• Research & Data
• Education
• Payment Cards Center
• Bank Resources
• Community Development

• Newsroom
• Careers
• Publications

Thursday, September 2, 2010

[ – ] Text Size [ + ]  |  Print Page

Home > Research & Data > Research Publications > Business Review > 1996 > Central City Decline: Regional or Neighborhood Solutions?

Business Review: March-April 1996

Central City Decline: Regional or Neighborhood Solutions?

Richard Voith

Local control holds a powerful appeal for many Americans. Residents of small suburban jurisdictions point with pride to their high-quality schools and relatively low taxes. The scale and role of local government, however, have changed over time. During the first half of this century, the central city government, by virtue of its overwhelming share of the region's population, was effectively a local and a regional government. In the second half of the century, rapid suburban growth dramatically increased the importance of smaller scale, local suburban governments while economic and social problems became increasingly concentrated in central cities. As we approach the end of the 20th century, the diverging economic paths of cities and suburbs suggest the need to reexamine the appropriate roles of suburban, city, and regional governments. Are regional approaches to problems concentrated in central cities warranted? Or should we seek local solutions by transforming cities into a group of smaller, more autonomous communities?

CAN WE SUSTAIN THE CURRENT SYSTEM OF LOCAL GOVERNMENT?

In recent decades, most city governments have confronted the problems of declining population and declining relative incomes of city residents. Increasingly, American cities have become wards for the poor, while middle and upper income Americans have chosen to live in the suburbs. The increasing concentration of poverty in central cities creates fiscal problems for central city governments. As the concentration of poverty increases, the tax base for providing basic services such as public safety, sanitation, and education shrinks. At the same time, the costs per capita of providing basic services are higher when the recipient population is poor (see the article by Janet Pack). To provide uniform levels of basic services, city governments tax middle and upper income residents at high rates, implicitly redistributing income from more wealthy city residents to poorer ones.

Tax revenues used for redistributive purposes are, at least in part, "capitalized" into city property values. Economic theory predicts that the costs of redistributive taxation are partially offset by lower land prices, which reduce the incentive to move out of the city to avoid taxes. As long as the taxes do not exhaust a city's intrinsic comparative advantages, lower land prices restore equilibrium, although fewer people and firms choose city locations. In recent years, however, technological changes have eroded the economic advantages of cities and have, therefore, reduced their ability to pursue redistributive policies. And as residents with higher incomes leave the city, providing the same level of government services requires even higher tax rates, which in turn induces more people to leave the city. Thus, while cities have some latitude for income redistribution, it is not without negative consequences, and the level of redistribution that cities can sustain in the long run has greatly diminished.

Charles Tiebout first analyzed the consequences of voting with one's feet. In Tiebout's world, people move to communities that have tax and expenditure policies that best suit their preferences. Tiebout argued that competition among small jurisdictions would lead to a system of homogeneous communities that efficiently provide the desired public services. Because Tiebout's communities are homogeneous, local income redistribution is irrelevant. Suburbs, which frequently have a large number of small municipal jurisdictions, approximate the Tiebout model and, hence, avoid the local income redistribution conundrum confronting cities.

Large cities, on the other hand, do not fit well into the Tiebout framework. Formed prior to the technological changes and public investments in transportation that made suburban alternatives attractive, cities provided public services to and imposed taxes on a population with diverse preferences and incomes. With little competition from other local jurisdictions, cities were able to spread the burden of poverty broadly across the population. Redistribution was sustainable because the cost of avoiding local taxes was very high; one had to leave the metropolitan area to change one's tax and service bundle.

However, with the opening of the suburbs, city residents had alternatives through which they could avoid the costs of their neighbors' poverty. Tiebout's observation that people vote with their feet implies that any city policy that implicitly or explicitly redistributes income has negative consequences for the city, as net contributors depart to join more homogeneous suburban communities.

The success of suburbs and the relative failure of central cities have tended to reinforce Tiebout's speculations about the benefits of smaller jurisdictions. But the Tiebout model, which suggests that competition among small communities will lead to efficient production and delivery of public services, depends on the assumption that communities are completely independent of one another. However, accumulating evidence indicates that there are substantial spillover effects from one community to another.

My recent research, as well as research by Charles Adams and associates and by Henry Savitch, offers evidence that central city decline has adverse effects on its suburbs. My 1994 study, for example, found that increases in the growth rate of incomes of central city residents had a positive impact on the growth rate of incomes of suburban residents and on the appreciation of house prices in the suburbs. Adams and associates found that central city problems adversely affected the rate of suburban population growth because fewer people are willing to move into the region's suburbs from other regions. Negative factors associated with central city decline suggest that cities and suburbs have common interests.

REGIONAL APPROACHES TO CENTRAL CITY DECLINE

If city decline adversely affects the overall economic health of a metropolitan area, both city and suburban residents alike have a stake in the economy of the city. In theory, if central city decline is not being driven exclusively by basic economic forces, but rather by public policy choices and costs associated with poverty, cooperative actions by cities and suburbs to provide public services more efficiently and to share resources to finance the burden of poverty can be mutually beneficial. The key element in any regional approach is that costs and benefits are shared across jurisdictions. There are many forms of regionalization, including regional governments, regional tax sharing, annexation, and creation of regional authorities that provide specialized services.

While regional planning agencies, which attempt to coordinate policies across city and suburban jurisdictions, are common in the United States, regional governments are not. Local governments have, in general, been unwilling to relinquish local tax revenues and local control to metropolitan governments. (One notable exception is the Minneapolis Metropolitan Council, which collects taxes throughout the metropolitan area and redistributes the tax revenues according to prespecified formulas.)

In many cases, however, county governments are partially regional governments in that counties frequently contain both cities and suburbs. To the extent that county governments provide services, such as court systems, corrections facilities, and the administration of the welfare system, they provide a mechanism by which cities and suburbs can share fiscal burdens. Counties are not truly regional governments, though, since one county seldom contains an entire metropolitan area. In addition, 15 large central cities, including Philadelphia, are counties themselves and, hence, have no opportunity to share fiscal burdens with their suburban neighbors.

Another form of regionalization is annexation, which allows cities to grow by incorporating the suburbs into the city jurisdiction as the metropolitan area grows. Annexation effectively limits the competition among local governments by reducing their number. Annexation is common in all areas of the country except the New England and mid-Atlantic census divisions. The city of Houston, for example, annexed 219 square miles from 1960-90, increasing its overall land area 68 percent. Annexation has allowed the city to retain the lion's share--58 percent--of the metropolitan area population. On the other hand, annexation is uncommon in most older metropolitan areas that have well-established suburban jurisdictions.

The most common form of regionalization is the formation of authorities that span several jurisdictions to provide specific services. Transit authorities are perhaps the most common manifestation of authorities that provide regional services. Regional authorities frequently share local tax revenues and provide services that are in the interest of the entire region. These organizations also tend to redistribute resources because the net benefits may not be distributed equally throughout the metropolitan area.

Advantages of Regional Approaches. To the extent that city decline is driven by factors associated with high concentrations of poverty, there are strong arguments in favor of regional approaches to improving the economy of cities.

First, the fiscal burdens of supporting poorer residents can be spread over a wider tax base. In particular, taxes to finance implicit and explicit income transfers are no longer paid only by middle and upper class city residents; rather, all middle and upper income residents in the metropolitan area share these costs. Second, the incentives to sort into rich and poor communities are reduced. When residents of a metropolitan area can avoid taxes without a corresponding loss of benefits simply by moving to another local jurisdiction, they will do so unless the costs of moving are very high. David Rusk found less racial segregation and less divergence in city and suburban incomes in central cities that are more regional in nature: those that can annex land or those that already contain a great deal of open space within their borders.

Lowering the incentives for individuals to separate into rich and poor communities may increase the productive capacity of the metropolitan area economy. A recent paper by Roland Benabou argues that the presence of highly educated and skilled (and therefore high income) individuals tends to facilitate the education and training of others. Sorting into rich and poor communities is likely to lower the return to time and effort spent on education in poor communities, thereby reducing the economic potential of the poor community and its residents and, ultimately, the metropolitan area's aggregate production and income. Benabou's theoretical result is consistent with my finding that higher growth of income in the city has a positive impact on growth in the suburbs.

Regional support for poorer residents frees cities from the adverse economic consequences of pursuing local income redistribution. Whether the costs to suburban areas associated with regional cooperation in support of the poor are offset by the benefits of a healthier city is an empirical question. While no one has calculated both the costs and benefits of regional efforts to improve a city's economy, in my 1994 article, I provide evidence that the potential benefits to the suburbs of improved growth in the city are large.

For example, in Philadelphia in the 1980s, if real income in the city had grown at the suburban rate of 19 percent instead of the city average of 14.3 percent, the average growth rate for income in the suburbs would have increased an additional 2.9 percentage points and the rate of appreciation for suburban houses would have been 6.5 percentage points higher. These estimates imply that an individual who earned $50,000 a year in 1980 and who owned a $200,000 house would have gained more than $38,750 in current dollars over the decade from the improvement in average income growth in the city. These calculations do not, however, reflect the costs associated with regional policies designed to increase the rate of income growth in the city.

Disadvantages of Regional Approaches. While the regional consequences of city decline provide strong arguments for regional cooperation to solve problems that have become concentrated in central cities, regional approaches are not without shortcomings. Just as local governments suffer adverse consequences when they pursue policies that redistribute income, entire metropolitan areas may suffer as well if redistribution is too large. After all, if the tax burden becomes too large given the services provided, individuals and firms can choose to relocate to another metropolitan area. Of course, the costs of changing metropolitan areas are greater than those of moving from city to suburb, so regions may have more latitude for redistribution, but redistributive policies are best carried out at the highest level of government.

Another drawback is that regional approaches may be less responsive to the desires of local residents. Regional organizations necessarily have constituent populations that are more heterogeneous, so that the likelihood that public policies meet the demands of all residents is reduced. In addition, because regionalization reduces an individual's ability to choose among jurisdictions, public choice economists have pointed out that reduced competition among jurisdictions may result in less efficient production of public services.

In a 1993 article, James McAndrews and I considered the likelihood that local communities would adopt a regional agreement that would actually mitigate negative regional impacts, given that there may be significant differences in the degree of political power across local jurisdictions. We found the somewhat pessimistic result that unequal political influence reduced the likelihood that solutions beneficial to the entire region can be realized. For example, if declining central cities are too weak politically, they may not be able to strike regional bargains that sufficiently improve the economic competitiveness of the central city, and the long-run regional benefits of city improvement will not be realized.

The most difficult hurdle for any regional approach to central city problems is overcoming suburban residents' skepticism that an investment in solving city problems will have a sufficient return for noncity residents. While statistical findings, such as those presented in my 1994 article, suggest common economic interest, most suburban jurisdictions resist regional efforts designed specifically to improve central cities.

NEIGHBORHOOD SOLUTIONS: CAN THE SUM OF THE PARTS BE GREATER THAN THE WHOLE?

In contrast to the regional approach, one may look to the success of smaller, suburban jurisdictions as a model for city revitalization. Just as there are significant differences among suburban jurisdictions, neighborhoods within central cities are not uniform; incomes, education, social cohesion, and underlying economic potential differ widely across central city communities. Many areas within cities have physical and historical attributes that give them unique economic opportunities, while others suffer from disadvantages unlikely to be overcome. Many city neighborhoods have the advantage of proximity to major centers of commerce and education, transportation, and the historical and cultural hub of the region.

On the other hand, some city neighborhoods suffer from environmental degradation from an earlier industrial heritage, obsolete and substandard residential and commercial structures, and degraded infrastructure and social structure. For central cities to prosper, they need to identify their strengths and develop mechanisms that allow communities that have strong comparative advantages to prosper.

One way to enable central city neighborhoods to reach their economic potential may be to increase the autonomy of city neighborhoods. In the extreme, localization could take the form of creating new, smaller, independent jurisdictions on a scale similar to that of suburban jurisdictions. While dissolution of cities into smaller jurisdictions is rare, it is not unprecedented. In the Netherlands, Rotterdam recently subdivided into 12 jurisdictions. Somewhat more common, parts of cities seek to withdraw from the larger city, usually to avoid actual or perceived intracity income transfers. Staten Island, a borough of New York City, has had a fairly strong secession movement for years. Similarly, in Philadelphia, local representatives of neighborhoods in Northeast Philadelphia have raised the issue of secession. Dissolution and secession are unequivocal means of achieving local autonomy.

One less drastic and increasingly popular method for expanding local autonomy is the creation of special service districts. Typically, special service districts are organized by neighborhoods to provide specific services, such as cleaning, maintenance, and security, over and above that provided by the city government. These organizations often have legislative approval to levy a tax to finance their activities and have local control over the expenditures. Philadelphia, for example, has two special service districts and at least two more are planned. These districts allow neighborhoods exclusive control over at least a part of their locally generated tax revenues. They provide a mechanism by which a community can invest in local improvement and better match the community's demand for public services with the supply.

There are other ways to increase local autonomy within a city as well. Decentralization of public education, even within the framework of a single school district, is currently a subject of great interest. Local home and school associations that raise funds for particular neighborhood schools fit hand in hand with decentralization. These types of activities, like the special service districts, all increase local autonomy within the city. For these activities to dramatically increase local autonomy, decentralization must involve both local control and dedicated neighborhood sources of funds.

Advantages of Localization. Localization has a number of significant potential benefits for central city economies. Unlike regionalization, increasing local autonomy can result in a better matching of public policies with the desires of local residents, which, in turn, may improve the quality of basic services. For example, communities may have a greater impact on the quality of local schools if changes involve only a couple of local schools rather than all schools in a large city school district.

At the same time, increasing local autonomy would tend to reduce unsustainable local income redistribution that induces middle class residents to leave the city, further reducing city resources. Local residents may be willing to expand their investments in the local community if they are confident that these investments have an impact on that community. Economically viable communities would be on a more level playing field with their suburban counterparts. Not only would they be at less of a disadvantage in competing for residents and firms, but they would also be in a better position to form cooperative agreements with suburban neighbors, when it is in the common interest.

Increasing the autonomy of local city neighborhoods is likely to result in the economic expansion of communities with unique economic advantages, providing the city with internal sources of growth and prosperity. Healthy city neighborhoods are likely to have a positive influence on other, less advantaged neighborhoods. Consider, for example, Center City Philadelphia (or any large city's central business district). Center City Philadelphia generates a great deal of tax revenue, a significant part of which supports basic services to neighborhoods throughout the city. If Center City were, in the extreme, an autonomous jurisdiction, it probably would require much lower tax rates and would have higher service levels. It would therefore be a more attractive location for businesses and residents. At the same time, a vibrant central business district would likely increase the desirability of neighboring communities, simply because of their proximity.

In addition to improving the conditions of economically viable communities, increasing local autonomy will almost certainly make it easier to target resources, from higher levels of government, that are intended to fight poverty, so that a greater fraction of these funds actually reaches lower income people. Communities no longer economically viable will be painfully evident if they are no longer supported by the rest of the city.

Disadvantages of Localization. The list of disadvantages of localization is shorter than the list of advantages, but the negative consequences of failing to address the primary disadvantage--that communities with few economic resources will lose the support of the larger city community--are potentially severe. Economically vulnerable communities may be unable to sustain basic services, and in the absence of financial support from higher levels of governments, this inability may involve unacceptable hardships for the residents of these communities. As Bryan Ellickson pointed out in a 1977 article, residents of poor neighborhoods are unlikely to support localization policies without some form of side payment from wealthier communities.

If an aggressively pursued localization strategy fails to address the needs of residents in disadvantaged communities, gains from the localization strategy in potentially prosperous city communities may be undermined. Just as my 199 study found strong evidence thatcity decline adversely affects suburbs, it is even more likely that neighboring communities in a city are interdependent. Problems in one community are likely to spill over into neighboring communities simply because of proximity.

Although this cross-community interdependence argues against localization strategies, cities cannot, by themselves, sustain the income transfers needed for the residents of failing communities. Increasing local autonomy can potentially increase the economic prospects for many communities in the city, but unless the negative consequences to the residents of economically vulnerable communities are addressed, the potential of localization to generate the metropolitan-areawide benefits of a healthy central city is unlikely to be realized.

COMBINING LOCAL INITIATIVE AND REGIONAL COOPERATION

Both local and regional approaches have strengths and weaknesses. Careful analysis suggests that there are clear and distinct roles for local and regional initiatives for improving the economic health of central cities and for generating significant positive benefits for the entire region. Localization strategies are effectively place-oriented policies that enable city communities to pursue their comparative advantages. Local initiatives should focus on policies that eliminate explicit or implicit intracity redistribution of income so that economically viable city communities can prosper. Special service districts, which have the power to tax and spend at the local level, are good examples of policies that enhance local autonomy. As long as there are complementary programs to address the needs of residents in economically distressed communities, localization policies need not attempt to artificially sustain these communities in their current configuration.

My research suggests that the regional benefits of improving central city economies are large. Regional initiatives designed to achieve these benefits should focus on two areas.

First, the needs of lower income residents are best addressed by people-oriented policies. A growing body of research (see the article by George Borjas, for example) suggests that neighborhood environment plays an important role in the social and economic success of individuals. This research suggests that eliminating the incentives that encourage people to separate themselves into rich and poor communities and encouraging residents of failing communities to make the transition to viable communities have the best chance of improving both city neighborhoods and the welfare of the poorest city residents. Financial support for these programs can be sustained on a regionwide basis, although even higher levels of government would be more appropriate.

Second, regional support is needed for services and amenities that are regionally beneficial and regionally valued. Some services, such as transit systems, are crucial to the survival of densely populated central cities and warrant regional support because of the indirect impact of these systems on the regional economy. Other amenities typically located in cities, including cultural, historical, and recreational facilities, deserve regional support because residents throughout the region value them.

One key to an economically vital metropolitan area is an economically vital central city. To improve central city economies, we need to provide the opportunity for viable city communities to build on their strengths. However, the declining fortunes of residents in economically vulnerable communities threaten the revitalization of viable city neighborhoods. The potentially large regional economic benefits of a healthy central city suggest that it is in the region's interest to provide regional support for residents in economically vulnerable communities and regional support for services and amenities located in the city that have positive regional impacts.