Municipal Choices during a Recession

Levine’s Step-by-Step Approach

Levine (1978) argues that local government fiscal decision-making strategies will vary dependent on economic conditions. When revenues are abundant, despite having the time and resources to utilize sophisticated decisions-making systems, there is no need for these tools, so informal methods such as intuition will predominate. However, when resources are restricted in times of fiscal stress, despite their usefulness, there is less time and money to invest in sophisticated techniques. During times of fiscal stress, therefore, organizational subunits will make decisions that will best promote their survival, regardless of the effects on the organization as a whole. Since resisting cuts outright is risky behavior, Levine argues that subunit managers will choose less risky actions to smooth the revenue declines and their effects on the organization (Levine 1978).

Although the choices change depending on whether the source of the decline is internal or external, organizations will generally try to avoid making service cuts by first broadening the revenue base (perhaps through annexation) and adopting user fees. Once those actions are taken, the next step would be to seek expenditure savings through efficiency improvements, deferring maintenance, or seeking voluntary employee reductions like early retirements or hiring freezes. As budget conditions become more austere, organization members begin to consider service cuts. Therefore, although cutback decision making does follow a somewhat rational process limitations and paradoxes inherent in the government experiencing budgetary shortfalls preclude an entirely rational process.

Coping Strategies Approach

A similar approach to Levine’s but one that envisions a hierarchical set of choices is advanced by a number of researchers who argue that there is a set of predictable coping strategies employed by local governments experiencing fiscal strain (Wolman 1980; Forrester and Spindler 1990; Bartle 1996). Faced with fiscal pressure, these scholars suggest that local governments must choose to either increase revenues or reduce local services. These studies found that coping strategies to address revenue losses were similar across different municipalities.

Using systems theory, Wolman (1980) advances a set of hypotheses to predict local government responses to fiscal stress. According to Wolman, local governments are problem-solving organizations that must seek stability with their environment. In the case of fiscal stress, local governments will seek solutions that are both feasible and effective. Making cuts in services is seen as a last resort. Instead, local governments will first attempt to buy time by implementing strategies that neither increase fees or taxes nor reduce expenditures—thus not upsetting either the internal or the external environment. Drawing down reserves or utilizing one-time revenues are examples of strategies that meet these conditions. According to Wolman, once these tools have been depleted, the government has no choice but to either increase revenues or cut expenditures, with the likely consequence of a decrease in services. Since the reduction in services upsets the external environment and creates risk for politicians, this is the choice of last resort. Wolman found that across the board cuts were more likely than targeted cuts given the perception of equity to the external and internal actors.

Other scholars also found patterns of responses when they investigated local government responses to fiscal pressure. Bartle (1996) found significant variation in municipal responses to state budget cuts in New York. However, despite this variation, he determined that the two most common strategies used by municipalities were to decrease capital spending and reduce cash reserves. Skidmore and Scorsone (2011) found that Michigan municipalities were most likely to make cuts in capital expenditures, general government, public works, and parks and recreation. Essential services, like public safety, were insulated from most cuts.

Unstructured Responses

Other findings dispute the hypothesis that there are patterns of coping strategies or that municipalities use a rational systematic approach in response to fiscal strain. These studies find that due to differences in statutory requirements and restrictions, resource capacity, and demographics, there is little predictability in how municipalities respond to cuts (Downes and Rocke 1984; Morgan and Pammer 1988; Bartle 1996). Despite the conclusion that it is difficult to identify patterns of responsive strategies across municipalities with different characteristics, some characteristics of the municipalities did seem to be related to strategic choices. The level of professionalism of the municipality’s leadership was one such factor.

Morgan and Pammer (1988) have done the most comprehensive work in this area. Using the “garbage can model” of decision making, Morgan and Pammer (1988) examined seven variables they hypothesized might influence the choices among three types of financial management practices during retrenchment—increasing revenue, improving productivity, and cutting spending. Their general conclusion was that although it is difficult to explain the strategies used to deal with fiscal austerity in cities, the city administrator plays a significant role in decision making. More specifically, Morgan and Pammer found that administrators’ perceptions of the city’s fiscal situation influenced choices to cut spending or increase revenue—as the manager’s perception of the fiscal problem increased, revenues and spending cuts also increased. No matter what the fiscal condition of the municipality, if the manager is not convinced that problem exists, steps to mitigate the fiscal distress will not take place.

In a later and more comprehensive study, Pammer (1990) used many of the same independent variables and expanded the number of fiscal choices. As in the earlier study, the administrator variables were the most significant predictors of fiscal choices in a recession. However, the low R ² figures in the model indicate that much of the variation in the model is not explained. Pammer concludes that fiscal choices during the retrenchment process are indicative of an unstructured decision process.

Bounded Rationality Approach

Although not directly applied to municipal choices in a recession in the literature, the bounded rationality model of decision making (Simon 1957) may provide an explanation for the choices municipalities make when under fiscal distress. According to Simon’s model of bounded rationality, the rationality of decision making is limited by imperfect or incomplete information. In government organizations, other constraints on rationality include the political process, insufficient time or expertise, and interest group involvement. These constraints, and the high level of complexity that is often inherent in government choices, lead officials and administrators to rely on heuristics rather than pure rationality when making decisions. Often, the resulting decisions are incremental and satisfactory but not necessarily ideal for a given situation.

Applying the bounded rationality model to fiscal choices in a recession would lead to a number of potential outcomes. Some initial actions are likely to be taken by all municipalities in the first year of revenue declines, such as deferring maintenance and instituting hiring freezes, consistent with a rational approach. At that time, the political pressures will be less severe as the full extent of the problem was not realized.

However, in the case of a downturn of exceptional severity and duration like the current recession, many municipalities would not be able to reach stability in a single budget cycle. At this point, the trade-offs would become more difficult and the multiple actors in the system would begin applying pressure to the elected officials. Actions taken by state government would potentially complicate matters further by placing greater pressure on the system. These pressures would serve as constraints on a rationale decision-making process, leading to greater variability among communities in the strategies to address fiscal stress.

While it is likely that all municipalities will try to preserve essential services, cutting those areas of the budget only as a last resort, how a community determines which services are essential may vary by community. These conditions will lead to a diversity of choices by local governments in subsequent budget cycles.

Given the results from Morgan and Pammer’s study (1988), it is possible that the presence of a professional manager will result in different choices to address fiscal distress. The presence of the manager could potentially increase the capacity for rationale decision making by insulating decisions from some of the politics. In this case, the expectation would be that the presence of a chief administrator will lead to different fiscal choices than in nonprofessional municipalities and may promote the implementation of more innovative fiscal choices.

Innovation and Fiscal Distress

Research in local government innovation is abundant; however, this research rarely addresses innovative financial practices in local governments. Harold Wolman (1986) used the innovation literature to develop research questions for investigating the relationship between the local government response to fiscal strain and innovation. Questions of what factors lead to innovation in local government, whether fiscally stressed municipalities are more or less likely to innovate than others, and what types of innovations are likely to be implemented in times of resource scarcity were not entirely addressed in subsequent research.

One exception used survey data from the Fiscal Austerity and Innovation Project to gather data from cities with populations of 25,000 and above (Clark 1994). Clark developed a list of innovative fiscal practices in place during the 1980s and early 1990s. He hypothesized that fiscal strain would encourage a municipality to innovate and that fiscal strain might interact with socioeconomic, leadership variables, and other values to promote innovation. Clark concluded that the degree of fiscal strain of a municipality was unrelated to its propensity to innovate and that the other relationships were weak. In addition, the use of innovative strategies was not confined to affluent communities (Clark 1994).

Clark (1994) used a set of five criteria from the Urban Innovation in Illinois Program to determine which fiscal choices were innovative. The authors found many types of innovative activities. In the face of revenue decline, municipal leaders found creative sources of revenue in the form of impact fees for development and user fees. Advents in financial software allowed for near-constant monitoring of a city’s fiscal status and better forecasting, allowing for a drawdown of rainy day funds. Clark also found that cities were using new forms of borrowing, such as short-term loans, to mitigate problems from declining revenues.

By far, the productivity category—doing more with less—contained the greatest number of innovative practices. For the most part, these innovations relied on creative partnerships with private companies, nonprofit organizations, or other governments. Some of the examples provided by Clark included joint purchasing agreements, joint personnel recruitment and training of police officers, partnerships with private companies that involve barters, and contracting out services previously provided by union staff.

Recent studies do not link innovation specifically to fiscal distress. However, one strategy that is often considered innovative is the use of privatization by local governments. A 2009 (Zullo) study found no relationship between fiscal distress and privatization rates of U.S. counties.

Clark’s inventory of innovative fiscal practices is useful; however, given its age, it is no longer comprehensive. In addition, many of the fiscal choices described as innovative, often creating controversy in the communities that adopted them are now nearly universal; city-issued parking stickers are a good example. This study seeks to determine what actions contemporary municipal leaders, faced with the worst recession in a generation, have taken to maintain fiscal stability despite debilitating revenue losses.

Differences in form of government are likely to become more significant as the political stakes increase. City managers, unlike mayors, do not face electoral pressures. Since the political stakes are lower in the council–manager form, policy choices are more likely to be based on strategy rather than political opportunism (Feiock and Kim 2001; Feiock, Jeong, and Kim 2003) and therefore, policy choices are likely to differ.

Recent research provides some insights into the choices of municipalities in the current recession. Scorsone and Plerhoples (2010) argue that state and local governments’ responses to the current recession, and other shortfalls since the early 2000s, have been more likely to rely on budget cuts and restructuring rather than the tax increases that were favored in earlier economic downturns. They argue that the increasing use of cash reserves may be one explanation for this shift. According to the National League of Cities’ 2011 report of city fiscal conditions (Hoene and Pagano 2011), the most common expenditure cuts taken by cities were reductions in personnel costs and delaying or cancelling capital expenditures. Consistent with the findings of Skidmore and Scorsone (2011), expenditure cuts are least likely in public safety and most likely in public works, parks and recreation, and libraries.

Drawing from the literature on innovation and municipal fiscal stress leads to a number of conclusions. First, municipalities operate in a turbulent and complex environment that influences the range of available fiscal choices (Wolman 1983; Pagano 1988; Hendrick 2004). The complexity of the environment makes it difficult to identify a simple pattern of municipal response to fiscal stress. Second, research has established that innovation should and can lead to better performance outcomes for local government (Watson 1997; Borins 2008). Third, structural variables influence innovation adoption and fiscal choices in municipal governments (Morgan and Pammer 1988; Moon and DeLeon 2001; Maher and Deller 2007; Nelson and Svara 2012).

The complexity of the environment and the differences (structural, cultural, and financial) of the municipalities means that municipal reactions to the recession should differ a great deal. This research will test whether the model of bounded rationality can explain these reactions. Under bounded rationality, in the early period of the recession, municipal governments are likely to employ similar strategies for addressing its effects because political and fiscal pressure should be less severe. These fiscal strategies will pose little threat to operations or to the elected officials—reducing overhead, hiring freezes, suspending salary increases for nonunion employees, and reducing overtime.

As fiscal conditions worsen, political and environmental pressures should lead to a divergence of fiscal strategies. A second set of strategies will pose minimal risk and will be employed by most municipalities. However, in some cases, states may restrict their use or the elected officials may deem them unacceptable. These strategies include tax and fee increases, furloughs, early retirements, labor concessions, and use of one-time revenues. Only a few municipalities will use the final set of strategies. These strategies pose the greatest risk or have the highest level of restrictions by state governments, and would include innovative cooperative arrangements and technology, use of volunteers to provide city services, new revenue sources, and new management strategies.

Increased Taxes and Fees

In all cases, to balance the annual budgets from 2007 to 2011, municipalities had to attempt to maximize their revenues. Table 2 summarizes the actions taken to increase revenues by the case study municipalities. Since all case municipalities obtained additional revenue through federal grants, grants are not referenced in the table. Increases in fees for utilities or service provision were preferred over tax increases and were generally implemented in the early years of the recession. Eleven of the fifteen case municipalities increased utility rates. Five of the case cities increased their property tax rate while four others increased rates of other taxes such as special assessments for public safety or income tax.

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Table 2.

Strategies to Increase Revenues 2007–11

Municipality	Lowest GF Revenues (2007–11)	Increase Fees/Utility Rates	Tax Increase	Draw on Reserves/Nonrecurring Income	New Recurring Revenue Source/Sources	Increase Delinquent Collections	Increase Investment Interest
Allentown, PA	2008	X	I	X	X		X
Camas, WA	2007			X	X
Cape Coral, FL	2009	X	P
Dalton, GA	2011	X	H/M
Hagerstown, MD	2007
Ogden, UT	2009	X		X
Paramount, CA	2010	X		X
Park Forest, IL	2007	X	P	X	X		X
Rockford, IL	2008	X		X
Saginaw, MI	2010		P; SA	X		X
Smyrna, GA	2011	X			X
South Bend, IN	2009	X	I; SA		X
Spartanburg, SC	2007	X
Springfield, OR	2007	X		X
Wilmington, DE	2007		P	X	X	X
Worcester, MA	2007		P		X

Note: H/M = Hotel/Motel; I = Income; P = Property; SA = Special Assessment (Public Safety).

State and local restrictions were critical factors in revenue capacity. Allentown’s income tax rate increase can only be used to fund pensions. Spending of the funds from the special assessments in South Bend and Saginaw is restricted to public safety expenditures. In Michigan and California, state caps on property tax rate combined with valuation restrictions led to sharp decreases in property tax revenue capacity. However, not all tax and expenditure limitations were harmful to municipalities. Although Massachusetts limits property tax increases, local governments can store up excess levy capacity by not making their statutorily permitted increases until they are needed, thus Worcester’s rate continued to increase throughout the recession.

Drawing from Nonrecurring Revenue Sources

Although drawing on nonrecurring revenue sources is an unsustainable practice that can harm a municipality’s overall fiscal outlook, more than half of the case municipalities chose to draw on these sources to balance their general funds at least once since 2007.

Allentown chose to sell excess land and buildings to garner additional funds. Other municipalities are choosing to sell space on city assets such as trash receptacles or parking permits to private companies for marketing purposes. In larger cities, the revenue generated from these initiatives can be substantial.

New and Recurring Revenue Sources

Seeking new but recurring revenues provides long-term benefits to municipalities, One source are recurring revenues of are payments in lieu of taxes (PILOTs). Negotiating with nonprofit organizations located within the city limits for PILOTs allows municipalities to recoup the costs of providing services to those organizations. Municipalities often spend a great deal of money providing public safety, transportation, and other services to hospitals, universities, and other nonprofit organizations that are often exempt from taxes. Allentown recently began negotiating for voluntary payment from tax-exempt organizations for the estimated costs of city services provided to those organizations. Worcester collects PILOTs from several higher education institutions within the city limits. PILOT programs have been used by municipalities in at least eighteen states (Kenyon and Langley 2010) and are likely to become increasingly common as municipalities face greater revenue pressures.

Other municipalities sought new revenues from excess capacity and casinos. Allentown realized additional revenues from its casino due to a recent expansion and they were able to lease their excess sewer capacity. Smyrna, Georgia, used available space in its jail to house prisoners from other jurisdictions, another new and recurring source of revenues.

Increase Collections of Delinquent Payments

When the economy is strong, initiatives to collect delinquent revenues may not prove cost-effective. However, if there is a substantial amount of revenue due to a municipality, failure to collect that revenue may be detrimental, particularly when revenues are declining. Two of the case municipalities made the collections of these revenues a priority. Wilmington’s program was called the “Plan for Change.” As the only municipality in Delaware that collects a wage tax (earned income tax), Wilmington experienced a significant level of noncompliance. As part of the plan, the city established a special collections and audit group made up of both employees and outside experts. The group has collected $50 million in wage tax revenues, $20 million in delinquent parking citations revenue, and $30 million for the water and sewer utility since its founding. A similar program was established in Allentown to collect delinquent revenues.

Cash Management

A final strategy used in the case municipalities to increase revenues was to seek new investment tools to maximize the interest returns from reserves. Park Forest, Illinois, began using a ladder CD portfolio that led to and increase annual investment interest by $75,000.

While efforts to maximize revenues were important to meeting budget deficits, they were not sufficient given that the most stable revenue sources for municipalities—property and sales taxes, continued to decline in most municipalities. However, it was more common for municipalities to use expenditure reductions and efficiency improvements to balance the budgets rather than seeking revenue enhancements.

Reducing Personnel Costs

For most of the cases, the primary goal in reducing personnel expenditures was to do so while retaining prerecession service levels. Some personnel expense reductions, including the reduction in workforce through attrition and/or hiring freezes, changes in benefit structure or contributions, and a reduction or elimination of cost of living increases were implemented universally and were usually implemented at least partially before 2009.

Reductions in force began in 2009. More than half of the case study municipalities used layoffs to reduce personnel costs and only one-third used furloughs applied to some or all of their staff. Greatest reductions in personnel were seen in those municipalities that lost significant amounts of state revenue sharing (Camas, WA; Saginaw, MI) or that had restrictive TELs (South Bend, IN; Paramount, CA). Other strategies to reduce personnel costs included renegotiations of union contracts, reducing full-time employees to 32-hour workweeks and reducing management pay levels. Consistent with the bounded rationality model, the environmental complexity led to a great deal of variability in expenditure reduction strategies (Table 3).

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Table 3.

Personnel Expenditure Reduction Strategies 2007–2011

Municipality	Reduce Personnel*	Furloughs, Change Shifts	Labor Concessions	Use of Volunteers	Reduce Health Care Costs
Allentown, PA	L, A, ER		X		X
Camas, WA	L, A	X	X	X
Cape Coral, FL	L, A	X	X	X	X
Dalton, GA	L, A, ER				X
Hagerstown, MD	L, A	X		X	X
Ogden, UT	A			X
Paramount, CA	A	X	X		X
Park Forest, IL	A
Rockford, IL	L, A, ER	X
Saginaw, MI	L, A		X
Smyrna, GA	A				X
South Bend, IN	L, A	X
Spartanburg, SC	L, A
Springfield, OR	L, A	X	X	X
Wilmington, DE	L, A	X			X
Worcester, MA	L, A	X	X

*Actions taken by all municipalities: delay hiring in vacant positions; reduce overtime; suspend cost of living adjustments or other benefits. Note: L = layoffs; A = Attrition; ER = Early Retirement

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Table 4.

Other Expenditure Reductions

Municipality	Cancel Events/Close Facilities	Delay Capital Projects; Defer Maint.	Technology	Intergovernmental Public–Private	Restructure/Combine Depts.	New Management Approaches
Allentown, PA	X					X
Camas, WA		X		X
Cape Coral, FL		X		X	X	X
Dalton, GA			X	X	X
Hagerstown, MD		X			X
Ogden, UT		X			X
Paramount, CA
Park Forest, IL		X	X
Rockford, IL					X	X
Saginaw, MI		X			X
Smyrna, GA		X	X	X
South Bend, IN				X	X
Spartanburg, SC
Springfield, OR				X	X	X
Wilmington, DE	X	X			X
Worcester, MA	X

Note: All municipalities reduced routine administrative expenses for overhead and supplies.

Volunteers

Some of the municipalities were able to reduce personnel costs by increasing opportunities for volunteer assistance. Cape Coral turned to greater assistance from police department volunteers. In Cape Coral, work for a park ranger program previously provided by contracted staff was transferred to the police volunteer program. The parks department in Camas, Washington relies on volunteers for multiple services, including office work, park maintenance, and assisting with special events. Hagerstown, Maryland recently formalized their citywide volunteer program that seeks to inventory the skills of potential volunteers and match them to various city departments. In Springfield, Oregon, volunteers staff and maintain the city museum.

Reduction in Benefits and Health Care Costs

Health care costs have greatly increased in the past several years. In most cases, municipalities have sought greater employee cost sharing for health care premiums or they have reduced retiree benefits. Some organizations are trying a more innovative approach to reducing costs for health care. Worcester sought reduced premiums through negotiations with insurance companies. Another innovative cost-savings approach is to offer employees incentives to opt out of municipal-provided health care. In Allentown, employees who are covered by another health insurance plan are able to opt out of the city’s insurance and receive a $1,500 incentive.

Other Expenditure Reductions

Although the preponderance of expenditure savings in municipalities were realized through changes in personnel policies, other areas were targeted for reductions as well. Three communities cancelled major events in their communities, such as July 4 fireworks displays. In several other cases, chief administrators proposed eliminating events but elected officials chose other reductions instead. Wilmington, Delaware chose to close several community pools, saving money in both staff and facility operations.

A common source of expenditure savings was through the delay of capital projects or the deferral of maintenance for buildings and facilities. Half of the municipalities chose these strategies. In some cases, the slowdown in residential growth meant that planned infrastructure expansion was no longer needed. Deferred maintenance included slowing down the timetable for replacing equipment, reducing the number of potholes filled, and making minor building upgrades.

Technological innovations were also credited with saving money. From low-energy options in transportation and lighting to software programs that improved efficiency while performing government services, technological advances were cited in most cities as having at least a minor cost-savings affect. Smyrna reduced expenditures by implementing a new electronic parking ticket system and began using SUVs in place of fire trucks to respond to medical calls.

Intergovernmental and Interorganizational Agreements

Municipal efforts to reduce costs and improve productivity through contracting out services, intergovernmental agreements, and public–private partnerships precede the recession. However, when faced with extreme reductions in revenues, these initiatives take on greater importance. While every municipal case in this study is engaged in these efforts to at least a limited degree, some have developed truly innovative approaches.

Among the case study cities, the most complicated new governance effort was a functional consolidation of the fire departments of Springfield and Eugene, Oregon. The consolidation resulted in combined offices of the chief, operations, fire marshal, and training, saving each department more than $100,000 per year. In his budget message, the Springfield city manager said that revenue declines have “required the organization to act and think differently” (Springfield 2012 Annual Budget Message, 3).

In the United States, combined dispatch services are becoming increasingly common. Park Forest, Illinois participates in SouthCom, a combined public safety dispatch service for four municipalities. SouthCom is able to use better technology at lower cost than the municipalities could provide individually. Hagerstown, Maryland consolidated its 911 dispatch services with the county.

Even small-scale efforts can result in substantial cost-savings. Allentown created a Corporate Partnership Initiative to seek support from individuals and organizations doing business with the city. Types of support include supplier discounts, donations from citizens, and corporate donations to offset costs of some projects. Cape Coral has outsourced several functions including street sweeping and formed a limited partnership with its county to take its biosolids. South Bend engaged in a number of small cooperative efforts to achieve costs savings that included consolidating building inspections functions with St. Joseph county and entering into a cooperative purchase agreement with other governments for road salt that saves the city nearly $100 per ton.

Overall, those municipalities with professional managers were more likely to seek out intergovernmental and interorganizational partnerships to alleviate fiscal strain. Of the mayor–council cities, only Allentown and South Bend undertook major cooperative endeavors.

Government Restructuring

Municipalities could also lower expenditures by consolidating functions into one department that were previously performed by staff in multiple departments, sharing staff between multiple departments, and cross training employees to fill multiple positions. For example, in South Bend, the finance and public works departments now share a finance officer.

Saginaw combined the administrative offices of the police and fire departments into a new administrative division called Community Public Safety overseen by the Assistant City Manager for Public Safety. Police officers also agreed to cross train as firefighters. By combining the administrative functions of the two departments, the city hopes to reduce costs; in the first year, the city was able to eliminate a clerical position. Hagerstown, Maryland underwent significant structural changes due to the recession. Although forty-three positions were eliminated, another five were added due to the restructuring.

New Management Approaches

While the Lean government approach is used in a number of federal agencies, more recently, local governments have begun implementing it. Only one of the case cities, Cape Coral, uses this method of continuous improvement that is customer focused and seeks to maximize the efficient use of government resources. If the Lean approach works, the government’s capacity will be increased without the need for additional revenues.

Engaging citizens or employees in efforts to balance the budget may lead to new ideas that management may not be able to develop on their own. In 2009, Allentown created a Blue Ribbon Finance and Operations Committee made up of community members from both the government and the private sectors. The committee successfully identified a number of potential new sources of revenue and expenditure savings. Rockford’s mayor appointed members of the community to a financial advisory board that is tasked with identifying areas of potential cost reduction that will not lead to consequent service reductions. Many of the ideas are being implemented including outsourcing some services and sharing services with other local governments. Springfield’s “My Ideas” program seeks money saving ideas from employees. As of 2011, sixty-three ideas had been implemented for an estimated cost savings of $232,000 (Springfield FY2012 Budget).

Form of Government

Half the municipalities used the council–manager form of government and half used the mayor–council form. Five of the eight mayor–council municipalities also employ a chief administrative officer. Overall, there did not seem to be any greater likelihood of innovative practices being instituted in one form of government versus another, nor did there seem to be a pattern to the choices in fiscal strategy related to structure.

However, efforts to engage other governments in cooperative agreements seemed to be more common in municipalities with council–manager form. All but one of the consolidated services arrangements occurred in council–manager municipalities. These findings provide mixed support for the research proposition that council–manager municipalities are more likely to implement innovative policies.

Region

Region did have an effect on the overall financial condition of the municipalities, but it was not primarily due to the decline of manufacturing industries of the Northeast and Midwest. Municipalities in states that limited municipal taxing authority and those that saw significant declines in state revenue sharing fared the worst in the recession. For example, Indiana’s 2010 property tax cap led to a loss of $22 million in property tax revenues for South Bend.

Municipalities that experienced revenue declines due to state action were more likely to institute a variety of personnel changes. In addition to reducing positions, these municipalities were more likely to use furloughs, reduce employee hours, and reduce benefits or salaries than those not experiencing these pressures. Forced to operate with a reduced workforce, municipalities under these conditions were also more likely to institute organizational restructuring.

Patterns of Municipal Response to Fiscal Stress

Choices municipalities are making in response to the recession are strategic, not haphazard. While environmental constraints preclude the ability for an entirely rational process, local governments are making choices that will preserve service levels, leading to a process that is rational, but bounded. The responses of the municipalities in this sample best fit the pattern of responses suggested for bounded rationality. If the municipalities were making decisions solely based on rational decision methods, a consistent pattern of responses would be likely across municipalities—as politics and other constraints would not factor into the decisions of the elected and administrative officials. However, with bounded rationality, strategy choices would initially be consistent across municipalities but become less so as the constraints increase. As the recession continues through multiple budget cycles and states continue to cut back on funds to local governments, municipal leaders have fewer options left that involve no political hazards. They have no choice but to take risks, develop creative solutions, and involve external actors.

Consistent with the bounded rationality approach, in the first year or two of the recession, all of the municipalities employed similar expenditure reductions. These cuts represented those that would have the least impact on service provision and represented little political risk. For example, all municipalities in the sample reduced expenditures for supplies, delayed filling vacant positions, sought and received federal grants, and reduced overhead as initial steps in controlling costs.

A second tier of strategies is employed by most municipalities, but not all. These strategies are not universally employed for two reasons—they involve greater risk than the first set of strategies or there are barriers to their implementation. For example, nearly every municipality increased either fees or tax rates. State limits on taxation may remove that option for some communities and others may have limited enterprise activities from which to garner greater revenues. A strategy that involves risk is choice to draw on reserved fund balances or to use other one-time sources of revenue. While drawing down reserves has little political risk, it can harm the credit rating of the municipality.

Patterns of fiscal strategic choices became much less predictable across municipalities as the recession wore on. The lack of predictability is consistent with bounded rationality. While ideally, perhaps, administrators and elected officials would be provided a handbook of steps that should be followed in the event of a recession, the reality is that the culture of the community, external pressures from state choices, and the level of revenue loss in a community create unique conditions for each municipality. These unique conditions lead to a distinct set of strategies employed by municipalities after those choices that bear little operational or political consequences have been exhausted.

In this research, community leaders made different choices about which services were most essential and needed to be preserved. This is both related to culture and the environment. Public safety is a good example; in some communities, the number of public safety personnel has increased since 2007. However, in other communities, factors such as high pensions and unsuccessful union negotiations led to large-scale layoffs of public safety personnel. A community that has had problems with crime in the past or that has a tradition of supporting police and fire services are less likely to support public safety cuts than are communities without those conditions.

Municipalities experiencing the greatest fiscal stress—largest revenue declines—tended to become the most innovative in seeking solutions. Several of these communities chose to engage the private sector to find creative alternative revenue sources or service delivery methods. Because some of these choices may pose some risk—for example, seeking PILOTs from nonprofit organizations—they may not be entirely rational; however, when a municipality has exhausted other options, its leaders may be more open to risk.

State governments are another factor that contributes to differing fiscal strategies by limiting the options of the municipalities. State decisions have had a considerable affect on municipal fiscal choices. Tax limitations are much more prevalent today than they were in the 1990s. While political culture seems to have little influence on local government fiscal choices, it may be responsible for the current movements to limit local government taxing discretion. Those municipalities that experienced the most significant state cuts and limits saw the highest numbers of employee reductions.

Although the results are not entirely generalizable, the findings provide a good starting point for future research. Determining how widespread some of the more innovative practices are and whether there are predictable patterns to the adoption of individual strategies would be beneficial. However, predicting the precise steps municipal leaders will take in a prolonged financial decline is difficult, if not impossible. The lesson learned from the research thus far indicates that municipal leaders must be proactive in monitoring their environment for fiscal changes, be conservative in their revenue estimates and fund balances, and be open to new ideas from both inside and outside the organization.