Incentives and Austerity: How Did the Great Recession Affect Municipal Economic Development Policy?

By Sara Hinkley (University of California, Berkeley) and Rachel Weber (University of Illinois at Chicago)

After the Great Recession of 2007-2009, cities across the country were hit by a perfect storm of revenue declines, inadequate federal stimulus monies, and state efforts to displace budget cuts onto local governments. As a result, local governments found themselves making unprecedented cuts to public services and jobs. Libraries and schools were closed, social work caseloads rose exponentially, and even “sacred cows” like police and fire services were put on the chopping block as decision-makers pushed austerity responses. In most parts of the country, those cuts were never restored, even long after population and economic growth recovered.

How did the recession affect the more entrepreneurial functions of the local state? Economic development was one of few areas of discretionary spending that local governments could cut or defer in response to mid-budget cycle revenue shortfalls. Did cities maintain or alter their approach to facilitating private development in the years following the crisis?

By some accounts, cities emerged from the Great Recession with renewed intent and capacity to determine their own economic futures, doubling down on entrepreneurial strategies like incentives for mega-projects and public-private partnerships. Others see beleaguered cities shifting funds to maintaining basic services and using the crisis as an opportunity to step back from controversial strategies like tax incentives. In some states, like North Carolina, left- and right-leaning interest groups formed coalitions to oppose tax giveaways. In progressive and relatively affluent cities like Minneapolis and Boston, the trend was even sharper; the contraction of available spending and need for tax revenues solidified a move away from subsidies. Still others see cash-strapped cities seeking to maintain both social and business services and manage cutbacks in a lean environment determined to a great extent by state governments.

For our paper in UAR, we compared Fresno, California and Milwaukee, Wisconsin—two cities hit hard by the recession, both fiscally and economically. Relative to the 50 largest U.S. cities, they had more lower-income households, significantly lower rates of college education, less diversified economies, and more vulnerable fiscal foundations when the recession began. We analyzed each city’s financial reports, interviewed local officials and fiscal watchdogs, and gathered data on economic development spending and incentive use to characterize the post-crisis period.

We find that declining state support and local autonomy weakened the municipal economic development function while leaving entrepreneurial logics largely intact. In the face of significant economic and fiscal stress after the recession, both Fresno and Milwaukee remained committed to conventional approaches to stimulating private development (through downtown redevelopment, corporate relocation, and the intensification of land use), even as their capacity to do so was severely constrained by state pre-emption and cuts in intergovernmental aid. Their states’ governors, driven by both pragmatic and ideological factors, reined in, rescaled, and reoriented the economic development function of the two cities.

State caps on property tax collections drove both cities to privilege new construction. Fresno attempted to lure businesses that paid sales taxes, such as e-commerce fulfillment centers, and to “upzone” industrial land areas to permit retail development despite the often-poor quality of retail jobs. Milwaukee used tax increment financing (TIF) to assemble land for downtown residential and retail construction and conversions.

As the recession wore on, state governments limited these pursuits. Tax increment financing was effectively ended in California, as were enterprise zones as a result of Governor Brown’s decision to shore up K-12 education funding. Milwaukee was snubbed by a state that took on a larger role in economic development. Republican Governor Scott Walker increased the number and amount of state incentives available to businesses and reduced corporate tax rates. Feuding with Democrat-led Milwaukee, the state dramatically reduced aid to the city and subsidized few businesses within its borders. Getting the cold-shoulder from the state made the city more reliant on one of the only tools it controlled: TIF. Indeed, both cities continued to use any (mostly land-based) means at their disposal and to rely on new regional organizations to facilitate flagship corporate relocations, even as they adopted some weak accountability and disclosure measures. The picture painted by these two cities complicates the idea that a “new localism” has enhanced the role of cities as economic actors.

We are now at a moment when the fiscal future of cities again seems bleak—as of this writing, there has been no federal stimulus for state and local governments, despite enormous need for public health infrastructure and unprecedentedly rapid revenue declines. There are some key differences: housing markets (and therefore property tax revenues) remain stable so far, despite indicators of decline in commercial and residential rental markets; municipal credit has remained accessible at historically low interest rates; and narratives of fiscal irresponsibility have been less pronounced, perhaps carving out political space for new revenue measures. But as in the Great Recession, local government employment has been more severely impacted than state employment, reflecting both the higher volatility of local revenues and the pullback of state intergovernmental aid. In most states, cities still operate in very limited fiscal policy spaces, with few short-term options for responding to sharp drops in revenue.

Fresno and Milwaukee again look like they stand to suffer significant harm: Milwaukee accounts for nearly 25% of Wisconsin’s COVID-19 cases and over 40% of the deaths as of October 4 (despite making up only 10% of Wisconsin’s population). Fresno has been hit with a double whammy of high COVID-19 infection rates and an unprecedented wildfire season. Both regions have lost more than 7% of their nonfarm jobs since February, paralleling U.S. job losses. The pandemic will offer another opportunity to examine the dynamics of state-city relationships in severe crisis. Will its new Democratic Governor (but Republican legislature) make a difference in Milwaukee’s options for recovery? California went into this recession with larger general fund reserves, thanks to the state’s belt-tightening over the past decade, but most of the reserves will be required to keep school districts afloat through 2022. As their unemployed residents lose benefit supplements, shuttered businesses go under, and the prospect of intergovernmental support fades, U.S. cities are once again left to grapple with high levels of need and an uncertain path toward recovery.

Read the UAR article here.

Photo by Tom Barrett on Unsplash

Author Biographies

Sara Hinkley is Lead Researcher at the Center for Labor Research and Education at the University of California, Berkeley. Her research focuses on local public finance, economic development, the quality of low-wage jobs, and the public sector workforce, with a particular emphasis on the impact of economic downturns on labor markets and local government.

Rachel Weber is a professor in the Department of Urban Planning and Policy at the University of Illinois at Chicago. She conducts research on economic development, public finance, and urban politics, particularly the relationship between financial instruments (tax increment financing, debt-backed securities) and infrastructures (public facilities, commercial real estate). Her book, From Boom to Bubble: How Finance Built the New Chicago (University of Chicago Press, 2016), won the Best Book Award from the Urban Affairs Association.

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