How Federal Funding Hurts Cities

The surprise election of Donald Trump has mayors and other local officials worried, especially after Trump’s appointment of Dr. Ben Carson, a man with no experience and little interest in local government, as Secretary of the US Department of Housing and Urban Development. Judging by commentary in liberal media the end is nigh. Cities could lose everything, except…. cities actually don’t have much to lose. Looking at a database constructed by the Lincoln Institute of Land Policy, you’ll see the median percentage of direct government expenditures of the 150 largest cities (adjusted to amalgamate and measure all local services whether delivered by municipality, county, school system or special district) is just 5.5 percent federally funded.

This runs counter to the image often projected by liberals and conservatives alike that federal subsidies to cities provide a large portion of local government revenue. Some of the cities with a reputation for needing and seeking federal subsidy receive less than the median. Detroit receives 4.8 percent of its expenditures from Federal sources and Buffalo 4.3 percent. Milwaukee is at a measly 2.9 percent. Local governments and their lobbying associations have been remarkably unsuccessful at obtaining dollars from the national government. They won a victory in 1972 when President Richard Nixon signed Federal Revenue Sharing into law. It provided no-strings-attached dollars to municipal budgets. Most cities shared in these transfer payments and poor small towns in rural states were among the greatest beneficiaries. But after some small cuts by Presidents Gerald Ford and then Jimmy Carter in this program, the coup-de-grâce was delivered by President Ronald Reagan when in 1986 Federal Revenue Sharing was repealed. In the competition for a share of the federal pie, cities just couldn’t compete with more powerful interests such as military equipment makers or the farm lobby and its cherished crop subsidy program.

Of course the federal government does supply significant benefits to cities, but not so much of the fiscal variety. The Bill of Rights and the interstate commerce clause of the Constitution foster the individual and economic freedom that cities thrive on. And some federal programs aimed at the entire population add value economically and socially to the lives of both urban and rural populations. Social Security and Medicare have eliminated abject poverty among the elderly. Health Savings Accounts and the Affordable Care Act, because of their national scope, encourage workforce mobility which makes the economy more efficient and dynamic. And while no serious attempt to restore Federal Revenue Sharing has been made since 1986, there are some urban programs remaining, perhaps the most widely used in big cities being rent subsidies for municipally owned housing and Section 8 housing assistance vouchers. There are also capital grants (mostly modest) for transit, water and sewer projects and the Block Grant program. Otherwise most federal funds transferred to other governments go to states.

In the book, What’s the Matter with Kansas?, Thomas Frank wondered why poor and middle class citizens in rural GOP states voted Republican and supported the GOP’s stance against federal spending even though their states disproportionately benefit from these transfer programs. Good question, but why not also ask liberals in big urban states like California and New York why they cheerfully pay way more in federal taxes than they get back in benefits? And that’s the thing: those who say they want to shrink the federal government benefit from more funding and those who support it tend to lose.

I find liberal enthusiasm for federal spending even stranger considering that some programs, particularly those that fund infrastructure and housing, actually can reduce the value of cities. From postal service to electrification and now possibly high speed internet service, urban taxpayers have been forced by the national government to subsidize rural services. Almost every little remote village has its own post office while over the last 30 years neighborhood post offices have been closed and consolidated and this at a time when private sector package deliverers like Amazon, UPS and Fedex are opening urban neighborhood service centers. The Rural Electrification program extends subsidized electricity to remote areas, undermining the natural advantage that proximity and density give to cities. There are efforts generated in both parties to promote the same for high-speed internet service.

The Federal Housing Administration has, since its creation in 1934, encouraged low-density housing and has assigned extra risk to housing proposed to be in close proximity to retail. These FHA rules on mortgage lending have migrated to the quasi-government agencies Fannie Mae and Freddie Mac and even into privately financed mortgage lending. HUD’s huge 221d4 multi-family program guarantees loans to developers, but only if they conform to rules that reinforce separate use zoning. One rule requires that 221d4 buildings must contain no more than 10 percent non residential. This means a building with retail on the first floor would have be 10 stories tall. This is not a problem in midtown Manhattan, but it’s a huge obstacle to street level retail in mid-sized cities across America. It’s even a problem in Brooklyn. For example, Flatbush Avenue is lined with many two to five story buildings built before FHA was founded in 1934. Many have apartments on the upper floors, but because of the 10 percent rule the apartments aren’t eligible for 221d4 nor do they qualify for FHA condo mortgages. In the last decade the market demand for urban living in walkable mixed-use urban neighborhoods has grown even while the federal government regulates against it.

The federal government’s transportation programs enable and favor long commutes over short trips involving walking, bicycling or transit. Federally funded projects tend to be gargantuan, serving travel over long distances: expressways and airports rather than the networks of streets and sidewalks that serve as the setting for commerce and the vitality of cities. Traditionally in the history of civilization, urban thoroughfares served three functions: (1) movement of goods and people; (2) a setting for commerce — the marketplace; and (3) a place for social interaction. Federal and state governments understand and embrace the first purpose, but largely ignore the second and third. There is a superficial logic to this thinking as the states are bigger in area than cities and the U.S. is vastly larger than any one state. However, if measured by economic value added, the dense and complex streets and transit networks of cities yield more return on investment. Urban economies also deliver most tax revenue to states and the federal government. This is especially the case when you comparison the imposition of rural road types like expressways to the traditional urban fabric.

To the federal government, and to most states as well, long-distance commutes by car are deemed appropriate for lavish subsidy while movement by walking, bicycle or transit are afterthoughts. Say there are two people doing the same job at the same business. One lives 20 miles away and drives on an expressway for most of her trip. The other lives across the street and walks to the workplace.Which one adds the most value? Actually both add the same value. However the 40-mile, round-trip auto commuter benefits from taxpayer financed roads while her vehicle issues pollutants. The pedestrian worker requires no infrastructure other than a sidewalk and issues no measurable pollution as she strolls out her door and crosses the street to her job. So the costs are lower with the walking commute while the benefits are equal.

In the 1960s the Wisconsin DOT sought to acquire land and build a vast Milwaukee expressway system. Before that, in 1949, the City of Milwaukee actually built a two- mile expressway with its own money. It ran through the city’s most popular park, ruining it, and divided the adjacent neighborhood. From a property tax base standpoint, it was a disaster. The city probably would have never built another one, but the state, having been showered with Federal Interstate money, reopened the issue. Freeways were built until the late 1970s, when neighborhood resistance grew. Opponents recruited candidates against road supporting legislators and defeated them. Similar road resistance movements broke out in New York, Boston, Cleveland and Washington D.C.

Recently James Fallows, editor of the Atlantic magazine made the point that local government is far more trusted to make wise decisions than the national government:

Are these impressions incomplete and anecdotal? Of course. But systematic surveys show the same thing. A Pew study in 2014 found that only 25 percent of respondents were satisfied with the direction of national policy, but 60 percent were satisfied with events in their own communities. According to a Heartland Monitor report in 2016, two in three Americans said that good ideas for dealing with national social and economic challenges were coming from their towns. Fewer than one in three felt that good ideas were coming from national institutions. These results also underscore the sense my wife and I took unmistakably from our visits: that city by city, and at the level of politics where people’s judgments are based on direct observation rather than media-fueled fear, Americans still trust democratic processes and observe long-respected norms.

Richard Florida, author of The Rise of the Creative Class, recently argued for devolution of power to cities to put the government and public policy more in sync with today’s economy. Florida describes the economy as dominated by urban concentrations of knowledge instead of resource extraction and manufacturing. He points to the November election backlash of the rural and less educated as evidence of this disconnect. Florida, however, offers no details on how to devolve power to cities.

In my view it would first require cities to advocate a more limited role for the national government. For advocacy organizations like the US Conference of Mayors, the National League of Cities and National Association of County Officials, this would mean abandoning their near hopeless dream of significant transfer payments from the federal treasury and instead oppose spending of urban taxpayers’ money on transfers to rural and wasteful national and state government interests. To achieve more power and control at the local level urban lobby groups would, in effect, switch sides and oppose more federal spending. This would present a difficult transition in thought for municipal officials, but it might be more effective than their long and unsuccessful effort to become more dependent on federal spending.

John Norquist served as Mayor of Milwaukee from 1988 to 2004.