 1976, Alcaly and Mermelstein 1976, Gordon 1976, Mollenkopf 1976, and Tabb 1976. O'Connor 1981recognized some of the limitations in his own earlier argument. Alcalay and Mermelstein 1976, Friedland et al. 1984, Pickvance 1980, and Gottdiener 1986 were some of his first critics. 28. Piven 1974 provides the theoretical basis for works like David and Kantor 1979, Kantor 1988, Haider 1979, P. Peterson 1981, Rubin 1982, and Clark and Ferguson 1983,who all attribute New York's fiscal crisis primarily to the mayor's inability to control demands of interest groups, particularly for social welfare spending. Shefter 1977,1985,provides the most ambitious and compelling of these analyses. 29. Bailey 1984 and Pecorella 1987 shift attention to the role of business and financial interests in New York during the fiscal crisis and its impact on governance after the crisis. Both studies argue that the role of business and financial interests during the crisis permanently altered interest group politics in the city. The "regime" change or "restructuring" that took place resulted in conditions similar to those P. Peterson 1981 posits in his unitary

NOTES TO PAGES 13-20

model of urban policy. Swanstrom 1985 in a study of Cleveland goes one step further and actually attributes fiscal crisis in that city to the negative role of business interests in promoting "growth politics." 30. See, for example, Lineberry and Fowler 1971; Clark 1971,1976; Clark and Ferguson 1983; Morgan and Pelissero 1980; and Ladd and Yinger 1989. 31. Katznelson 1981. 32. P. Peterson 1981. Peterson's conclusions concerning the lack of interest group influence on city policy are disputed by Stone and Sanders 1987, Stone 1989, and Wong 1990, for example. 33. There has also been no lack of nonacademic writings on New York's fiscal crisis. But while most of them provide detailed and interesting accounts of the immediate events which preceded the fiscal crisis, they make no effort to explain what really caused the crisis condition to emerge in the first place. Examples include Feretti 1976, Newfield and DuBrul1977, Auletta 1979, and R. Starr 1985. Morris's 1980 work is the exception. It is theoretically important a s well a s rich in the description that only an insider can provide. Chapter 2 1. Ironically, the controversy and confusion in the literature over the definition of these two basic concepts, fiscal crisis and fiscal instability, led to the comparative case study approach adopted in this book and provides the rationale for developing a n alternative political theory of urban fiscal policymaking. 2. I do not distinguish among other descriptive terms, e.g., fiscal "strain," "stress," or "distress." I will use these terms as synonyms for "instability." 3. See, for example, d a r k and Ferguson 1983, Rubin 1982, Leeds 1983, and U.S. ACIR 1985. 4. This definition is adopted from the U.S. ACIR 1985 definition of "financial emergencies." Default is a failure to pay principal or interest on a loan which has come due. Bankruptcy may or may not involve default and is a declaration by the municipality of insolvency by a formal petition filing under Chapter 9 of the Federal Bankruptcy Act. 5. U.S. ACIR 1973, pp. 12,17-24. 6. Ibid, p. 16. 7. Ibid. 1985, pp. 22-25,8. 8. Cuciti 1978, p. 53. 9. This approach is widely adopted in studies of urban public administration. See, for example, Moak and Hillhouse 1975, Dearborn 1977, and Lane 1980. 10. Auletta 1979, p. 102. 11. "Snowbelt" ("frostbelt") and "sunbelt" are meant to designate climatic regions of the United States and have come to be associated with economic decline and growth, respectively. In fact, however, there were some older cities in the sunbelt, such a s Atlanta, Richmond, and New Orleans, whose economies during this period more closely resembled those of the snowbelt cities-declining manufacturing base, loss of middle-class population, and aging infrastructure.

NOTES TO PAGES 20-29

12. SMSAs are Standard Metropolitan Statistical Areas as defined by the U.S. Bureau of the Census. An SMSA, except in New England, is a county or group of contiguous counties which contains at least one city of fifty thousand inhabitants or more, or "twin cities" with a combined population of at least fifty thousand. In New England, SMSAs consist of towns and cities, rather than counties. 13. The four measures used to construct the index were standardized citysuburban ratios, based on 1970 Census data, for (1)percent unemployment, (2) percent dependency population, (3) percent population with less than high school education, and (4) per capita income. See Nathan and Adams 1976. 14. G. Peterson's 1976 study of twenty-eight cities had similar findings. 15. Nathans and Adams 1989. 16. See Cuciti 1978 and Nathan and Adams 1976 for economic hardship rankings. 17. See, for example, J. Petersen 1980, pp. 185-86; and Reischauer 1978, p. 100. 18. G. Peterson 1976,p. 44. 19. See Clark and Fuchs 1977b; W. J. Wilson 1987; Nathan and Adams 1989; and Caraley 1977,1991,for more comparative evidence. 20. U.S. Department of Commerce, Bureau of the Census, 1973,1985. 21. U.S. Department of Commerce, Bureau of the Census, 1989, as reported in Caraley 1991. 22. W. J. Wilson 1987,p. 171. 23. The Bureau of the Census defines "nonwhite" as total population less percent white. Consequently, this does not include white Hispanics. 24. Number of welfare recipients equals all those receiving general assistance or AFDC as determined by the U.S. Department of Health and Human Services (formerly the U.S. Department of Health, Education, and Welfare). 25. Since the figures are in current dollars and do not take into account the effect of inflation, change rates are more meaningful than actual dollar amounts. 26. Nathan and Adams 1976, p. 60. 27. Standard and Poor's has a similar rating scale which ranges from AAA to D. 28. See Sbragia 1983, 1986, for an excellent discussion of municipal bond market rating institutions and urban fiscal problems, and J. Petersen 1980for the bond ratings of large U.S. cities in the pre- and post-fiscal crisis periods. 29. This procedure was applied by Clark in several studies. In "How Many More New Yorks?" a measure of fiscal strain was constructed by summing the standardized scores for each city in his sample of fifty-one on four indicators: long-term debt per capita, short-term debt per capita, expenditures for nine common functions per capita, and tax effort per capita. With 50 as the mean score, New York scored an excessively high 165.03 while Chicago was a comfortable 55.33 in 1974 (Clark 1976, Clark et al. 1976,Clark and Fuchs 1977a). In Ott and Yoo's 1975 study, the seven largest cities were compared using six

NOTES TO PAGES 29-35

representative indicators of budget management (p. 16). Chicago and Houston compared most favorably, while New York's fiscal performance ratings were very poor. 30. New York received its first MFOA certificate of conformance in 1980. 31. U.S. ACIR 1973, p. 68; and First National Bank of Chicago 1976. 32. Byrne's financial staff "discovered a $31 million discrepancy in the "trust and agency" accounts. These were segregated funds earmarked for special uses, like neighborhood redevelopment. The fact that Daley had diverted these funds for ordinary city expenses was not real news in Chicago (see Ehrbar 1980). Daley's spending priorities can certainly be questioned, but far from being fiscally imprudent, this was yet another indicator of Daley's extraordinary personal control over city revenues. See Haider 1982, p. 69, for further confirmation that Chicago was well run in the 1970s. 33. See Feagin 1988, pp. 235-39, for a discussion of Houston's fiscal problems. 34. King 1983. 35. Bilandic 1976. 36. See Brazer 1959; Bahl 1969; Liebert 1974; and Clark, Ferguson, and Shapiro 1982. 37. The accepted methodology for dealing with the problem of service delivery variability among cities and over time is the division of city expenditures into common and non-common function categories. I am indebted to D. Caraley for suggesting the idea of common function debt. Common function debt = (common function expendituresltotal expenditures) x gross debt. Common function services are highways, police, fire, sewage, sanitation, parks and recreation, financial administration, public buildings, and general control. City expenditure and hence debt is generally more strongly related to common function than to non-common function expenditure. 38. According to Moody's, gross direct debt is the city's bonded debt and is unfunded-typically short-term debt. Gross direct debt does not net out sinking funds (an account that holds money for payment of the debt service) or self-supporting debt. Overlapping debt for the city is its proportionate share of the debt of other local governmental units which either overlap it (the issuer is located either wholly or partly within the geographic limits of the city) or underlie it (the other units are located within the geographic limits of the city). Since these jurisdictions usually fund their debt through a separate property tax, the debt is apportioned on the basis of relative assessed valuation of property. The debt issued by public benefit corporations or authorities which can float their own bonds but do not have taxing powers is now considered by Moody's as part ofthe city's gross direct debt, since the debt is supported by general city revenues and not through a dedicated tax. Debt for special districts or counties which serve the city population but have their own taxing powers is considered overlapping debt. Using this definition, New York's debt in the pre-fiscal crisis years would have actually been higher than the amount provided by the Census (Moody's on Municipals 1989, pp. 57-58). 39. The political and fiscal implications of special districts are discussed in chap. 6.

NOTES TO PAGES 35-46

40. See chap. 4 for a more extensive discussion of the fiscal implications of the functional performance issue for New York and Chicago. 41. This finding is supported by a 1976 comparison of overlapping debt among the nation's ten largest cities. Chicago, including all its greater government entities, had the third lowest debt per capita. Bilandic 1976. 42. Tax burden is measured as the ratio of revenue from own sources over the total population. 43. See Hirschman 1970, Frey 1979, Wheaton 1979, and Clark and Ferguson 1983. 44. See, for example, Aronson and Hilley 1986; Wasylenko 1981; Schmenner 1980,1982;Bluestone, Bennett, and Baker 1981; and P. Peterson and Rom 1990. 45. See, for example, Judd and Ready 1986. Chapter 3

1. New York did not experience its first fiscal crisis during the Depression. For a discussion of New York's 1871fiscal crisis see Mandelbaum 1965. 2. U.S. ACIR 1973, p. 28. 3. Ibid, p. 12. 4. The historical account found in this chapter was reconstructed from articles in the New York Times and Chicago Tribune unless otherwise noted. 5. Douglas 1930, p. 325; New York Times, February 2,1930. 6. See Murphy 1981 for a n excellent discussion of the role of the teachers' union in Chicago's tax reform movement. 7. Simpson 1930a. 8. New York Times, February 2,1930. 9. All of these overlapping governments provided services to the city and all or part of their property tax revenues were received directly from Chicago residents. The issue of overlappingjurisdictions is discussed in great detail in chap. 6. 10. New York Times, January 26,1930. 11. Beito 1989, p. 42. 12. Ibid., p. 41, points out that interest rates on Chicago's short-term debt were 6.5 percent a t this time, while Detroit and New York were borrowing a t 3.5 percent rates. 13. For an extensive discussion of the political activity of ARET and its relationships with the Chicago Real Estate Board see ibid., pp. 43-63. 14. New York Times, January 26,1930. 15. New York Times, January 30,1930. 16. The group included Silas Strawn, Ernest Graham, an architect, and Robert Carr, president of Dearborn Chemical Company, and was headed by James Simpson, president of Marshall Field and Co. Thompson reluctantly named three officials to the committee: alderman John Clark, chairman of the Finance Committee and leader of the anti-Thompson forces, comptroller George Schmidt, and corporation counsel Samuel Ettelson (New York Times, February 9,12, and 14,1930).

HOTESrO PAGES 48-64

17. New York Times, July 3,1931. 18. New York Times, December 8,1931. 19. Chicago Tribune, January 5,1932. 20. New York Times, January 24,1932. 21. Biles 1984, pp. 21-22. 22. Chicago Tribune, December 8,1932. 23. Chicago Tribune, January 12,1933. 24. Chicago Tribune, December 30,1932. 25. Chicago Tribune, January 26,1933. 26. Biles 1984, p. 26. 27. In the 1930s, New York's machine was generally referred to as Tammany Hall, but in fact the leader of Tammany only controlled the Manhattan Democratic party organization. There were three other major county organizations, Brooklyn, the Bronx, and Queens, each with its own chairman. All four leaders jointly controlled the city organization. 28. The state delegation from New York City's machine organizations had followed Roosevelt's lead on all of the issues. Roosevelt repaid their loyalty with state patronage jobs and by consulting local leaders concerning appointments that affected their districts. Roosevelt actually postponed an investigation of charges of political corruption in the Walker administration to avoid offending Tammany (Friedel 1956, pp. 91-92; Dorsett 1977, p. 7; and Schlesinger 1957, pp. 393-95). 29. New York Times, February 7,1930. 30. New York Times, March 5,1930. 31. New York Times, March 8,1930. 32. Kessner 1989, p. 218. 33. New York Times, August 17,1931. 34. New York Times, August 23,1931. 35. Kessner 1989, pp. 216-17, points out that it was the private sector that first recognized the need for programs to help victims of the Depression. Walker did not allocate city funds for unemployment relief until 1930, and then only $2 million. Kessner argues that the city's relief efforts, like the rest of its activities, were rife with favoritism and corruption. Yet, even these inadequate relief efforts should be placed in the context of urban America in the 1930s.At that time, before federal aid became available, New York was spending more to alleviate the ravages of the Depression than any other city in the country. The departments providing these services may have had problems, but the problems were no different from those of other departments in the city plagued by political corruption and inefficiency. 36. New York Times, September 17,1931. 37. New York Times, November 1,1931. 38. New York Times, January 17,1932. 39. Ibid. 40. Kessner 1989, pp. 227-32. 41. Garrett 1961, pp. 91-93. 42. New York Times, October 18,1932. 43. New York Times, October 31,1932.

NOTES TO PAGES 64-88

44. New York Times, November 17,1932. 45. New York Times, November 20,1932. 46. New York Times, December 3,1932. 47. New York Times, December 7,1932. 48. New York Times, December 19,1932. 49. New York Times, December 14,1932. 50. Ibid. 51. New York Times, March 31,1933. 52. New York Times, June 12 and February 25,1933. 53. New York Times, June 12,1933. 54. New York Times, September 29,1933. 55. Ibid. 56. Kessner 1989, p. 264. 57. Mann 1965. 58. Garrett 1961, p. 143. 59. Whyte 1935, p. 40. 60. Kessner 1989, pp. 269-70; Whyte 1935, p. 41; and Garrett 1961, p. 144. 61. Garrett 1961, p. 145. 62. Citizens Budget Commission 1960, p. 22. 63. Ibid., p. 23. 64. New York Times, October 31,1932. 65. New York Times, April 15,1930. 66. New York Times, February 7,1931. 67. See Biles 1984, pp. 89,94-96. 68. See Green 1987 and Biles 1987. 69. DiGaetano's 1988 study argues that administrative authority in city governments was already consolidated when party bosses organized centralized machines. On this general point it appears that DiGaetano confuses local autonomy with local control. To say that the mayor is at the center of the policy process tells us little about policy outcomes, as the cases of Chicago and New York demonstrate. Also, Chicago is curiously absent from his analysis, perhaps because it never adopted a strong mayor form of government, one of DiGaetano's crude indicators of a centralized local state apparatus. 70. Gosnell1968, p. 187. 71. Lowi 1968, p. vii. 72. Citizens Budget Commission 1960, p. 31. 73. Ferretti 1976, p. 90, provides a detailed chronology of New York's fiscal crisis based on the New York Times account. 74. New York Times, December 13,1974. 75. Ferretti 1976, p. 199. 76. Members of MAC were its chairman, William Ellinghaus, New York Telephone Company president (Thomas Flynn, a partner in the accounting firm Arthur Young & Company, was replaced a s chairman after five weeks); Felix Rohatyn, partner in the investment banking firm Lazard Freres; Simon Rifkind, partner in the New York law firm Paul, Weiss, Rifkind, Wharton & Garrison; Thomas Flynn, of Arthur Young & Company; Donna Shalala, pro-

NOTES TO PAGES 89-99

fessor of political science a t Columbia University; Robert Weaver, former Secretary of Housing and Urban Development; Francis Barry, president of Manhattan's Circle Line; John Coleman, former board chairman of the New York Stock Exchange; and George Gould, a financier and chairman of Donaldson Lufkin and Jenrette investment banking firm. Shalala was the only original member of MAC without banking or brokerage connections (Newfield and DuBrul1977, pp. 179-81). 77. Ferretti 1976, p. 233. 78. Ibid., p. 299. 79. Financial Emergency Act for the City of New York, New York State Laws, 1975, chaps. 868-70. 80. Bailey 1984, pp. 41-42. 81. Ferretti 1976, pp. 341-42. 82. Ibid., p. 357. 83. Ibid, p. 354. 84. See chap. 4 for a detailed discussion of cutbacks. Chapter 4 1. Only a few political scientists and popular writers have taken a historical, data-based approach to analyzing contemporary urban fiscal policy. See, for example, P. Peterson 1981, David and Kantor 1979, Morris 1980, Jackson 1972, Clark and Fuchs 1977b, Brecher and Horton 1990, and Temporary Commission on City Finances 1977a. Some studies trace the causal chain back to the post-World War I1 period while the general inclination is to go back only to the 1960s. 2. Recently, incrementalism has been widely criticized by analysts of federal and local budget policy, including Wildavsky 1988 himself (see also Padgett 1980, Brecher and Horton 1985, McDonald 1986, and Rubin 1990), but its historical position as the dominant budget paradigm makes it still important to consider. See, for example, Crecine 1969; Jackson 1972; Sharkansky 1968; Lindblom 1959; Wildavsky 1964; Davis, Dempster, and Wildavsky 1979; and Meltsner 1971. 3. Data are presented later in this chapter. See, especially, fig. 1. 4. See Tufte 1978 and Nordhaus 1975. 5. Particularly since New York's fiscal crisis, mayors have tried to affect their local economies through tax incentives, but their legal authority over tax policy is severely limited by state legislatures. Nevertheless, mayors are like other elected officials in that they are unlikely to request new taxes during a n election year. 6. Data are presented later in this chapter. See, especially, fig. 1. 7. See P. Green 1988, Freedman 1988, and Suttles 1990. 8. Data for this chapter come from the U.S. Department of Commerce, Bureau of the Census, Financial Statistics of Cities 1929-39 and "City Government Finances" 1940-89. Budget data are reported for each city's fiscal year (ITin )1967 constant dollars per capita. The 1929 budgets reflected both cities' expenditures before their 1930s fiscal crises, while 1975 was the budget

NOTES TO PAGES 100-144

year that best reflects the beginning of New York's second fiscal crisis. For a detailed description of data sources and methodological innovations, see appendixes B and C. See appendix A for a list of mayors and the years they served in office. See appendix B for the methodological rationale for analyzing four-year differences based on mayoral administrations. 9. See appendix C for a complete description of how the general expenditure category was formulated. 10. Census data categories were recast for New York and Chicago to create comparability between cities and different historical periods. Expenditures by functions are for both operations and outlays. See appendix C for a complete discussion of how these categories were constituted. The impact of functional responsibility and formal-legal arrangements on the city's fiscal condition is considered extensively in chap. 6. 11. Expenditures by functions are for both operations and outlays. See appendix C for a complete discussion of how these categories were constituted. 12. See Clark and Ferguson 1983. 13. See Lowi 1964a, b; and P. Peterson 1981. 14. The public welfare category is close to the P. Peterson 1981 and Clark and Ferguson 1983 conceptualizations. 15. See Clark and Ferguson 1983. 16. See P. Peterson 1981. 17. Private police protection has become the exception. Communities, as well as individuals, which can augment police services with private security guards have often chosen to do so. This practice, however, is not viewed as a substitute for municipal police forces and has not reduced the public's general interest in increased police spending. 18. Municipal employee expenditures are considered in per capita constant dollars as well as average salaries per employee. The size of the municipal labor force is measured per one thousand residents. See appendix C for a complete description of how these categories were formulated. 19. Clark and Ferguson 1983, p. 148. 20. Ibid. 21. See appendix C for a description of how these categories were constructed. 22. See description of Houston in chap. 2. 23. City of Chicago Department of Finance 1940. 24. This discussion of municipal employee expenditure could only cover the post-1944 period because reliable comparative data were not available. Also, ~unicipalemployeeexpenditure does not include the city's contribution to employee retirement systems. See appendix C for a complete description of how these variables were created and chap. 6 for a discussion of service deliverv differences in both cities. 25. See appendix C for a description of how these categories were constructed. 26. See chap. 6 for a complete discussion of the PBC. 27. Data on city contributions to municipal employee retirement systems were not available for the entire period under consideration. When these data

NOTES TO PAGES 147-183

are included in the analysis of municipal employee costs, it will be appropriately noted. See appendix C for a complete description of how this variable was created. Chapter 5 1. See appendix C for a description of how these categories were formulated. 2. See chap. 6 for a more complete discussion of intergovernmental relations and the urban fiscal policy process. 3. See appendix C for a description of how these categories were formulated. 4. New York Times, March 14,1989, December 30,1990, and May 31,1991. 5. U.S. ACIR 1977. 6. Budget deficits were calculated as ratios of total expenditures to total revenues. A ratio of one (1) indicates a balanced budget, and the proportion above one (1)is the deficit. 7. Rounding errors may lead to totals which are other than 100 percent. 8. As chap. 3 explained, Chicago was not effectively collecting property taxes in 1929 and 1930. An average was calculated as a more accurate indicator of the city's level of dependency on property taxes during this period. 9. Yearly property tax rates and taxable property value data were provided by the New York City Department of Finance. 10. For example, federal and state aid that was tied to specific programs like education or welfare did not appear in Chicago's budget, since otherjurisdictions were legally responsible for administering them. 11. Yearly property tax rates and taxable property value data were provided by the Office of the Cook County Clerk, Tax Extension Department. 12. See appendix C for a n explanation of these categories. 13. Data on Chicago's short-term and long-term debt were not available for the years 1929-39. 14. It could also be argued that New York was more successful than Chicago in extracting federal and state assistance for the funding of local programs, but the implications for fiscal stability remained the same: success translated into fiscal dependency and an expanded city budget. 15. See Shefter 1985.

Chapter 6 1. Grodzins 1961, p. 6. 2. Clinton us. Cedar Rapids 1868. 3. See Liebert 1974 and Wager 1950. 4. U.S. ACIR 1973, p. 164. 5. Ibid., p. 165. 6. Ibid., p. 168. 7. The quote is from ibid., p. 70; U.S. ACIR 1985, p. 5. 8. U.S. ACIR 1973, p. 12. 9. See Love11 and Tobin 1980 and U.S. ACIR 1978.

NOTES TO PAGES 183-191

10. U.S. ACIR 1978. 11. State limitations on the local property tax rate follow some general standards. The state sets the maximum rate the city can apply against the assessed value of property. If a city's tax rate reaches the ceiling, then the property tax revenue can increase only when the assessed value of property increases. A levy limit establishes the maximum amount of revenue a city can raise through the property tax. States usually allow a n annual percentage increase. Full disclosure laws are also designed to limit property tax increases. By mandating public hearings on any local action that will increase the property tax burden, local elected officials are accountable to the public for their actions. Assessed valuation of property is based on a proportion of the market value of that property. State control over the assessment prices can also stop local governments from increasing property tax revenues by raising the ratio of assessed value to market value (U.S. ACIR 1977, pp. 11-14). 12. U.S. Department of Commerce, Bureau of the Census, Financial Statistics of Cities 1929 and "City Government Finances" 1974-75,1988-89. 13. U.S. ACIR 1975, p. 14. 14. City of Chicago Offices of the Mayor and the Comptroller 1981; League of Women Voters of Chicago and Cook County 1978. 15. U.S. Department of Commerce, Bureau of the Census, "City Government Finances" 1974-75,1988-89. 16. City of New York Offices of the Mayor and the Comptroller 1976, p. 27. 17. Ibid. 18. U.S. Bureau of the Census, "City Government Finances" 1974-75, 1988-89. 19. Moak and Hillhouse 1975, pp. 405,413. 20. City of New York Offices of the Mayor and the Comptroller 1976. 21. U.S. ACIR 1979. 22. League of Women Voters of Chicago and Cook County 1978 and Fiske 1989. 23. City of New York Office of the Comptroller 1984, pp. 43-48. 24. The survey was done by Professor Joseph F. Zimmerman for the U.S. Advisory Commission on Intergovernmental Relations (U.S. ACIR 1978). 25. New York's per capita constant dollar contribution to its employee pension funds was $74.95 while Chicago's was only $10.88. However, this is not a meaningful comparison; because of the functional differences, New York's rate of contribution is invariably greater (U.S. Department of Commerce, Bureau of the Census, "City Government Finances" 1974-75). 26. U.S. ACIR 1978. 27. McCormick and Rogoff 1976 maintain that residency requirements will not provide significant fiscal benefits. However, they do provide a compelling "equity" rationale for giving city jobs to city residents. 28. Fuchs 1978. 29. New York Times, May 15,1978. 30. U.S. ACIR 1978, pp. 32,34. 31. Green and Moore 1988, pp. 237-38.

NOTES TO PAGES 191-204

32. See chap. 7 for a discussion of the changing role of municipal labor unions in Chicago's fiscal policy process. 33. U.S. Department of Commerce, Bureau of the Census, "City Government Finances" 1988-89. 34. Koch 1980. 35. New York State Legislative Commission on State-Local Relations 1987. 36. In this discussion, the terms "special district" and "public authority" are used interchangeably, although authorities are more frequently engaged in revenue-producing enterprises financed solely by revenue bonds and user fees. For a more extensive discussion of this distinction see Bollens 1957 and U.S. ACIR 1964. 37. U.S. ACIR 1976, pp. 27,29. 38. Ibid., pp. 27-34. 39. MacManus 1981. 40. See Dye and Garcia 1978; Liebert 1974. 41. Clark, Ferguson, and Shapiro 1982. 42. For a n extended discussion of the reasons for creating special districts see U.S. ACIR 1964, pp. 53-63; and Stetzer 1975, pp. 26-37. 43. U.S. Department of Commerce, Bureau of the Census, "City Government Finances" 1974-75. 44. Historical and descriptive information on Chicago's government structure comes from the League of Women Voters of Chicago and Cook County 1978, Stetzer 1975, and City of Chicago Offices of the Mayor and the Comptroller 1981,unless noted. 45. Stetzer 1975. 46. See Fiske 1989 and City of Chicago Offices ofthe Mayor and the Comptroller 1981for descriptions of the special district governments. 47. League of Women Voters of Chicago and Cook County 1978, p. 74. 48. League of Women Voters of Chicago and Cook County 1978. 49. Ibid., p. 165. 50. The descriptive material concerning the development of the PBC relies on newspaper articles from the Chicago Tribune (July 27,1956; July 1,1971; December 13, 1970; February 3,1974; April 3,1968; June 22,1968; June 25, 1978; December 7, 1977; December 28, 19761, the Chicago Daily News (November 18, 1971; March 3, 19691, and the Public Building Commission of Chicago 1976,1989. 51. Temporary Commission on City Finances 1966, ~ p8,30. . 52. Historical and descriptive information on New York's government structure comes from Smith 1973, Sayre and Kaufman 1965, City of New York Offices of the Mayor and the Comptroller 1976, City of New York Office of the Comptroller 1984, and Temporary Commission on City Finances 1977a, unless noted. 53. Fuchs 1988. 54. The Interborough Rapid Transit (IRT) and the Brooklyn-Manhattan Transit Company (BMT) were originally privately owned. 55. Temporary Commission on City Finances 1977a. 56. On February 25, 1975, the UDC defaulted on $104.5 million in short-

NOTES TO PAGES 204-218

term (full-faith and credit) notes. This represented the biggest collapse of a government agency since the Depression. New York City's fiscal crisis came on the heels of the UDC default, and there is evidence that the banking community linked the two fiscal conditions (Newfield and DuBrul1977, pp. 28, 35-37). 57. City of New York Offices of the Mayor and the Comptroller 1976. 58. Garrett 1961, pp. 183-84; and Caro 1975, pp. 762-67. 59. City of New York Offices of the Mayor and the Comptroller 1976, p. 73. 60. MTA 1978 and Smith 1973. 61. City of New York Offices of the Mayor and the Comptroller 1976 and Temporary Commission on City Finances 1977b. 62. Temporary Commission on City Finances 1977a. 63. Green and Moore 1988, pp. 237-38. 64. Shafroth 1989, p. 116. 65. Zimmerman 1987, p. 6. 66. Quoted in Martin 1965, p. 98. 67. Gelfand 1975, p. 45. 68. Mollenkopf 1983, p. 65. 69. Gilbert 1986, p. 89. 70. U.S. GAO 1990, p. 54. 71. In 1980 only 35 percent of large-city residents reported voting for Reagan while in 1984 his margin increased to 36 percent (New York TimesICBS News Poll as cited in New York Times, November 8,1984). 72. U.S. GAO 1990, p. 56. 73. See, for example, G. Peterson 1986, Beam 1984, and Brintnall1989. 74. Nathan and Doolittle 1987. 75. See Dorsett 1977; and Biles 1984,1987. 76. See Garrett 1961, Kessner 1989, Blumberg 1979, and Dorsett 1977. 77. U.S. Department of Commerce, Bureau of the Census, "City Government Finances" 1974-75. 78. U.S. Department of Commerce, Bureau of the Census, "City Government Finances" 1988-89. 79. Council-manager cities, as mentioned earlier, have a somewhat different political dynamic. 80. In this analysis of the budget process the bureaucracy is treated as a resource of the mayor and assumed to have an important role in framing and implementing mayoral budget priorities. This study does not, however, focus on the internal bureaucratic competition but, rather, the external constraints on executive branch budget authority. 81. League of Women Voters of Chicago and Cook County 1978, p. 5. 82. Kilian 1976. 83. Rakove 1975, p. 112. 84. Royko 1971, p. 70. 85. Metropolitan Area Housing Alliance Organizer 1978. 86. Yates 1977, p. 156. 87. City of Chicago Offices of the Mayor and the Comptroller 1981.

NOTES TO PAGES 218-233

88. See chap. 7 for a more detailed discussion of the Council Wars. 89. Stein 1989. 90. The discussion of New York City's formal budget process relies on information in the New York City Charter; Sayre and Kaufman 1960; Citizens Budget Commission 1960; Smith 1973; Baldwin 1982;New York Times,October 17,1988; New York City Charter Revision Commission 1989; and Viteritti 1989. 91. Certainly municipal reformers had every reason to be wary. New York City has had its share of political scandals which either directly or indirectly involved the mayor. In 1932, Mayor Jimmy Walker was forced to resign and the state-appointed Seabury Committee found widespread corruption. In 1949, Mayor 07Dwyerresigned in a cloud of scandal. In 1988, the Koch administration was rocked by political corruption; while the mayor was not implicated, he did lose the next election. Apparently, even the administrations of "reform" mayors are not immune to the temptations of the political payoff. 92. Citizens Budget Commission 1960, pp. 43-45. 93. Ibid, pp. 42-43. 94. Bowman 1977, p. 15. 95. This point is elaborated in chap. 7. Chapter 7 1. See Mayhew 1986, especially pp. 227-28. My thanks to Kay Lawson for bringing this point to my attention. 2. See Brown and Halaby 1984, p. 75. In a later article Brown and Halaby 1987 examine thirty of the fifty largest cities a t the year 1900 and find 60 percent had dominant machines a t some point between 1870 and 1945. 3. Eldersveld 1964, pp. 6-7. 4. Sorauf and Beck 1988, p. 16. 5. Brown and Halaby 1984 make the distinction between dominant and factional machines. While the difference is valid, this analysis prefers Shefter's 1978 conceptualization and reserves the term "machine" for strong party organizations which centralize citywide power. This being the case, factional machines are not considered machines but factional party organizations. 6. Banfield and Wilson 1963, p. 115. 7. Ibid., p. 127. 8. Fuchs and Shapiro 1983. 9. Katznelson 1973 and Scott 1972 argue that the machine was particularly effective in preventing the development of grassroots political movements and protected elites from potentially dissident groups. Greenstone and Peterson 1972,1973,also maintain that the machine concentrated on restraining and pacifying the lower classes. Erie 1988 contends that the machine was especially effective in using the welfare state to control the black vote. 10. Schattschneider 1960. 11. Przeworski 1975. 12. See, for example, Piven and Cloward 1971 and Brown and Erie 1981.

NOTES TO PAGES 233-247

13. See Fuchs and Shapiro 1983 and Erie 1990. 14. New York Times,December 9,1986. 15. Key 1964, p. 18. 16. Schattschneider 1960,p. 30. 17. Truman 1971, p. 112. 18. Ferrnan's 1985 research supports this argument. 19. See Sears and Citrin 1985, Susskind and Serio 1983, and Greiner and Peterson 1986. 20. See P. Peterson 1981. 21. McDonald 1985,1986,1989. 22. See, for example, Brown and Halaby 1984, McDonald 1986, and Erie 1990. 23. McConnell1966, p. 181. 24. Ibid., pp. 191-95. 25. Downs 1957. 26. Lowi 1967. 27. See P. Peterson 1981. 28. See, for example, Squires 1989, Stone and Sanders 1987, Stone 1989, and Eisinger 1988. 29. See Troy 1990 and Goldfield 1988-89. 30. Lowi 1967, p. 22; and Truman 1971,p. 535. 31. See, for example, Fainstein and Fainstein 1974, Gittell et al. 1972, and Berube and Gittell1969. 32. See Piven 1974. 33. See, for example, Dorsett 1977 and Erie 1988. 34. See City of New York Office of the Mayor 1986 for New York data; see City of Chicago 1985 as cited in Holli and Green 1989,p. 122, for Chicago data. 35. See Fuchs and Shapiro 1983. 36. See Erie 1988. 37. See Yates 1977 and Rogers 1971. 38. Sayre and Kaufman 1965. 39. Sayre 1970, p. 592. 40. Haider 1979 and Bailey 1984. 41. Sayre 1970, p. 563. 42. Costikyan 1966, p. 35. 43. Sayre 1970, p. 570. 44. See Sayre and Kaufman 1965, pp. 688-89. 45. See ibid., p. 677; Sayre 1970, p. 566; Costikyan 1966, p. 17; and Lowi 1964a, p. 205. 46. J. Wilson 1962,pp. 36-39; and Lowi 1964a, p. 207. 47. See Costikyan 1966 and Mann 1966. 48. J. Wilson 1962, p. 42. 49. See Yatrakis 1988 for a discussion of Brooklyn's machine and the issue of delivering votes. 50. Sayre and Kaufman 1965, p. 476. 51. Haider 1979, p. 137. 52. Sayre 1970, p. 578.

NOTES TO PAGES 248-260

53. Sayre and Kaufman 1965, pp. 506,514. 54. See Horton 1973, Douglas 1976, McCormick 1978, Bellush and Bellush 1981, and Maier 1987 for analyses of the role New York's municipal employee unions have played in the fiscal policy process. 55. See McCormick 1984 for an excellent discussion of the impact of collective bargaining on New York's fiscal condition. 56. For a detailed discussion of union benefits see Auletta 1979, pp. 147-60. 57. Bellush and Bellush 1981, p. 12, point out that the unions feared bankruptcy as much as the mayor did, preferring to maintain a political environment where they were still considered key decision-makers. 58. For a sample of different opinions see Bellush and Bellush 1981,Auletta 1979, Morris 1980, and Shefter 1985. 59. See McCormick 1984 for a similar argument. 60. Merriam 1929, pp. 97-98. 61. See Colby and Green 1979 and Schmidt 1987. 62. Bradley and Zald 1965, p. 163. 63. Ibid., p. 165. 64. Gable 1953, p. 10. 65. Kleppner 1985, pp. 68,264. 66. Gosnell1968, Meyerson and Banfield 1955, and Banfield 1961. 67. See, for example, Gosnell1968, Meyerson and Banfield 1955, Banfield 1961, Wilson 1965, and Pinderhughes 1987. 68. Rakove 1975, p. 197. 69. J. Wilson 1962, p. 73. 70. Rakove 1975, pp. 112-13; and Johnson 1988, p. 482. 71. See Fuchs and Shapiro 1983 and Erie 1990. 72. See Shakman u. Democratic Organization of Cook County 1970. 73. The importance of informal political relations is highlighted by the fact that Chicago has had civil service since 1895. While the machine dominated city politics, civil service laws were easily circumvented. 74. Freedman 1988, p. 25. 75. See Freedman 1988 for an excellent overview of the Shakman Decree. 76. See Holli and Green 1989, pp. 27-33. 77. See Freedman 1988; Suttles 1990, pp. 262-72; Green 1988; Holli and Green 1989; and Baquet, Lipinski, and Gaines 1987 p. 28. 78. See Grimshaw 1982; Holli and Green 1989, pp. 151-52; and Douglas 1976, pp. 98-101. 79. Grimshaw 1982, pp. 69-71. 80. Holli 1987, p. 176. 81. Holli and Green 1989 and Freedman 1988. 82. Bennett 1987, p. 8; and Squires et al. 1987, p. 76. 83. See, for example, Meyerson and Banfield 1955, Banfield 1961, Fish 1973, Rosen 1980, and Hirsch 1983. 84. Bennett 1987, p. 15. 85. Protess 1974. 86. Squires et al. 1987 point out that citywide groups like the Citizens Action Program and the Metropolitan Area Housing Alliance were short-lived.

87. See Cafferty and McCready 1982. 88. Most of this discussion focuses on CAP, but other neighborhood-based federal antipoverty programs will also be considered. 89. Current discussions of the role of interest groups in formulating fiscal policy tend to consider only the interests of business organizations and municipal employee unions. The case of CAP is a reminder that other interests can also affect fiscal outcomes. 90. See Washnis 1972. 91. Royko 1971, p. 148. 92. Cunningham 1970,p. 42. 93. Greenstone and Peterson 1972. 94. Washnis 1972,p. 361. 95. Ibid., pp. 103-35. 96. Ibid., p. 3. 97. Cunningham 1970, p. 43. 98. Greenstone and Peterson 1972,p. 22. 99. Rokyo 1971, pp. 124-25. 100. Cunningham 1970, p. 44. 101. Rose and Canter 1969, p. 70. 102. See Gittell et al. 1972; Lipsky 1970; and Rogowsky, Gold, and Abbott 1971. 103. Bell and Held 1969,p. 154. 104. See Donovan 1980 and David 1971. 105. See Bell and Held 1969, David 1971, and Greenstone and Peterson 1972. 106. Greenstone and Peterson 1972, p. 42. 107. Washnis 1972, pp. 158-59. 108. Ibid., p. 178. 109. Bell and Held 1969, p. 155. 110. Eisinger 1970 studied six Community Corporations in Brooklyn and found that the strategic approach of these agencies varied by neighborhood. Moreover, the city's Community Development Agency did not provide a consistent policy directive to the Community Corporations. Eisinger also noted that New York was funding neighborhood-based organizations whose purpose was to pressure the city for increased spending. 111. Bell and Held 1969. 112. Washnis 1972, p. 181. 113. See Lowi 1967 and Costikyan 1966. Chapter 8 1. New York Times, May 31,1991. 2. USCM 1990,p. ix. 3. See, for example, Nathan and Doolittle 1987. 4. New York Times, March 14,1989, and December 30,1990. 5. See, for example, Poole 1980, Savas 1987, and Linowes 1988. 6. Lipsky and Smith 1989-90, Henig 1989-90, and P. Starr 1987. 7. R. M. Stein 1990 offers a compelling analysis of how cities can use priva-

NOTES TO PAGES 282-288

tization effectively. However, he does not grapple with the impact this rhetoric has had on intergovernmental assistance. 8. New York Times, July 6,1990. 9. Dalton 1991. 10. New York Times, September 30,1990; interview withLos Angeles Times reporter Frank Clifford, May 29,1991; and City of San Francisco Office of the Mayor 1991. 11.P. Peterson 1981. 12. Schattschneider 1960 and Bachrach and Baratz 1970. 13. See Caraley 1982, p. 7, for an early prediction of this problem.

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Adams, Charles, 20-21 Advisory Commission on Intergovernmental Relations (ACIR), 12,182,19293 Agnos, Art, 286 Aid to Families with Dependent Children (AFDC),191,198,203 Akron, 18 Alinsky, Saul, 259 American Federation of State, County, and Municipal Employees (AFSCME), 249 American Labor Party (ALP),246 ARET. See Association of Real Estate Taxpayers of Illinois Asheville (N.C.),18 Assessed property value: as indicator of fiscal stress, 27; in New York, 73; and property taxes, 151,318n.11 Association of Real Estate Taxpayers of Illinois (ARET),45,49, 75-76,82 Bachrach, Peter, 287 Back of the Yards Council, 259 Bailey, Robert, 308n.29 Baltimore, 12 Banfield, Edward G., 232,253,259 Bankers Agreement, 69-71,89 Bankers' Statement, 64-65 Bankruptcy, 18,211,309n.4 Banks: fiscal policy role during fiscal crisis, 76; in New York fiscal crisis of 1975, 87-88; in resolution of fiscal crisis, 77 Baratz, Morton S., 287

Beame, Abe: banks attacked by, 88; capital expenditure and debt service, 133; common and non-common function expenditures, 115-16; debt trends, 170; election defeat of, 92,99; intergovernmental revenue, 162,175; long-range fiscal plan of, 89; and Lyons Law, 190; mayoral tenure, 292; municipal employee expenditure, 128; in New York fiscal crisis of 1975,87,145; per capita spending, 106; spending increases, 109 Beck, Paul A,, 231 Bell, Daniel, 266,268 Bellush, Bernard, 323n.57 Bellush, Jewel, 323n.57 Berry, Charles: in New York crisis of 1931-33,57,59-61,63-64,66; report on New York's fiscal status, 75; subway bond proposal, 73 Bilandic, Michael: budget role, 216; and Chicago Board of Education crisis, 7; common and non-common function expenditures, 121,123; debt service reductions, 136; debt trends, 172; and interest groups, 99; intergovernmental revenue, 165; mayoral tenure, 291; municipal employee expenditure, 129; per capita spending, 106; and Public Building Commission, 201; total expenditure trends, 110 Board of Aldermen, 219 Board of Estimate: elimination of, 226; and interest groups, 248; New York budget role, 214,222-23; 1938 Charter changes, 220-21; and party fragmentation, 244-45; unconstitutionality of, 224

Board of Estimate and Apportionment, 219-20 Boroughs: budget role of, 85,219,22425,227; in fiscal crisis of 1931-33,63; and mayor, 6; and party organization, 244 Boston, 18,285 Brennan, George, 80 Britain, Joseph K., 50 Brown, M. Craig, 321n.5 Budgets: balanced, 152-53,284,289; capital and operating costs, 105; in Chicago, 84,215-18,254; city data problems, 295-96; cuts in, 236,287; expenditure trends, 94-146; and fiscal policy, 94-96,147-48,226-29; and fiscal stress, 12,19; and interest groups, 235-37; intergovernmental revenue in, 149-50; legal authority over, 180; mayoral control of, 3-4,78,214-25, 226-29,243,32011.80; in New York, 84-85,218-25; New York and Chicago compared, 172-73; revenue and debt trends, 147-78. See also Expenditures; Revenue Bureau of the Budget, 220 Bush, George, 212-13,281-82,284 Business community: in budget process, 236-37; in New York, 248,30811.29; in urban policy, 239-40. See also Banks Byrne, Jane: budget role, 217-18; capital spending and debt service, 136; and Chicago Board of Education crisis, 7; on Chicago's fiscal condition, 29, 309n.4; common and non-common function expenditures, 121,123,146; debt trends, 172; intergovernmental revenue, 165; and labor unrest, 259; mayoral tenure, 291; municipal employee expenditure, 129; and school finance, 258; and Shakrnan Decree, 255; total expenditure trends, 110 California, 192 CAP (Community Action Program), 26170 Capital expenditure (capital outlay): Census Bureau definition, 104-6,304; in Chicago, 133-36; in New York, 12933; New York and Chicago compared, 137-40

Carey, Hugh, 88-89,91 Carter, Jimmy, 211 CBC. See Citizens Budget Commission Census data, 295-305 Centralization, 3,228, 307n.4 Cermak, Anton: budget role, 216,254; capital expenditures, 135; in Chicago fiscal crisis of 1930s, 48-49,52-56; common and non-common function expenditures, 120,142; debt trends, 171; governmental restructuring, 84; intergovernmental revenue, 163; mayoral tenure, 291; and party politics, 80-81, 251,274; revenue stabilization, 155; total expenditure trends, 109 CHA. See Chicago Housing Authority Chicago: assessed property value, 27; balanced budgets, 172-73; budget process, 214-18,226-29; capital expenditure, 133-40; civil service in, 323n.73; common and non-common expenditure, 117-24,140-46,194; common function debt, 35-36; Community Action Programs, 263-66, 269-70; debt problems, 175-77; debt types, 170-72; deficits, 155-56; expenditure and fiscal policy, 136-46,17778; federal aid to, 213-14; fiscal crisis and fiscal policy in, 5-11; fiscal crisis of 1930-32,5,42-56, 73-77; fiscal crisis of 1970s, 12; fiscal policy and politics, 271-74; fiscal policy model, 274-77; fiscal year, 293; functional responsibility in, 195-202; gross debt trends, 167-68,176-77; interest on debt, 3334; intergovernmental relations in, 83-86; intergovernmental revenue, 173-76; labor force, 24-26; local revenue, 173,175; long-term causes of fiscal crisis of 1930s, 78-86; long-term debt, 31-32; mayoral administrations, 291; median family income, 23-24; MFOA certification, 29; minorities in, 241; municipal employee expenditure, 124-29,144-45; municipal employee pension contribution, 31811.25; municipal employee residency requirements, 189-90; municipal tax burden, 37-38; New York City and Houston compared to, 20-39; New York City compared to, 2-11,16-17,28; nonwhite population,

22-23; overlapping debt, 36-37; per capita cost of service delivery, 193; per capita retail sales, 27-28; politicalbusiness cycle spending, 98-99; political parties and interest groups in, 7983,251-61; population change, 21-22; property taxes, 173-74,184; and recession, 178; revenue types, 156-59,16367; sales taxes, 185; short-term causes of fiscal crisis of 1930s, 73-74; shortterm debt, 30-31,177; special district utilization, 194-202; state mandates on debt, 187-88; state mandates on municipal employees, 189-92; state mandates on taxing, 184-85; state mandates on welfare, 191; total expenditure trends, 106-7,109-10,136-37; total revenue trends, 151-53,155-56; unemployment, 25-26,55; welfare burden, 24-25; welfare responsibility of, 55 Chicago Board of Education: financial authority of, 83; fiscal crisis of 1930s, 51; fiscal crisis of 1979, 7,258; as service provider to Chicago, 195 Chicago Housing Authority (CHA),196, 198,256 Chicago Park District, 195-96,256 Chicago Public School Finance Authority, 197 Chicago Regional Port District. See Illinois International Port District Chicago Teachers Union, 258 Chicago Transit Authority (CTA),19899; creation of, 122; as machine stronghold, 256; as service provider to Chicago, 195-96 Citizens Budget Commission (CBC): and business community, 236,248; formation of, 62; in New York fiscal crisis of 1930s, 64,67,72,75,219; on statemandated spending, 85 City Council (Chicago): budget role of, 215-18,254; Council Wars, 7-8,218, 226,255-56; reform of 1921,251 City Council (New York): budget role of, 221-25; creation of, 220 City councils, budget role of, 214,226-27 City government: and federal government, 207-14; functional responsibility and special districts,

192-207; and Great Depression, 4-5; and political parties, 238; and state government, 180-207; state mandates on expenditures, taxing, and debt, 183-92; state supervision of city finances, 181-83. See also Budgets; City councils; City services; Comptrollers; Mayors City Planning Commission, 220-21,248, 266 City services: capital expenditure on, 105; in Chicago, 78-79,83-84,176, 195-202,274; common and noncommon function expenditures, 100103,140-46,192-94,228,311n.37; dependency on intergovernmental revenue, 149-50; expectations for reduced, 285; functional consolidation of, 192; functional performance issue, 34, 124,163,173; functional responsibility and special districts, 181,192-207, 227-28; and Great Depression, 4-5; and machine politics, 81; and municipal labor force, 103-4; in New York, 6, 78-79,84-85,176,202-7,275; New York and Chicago compared, 176; privatization of, 9, 281; safety services, 100,111-14,118-20,144,316n.17; and spending cuts, 236. See also Welfare Civic Federation, 236 Clark, Terry N., 310n.29 Cleveland, 18,21 Common function debt, 34-36,31111.37 Common function expenditures, 100103; Census Bureau definition, 304; Chicago trends, 117-24; New York trends, 111-17; New York and Chicago compared, 140-46 Community Action Program (CAP), 26170 Community boards, 223,225 Community participation: in Chicago, 263-65,269-70; in Community Action Programs, 262-63; and fiscal instability, 271; in New York, 266-67 Comptrollers: in Chicago, 215; and mayors, 75; in New York, 225 Conservative party, 246 Cook County: board electoral districts, 196; Chicago's relation to, 83; Depression-era relief loan, 55; 1930s

Cook County (continued) default, 50-51,53; property tax responsibility, 184-85; special district utilization, 195; welfare burden, 35, 123,197-98 Corporate Fund, 217-18 Corr, Francis, 56,291 Costikyan, Edward N., 244 Council Wars, 7-8,218,226,255-56 Criminal justice services: in Chicago, 199; in Los Angeles, 286; in New York, 203 CTA. See Chicago Transit Authority Curry, John, 63,64 Cutback management, 287 Daley, Richard J.: balanced budgets, 155-56; budget role, 217; capital spending and debt service, 136; change from patronage to service strategy, 233,254; and Chicago Board of Education crisis, 7; and Chicago Teachers Union, 258; common and non-common function expenditures, 120-23,143; and Community Action Programs, 262-65,267,270; control over City Council, 215; control over revenue, 311n.32; debt trends, 170; and interest groups, 260-61; intergovernmental revenue, 163-64; Lindsay compared to, 273; mayoral tenure, 291; municipal employee expenditure, 128-29; municipal employee residency requirement, 190; and party politics, 253; and Public Building Commission, 200-201; revenue problems in fifth term, 174; total expenditure trends, 109-10; and welfare responsibility transfer, 198 Daley, Richard M.: budget role, 218; and community interests, 261; mayoral tenure, 291; and municipal employee unions, 259; policies, 8-9; and political machine, 99; and Public Building Commission, 201; reform image, 25657; and Shakman Decree, 255 Dallas, 13 Debt: Chicago trends, 170-72; common function, 34-36,31111.37; federal mandates on, 208; and fiscal policy, 166, 172-78; funded, 187; gross, 165,16772,176-77,303-4,31111.38; New York

and Chicago policies, 175-77; New York trends, 168-70; overlapping, 3437; per capita, 30-34; and revenue, 147-78; rolling over, 50,59-60,73, 166,183; state mandates on, 186-88. See also Long-term debt; Short-term debt Debt service. See Interest Default, 18; of Cook County, 50-51,53; defined, 30911.4; of New York City, 89, 319n.56; between 1929 and 1937,183 Deficit spending: as cause of fiscal crisis, 72; in Chicago, 155-56; in New York, 87,153-55 Democratic party: Cermak machine, 8081,274; in Chicago, 6,8,251-52,27475; Chicago City Council control of, 216-17; and Chicago Community Action Programs, 264-65,270; La Guardia's conflict with, 82; in New York, 244-46,276; in single-party cities, 231. See also Tammany Hall Department of Finance, 215 Depression, Great. See Great Depression DeSapio, Carmine, 246 Detroit: Depression default, 18; economic depression in, 21; poor population in, 22 Dever, William, 251 DiGaetano, Alan, 314n.69 Dillon's Rule (Ultra Vires Rule), 180,194 Dinkins, David: budget role, 225; fiscal problems confronting, 10-11,92,133, 287; interest group opposition to, 243; mayoral tenure, 292 Dunne, George, 201 Economic cycles, 96 Economic decline: and fiscal stress, 2028; and long-term debt, 166 Economy Bill, 71 EFCB. See Emergency Financial Control Board Eisenhower, Dwight, 210 Eisinger, Peter K., 32411.110 Eldersveld, Samuel, 231 Ellinghaus, William, 89-90 Emergency Financial Control Board (EFCB): creation of, 88-89; and Financial Control Board, 92; members, 90; in New York fiscal crisis of 1975,9, 109,223,276

Emmerson, Louis, 46-47,50,52-53 Erie, Steven P., 321n.9 Expenditures, 94-146; capital, 104-6, 129-40,304; common and noncommon function, 100-103,111-24, 140-46,192,194,228,304; cuts in, 15, 284,287; debt service, 104-6,129-40; deficit spending, 72,87,153-56; and economic cycles, 96; and fiscal crisis, 177; general, 300-301; and incrementalism, 97; municipal employee, 103-4, 124-29,144-45,189-92,305,31811.25; New York and Chicago policies compared, 177-78; in New York crisis of 1975,174,276,308n.28; and politicalbusiness cycle, 97-99; public welfare, 304; safety, 304; state mandates on, 188-92; total, 100,106-10,112,118, 136-37,143,300-301; utility, 300-301 Fall River (Mass.), 18 FCB. See Financial Control Board Federal government: aid to Chicago, 163-65; aid to New York, 161; antiurban policy, 288; and city government, 207-14; Community Action Programs, 261-70; Depression's effect on, 156; Great Society, 143,163, 211,233,266; as intergovernmental revenue source, 149,209-14; mandates, tax policy, and debt policy, 2079; New Deal, 209-10,280; New Federalism, 150,162,211,281; in new model of fiscal policy, 289-90; and urban finance, 1,4,21,31,49,61,175, 228-29,280-82,287 Federal system, 284 Finance Committee, 216,218 Financial Community Liaison Group (FCLG), 87 Financial Control Board (FCB): and Dinkins, 11,92,225; and fiscal crisis of 1975,9-10; and state supervision of city finance, 182 Financial Emergency Act, 89-90 Financial management: and fiscal crisis, 12,287,289; and fiscal stress, 18,2839,289; in Lindsay administration, 170; and political pressures, 182 Fiscal crisis, 17-18; and budget reductions, 113; in Chicago, 1930-32,42-56;

condition of, 74-77; and debt, 167; of Depression era, 40-93; as financial management problem, 12,287,289; and fiscal policy, 3-11,40; fiscal stress compared to, 17-39; interest groups' role in, 236-37; long-term causes of, 78-86; in New York City, 1931-33,5672; as opportunity for restructuring, 278; political theory of, 1-16; and public policy, 11-15; resolution of, 77; and revenue estimates, 172; rhetoric of, 283-86; short-term causes of, 72-74; and spending, 177 Fiscal Crisis of 1975 (New York City), 12,86-93; budgetary process during, 221-22,226; common and noncommon function expenditure, 111, 144-45; deferred maintenance during, 104; and higher education spending, 205-6; interest groups in, 270, 308n.28; intergovernmental revenue during, 162,172; long-term causes of, 95-96; municipal employee cutbacks, 125; per capita debt during, 168; Republican view of, 282; spending as cause of, 174,276,308n.28; statemandated debt restrictions, 188; theoretical analysis of, 12-14; total spending decrease, 107; unions' role in, 103 Fiscal instability. See Fiscal stress Fiscal policy: alternative models for, 274-77,289-90; and budgets, 94-96, 147-48,165-67,214-29; and Chicago crisis of 1930-32,42-56; and Chicago politics, 251,254,256-57,260; citystate relations in, 180-207; and Community Action Programs, 261-70; and debt, 166,172-78; and expenditures, 136-46; federal-city relations in, 20714; and fiscal crisis, 3-11,40; and fiscal crisis rhetoric, 283-86; intergovernmental relations in, 83-86,179-229; and long-term causes of fiscal crisis, 78-86; and municipal employees, 103; and New York crisis of 1931-33,5672; and New York politics, 242-43, 248-50; political framework for, 27779; political parties and interest groups in, 79-83,230-72; and resolution of fiscal crisis, 77; and revenue,

INDEX

Fiscal Policy (continued) 172-78; and revenue diversification, 149; and urban politics, 279. See also Budgets Fiscal stress, 18-20; and budgets, 12,19; and community participation, 271; defined, 30911.2; and economic decline, 20-28; and financial management, 18, 28-39,289; fiscal crisis compared to, 17-39 Flynn, Edward J., 57 Ford, Gerald R., 1,90-91 Fort Lee (N.J.),18 Foundations, 266 Frostbelt. See Snowbelt Functional consolidation, 192 Functional performance, 34,124,163, 173 Functional responsibility, 192-207; in Chicago, 195-202; and fiscal policy, 227-28; in New York, 202-7 Funded debt, 187 Funds (city), 66,296-97 Garcia v. Sun Antonio Metropolitan Transit Authority, 208-9 Gary, 21 Gelfand, Mark I., 30811.10 General expenditure, 300-301 General obligation bonds (G.O. bonds), 187 General revenue, 302 General Revenue Sharing, 211-12 Goldin, Harrison, 87,90 Goode, Wilson, 286 Gosnell, Harold F.,253 Gramm-Rudman-Hollings Act, 211-12 Great Depression: Chicago per capita debt during, 167; and city service spending, 141-42; and federal spending, 156; fiscal crises caused by, 74; fiscal crises in Chicago and New York during, 40-93; and intergovernmental revenue, 160; and modern city government, 4-5; municipal loan defaults during, 18; New York capital expenditure and debt service, 129-33; public works projects during, 104 Great Society, 143,163,211,233,266 Greenstone, J. David, 264,267,321n.9 Grimm, Peter, 58-59,62,64,67,75,87

Gross debt: Census Bureau definition, 303-4; defined, 165,311n.38; New York and Chicago trends, 167-72,176-77 Haider, Donald, 7 Halaby, Charles N., 32111.5 Harrison-Halsted Community Group, 260 Hayley, Margaret, 43 Heart Law, 192 Held, Virginia, 266,268 Hofstadter committee, 66 Home rule, 180,209; in Illinois, 184-185, 187 Horner, Henry, 54-56 Houston: assessed property value, 27; Chicago and New York City compared to, 20-39; common function debt, 3536; fiscal problems of 1980s, 13; interest on debt, 33-34; labor force, 24-26; long-term debt, 31-32; median family income, 23-24; municipal tax burden, 37-38; nonwhite population, 22-23; overlapping debt, 36-37; per capita retail sales, 27-28; population change, 21-22; short-term debt, 30-31; unemployment, 25-26; welfare burden, 24, 25 Illinois: special districts in, 195; supervision of city finances, 182 Illinois International Port District (Chicago Regional Port District), 19697 Illinois Sports Facilities Authority, 197 Impellitteri, Vincent: capital expenditure and debt service, 132; debt trends, 169,177; mayoral tenure, 292; municipal employee expenditure, 127; property tax revenue, 161; and Tammany Hall, 245; total expenditure trends, 108 Incrementalism, 97 Independent Budget Office (IBO), 22425 Independent Voters of Illinois (IVI), 253 Infrastructure, 140,288 Interest (on debt): Census Bureau definition, 303; Chicago trends, 133-36; expenditure on, 104-6; as indicator of fiscal stress, 32-34; New York and

INDEX

Chicago compared, 137-40; New York trends, 129-33; state mandates on, 186-87 Interest groups: in budgetary process, 235-37; in Chicago, 254,257; Chicago neighborhood groups, 259-61; and Community Action Programs, 261-70; and electoral-economic model, 98-99; in fiscal policy process, 79-83,230-72; municipal employees as, 103; in New York, 218,242-50,308n.28; and political parties, 230-35,238-42,270-74; relations with mayors and councils, 214,290; state-mandated expenditures for, 189; and Tammany Hall, 276 Interest group theories, 13-14 Intergovernmental relations: in budget process, 226-29; Depression's effect on, 5; in fiscal policy process, 83-86, 179-229; political parties' impact on, 237-38 Intergovernmental revenue, 149-51, 280-82; Census Bureau definition, 303; in Chicago, 163-65; and federal government, 209-14; during fiscal crisis of 1975,162,172; and fiscal policy, 228-29; in New York, 160-62; New York and Chicago trends, 156-59,17376 Internal Service Funds. 217-18 Johnson, Lyndon B., 211,265 Joint Commission on Real Estate Valuation (JCREV),43-44

Katznelson, Ira, 32111.9 Kaufman, Herbert, 242,247 Kelly, Ed: common and non-common function expenditures, 121-22,142; debt service reductions, 135; debt trends, 171; and Democratic machine, 80,99; election as mayor, 56; and federal government, 213; intergovernmental revenue, 163; mayoral tenure, 291; municipal employee expenditure, 128; and party politics, 252,274; revenue decline, 155; total expenditure trends, 109 Kelly plan, 49,53 Kennedy, John F., 265-66

Kennelly, Martin: balanced budgets, 155; debt service reductions, 135; debt trends, 171; intergovernmental revenue, 163; mayoral tenure, 291; municipal employee expenditure, 128; property taxes, 164; as reform mayor, 252 Kessner, Thomas, 31311.35 Key, V, O., 234 Koch, Edward: capital expenditure and debt service, 133; common and noncommon function expenditures, 11517; and corruption, 177,272,321n.91; debt trends, 170; development projects opposed, 285; election of, 92,99; and fiscal policy process, 9-10; intergovernmental revenue, 162; and Lyons Law, 190; mayoral tenure, 292; municipal employee expenditure, 128; preand postcrisis spending, 145-46; total expenditure trends, 109 Kohler, Charles L., 59 Labor force: as indicator of fiscal stress, 24-26; municipal, 103-4,124-29 Labor unions: Chicago municipal employees, 258-59; and Daley, 9,259; and Dinkins, 10-11; municipal employee expenditures, 103; New York municipal employees, 248-50; state mandates for, 189; in urban politics, 239-40 La Guardia, Fiorello H.: and airport development, 204; capital expenditure and debt service, 131-32,139; common and non-common function expenditures, 114-16,141-42; debt trends, 169; deficits, 153; and federal government, 209,213; fiscal policy of, 275-76; intergovernmental revenue, 160; mayoral tenure, 292; municipal employee expenditure, 127; and municipal salaries, 86; in New York fiscal crisis of 1930s, 63,70-72,145; and party politics, 80,82,245-46; total expenditure trends, 108 Lasswell, Harold, 2 Legislative Office of Budget Review, 223 Lehman, Herbert, 65-66,69,71-72 Levitt, Arthur, 90 Lewis, James, 49

INDEX

Liberal party, 246 Lindsay, John: capital expenditure and debt service, 133,139; common and non-common function expenditures, 114-17,143; and Community Action Programs, 262,266-70; Daley compared to, 273; debt trends, 170; deficits, 154; intergovernmental revenue, 160-61; mayoral tenure, 292; municipal employee expenditure, 12728; and municipal employee unions, 248; and party politics, 246; property tax revenue, 162; spending policies, 174; total expenditure trends, 109 Linkage fees, 285 Local political parties. See Urban political parties Local revenue (revenue from own sources), 149-51; Census Bureau definition, 303; in Chicago, 173,175;in New York, 175; New York and Chicago trends, 156-59 Long-term debt: for capital spending, 104-5; Census Bureau definition, 3034; as indicator of fiscal stress, 30-32, 166; New York and Chicago trends, 167-72; of New York in 1930s, 60; state mandates on, 186-87 Los Angeles, 22,286 Lowi, Theodore J., 239-40 Lyons, James J., 190 Lyons Law, 190 MAC. See Municipal Assistance Corporation Macchiarola, Frank, 279 McConnell, Grant, 238 McDonald, Terrence J., 237,30711.6 McDonough, Joseph, 49 McGoldrick, Joseph, 66-67 Machines, political. See Political parties McKee, Joseph: budget-cutting proposal, 77; budget role, 219; mayoral tenure, 292; in New York fiscal crisis of 1930s, 63-65,70 Mahon, Dennis, 64 Malone, William, 43 Mandates: federal, 207-9; state, 183-92 Margolis, David, 90 Mass transit: in Chicago, 122,195-96, 198-99,256; in New York, 68,73,153, 203-6; special districts for, 194

Mayhew, David R., 231 Mayors: administrations in Chicago and New York, 291-92; and budgetary process, 3-4,78,214-29,243,32011.80; capital outlay planning, 104; in Chicago, 215-18,254; and city councils, 214; Community Action Program control, 261-63; and comptrollers, 75; fiscal crisis rhetoric of, 283-86; in new model of fiscal policy, 290; in New York, 219-25,244-45,247-48,250; in New York and Chicago, 6-7,84-85, 277; and political-business cycle, 98; and political parties and interest groups, 79,235-38,271; and poor people, 241; and Reagan's urban agenda, 284,288; and responsible fiscal policy, 277-82; and revenue, 147-48; revenue overestimation, 172; and special districts, 227-28; and spending cuts, 15;United States Conference of, 5 Median family income, 23-24 Merriam, Charles, 54-55 Merriam, Robert, 253 Metropolitan Area Housing Alliance (MAHA),217 Metropolitan Transportation Authority (MTA), 205; special-district advantages of, 194 Metropolitan Water Reclamation District of Greater Chicago (Metropolitan Sanitary District of Greater Chicago), 195,197 Meyerson, Martin, 253,259 Mitchell, Charles E., 63 Moody's Investors Service: bond-rating scale, 29; Chicago bonds, January 1980, 7; Chicago bonds, October 1987, 8; New York bonds, February 1991,ll; Philadelphia bonds, 1990,286 Morris v. Board of Estimate, 223-24 Moses, Robert, 132 MTA. See Metropolitan Transportation Authority Municipal Assembly, 219-20 Municipal Assistance Corporation (MAC):capital spending and debt service under, 139; federal loan guarantee for, 90; long-range fiscal plan of, 89; members, 314n.76; and New York's restructuring, 31,88; state authorization of, 188

Municipal bonds: in Chicago crisis of 1930s, 46; congressional regulation of, 208; general obligation, 187. See also Moody's Investors Service Municipal employee expenditures, 1034; in Chicago, 128-29; in New York, 127-28; New York and Chicago compared, 124-29,144-45; pension contributions, 31811.25;state mandates for, 189-92 Municipal employee unions: in Chicago, 258-59; expenditure mandates for, 189; in New York, 248-50 Municipal Finance Officers Association (MFOA), 29 Municipal Labor Committee (MLC), 249 Municipal tax burden, 36-38 Municipal Water Finance Authority, 206-7 Nash, Pat, 56 Nathan, Richard P., 20-21 National political parties, 231-32,239 NCHs. See Neighborhood City Halls Neighborhood City Halls (NCHs), 267, 269-70 Neighborhood groups: in Chicago, 25961; and Community Action Programs, 261-70 Neo-Marxism, 13 Newark, 18,21 New Deal, 209-10,280 New Federalism, 150,162,211,281 New Orleans, 286 New York City: assessed property value, 27; bond default, 18; budget process, 214,218-29; capital expenditure and debt service, 129-33,137-40; Chicago and Houston compared to, 20-28; Chicago compared to, 2-11,16-17,28; common and non-common expenditure trends, 111-17,140-46,194; common function debt, 35-36; Community Action Programs, 266-70; debt trends, 168-70; deficits, 153-55,172-73; expenditures and fiscal policy, 136-46, 177-78; federal aid to, 213-14; fiscal crisis and fiscal policy in, 5-11; fiscal crisis of 1931-33,5,56-72; fiscal crisis rhetoric in, 285; fiscal policy model, 275-77; fiscal policy toward debt, 17577; fiscal problems of 1990s,287;fiscal

year, 293; functional responsibility in, 202-7; gross debt trends, 167-68, 176-77; interest on debt, 33-34; intergovernmental relations in, 83-86; intergovernmental revenue, 173-76; labor force, 24-26; local revenue, 175; long-term causes of fiscal crisis of the 1930s, 78-86; long-term debt, 31-32; mayoral administrations, 291-92; median family income, 23-24; and MFOA, 29; minorities in, 241; municipal employee expenditure, 124-28, 144-45; municipal employee pension contribution, 31811.25;municipal employee residency requirements, 18990; municipal tax burden, 37-38; nonwhite population, 22-23; overlapping debt, 36-37; per capita cost of service delivery, 193; per capita retail sales, 27-28; political-business cycle in, 9899; political confrontations of 1960s, 240; political corruption in, 32111.91; political parties and interest groups in, 79-83,242-50,271-74; political party control of elections, 234; population change, 21-22; property taxes, 174,185;and recession, 178; revenue types, 156-67; sales taxes, 185-86; short-term causes of fiscal crisis of 1930s, 72-74; short-term debt, 30-31, 177; special district utilization, 194; state mandates on debt, 186-88; state mandates on municipal employees, 189-92; state mandates on taxing, 185-86; state mandates on welfare, 191; total expenditure trends, 106-9, 136-37; total revenue trends, 151-56; unemployment, 25-26; welfare burden, 24-25,203-4,313n.35. See also Fiscal Crisis of 1975 New York City Transit Authority (NYCTA),204,206 New York Seasonal Financing Act, 91 New York state: supervision of city finances, 182; welfare responsibility, 203-4 Nixon, Richard, 211,265 Non-common function expenditures, 100-103; Census Bureau definition, 304; Chicago trends,117-24; and decentralization, 228; functional consolidation of, 192;New York and

INDEX

Non-common function expenditures (continued) Chicago compared, 140-46,194; New York trends, 111-17 Nonwhite population, 22-23 NYCTA. See New York City Transit Authority O'Brien, John: budgetary reforms, 219; City Charter amendments of, 85; common and non-common function expenditures, 115; mayoral tenure, 292; in New York fiscal crisis of 1930s, 64-66, 68,70; retrenchment proposal, 77 O'Connor, M. J., 49 O'Dwyer, William: and airport responsibility, 204; capital expenditure and debt service, 132,138; common and non-common function expenditures, 114-16,142; and corruption, 177, 321n.91; debt trends, 169; deficits, 15354; intergovernmental revenue, 16061; mayoral tenure, 292; municipal employee expenditure, 127; and Tammany Hall, 245; total expenditure trends, 108 Office of Economic Opportunity (OEO), 264-65 Office of Management and Budget (OMB) (New York), 221,224 Omnibus Budget Reconciliation Act, 211-12 Operating costs, and capital costs, 105 Overlapping debt, 34-37 Parlier (Calif.), 18 Paterson, Elmore, 87 Patronage, 195,232,254,271-72 PBC. See Public Building Commission Pecorella, Robert F., 30811.29 Per capita debt, 30-34 Per capita retail sales, 27-28 Per capita tax burden, 36-38 Peterson, Charles, 75 Peterson, George E., 21 Peterson, Paul E., 237,239,264,267, 287-88,308n.29,321n.9 Philadelphia: fiscal crisis of 1990s, 286; fiscal stress of 1970s, 18; poor population of, 22 Pittsburgh, 12 Pluralism in New York City, 242

Police, 316n.17 Political-business cycle, 97-99 Political parties: in Chicago, 251-61; Chicago machine, 6,8,80-81,84,99, 251-58,271-74; in fiscal policy process, 79-83,230-72; and interest groups, 230-35,238-42,270-74; machine politics, 42,99,232-35,240-41, 32111.5; in new model of fiscal policy, 289; in New York, 6,243-50; New York machine, 247,249; and politicalbusiness cycle, 98-99; special district patronage, 195; urban political role, 237-38. See also Democratic party; Republican party; Tammany Hall Political reformers: and banks, 76; in Chicago, 251-52; as indicator of fiscal crisis, 75; and Koch, 92; and New York mayors, 219, 244-45; and political parties, 248,272 Political science, analysis of fiscal crisis, 11-15 Poor people's groups: and Community Action Programs, 261-70; and political parties, 240-41 Population change in Chicago, Houston, and New York, 21-22 Port Authority of New York and New Jersey, 204 Post-fiscal crisis city, 282-88 Poverty, 22,289. See also Poor people's groups Presidential elections, 97 Prial, Frank, 65 Private activity bonds, 208 Privatization, 9,281 Property taxes: in Chicago, 42-43,45, 53,164-65,173-74,184; a s local revenue source, 148,151;in New York, 60, 66,73,161-62,174,185; New York and Chicago trends, 156-59; revenue from, 303; state mandates on, 184,31811.11 Proposition 24,148 Proposition 13,148,159,208,236 Protess, David L., 260 Przeworski, Adam, 233 Public authorities, 319n.36. See also Special districts Public benefit corporations, 204 Public Building Commission (PBC), 133, 136,139,196-97,200-202,274

Public policy and fiscal crisis, 11-15. See also Fiscal policy Public welfare expenditures, 304. See also Welfare Public Works Administration (PWA),210, 213 Rakove, Milton, 253 Reagan, Ronald: antiurban rhetoric, 283-85; New Federalism, 150,162,211, 281; tax reform, 207; and Urban Development Action Grants, 212-13 Reconstruction Finance Corporation (RFC), 54-55,61 Redistributive services. See Welfare Reformers, political. See Political reformers Regional Transportation Authority (RTA),194-96,199 Republican party: in Chicago, 251; machine politics, 42; in New York, 246; New York crisis viewed by, 282 Residency requirements, 189-90 Retail sales, per capita, 27-28 Revenue: and debt, 147-78; diversification, 149-51,186; general, 302; local, 149-51,156-59,173,175,303; New York mayors' neglect of, 244; from property taxes, 303; state mandates on, 183; total, 149,151-56,302-3; types in New York and Chicago, 15667; utility, 302. See also Intergovernmental revenue; Taxes Revenue Anticipation Notes (RAN), 18788 Revenue from own sources. See Local revenue Revenue from property taxes, 303 Revenue Sharing, General. See General Revenue Sharing RFC. See Reconstruction Finance Corporation Rhetoric of urban fiscal crisis, 283-86 Rohatyn, Felix, 89-91 Rolling over debt, 50,59-60,73,166,183 Roosevelt, Franklin D.: and Cermak, 251-52; and federal aid to cities, 92; and La Guardia, 213; New Deal, 20910,280; in New York City politics, 57, 313n.28; in New York fiscal crisis of 1930s, 65,67

Rosen, George, 260 Royko, Mike, 263 RTA. See Regional Transportation Authority Saco (Me.), 18 Safety expenditures, 304 Safety services, 100; Chicago expenditure trends, 118-20; New York and Chicago expenditures compared, 144; New York expenditure trends, 111-14; police, 31611.17 St. Louis, 12,18,21 Sales taxes, 73; in Chicago, 185; federal policy on, 207-8; in New York, 185-86 San Francisco, 285-86 Sawyer, Eugene: capital spending and debt service, 136; common and noncommon function expenditures, 123; intergovernmental revenue, 165; mayoral tenure, 291; municipal employee expenditure, 129; and Public Building Commission, 201; total expenditure trends, 110 Sayre, Wallace, 242-43,247 Scarcity: and capital spending, 105; and fiscal crisis, 12,15,276 Schattschneider, E. E., 232-34,287 School Construction Authority (SCA), 206-7 Scott, James C., 32111.9 Seabury, Samuel, 75 Shakrnan Decree, 8,255-56,272 Shefter, Martin, 30711.6 Short-term debt: Census Bureau definition, 303-4; of Chicago in 1929,44; as indicator of fiscal stress, 30-31,166; New York and Chicago trends, 167-72; of New York in 1930s, 56,60-61,73; state mandates on, 187 Simpson, Dick, 218 Simpson, Hubert, 43 Simpson, James, 46,52 Simpson Committee, 46,31211.16 Sinking funds, 66 Skowronek, Stephen, 307n.5 Smith, Alfred E., 85 Snowbelt (frostbelt): as climatic and economic region, 30911.11; economic decline in, 20; economic improvement in, 38,278

Social control theory, 14 Social services. See Welfare Sorauf, Frank J.,231 South Carolina v. Baker, Secretary of Treasury, 208 Special districts, 193-94; and budget process, 227-28; Census Bureau data problems for, 299; in Chicago, 195202; in New York, 202,204; public authorities compared to, 31911.36 Spending. See Expenditures Standard and Poor's, 29 Standard Metropolitan Statistical Area (SMSA), 31011.12 State government: aid to Chicago, 175; aid to New York, 161,175; assignment of functional responsibility, 192-207; city-state relations, 180-207; and federal mandates, 207; and fiscal policy of cities, 228; as intergovernmental revenue source, 149-50; lost federal aid substituted by, 281; mandates on city finances, 183-92,318n.11; mayors' attitude toward, 209; in new model of fiscal policy, 289-90; supervision of city finance, 181-83 Stein, R. M., 324n.7 Strawn, Silas, 44-48,75,87 Sunbelt: as climatic and economic region, 31111.37; economic growth in, 20; economic problems in, 38,278 Tammany Hall: budget role of, 85; and interest groups, 276; in New York fiscal crisis of 1930s, 57-59,62-65,6970; in New York party politics, 245-46, 313n.27 Tax Anticipation Notes (TAN), 187-88 Taxes: Daley's policy on, 9; and economic decline, 19; and expenditure, 95; federal policy, 207-9; incentives for business, 284-85,31511.5;; in New York, 69-70; per capita tax burden, 36-38; and politics of fiscal crisis, 4; reduction movements, 236; sales taxes, 73,185-86,207-8; state mandates on, 183-86; tax base expansion required, 289. See also Property taxes Tax Reform Act of 1986,207-8 Thompson, Big Bill: austerity budget of, 77; bankers attacked by, 76; in

Chicago fiscal crisis of 1930s, 42,4448; mayoral tenure, 291; per capita spending, 106 Total debt. See Gross debt Total expenditures, 100; Census Bureau definition, 300-301; trends in Chicago and New York, 106-10,112,118,13637,143 Total revenue: Census Bureau definition, 302-3; components of, 149; New York and Chicago trends, 151-56 Traylor, Melvin, 52-53 Trenton, 12 Truman, David B., 234,240 Truman, Harry, 210 Tulsa, 13 UATF. See Urban Action Task Force UDAG. See Urban Development Action Grant Ultra Vires Rule. See Dillon's Rule Unemployment: in Chicago in 1932,55; as indicator of fiscal stress, 25-26 Unions, labor. See Labor unions Unitary model of fiscal policy, 14 United States Conference of Mayors (USCM), 5 Untermeyer, Samuel, 69 Urban Action Task Force (UATF),267-69 Urban Development Action Grant (UDAG), 211-13 Urban fiscal policy. See Fiscal policy Urban political parties, 231-35,239-40 Urban Progress Centers (UPCs), 264 Urban Renewal Notes (URN), 187 Urban Summit, 290 Utility expenditure, 300-301 Utility revenue, 302 Wagner, Robert: capital expenditure and debt service, 132,139; common and non-common function expenditures, 114-16,143; and Community Action Programs, 267; debt trends, 169-70, 177; deficits, 154; intergovernmental revenue, 160-61; Lyons Law repealed by, 190; mayoral tenure, 292; municipal employee expenditure, 127; and municipal employee unions, 248; and party politics, 246; property tax revenue, 162; total expenditure trends, 108

INDEX

Walker, Jimmy: bankers attacked by, 76; budget cuts opposed by, 77; capital expenditure and debt service, 131; common and non-common function expenditures, 115,141; and corruption, 32h.91; debt trends, 169; mayoral tenure, 291; in New York crisis of 1930s, 57-63,145; and party politics, 245; per capita spending, 106; subway fare increase opposed by, 74 Washington, D.C., 286 Washington, Harold: budget role, 218; capital spending and debt service, 136; common and non-common function expenditures, 121,123,146; and Council Wars, 7-8,218,226,255-56; debt trends, 172; mayoral tenure, 291; municipal employee expenditure, 129; and municipal employee unions, 259; and neighborhood groups, 261; and political machine, 99,256; and Public

Building Commission, 201; revenues, 165; and Shakman Decree, 255; total expenditure trends, 110 Welfare: AFDC, 191,198,203;Chicago expenditure trends in, 118-20; Chicago's responsibility for, 55,123,173-74,19798,274; as indicator of fiscal stress, 2325; in new model of fiscal policy, 28990; New York and Chicago expenditures compared, 144-45; New York expenditure trends in, 111-14; New York's responsibility, 203-4,275; as non-common function expenditure, 101; public welfare expenditure defined, 304; state mandates on, 190-91 Wilson, James Q., 232 Wilson, W. J., 22 Works Progress Administration (WPA), 210,213,274 Yonkers (N.Y.), 18