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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