Cities in Crisis: How to fix municipal government budgeting


An organization’s approach to decision-making guides what it does. No one in the city could explain why the organization does what it does because no one thinks in those terms. No one questions the traditional approach or the earlier decisions. But if cities can manage their way into insolvency, they can manage their way out. They need a framework – a framework for understanding what now seems incomprehensible – a framework from which real solutions can emerge.

Read an excerpt from The Municipal Financial Crisis: A Framework for Understanding and Fixing Government Budgeting by Mark Moses (reprinted with permission).

There was an alleged exchange in the 1950s between golfing great Sam Snead and baseball legend Ted Williams regarding which sport is more challenging. Ted pointed out that a baseball batter must hit a ball moving unpredictably at speeds that can exceed 90 miles per hour and, therefore, must start his swing before he knows where the ball will be by the time it reaches him. In contrast, the golf ball is still, and a golfer can take as long as he wants to prepare for and execute his swing. Sam’s unanswerable response was, “Ted, you don’t have to go up in those stands and play your foul balls.”

In contrast to institutions in the commercial and nonprofit sectors, municipalities must play their foul balls.

Read "The Municipal Financial Crisis" by Mark Moses
Read “The Municipal Financial Crisis” by Mark Moses

In every municipality where I have worked, I observed a management hampered by past decisions and indecision. I encountered computer systems only partially implemented, active contracts that no one understood, and unresolved property ownership. Often this unfinished business went back not simply years, but multiple decades. The weight of such unresolved issues made it difficult to move forward. Compounding matters were legacy labor provisions, failed commercial ventures, and the effects of a previous lax approach to financial reporting. The longer these issues remained, the less urgent they became. After all, the organizations were still standing.

In private industry, the impact of bad decisions and unfinished business is transitory. Organizations that make poor decisions quietly disappear, or their assets transpose elsewhere. The speed of business reduces the likelihood that a policy or directive will outlast its usefulness. Competition, mergers, acquisitions, divestitures, industry cycles, product cycles, and a more frequent rate of employee turnover ensure regular disruption and reinvention.

The average lifespan of modern corporations has been declining for decades. Meanwhile, municipalities are growing older. And the foul balls – or languishing, unresolved issues – are growing in number. Typically, local governments do not contemplate their demise. Disincorporation is rare. And municipal bankruptcy only offers relief from debt and other financial obligations, which leaves the organization, along with its unresolved practices and other baggage, intact.

The differences between working in a financially challenged, temporal organization and one considered to be everlasting are vast. I once prepared dozens of financial projections for a bank whose ability to survive the next 60 days was an ongoing question. Some of the bank’s employees left for more stable or promising work environments, while others remained. Those who remained labored in an atmosphere of total uncertainty. I contrast that experience in the private sector with its equivalent in local government. In working for a financially troubled city, proving to everyone’s satisfaction that the financial condition of the organization is in fact dire can take a year or more. In the meantime, there is rarely any urgency.

In the face of dire circumstances, business-as-usual operations and the consequences of past municipal decisions are significant drains on scarce financial resources. And while some jobs are at immediate risk, most employees are not worried. Vacations are neither canceled nor interrupted. Emergency city council and municipal board meetings are rare. This should not be surprising. The overwhelming majority of jobs will continue – and no one believes that the organization’s survival is at stake. Cursed with seeming immortality, municipalities have an endless number of innings in which to play their foul balls.

The consequences of managing a perpetual organization are just one facet of the crisis. There are several others. There is rampant confusion regarding the nature of the crisis and how to describe it. Such confusion is worsened by disjointed municipal funding and spending dynamics, which make the financial problems appear intractable. Meanwhile, vague organizational missions and visions provide a weak basis for decision-making. This decision making is further weakened by poor, unquestioned assumptions. All of these factors contribute to the current crisis in municipal budgeting. It is useful to understand all of them, if for no other reason than to help sort through the confusion. The most fundamental of these factors is the municipal decision-making approach.

Let us start with the confusion that surrounds a city’s budget. When I was deeply involved in municipal budget development, I struggled to keep track of all of the assumptions, all of the issues and all of the moving parts. I cannot imagine how any outside observer could make sense of the outcome of a municipal budget meeting. And to anyone relying on the local news, the coverage of such meetings must be mystifying. At first, stories break with announcements of budget deficits, portending doom. Within a matter of weeks the narrative shifts to the just-in-time resolution – a balanced budget.

The deficit is forgotten. Then several months later, when the books are closed for the prior year, a budget surplus is revealed. No one asks for clarification, so the confusion persists. It is impossible to distinguish such uneventful sequences from those that foreshadow an actual financial collapse.

Most of those inside local government are likewise bewildered. How does city management convince labor union representatives that employee compensation needs to be restrained when, year after year, the city somehow manages to balance its budget? How does a city manager motivate a department head to reduce the scope of activity in her department when the finance director somehow finds a way to resolve budget shortfalls? In such an environment, why would the city reject any new program that fits however loosely with its goals?

Sadly, city officials – those empowered to direct the organization’s activities – are as confused as everyone else. They do not know what to do. And they are not asking the questions that would bring them closer to a productive solution. Whether they think their organization’s struggle to achieve financial stability is a new normal or an old normal, most city officials accept such ongoing struggle as the norm.

When searching for solutions, city officials struggle to name the problem. Is it a lack of control over salary costs? Is it the cost of open-ended (e.g.., defined-benefit) pension and retiree medical benefits? Is it the inability to improve the way services are delivered? Is it an unwillingness to terminate activities that should be shed, but are politically favored? Is it unrealistic expectations from the community? Is it inadequate accounting and financial reporting standards? Is it a matter of insufficient tax revenues or state distributions? I have heard all of these questions posed.

Many people outside local government (i.e., citizen groups, taxpayer organizations, think tanks, etc.) have given their answers to these questions. Most of these observers cannot fathom why local government finds operating within the organization’s financial means to be elusive. But none of these groups have prompted noteworthy breakthroughs. I am sure that to such groups municipalities must seem impenetrable.

Municipal managers and industry consultants, those closest to the problem and with the greatest access to pertinent information, fare no better with these questions. Nor are they able to offer viable solutions. The prevalent municipal financial remedies do not lead to meaningful or sustained improvements to the organization’s financial health. I know because I have tried them all.

In the course of applying the conventional financial remedies, I observed that most municipalities’ problems are self-inflicted. Notwithstanding legal mandates, municipalities have a great deal of control over what they do and how they do it. Unfortunately, these organizations are rarely in touch with that control. I saw evidence of this detachment whenever I asked city staff two questions: Why does the city do this? Why does the city do this in this manner?

I was astonished by the hesitant answers to these questions. But more astonishing is that no one was embarrassed by their answers. It is completely acceptable to be uninformed about why the organization has undertaken something and why it does things the way it does. I could not accept this surrender to obliviousness. I needed to understand. If the problems are self-inflicted, then they are solvable.

I want to see the problems of local government finance solved, not simply to save the organizations as an end in itself, but to secure the elements of local government that we need to live our lives well. It is natural to think of local government in terms of one’s last encounter – a water bill, a building permit, a business license or an emergency service call. But when I think about how to save local government, I think about saving the elements that recognize our needs and protect us so we can plan our days, choose our careers and live our lives.

Missing from the conventional approach to municipal management is a way for officials to examine what local government does that is important to the human needs of residents and thriving of businesses and what it does that detracts from this aim. What things critical to residents’ lives does municipal government enable, and what does it restrain? This distinction is vital to examining local government operationally and financially, planning the path forward and reaffirming the ends of local government. Reaffirming the ends of local government is the topic that city officials should be discussing in city halls today – but it is a topic that no one places on the agenda.

If a local government does not know what it does in relation to the human needs of residents, how does it know when to intervene? And how does it know what goals to establish? Without clarity in these areas, how does it successfully design solutions to financial distress?

Local governments operate most comfortably when they are following familiar procedures and conducting business as usual. They treat the scope of what they do as settled, except when they are expanding that scope. These organizations act as though they have always been here, they have always been doing what they currently do, and they will always be doing it. Contrary to what is projected by their demeanor, the local government institutions we have today are new by historical standards. The formative decisions that set the scope of local government were made between the mid-1800s and early 1900s. And decisions regarding this scope – for better or worse – were shaped by the values and goals of those who were influential at the time. It is time now to evaluate which decisions were for better and which were for worse.

The first public police force was established in Boston, in 1838. Fifteen years later, the first city fire department was formed in Cincinnati. The public parks and recreation movements became active in the mid-to-late 1800s as industrialization shortened the workday. This resulted in the emergence of city parks, bath houses and gymnasiums over the next several decades. The formation of public water and sewer utilities burgeoned during the late 1800s. Meanwhile, public works as a local government concern began modestly in the late 1800s and expanded over the next several decades with the paving of existing roads and the building of new roads. City land use planning and zoning emerged on both coasts in the early 1900s and were made portable by legislation championed by then Commerce Secretary Herbert Hoover.

Most people take the resulting scope of activity for granted, rarely reflecting upon the history. But I often wondered how former officials made decisions regarding the scope and range of municipal activity. Of course, no one can change these decisions. But we can evaluate how elements underlying those decisions guide municipal officials’ decisions today.

Until recently, it appeared unnecessary to examine municipal government history or the underlying decision-making approach. That is because the decades that followed the Great Depression were characterized by strong economic growth. Municipal financial crises were infrequent and low profile. Bankruptcy and dissolution were limited to small jurisdictions – e.g., hospital, water, and sanitation districts. New York City’s near bankruptcy in 1975 and Cleveland’s loan defaults in 1978 were notable but rare exceptions. The few city and county bankruptcies did not occur until decades later. And the first of these financial collapses were rooted in singular events, such as Orange County’s investment losses (1994) and Desert Hot Springs’ legal judgment (2001).

By the early 2000s, waning economic growth exposed the accumulation of municipal financial commitments as well as organizational inflexibility. The absence of major financial failures up to that time constituted only the appearance of financial stability and organizational adaptability. Beginning in 2008, the United States witnessed a geographically diverse succession of high-profile municipal bankruptcies that did not emerge from extraordinary events and circumstances: Vallejo, 2008; Jefferson County, 2011; Stockton, 2012; San Bernardino, 2012; and Detroit, 2013. Then it struck me. Municipal governments are managing their way to financial failure.

Today, the struggle to meet debt obligations, satisfy employee retirement commitments, and maintain services threatens hundreds, if not thousands, of local governments nationwide. The cost to bring city streets, buildings, and other infrastructure into good repair is mounting, just as the count of retirees – for whose past work municipalities still pay – exceeds the count of current employees. As recently as a few years ago, it was extraordinary for a city official to declare a looming fiscal crisis. Such a public declaration was an admission of management failure, a strategy to game the labor negotiations process, or a sign that a rare municipal bankruptcy was imminent. Now, it is unremarkable for city officials to openly acknowledge financial despair. The municipal bankruptcies since 2008 – small in number – are proving ominous.

But even if the incidence of formal bankruptcy and state takeovers remains small, such events do not constitute the only evidence of municipal failure. Avoiding insolvency by deferring maintenance, desperately selling assets, shifting costs to a future generation, relying on state or federal aid and increasing taxes serially are tantamount to a management failure. Meanwhile, local officials cut back services not by design, but out of desperation. Then there are the many city governments that have fallen behind in their accounting, rendering them unable to report on their current financial condition.

An organization’s approach to decision-making guides what it does. No one in the city could explain why the organization does what it does because no one thinks in those terms. No one questions the traditional approach or the earlier decisions. But if cities can manage their way into insolvency, they can manage their way out. They need a framework – a framework for understanding what now seems incomprehensible – a framework from which real solutions can emerge.

Mark Moses has consulted California municipal governments in the areas of finance and administration since 2011. Also during that time, he served municipalities in finance director roles. Prior, he spent two decades working directly for local government in senior management positions. This chapter from his book, “The Municipal Financial Crisis,” (Springer International Publishing, 2022) is reproduced with permission of Springer Nature Customer Service Center (SNCSC).

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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