Population Change and Impacts on Government Finance

Fiscal trends are often closely related to population and income trends. In general, as population increases or disposable incomes rise, government revenues and expenditures rise. By comparing city, and county estimates with their respective averages and the state, a particular jurisdiction can assess its changes in relation to the larger system. Demographic trends that mirror those in the larger geographic entities are generally preferred over a scenario in which the trends are in the opposite direction. For example, a decline in a city or county’s population at a rate greater than their respective averages (of all cities or counties in a state) is a cause for concern and requires further investigation to assess the underlying factors.

Another important aspect of population change is where it is coming from. By understanding age distribution and the median age by sex of residents, it becomes easier to assess how this will likely influence and impact revenue flow as well as future spending patterns. A positive change in median age means that the jurisdiction has experienced an increase in the age of its residents and vice versa when the change is negative. Changes in a city or county’s median age have implications on a variety of fronts. For example, a decrease in median age—that is, a younger resident base in the community—may create the need for additional amenities suitable for young adults and children, such as more parks or bigger or more schools. Similarly, an older resident base may require services geared toward elderly residents. Further, the income levels of residents and the changes that occur as a result of demographic shifts influence revenue stream of the city or county and can be either be positive or negative, with varying degrees. Either of these scenarios requires closer inspection assess the impacts on spending to meet the changes in likely demand for public goods and services.

New 2015 data from the Census Bureau’s American Community Survey provide an updated demographic snapshot for localities across the nation. Research suggests that high poverty rates, high unemployment and older populations can stretch a city’s services thin. Past experiences once again suggest that state and federal programs provide a lot of support, especially, cities are burdened with additional costs.

In a recent research, Prof. Inman at Univ of Pennsylvania has developed a formula that indicates a threshold beyond which cities could be put at a fiscal disadvantage. According to him, if the percent of a city’s population that were elderly or living in poverty exceeded 35 percent, a city could run into fiscal challenges. It’s based on the assumption that at this level, middle-income residents will pay roughly 20 percent higher taxes for the same services as they would in nearby jurisdictions, leading them to consider moving out of the city. “Cities are going to feel this kind of demographic pressure on their budgets,” said Inman. “But good economies and good policies can overcome the demographic disadvantage.”

Five major cities in Iowa: Iowa City (34.2%), Davenport (23%), Sioux City (20.8%), Des Moines (21.3%) and Cedar Rapids (19.5%) are listed in Prof Inman’s study findings. Figures in parentheses reflect the percent of population below poverty or are elderly.

Reference: Demographics Can Spell Trouble for a City’s Finances, Mike Maciag | Governing.com, September 15, 2016

Why property assessment methods matter?

It is common knowledge that local governments in general rely heavily on property tax as a major source of revenue. Typically, school districts and counties rely more on property tax relative to cities. Nonetheless, the importance of this local source of revenue makes it a key issue for debate and discussion.  Broadly, property tax revenue is determined by two factors, the taxable base and the property tax levy rate. The taxable base is based on the assessed value of property in four major classes – residential, commercial, industrial and agricultural. While residential property accounts for a large portion, the rest three classes of property are as important, especially in urban areas and small regional hubs, in rural parts of a state. Commercial property which includes retail establishments are also a key component of the tax base.

The method used to arrive at the value of a property is different by class. While residential property value is tied to the market value and is relatively simple, other classes value assessment can be complex. Depending on the method, the valuation estimates tend to vary, sometimes by significant amounts.

Across the nation, there are growing instances of commercial property owners challenging the accuracy of valuation methods. Especially, big box retailers in recent past have been successful at not just questioning the accuracy of the valuation method, but have been successful at changing the methods to lower the valuation estimates, thereby paying lower amounts of property tax. “Big-box retailers argue that the market value of their commercial property should be the sale price of similarly sized but vacant retail buildings. They point out that these buildings are extremely hard to sell as-is once the retailer moves out. They tend to sit empty for long periods. Thus, the assertion is, they aren’t worth nearly as much as local tax assessors have traditionally assumed in valuing the property.” (Governing.com, Sept, 2016)

Referred to as the ‘dark-store’ strategy, there is evidence of big retailers in states including Michigan, Alabama, Iowa, Florida and Indiana, North Carolina, Ohio, Tennessee, Washington and Wisconsin successfully trying to lower assessed valuation for tax purposes. This is putting a severe dent into the revenue stream of local governments and putting them in a situation to cut services and make other adjustments.

Given the complexity of property tax assessment and the differences in appraisal laws between states, it has been tricky for lawmakers to come up with legislative solutions that can assist local governments to respond to this situation. While some states have already done and others are considering laws to protect the local governments, this ongoing process has already financially hurt a number of communities.

Given how critical the issue is, we certainly will hear a lot more of this in coming months and years.

Capital Spending in Iowa

Much of the growth and progress that United States achieved over the last century was made possible due to its strong and reliable public infrastructure. Public investments in assets, which included highways, roads, bridges, public schools and higher education institutions, water and sewer systems, ports, railways, airports etc., allowed the free market economy to thrive, creating wealth, opportunities, prosperity and improving quality of life of residents. Slowly, it is now becoming more apparent that public infrastructure is aging and there is a growing need for major investments to rehabilitate existing and create new assets. One of the key aspects of public infrastructure is not just the capacity it provides to local governments to facilitate the provision of essential services to residents but also the critical role it plays in assisting private farm and non-farm businesses to carry out their production and distribution activities. This translates into forward and backward economic linkages that, through a cascading effect, positively contribute to the national, state and local economies. In addition to these direct benefits, expenditures made toward periodic maintenance, rehabilitation and replacement of existing public assets help the economy by way of supporting large number of jobs.

Capital Expenditures of Local Governments

At the local level, capital expenditures are usually funded through federal and state grants, borrowings from the capital market using municipal bonds, property tax levies, sales and local option sales tax and sometimes by cash. A closer introspection of the financing mechanism for capital projects reveals that approximately 90 percent of U.S. total capital spending takes place at the state and local level. Besides using funds from their operating budget (mostly for larger local government entities), most local governments rely on state and federal funding of projects by way of direct transfers, loans and grants. It is therefore logical to infer that during hard economic times, as federal and state revenues decline, it ultimately impacts the local governments’ ability to undertake capital improvements. However, during periods of economic boom, besides relying on intergovernmental revenues sources, local governments also use local tax revenues, surplus fund balances and various types of debt instruments to finance capital improvement projects. However, depending on the state, there could be statewide revenue and spending limitations mandated by the state that could inhibit the capacity of local governments to finance capital improvements. That could sometimes add to the cost of capital investments at the local level and hence act as a deterrent. Given the historical context on the state of capital assets and the prevailing economic conditions, it is an opportune time to study the scale of capital expenditures at the local level and the factors that influence such investments. Given the recent economic slowdown and the subsequent recovery over the past 7-8 years, that will act as the backdrop for undertaking the proposed study.

The State of Iowa

Iowa is the leading producer of corn, soybeans and eggs and also boasts of diversified industry sectors that contribute to the state and local economy. With its strategic location, it is also the pathway that connects several large metropolitan areas in the nation and thus facilitates regional, national and global economic activity. According to the Iowa Economic Development Authority, Iowa is “home to a diverse and robust industry mix, Iowa offers a strong economy and numerous business opportunities in a variety of industry segments — including targeted sectors of advanced manufacturing, biosciences and insurance and financial services. Nine industry segments contribute $127.7 billion real gross domestic product (GDP) to Iowa’s economy, with the service industry employing more than one-third of the state’s workforce and manufacturing contributing the largest share (20.8 percent) of total output.” Iowa also presents an interesting case study to the recession’s lingering effects on rural areas. Many rural areas, including those in Iowa, have yet to regain the pre-recession employment levels that likely impact decisions on capital improvements.

The information is timely and will likely expand the discussion on the need for capital spending to keep the public infrastructure from deteriorating and making communities sustainable into the future.

Link below provides per capita capital spending for all 945 cities in Iowa. The table includes 4 select years that span a 10 year period, from 2005-2014.

https://drive.google.com/file/d/0B1fUweg82Z6qak1SUkFkZGR5ZDg/view?usp=sharing

Questions, comments suggestions can be directed at Biswa Das, email: bdas@iastate.edu

Acknowledgements: Amelia Schoeneman for assisting with the data related work.

Municipal Fiscal Health in Iowa

City governments rely heavily on property taxes to fund a variety of services. In addition to being a major source of revenue, property tax also provides the local government entities to have some degree of control on changing it to levels that become necessary, adhering to state mandated codes. Cities that have a robust property tax base usually tend to be in good financial condition and those that have limited property tax base are restricted in their ability to provide services and make long term capital improvements. While other revenue sources like local option sales tax, user charges and fees are available, they are not as reliable and steady as property tax as a source of revenue.

In an effort to track fiscal health of Iowa municipalities, through the Iowa Government Finance Initiative, we have created two indexes – fiscal capacity and fiscal effort. These indexes were first used by the United States federal government in the 1960’s to make comparison between states on their overall fiscal health. Using the same concept, we have adapted it to help understand the fiscal health of Iowa municipalities.

In developing the two indexes, we have used city-level data on total property valuation, population and city-levy rates. The 945 cities in the state have been divided into following groups:  > 50,000; 25K-49, 999; 10K-24,999; 2.5K-9,999; 500-2,499; and < 500.

Fiscal Capacity Index

For each of the subgroups, we have estimated the per capita valuation for each city by taking the ratio of its total property valuation and the population for the same year. Based on the sum of the total valuation of all the cities and the total population of all the cities, per capita valuation is then calculated for each subgroup.

To arrive at the fiscal capacity index, we use the ratio of the per capita property valuation for each city to the per capita valuation of the corresponding subgroup. To create the index, the ratio is multiplied by 100.

The fiscal capacity for each subgroup is 100. If a city has a fiscal capacity value greater than 100, it simply indicates that relative to the group, that particular city has a relatively higher per capita valuation. If the index for a city is less than 100, it indicates that relative to the group, that city has a lower per capita valuation.

Fiscal Effort Index

Fiscal effort is he ratio of each individual city’s per capita levy to the levy it would generate by using the group levy rate. Per capita levy is the ratio of the total property tax revenue in a particular year and its population. The group levy rate is determined by taking he ratio of the sum of all the property tax revenue to the taxable base of that group.

The fiscal effort index for each group is 100. If a city has an effort index of greater than 100, it indicates that the levy rate in that city is relatively higher than the group average levy rate and vice versa.

Fiscal Health

We use a combination of the capacity and index to define fiscal health. Four scenarios are possible based on he two indexes.

  1. Capacity index>100, Effort index <100
  2. Capacity index <100, Effort index>100
  3. Capacity index>100, Effort index >100
  4. Capacity index <100, Effort index<100

(1) represents a case of fiscal comfort.

(2) represents a case of fiscal stress

(3) represents a case of over reliance on property tax revenue (lack of adequate alternate revenue sources)

(4) under-reliance on property tax revenue (higher level of local option sales tax might allow a city to keep property tax rate low)

Use the link below to access the fiscal capacity and effort index for all 945 cities in Iowa, FYE 2014.

https://drive.google.com/file/d/0B1fUweg82Z6qTk03eXBBdXlMUjA/view?usp=sharing

Questions can be directed to Biswa Das at bdas@iastate.edu

Understanding Fiscal Health of Counties in Iowa

Local governments in Iowa provide vital public services affecting citizens’ quality of life and creating an environment for economic opportunity. While often undervalued for the role they play, local governments are an essential institution in the maintenance of civil society. The collective organizational capacity represented by municipalities, counties, school districts, and other local public entities is all too often not fully understood. Changes in demographic, economic and political factors are  however, making the task of maintaining and improving local public services more difficult and challenging for the foreseeable future.

Increasing economic downturns, continuing depopulation of rural areas, aging infrastructure and rigidly divided political ideologies are contributing toward local government ‘fiscal stress.’ While there are different ways of defining fiscal stress, the most important feature is the added pressure on government finances as revenue streams slow down and expenditure level rises either due to rising cost or increasing demand. Using two indexes – fiscal capacity and fiscal stress, we are tracking the evolving fiscal health of local governments in Iowa. For a more detailed understanding of what the index means and how to interpret it, please refer to our recent publication in the Iowa County, a monthly publication from the Iowa State Association of Counties. The link to the article is

http://www.iowacounties.org/wp-content/uploads/2015/12/TheIowaCounty-January2016.pdf