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HomeMy WebLinkAbout1981-11-16 Info Packet^. City of Iowa Cit%< MEMORANDrVM Date: November 10, 1981 To: City:Council From: CitManager Re: Parking Lot, Recreation Center The City still has not closed on the parking lot at the Recreation Center. There are several legal problems which the Legal Department hopes to have resolved at an early date. A plan has been reviewed for redesign of that parking lot. Meters will be installed in the parking lot and it will be used for combined parking permit and metered parking in a manner similar to the Chauncey Swan lot. Concrete islands will be constructed at the end of each row of parking so that trees can be planted in the parking lot. In addition, new lighting fixtures will be installed. The lighting poles will be those salvaged from other City jobs. All of the work will be accomplished by City departments in order to minimize the cost of the improvement. tp5/6 cc: Bob Jansen Legal Staff Dennis Showalter Jim Brachtel MICROFILMED BY 'JORM MICROLAB CEDAR RAPIDS -DES I40INES /60'45 G I— City of Iowa CI N MEMORANDUM Date: November 12, 1981 To: City Cou cil From: Citi pager Re: Benton -Riverside Reconstruction Project Recently Chuck Schmadeke and I met with Bob Henely, the District Engineer for IDOT. Mr. Henely has indicated that because of time required for planning of the Benton -Riverside reconstruction project, particularly land acquisition, it probably will not be possible to construct this project in the next construction season. Therefore, the project will be delayed until late in FY83 or early FY84. The benefit of this change is that the project will not interfere with completion of the Highway 1 reconstruction and it will provide the City with additional time to obtain a grant for the University Heights trunk sewer. The Department of Transportation will hold a public meeting in Iowa City on November 24 at 7:30 PM in Room A of the Recreation Center to discuss the project with adjacent property owners. If you have any questions concerning the project please contact me or Chuck Schmadeke. bj/sp cc: Chuck Schmadeke Jim Kimm MICROFILMED BY 'JORM MICROLAB CEDAR RAPIDS -DES MOINES F_ CITY CSF IOWATY CIVIC CENTER 410 E. WASHINGTONCI ST. IOWA CITY, IOWA 52240 (319) 356-500c) November 10, 1981 Mr. Jeffrey Cox 112 S. Dodge Iowa City, Iowa 52240 Dear Mr. Cox: A public meeting will be held November 17 at 4 PM in the City Manager's Conference Room of the Iowa City Civic Center. The purpose of the meeting is to provide time during which interested persons may make comments on the proposed plan for the re-precincting of Iowa City. i The City of Iowa City must adopt an ordinance outlining the boundaries of election precincts in the City which reflect the Population distribution of the 1980 census and changes made in legislative district boundaries. The precinct boundaries must be approved by December 31, 1981. The re-precincting plan to be presented is being drawn up by City staff and the Iowa City/Johnson County League of Women Voters. The plan is scheduled to be brought before the City Council on December 8, 1981, If you have any questions concerning the plan prior to November 17, Please contact Doug Boothroy at telephone number 356-5240. Sincerel yours, Neal G. Berlin City Manager tp5/11 Same letter mailed to: Mr. Donald E. Johnson 1500 Old Hickory Road Coralville, Iowa 52241 Ms. Susan Thompson 1 Crestwood Circle Iowa City, Iowa 52240 Mr. Tom Slockett County Auditor Johnson County Courthouse Iowa City, Iowa 52240 MICROFILMED BY 'JORM MICROLAB CEDAR RAPIDS -DES 1401NES /64?7 c 7 Date: November 9, 1981 To: Chief Harvey Miller From: Assistant City Manager Re: Taxicabs in the Central Business District Joe Fowler has notified managers of all taxicab companies operating in Iowa city that they may begin using the commercial vehicle loading zones to wait for fares, this policy being effective on Thursday, November 12, 1981. This policy is being enacted in lieu of designating Cab Stands and for the purpose of better utilizing reserved parking areas downtown. Cab drivers will be instructed that they must remain with their vehicle while waiting for fares, and that they must move if the loading zone is needed by another commercial vehicle. The only exception to this would arise in the event that a driver leaves his/her vehicle in order to assist a passenger to or from the cab. This policy is being enacted for a three month trial period after which it will be re-evaluated. Please report to Joe Fowler any problems which your officers may encounter regarding the above outlined arrangement. Your cooperation in ensuring that all officers are apprised of this policy prior to its effective date is greatly appreciated. bdw1/3 cc: City Manager Parking Systems Supervisor on / MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES MOINES -. City of Iowa Cid MEMORANbUM Date: November 13, 1981 To: City Council From: Rosemary Vitosh, Director of Finance p—v Re: Capitol Street Parking Ramp Approximately one year ago, the Clinton Street entrance of the Capitol Street Ramp was closed to alleviate the traffic flow problems in the ramp. The closure was a successful solution to the constant traffic congestion in that area of the ramp, however, it has created other problems. The first problem is that some of the merchants have stated that ramp users do not see the closed sign, pull into the entrance and then have to maneuver backing out. Secondly, motorcycles are exiting through the entrance and avoiding paying for parking. Since we want the flexibility of being able to use that entrance in the future if the need should arise, we have placed a more stable temporary closure there which should sdlve the current problems. The Streets Division has put in an asphalt curb along the street edge and the sidewalk. The area will then be filled with dirt and planted in ground ' cover in the spring. If the entrance was to be reopened in the future, an endloader could remove the curbing and fill with little problem. Total cost of the project for the curbing., dirt and spring planting will be approximately $200. bj/sp MICROFILMED BY 'JORM MICROLAB CEDAR RAPIDS -DES I40INES F City of Iowa Citx MEMORANDUM Date: November 13, 1981 To: The Honorable Mayor and City Council of Iowa City From: Linda N. Woito, Assistant City Attorney / Re: Star Port Bar - New Trade Name JJ�� The Application for a new beer permit submitted by Star Port Bar and considered by you last Tuesday, November 10, 1981, has been withdrawn by the business' attorney, Mr. Rick Zimmerman. This new Application was based on a change in the corporate structure of the business; but due to possible tax consequences, Mr. Zimmerman has recommended his clients retain the original corporate structure. Thus, the Application has been withdrawn. Under Chapter 123, Code and Rule 150-5.7(2) of the Iowa Administrative Code (September 3, 1980), a new beer permit is not required when the trade name of the business has been changed unless there is also a change of ownership. Since it has now been determined that there is no change in ownership or financial interest, the name change of the bar has simply been added to the permit by the State Beer and Liquor Control Commission, and forwarded to the City Clerk. This Permit has been released to Mr. Zimmerman and requires no further Council action at this time. bj4/12 MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES 140INES /690 -.7 s, Johnson Cc"I% ty Council of Governm-�qts 410E Vvtuhirlg[cnSt. bAU City, bv�C 52240 r r 00 / IOWA CITY AREA REPRESENTATIVES MEETING WITH MR. ARTHUR TEELE, ADMINISTRATOR URBAN MASS TRANSPORTATION ADMINISTRATION TUESDAY, NOVEMBER 10, 1981 SENATOR ROGER JEPSEN'S OFFICE BLACKHAWK HOTEL DAVENPORT, IOWA TRANSIT ISSUES IN THE IOWA CITY URBAN AREA I I. Transit Funding for New Urbanized Areas I As a result of the 1980 Census, Iowa City and surrounding communities were designated an Urbanized Area (UA). It is our understanding that the U.S. Senate DOT Appropriations Bill calls for using the 1980 Census therefore providing Section 5 funds to new UA's. The House version of the DOT Bill excludes Section 5 funds to new UA's by calling for the use of the 1970 Census. This year Iowa City Transit and Coralvillle Transit received Federal Section 18 operating funds for the first time. The Federal Highway Administration has stated that no additional Section 18 funds will be provided to new Urbanized Areas. A. What is UMTA's position on Section 5 funding to new UA's7 i MICROFILMED BY JORM MICRO_ LAB CEDAR RAPIDS -DES MOINES 4' �_T it r,:_ B. Will UMTA insure that new UA's are not left ineligible from either Section 18 or 5? C. If new UA's are eligible for Section 5 funds: 1.' Will there be simplified application procedures? 2. Will new UA's be under the 13C labor protection provisions? 3. Will the allocation procedure continue to be based on population and population density or might it be based on performance indicators? D. If general operating assistance is phased out, is it possible that UMTA will fund individual transit components such as maintenance costs? II. Elderlv and Handicaooed Transportation Local officials are thankful for the changes in 504 regulations permitting local option. The area transit systems have deleted the wheelchair lift equipment on currently ordered equipment and have chosen to provide specialized service through Johnson County SEATS and the University of Iowa Bionic Bus. MICROFILMED BY 'JORM MICROLAB CEDAR RAPIDS -DES MOINES X49/ i ■ F A. Is UMTA considering any capital or operating funding sources earmarked for Elderly and Handicapped transportation services? B. What does UMTA consider to be an appropriate level of special efforts? III. Maintenance and Storage Facility Needs Currently each system, Iowa City Transit, Coralville Transit, and University of Iowa CAMBUS, operate out of their own maintenance and storage facility. When the systems receive their new coaches this spring each will be required to store coaches outside. Iowa City Transit has the most inadequate facility and is currently beginning to plan a new maintenance and storage facility. A. Is it correct that UMTA's philosophy is to emphasize proper vehicle maintenance programs? B. As a new Urbanized Area, what kind of funding can Iowa City expect for a.new facility? C. The UMTA Region 7 Office and the Iowa Department of Transportation appear to be using Iowa City's need for a new facility as a lever to encourage coordination/consolidation of the three transit systems. MICROFILMED BY JORM MICROLAB CEDAR RAPIDS•DES FIOINES I 11- i Is this consistent with the Administration's philosophy of lessened federal involvement in local decision making? IV. Section 15 (UDMS) Reporting System It seems that UMTA is placing a great deal of emphasis on a uniform system of accounts and records. The Iowa DOT currently requires all recipients of.State Transit Assistance to collect and report information similar to Section 15. However, we are disappointed with the Iowa DOT because of extremely slow computer processing of the information we have collected. A. If Iowa City area transit systems receive Section 5 funds, will they be required to collect Section 15 information? B. If so, who will process the information? C. If operating assistance is phased out, will Section 15 requirements continde? V. Transit Planning Issues UMTA has provided the Johnson County Council of Governments Section 8 funds to establish a Metropolitan Planning Organization 3-C planning process in anticipation of urbanized status. MICROFILMED BY 'JORM MICROLAB CEDAR RAPIDS -DES MOINES /6 V 4- ...7 A. Does UMTA expect to continue funding to Metropolitan Planning Organizations? B. Interim planning requirements have been published in the Federal Register, is UMTA and FHWA continuing to work on new. requirements? If so, will the small urbanized areas have simplified requirements? C. Will UMTA fund the planning for a new maintenance facility? PERSONS IN ATTENDANCE: Mr. John Balmer t Mayor of Iowa City Civic Center Iowa City, Iowa 52240 (319) 356-5000 Ms. Mary Neuhauser Iowa City Council Member Member, Board of Directors National League of Cities Iowa City, Iowa 52240 (319) 356-5000 Mr. Neal Berlin City Manager of Iowa City Civic Center Iowa City, Iowa 52240 (319) 356-5010 i MICROFILMED BY 'JORM MICROLAB CEDAR RAPIDS•DES MOINES Mr. Michael Kattchee Mayor of Coralville City Hall Coralville, Iowa 52241 (319) 351-1266 Mr. John Lundell Transportation Planner Johnson County Council of Governments 410 East Washington Street Iowa City, Iowa 52240 (319) 356-5252 Mr. Hugh Mose Transit Manager Iowa City Transit Civic Center Iowa City, Iowa 52240 (319) 356-5154 4. THE REGISTER'SEDITORIALS /t6 9aZ MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES MOINES ..7 Tough days far transit It's too soon to say flatly that . lawmakers may have assumed •that the systems only serve big mass transit in . Iowa. will• disappear unless the Legislature cities. That assumption is wrong: authorizes local -option tares, Nearly a third of the rides taken though that warning was made annually in Iowa are provided by last week by Forest Swift, small urban and rural systems. secretary of the Iowa Public The Legislature needs to do Transportation Association and more than appropriate. It needs general manager of the Des to give cities and counties the Moines Metropolitan Transit power to impose tares to support Authority. But Swift is right to mass transit. Such local -option sound the alarm, because it is a taxes might be on income, sales, near -certainty that federal earnings or motor vehicles. As an dollars for mass transit will get interim measure, under existing fewer, and replacement dollars , law,. cities can -enact a special will have to be found. property tax (54 cents for each Congress has not yet deter- $1,000 of assessed valuation) mined what to spend on mass earmarked for transit use. transit this fiscal year, let alone Higher fares are possible, but in fiscal 1983 and beyond. The there are limits to what passeo- administration intends to phase gets willp ay to ride, and fare out operating subsidies by 1985, increaseswouldn't generate shifting that responsibility to much additional revenue: Some state and local governments and money might be freed by curtail - transit riders: A: phase-out would In service, but cutbacks signifi- need congressional approval, but cant enough to matter would dis- - given the administrations success in getting its proposals courage ridership, thus decreas- through Congress — prudent in farebox revenue. g transit operators and others Mass transit is, at bottom, a concerned with the survival of government responsibility. mass transportation had better That's because It's a basic start looking for other revenue service, like police and fire pro - tection. To continue the service sources. One is state assistance, which transit provides, and to preserve Is disgracefully low In Iowa. The its potential for a future that level of state aid to local systems may include abrupt -and severe — about $2 million a year — has energy shortages, It must be ade- not appreciably cbanged in three quately. maintained, If the federal government abandons its years. During that time, farebox• revenues increased 36 percent, role, state and local governments and contributions by cities must be ready to fill In. Their climbed 86 percent. Some state preparation time may be short. /t6 9aZ MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES MOINES ..7 SPECIAL REPORT STATE prl� � 1 LC SA AND L IN TROUBLE How well will the Reagan economic revolution work? Most attempts to answer that question so far have focused on the overall U.S. economy and on the finan- cial markets. But the true test of Reaganomics will come at the state and local level. The President is shifting more of the burden of -government away from Washington at a time when the local infra- structure is decaying, when the ability of SPECIAL REPORT states -and cities to borrow is withering, and when state and local revenues are shrinking. The problems are so severe as to constitute a crisis for state and local government. In the pages that follow, the editors of BUSINESS WEEK document the extent of the crisis and examine its implications for economic growth and for the growing rivalry between regions, as well as its probable political and social impact. MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES 1101NES BUSINESS WEEK; October ¢8, 1981 138 /%o93 STATE AND LOCAL GOVERNMENT IN TROUBLE at "fit,.r ? ? 74 4 r .? ' mr Mmmhile high interest rates have led in recent weeks to IM doubts over the prnspects for President Reagan's economic program, Ameri- cans at large still seem to be committed to its central premise— that a revolutionary curtailment of the government's rule in the economy should release resources to the private sector and create a new era of noninflationary growth. Vast tax and spending cuts have been passed that are intended as en- abling lehslminn for unleashing the pri. vate sector. Rut in its zeal to put the U.S. back on a fast -growth track, the Reagan Administration may unwittingly have created a barrier to the success of its program. Falling revenues are now combining with an inability to borrow in a way that is making it extremely difficult for Washington's great partner in the feder. al system, state and local government, to fill its traditional role of producing the basic government infrastructure for growth—such elementary things as bridges, roads, sewage, water, and mass transit. So serious is the decay of the nation's infrastructure and so poor the prospects for its refurbishment that many sophisticated businessmen and economists believe the U. S. is entering a period of severe crisis for state and local government. The nation's physical infrastructure is only part of the state and local authori- ties' problem. Compounding the crisis are cuts in federal funding in the no less important area of human capital—job training, vocational education, and health care. Letting such public services decline could have high costs not only in social and political terms but also in terms of the operating environment for business. Acceptance of decay To a nation that has already experi- enced the virtual bankruptcy of New York City in 1975, the forced reorganiza- tion of Cleveland's finances in 1978, and the recurring difficulties of many cities and states, including Michigan and Mis- souri, in meeting their payrolls, the idea that local governments are once again in dire straits may seem like nothing to get alarmed about. Indeed, as the passage of 176 BUSINESS WEEN: October 26, 1981 Proposition 111 in California and similar tax -spending -limitation mores in IS oth- er states has shown, the American pub. lie is sick and tired of paying high local taxes, even if tax relief means acrrpting a reduction in services and living with potholes in the streets, bridges that are on the verge of collapse, and an inter. state highway system that is about 951: complete hot already needs $26 billion in repairs. But the current crisis is far more severe than in the past. For a series of forces is now at work that calls into question the ability of local governments throughout the nation—not only in the traditionally depressed Nnrtheast and Midwest but even in the fast-grnwing Sunbelt—UI provide the infrastructure needed for economic growth. These forces are: MASSIVE CUTS IN FEDERAL AID TO STATE AND LOCAL GOVERNMENT. After growing almost fnurfold in the 1970s, federal grants-in-aid will be drastically reduced. falling from $88 billion in 1980 to $75.6 billion in 1953 (chart). A REDUCED STATE AND LOCAL TAX BASE. With the cut in federal taxes—especially for business—some 30 states that tie 210 116 176 their taxes to federal taxes will face declining revenues. RECORD-BREAKING INTEREST RATES. The rates that states and cities have had to pay for money have almost doubled since 1975. The average municipality now has to pay S5S: of what the U.S. Treasury has to pay for long-term money; only two years ago it was 70%. So prAihitive have borrowing costs become that even such financially sound states as Califnr- nia have recently suspended new bond nffcrings. A REDUCTION IN THE ATTRACTIVENESS OF STATE AND LOCAL BONDS. To spur private saving and investment, the Reagan Ad- ministration has lightened the tax load, particularly in the upper brackets, and has provided special tax-exempt invest- ment vehicles such as the All Savers rer- lilirates and has broadened the scope of Individual Retirement Accounts. This has reduced the attractiveness of tax- exempt municipals to the rich, whip have been their traditional purchasers. The effect of these four forces is to put municipal finance in an unprecedented vise at a time of growing need. According to the Urban Institute, ne. glect in maintaining the country's exist. A slowing in state and ...has already caused a local tax revenues. decline in public investment_ Stell and local government revenues 150 756 11'71 ED. 61976 '7! •le A Illlllonr of 1972 6e11s" MICROFILMED By JORM MICROLAB CEDAR RAPIDS -DES MOINES Stet( and Iota 9evlmminl n eepindltom tar Inhe:huDure 21 2e !6 u to 71 '16 ESI. 7176 1976 72 Aellllenr of 1172 tails" SPECIAL REPORT 14 G I.. STATE AND LOCAL GOVERNJIENT'IN TROUBLE Mille em IT= NO 0 X ""a" i 0 A" U "L rm 1""A enown :if vital state and local facilities inti infrastructure will push mainte. native investment alone to over $660 bil- lion in the next 15 years. This is as much as state and local government has spent on new investment in the past 20 pears; it is equal to 20':. of the entire 11. S. gross national product in III91I. If .stale and local government cannot find a way out of this hind, the o•trects will he devastating. It is perfectly true that the private sector has carried the responsibility for economic growth throughout the history of this nation. But at virtually every stage of the na- tion's history, growth was dependent on a balance between private and public investment. The great canal honor of the curly 19th cenuup• was financed mainly by private sourves, hilt public subsidies provided a favorable in•estnenl climate. This was even rare true of the railroad Isvom of the hue 10th century. The growth of the nation's great manufacturing renters, with their dense concentrations of puupu. lation, was dependent on public spending for streets, bridges, and mass transit. The great auto boom of the 20th rentury could never have occurred without huge public investment in roads and high- ways. Similarly, the greal post -World War II airliner boom was dependent on complementary public investment. There is no reason to believe that this histori. ral necessity for balanced inivsunent has come to an end. So even if, initially. 1'resident Reagan :s economic program rives unleash a surge of private invest- ment, it would le likely to abort if slate and Loral government cannot find the w•her—mvithal to build the public facilitir, needed for suppaml. In the past decade, the crisis of state and local government has arcurrdvl mainly in the Frosth elt. But it would be a serious mistake to infer that the states of the Sunbelt will therefore he immum, to the infrastructure crisis of the 1980s. For just :as New York Pity nerds a sa billion investment in mass transit to prevent a further erosion of jobs and population. Iluuston needs In incest heavily in new freeways or mass transit in order to prevent the traffic ennueslion that threatens to strangle its growth. The crisis of the 1970s became highly visible because some cities and states were hanging by their financial finger. nails and had to redure expenditures sharply and restructure debl. I?:nknqu- ..Which Will be intensified by ..:and massive cats in continued high interest rates.» federal assistance Municipal bond Federal pteMe- Interest rates / In -std' Int (noes ennuel file) DMr: Char Earnmedrn ECIAL REPORT is w 70 70 60 o� el n r '19 'e0 V Eel. of dolls" Osla MICROFILMED By JORM MICROLAB CEDAR RAPIDS -DES MOINES cies and near-bankruplries may also nr- cur during the 1981,,. But these lurid financial episodes only serve to worsen the real growth prddem. For in Ill.• past local palitirinns have responded Ill finan. rial stress by post7oning the mainte- nancv of existing capital plant and dv6,r- ring the building of new plants, nmrh the same way an execul doe in the privatd- sector nets when his company is in a financial hind. Says Vrw York Siatd- ('ongdtruller Edward V. Itrg:n, • Vml ran always delay public inresrnent, but in the end it ruches up with yon.' A wave of anxiety The Reagan Administration agars that, until now. a godal part of the infra- sturuure crisis has born the re>ull vol of insullieienl spending but of inrlldri,1nt, wasteful spending. It maintains, for -s- ample, that subsidies to mass u•an<it :dry nal rot-efrecliee and that the srwd•rage. treatment program, which cost $II.I NI. lion in 1990, is in aced of overhaul. It believes that federal spending for road, should be confined ti o major highways essential for national defi-nse. These ar. Laments reflect the Administrtidm'x basic philosophy that mon• and* mon- federal functions should he shifted to Mote and uncal government. And lit.- Administration heAdministration maintains that it has taken a large step in that direction by consolidating 57 separate federal pro- grams into 9 new or modified categories of black grants. Although many state and Inval offi. cials may have welcomed the added Ilvx- ihility in the way they can spend fed.•r l money, the. Reagan -imposed austerity. particularly the proposed second round of budget cuts, is now stirring a •.cave of anxiety among local nfficeholders, in. cluding many key Republiran governors and mayors. They fear that the states and cities have been set adrift, because there may simply not be enough money from any source. They say that Reaunn's new federalism has assigned them n role that they plainly do not have the re- sources to fill. As a consequence a des. Aerate hunt is on for new ways for cities and slates to raise revenues and to increase the borrowing power needed to attack the infrastructure crisis. But no one thinks funding solutions will be easy. BUSINESS WEEK: October 26. 1961 177 /693' -1 STATE AND LOCAL GOVERNMENT IV TROUBLE E323 To 29110 AND 221PIUM, ar pears cities and slates repairs: a picture of a rihhon-cutting; was strurlun•. Yet the kr:t¢:m Administra- hate netili-m nl their hash.surely worth more cutl:s than oti one If a tion'., $:IG billion tiros-rouL nd nd¢t•t VIIIA li(e supleirt systems. Vol- sewer lint- living replaced. This slrtueg, and lin.posed #IS billion seri lnd nand, .•rs denl:mded mare gx-lire- map havv gotten Iwlilieians rerlerled, r)ming wlwn the nnmirip:d v:g•i•al niar. nwit :and washers :and :I. hilt it left the infrastructure to Lets are in rhauA. ruuld pre•:..r.t :!ii' m••.c v; 11, un transit fare : linu•Ip crumble. :awakening from brine tr:m•htivd int) road repairand hus mnintrnamr .,remelt Hownlly. however, growing nunllit•rs rf(rrl ice wet ion. If Ihat ,erne.. IVs, important. And politivi:uts readily of bursting, water mains. tluwxling hnsr- runtphed with [III- voles' priorities and menu, creaking bridges, rollapsinl, Spreading urban strew: In New York. nrglertrd their lural infrastnu•lures. reads, ;Intl stalling huses have awaken'.il a collision on the deter•ormmg cubwav When Ihrc did s u-nd nomtw for incest- Ihr iddiv :and eleruvl otlirials ;dike to system and a water -n. w hreoR.:uet a I 1 become, Ism in Hzed nn, out I cilild I-,-. mean, rtu.e Gleorrd nru• stnwntn•s ower the problem of the drlrrinru inp intro- become paralyzed wnnrw r•,.I :-. SPECIAL REPORT MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES 1401NES S 0 BUSINESS WEEN: October 26. 1391 139 4 93 STATE AND LOCAL GOVERNMENT IN TROUBLE the result would be supremely ironic. For the economic expansion Reagan is predicting requires a strong and healthy public infrastructure. Industry cannot expand without adequate water and se- wage systems and well-maintained roads, bridges, and mass transit systems to get its employees to work and its goofs to market. Says Pal Choate. author of Amrrirn in HRins and currently an economist at TRW Inc.: "I don't want to sound like the Joe Granville of public works, but the fact is that much of America's infra- structure is on the verge of collapse." The problem is so widespread, he says. that "three-quarters of America's com- munities can't participate in Reagan's economic growth program." The decay is evident in all parts of the nation 5 stock of public capital: STREETS AND HIGHWAYS. )I(IrP than s irt) mi. of the interstate highway sys- tem's 42.500 mi. and 11% of its bridges are nowbeyond their designed service life and must be rebuilt. And just to maintain current service levels on the roads :cod highw-ays outside urban areas [hat are not part of the interstate sys- tem will require more funds for rehabili- tation and reconstruction during the 1980s—over $500 billion—than all levels of government spent on all public works Investments during the 1970x. BRIDGES. it Will cost $41.1 billion to replace or rehabilitate the more than 200,000 deficient bridges—two out of ev- ery five—in the nation. 22.5 22.0 21.5 21.0 28.5 SEWEns. To meet existing water pollu- tion control standards, federal and local governments will have to invest more than $:31 billion in sewer systems and wastewater treatment plants over the next five years. WATER. The 756 urban areas with popu- lations over 50,000 will have to spend up 1,1 $100 billion over the next two decades just to maintain their water systems. F.ven more money will be required to develop more water sources for fast- growing areas in the Snuthwest and West. MASS TRANSIT. Spurred by the Admin- istration's proposed elimination of oper- ating subsidies and other pressures, up to one-quarter of the country's 8110 met- ropolitan transit systems might have to tease operation by 1985. The New York City Transit Authority must raise $5 bil- lion to rebuild its rusty, dilapidated rail and bus systems. Chicago's system raised its Care to We from 60c this year, and scheduling, maintenance, and finan- cial problems still abound. Deterioration of the infrastructure hurls growth because its Costs must be M1rne by America's husinesns, U. S. Steel Corp. is losing $1.2 million per year in employee time and wasted fuel rerout. ing trucks around the Thompson Run Bridge, in Duquesne, Pa., which is posted for weight restrictions because it is in such disrepair. Companies wanting to locate in certain parts of downtown Boston must bear the additional cost of a sewage holding tank to avoid overload - Ing the system in peak hours. And com- ponies in Manhattan lose $160 million a year for each additional five-minute de- lay on the subways and buses. In real terms. Reagan's first-round budget cuts represent a 257, reduction in state and local aid, and a substantial part of that will come straight out of spending for roads, bridges. mass transit systems, and sewers. Moreover. there is a danger that these first-round federal cuts will induce stale and local gnvern. rnents to shift their own finds to ser- vices and out of infrastructure. And while Reagan's second round of cuts - 12 across the board—is being resisted by Congress, there. is little doubt that the final result will be to shrink even further the money available for upkeep of local public capital. Not only older cities The blow these cuts will deal to older cities will he especially severe, for that it where the problems are most advanced. Financially strapped New York t•ity must spend mo. billion in repair :Intl rebuild its 6,000 mi. of streets. 6.2111 mi. of sewers, the 775 bridges it owns.:11111 the 1.5 billion aal.-per-clay' Water system. Cleveland needs $181 million In rehdliii- 1 ate more than •10 of it 4116i11i idm—half il Chicago is seeking from the feds—over the nest lice years to rehabilitate everything—roads. bridges. sewers, and mass transit. But even cities,in the Sunbelt, which How state and local infrastructure is decaying Average age of highways and streets 28.9 •;• " i 9s 76 •90 76 o•u 1979 ,'72 1970 A Yesm Oala Bureau of Eoro AMMS Average age of bdildings IMIUCee Oe[e W-Nmgs,aWdvv s, lea ana lIOKs'14ims. aM [auris. l,clWef Wools aM W$Ad is A Yea" 142 BUSINESS WEEK: October 26. 1981 MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES M010ES in gms, ealuel Average age of equipment and vehicles .egmea p W"72 1970 A Yes" SPECIAL REPORT /69.3 3 1t, _:, ;.• ,,;y ST -ATE AND LOCAL GOVERNMENT IN TROUBLE have newer physical plants and rapidly expanding tax bases, face problems with their infrastructures. Fast- growing Dallas must raise some $700 million for water and sewage treatment facili- ties over the next decade and more than $109 million to re- pair deteriorating streets. And booming Denver has be- gun informally delaying its repair and maintenance schedules. Obviously youth and growth do not guarantee sound and adequate infra- structures any more than age and stagnation necessarily condemn the physical plant to decay. Maintenance, management, and revenues explain why Cincinnati's infra- structure is stronger than Cleveland's and why the bridges run by the Port Authority of New York & New Jersey are better kept than those controlled by New York City. And sophisticated main- tenance management is why Dallas' in- frastructure, while not perfect, is in bet- ter shape than most. The lack of maintenance has inflicted severe damage on the roads, bridges, and mass transit systems that form the life- line of the nation's business. Bad roads and bridges keep some 25`.i, of America's communities out of the growth business, says Choate. Even the relatively new interstate highway system is spotted by dilapidation. The federal government, which did not provide funds for "the three Rs"—resurfacing, restoration, and rehabilitation—until 1976, blames the states for failing to keep the highways in good repair. The states complain of the federal government once again saddling them with the responsibility of main• taining whatever Washington builds. The Reagan approach is to take most of its overall cuts in funds for secondary and urban roads and to use them for the interstate program, which will require $53.8 billion through 1990 to complete and repair. This would leave the states and localities to bear the entire cost of local roads. The federal government now pays 75% of that This proposed retreat from aid for local roads means that the potholes that already dominate many local roads will only proliferate. In New York City, where street repair slowed to a near• standstill in the late 1970s, streets, which engineers say have about a 25 - year life, are being replaced a't a 700• year rate; the replacement rate is d9 years in Cleveland, 50 years in Balti- more, and 100 years in Oakland. The deterioration of the mass transit A New Jersey collapse: Two U. S. bridges in five need repairs. 146 BUSINESS WEEK: October 26, 1981 systems that move people to and from work has been even more profound. No. where is this more evident than in New York City. The Metropolitan Transpor. talion Authority of the State of New York "literally slopped preventive main. tenance in 19M," when the city's fiscal crisis hit, .says City Council President and NITA Ixtard member Carol Bellamy. The results were stark: The number of serious breakdowns on route rose to 12,2111 in 1957 and tripled to an esti- mated 36,000 this year; and the number of miles traveled by the average subway car before having to he laid up for major repairs dropped from 13,627 in 1977 to 6,500 in 1981. The MTA's plans to borrow some $5 bil- lion to rehuild its system have been set back by high interest rates and will suf- fer further from Reagan's proposed cuts, which could reduce capital aid by $30 million and operating assistance by $165 million over three years, forcing higher taxes or a 15c fare increase, to 90c, says Steve Polan, special counsel at the MTA. And if the rebuilding is delayed, transit failures will choke the economic vitality of the region even further. The irony in Reagan's cuts is . that the; growth he is predicting, cannot take place withoutadequate water,' sewage, And transit MICROFILMED BY JORM MICROLAB CEDAR RAP1DSe DES MOINES In Massachusetts, federal operating subsidies will de- cline $13 million in fiscal 1982 and $24 million more over the next two years. "The first third that goes we can cope with," says James F. Carlin, Massachusetts' Transporta- tion Secretary. "Rut when the cuts go up to $20 million, we could have some problems." One of their problems will be caused by Conrail's consolida- tion, which will leave the com- munities in the southeast of the state without service. "The state is going to have to come in and acquire the rail- ways and then get some carri. er to come in and run those lines," explains Carlin. Since fast-growing cities in the Sun- belt have avoided reliance on federal help for their still small transit systems, the cuts will not hurt them as much. The Metro bus system in Houston does not use federal money for operating ex- penses, so it will not he affected immedi- ately by any budget cuts. %lost of the federal money for two bus maintenance facilities has already been committed. And work on contraflow lanes and raised tracks for buses will continue with local money. Nevertheless. Houston's plans to develop a rail line to link southwest Houston with downtown will be slowed, even though the city will continue to fund engineering studies with some $10 million in local taxes. The vital connections Similarly, Dallas, which has been slow in reacting to the need for a sophisti- cated system, is now faced with bearing the full burden of financing its future mass transit needs unless the state helps. Although the voters just last year rejected the establishment of a regional transportation authority, mass transit, like sewers, is vital for growth. If growth continues at its present rate, without the development of a mass transit system, cities like Dallas and Houston could eventually be paralyzed. Inadequate and dilapidated sewer lines and wastewater treatment plants are also stalling economic activity both in stagnating cities that have to bring their systems up to congressionally man- dated standards and in growing areas that need additional capacity. Waste- water treatment plants in 475 of the communities surveyed by the Commerce Dept. in 1978 were operating at 80% or more of capacity, while the generally accepted effective full capacity utiliza- tion rate is 70%. That means that new SPECIAL REPORT /G 93 - STATE AND LOCAL GOVERNMENT IN TROUBLE plants and homes could not he hooked up to those systems. The Florida Environ. Mental Protection Dept.. for example, recently prohibited Orlando, one of the fastest-growing areas in the U. S., from adding more homes to its overloaded sewer system. The moraturimn was lifted only when Orlando signed court decrees promising to build more sewage treatment plants. If the Administration's plans for dis- trihuting treatment plant funds go through—it wants to limit funds to the cities needs as of 1980—Orlando and other grieving cities and suburbs will have to build capacity for new popula- tion without federal money. Capital spending for wastewater treatment fa- cilities by all levels of government has tripled since the Clean Water Act was passed in 1972, making it the largest sin- gle public works program now under way. The Administration wants to cut the estimated remaining federal costs for treatment plants to $21 billion front $90 hilliun. And Reagan would slice an- nun] federal expenditures from $3.5 bil- lion lu $2.4 billion. Water and the West If Reagan's changes become law, there will he less money to spend overall, but changes in the allocation formula will benefit some cities and cost others. It could end up penalizing growing areas and helpink older cities. Baltimore, for example, needs to spend nearly $1.5 bil- lion, or $1.880 per capita, to get its sew- ers and waste treatment System in shape, according to estimates by the U. S. Environmental Protection Agency. With current levels of federal aid, it has been spending around $35 per capita per year, according to the Washinitton-haled Urban Institute, which has made a ma- jor study- of infrastructure needs. Rea- gan's proposals are expected to give Bal- timore more money. But in the Chicago area, where the sewer systems overflow raw sewage into homes and lakes and rivers alike with a disturbing regularity, the Metropolitan Sanitary District is less likely to get the funds it wants to build a $3.4 billion, 131 -mi. "deep tun- nel" to upgrade its system. It has al- ready sunk $1.2 billion into pollution control and will probably have its flood control moneys slashed by Washington. Reagan s approach could also reduce grants going south of the Mason-Dixon Line and west of the Mississippi. Right now there is little concern among local officials. partly because the spending re- quirements to meet standards on these newer systems are low: $3 per capita for Tulsa, Tucson, San Jose, and Dallas. But over the long run the cuts could SPECIAL REPORT create problems. Houston is receiving 75': federal matching funds for a large sewage plant, which the city needs to meet federal clean water standards. Once that is spent, City Controller Kath- ryn J. Whitmire does not expect any more federal funds. "If we don't have federal assistance, we'll finance as much as is feasible through revenue bonds haled on user fees," she says. "But for large additional projects, we'll have to turn to the developers: we've already seen developers ready to participate." But some experts point out that this will raise the cost of new construction, and that could slow growth. Iluge investments also will be re- quired in water systems over the next two decades to maintain economic vital]- ty. "The history of much of the West is the history of its water projects." says Choate. "And water will determine its Even cities in the Sunbelt, with newer physical plants and rapidly expanding tax bases, delay repairs and curtail services future." The water systems in much of the West have not been well maintained, and they will require additional spend- ing in the 1980s. Since the federal gov- ernment does not support local water systems, Reagan's cuts will have no direct impact. But where water is tan - trolled by cities instead of independent authorities, the cuts in other areas could force politicians to divert funds that would'normally go to maintain the water system, and that could increase prob- lems in the future. In the East, too, money will have to he spent on water, but there the problem is storage, treatment, and distribution. "One half of the water lines are so decrepit that they need to be replaced," says Choate. New York City, for exam- ple, loses 100 million gal. of water per day because of leaks. The squeeze on state and local govern- ments is not coming only from Reagan's austerity push. Even while federal capi- tal aid is being slashed, court -mandated improvements in jail conditions are re - MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES MOINES quiring many cities and states to up- grade their prisons. "If the federal gov- ernment doesn't give the local govern. ments and states the money for jail and prison construction;' .says Susan Walt- . ers. an infrastructure expert at the Council of State Planning :Agencies. "the trend of mandating jail replaremvnt by the judiciary means that streets, water systems, and schools will go." Cities and states are scrambling to find ways to buffer their infrastructures from these revenue shortfalls. Env ap- proach being considered by cities that still control their sewers and water sup- plies and other facilities is to turn these over to independent operating authori- ties that have pricing and landing pow- er. Experts have noted that, since they have their own revenue sources, the au- thorities' maintenance programs have been insulated from the fiscal squeeze that has led many municipalities to skimp on maintenance. They "generally maintain their capital plants better ani have healthier financing," says 1'rhan Institute economist George F. Peterson. "There's not a pothole in the Goorge Washington Bridge," says Peter C. Goldmark Jr., executive director of the Port Authority of New York k New Jer- sey, the largest multipurpnse operating authority in the LT. S. We resurfaced it two years ago." The City of New York, by contrast, has so neglected mainte- nance on the Manhattan Bridge that it must sharply limit traffic there for sev- eral years while it rebuilds. A long recovery Yet independent authorities have their drawbacks: Every time one is set. up, it limits the flexibility of the govern- ment to shift funds m meet its most pressing priorities. There is no way city officials can subsidize street repair out of water fees, for example, if the water system is operated by an independent authority. Says Peterson, head of ut's infrastructure study: "If you generalize that model so every service has its own financing and operating authority, it eliminates all trade-offs between ser- vices. How far can you go?" The crisis in America's infrastructure has been building for decades, and its resolution will take decades. "This is not a crisis for the, short-winded," says former New York City Budget Director David A. Grossman. "Most rebuilding will take a decade or decade and a half." adds TRW's Choate. Yet even with such a long horizon, there is no doubt that the cuts Reagan has made and the cuts he has proposed portend a major setback to the rebuilding of America's infra- structure. BUSINESS WEEK: October 26, 1981 1`693 STATE AND LOCAL GOVERNMENT IN TROUBLE ,storicilly among the best credit risks in the financial markets, the state of Cali- fornia approached Wall Street underwriters this September with plans for a $lob million bond issue for parks and water cleanup. The plan looked almost boringly routine in an era when suite and local issuers tap the debt markets for amounts approaching $1 billion ;It a crack and use the money for things as offbeat as building fastdrud rnslau- ranls. out f..alifornia financial planners were in fora rude shock. Interest renes leaped beyond the stnte's self-imposed statutory limit of 1I'.: for public debt — etfectively shutting the state out of the bond market. The Mrroaing still has nut been dune. California is nut :done. Slates and cities across the (-,)unto• are facing a borrowing crunch tir unprecedented di. mension, hirause of their inability or unwillingness to pay high enough inlyr- est rates. Lovid governments have issued about $2.5 billion in stopgap, short-term notes this year in anticipation of retiring them when they can again hring honds to market. The amount of bonds autho- rized but unissued is at least three times that, acrording to securities industn• es- timates—bringing the total of lands held back to about $10 billion. All in all, the comhinalion punch of high interest rates and blocked borrow- ing will nit -an more financial pressure un states and cities at a time when they can (east afford it because of the sharp fed- eral cutbacks in aid. Debl service as a perremage of total expenditures will rise for those that can harrow, local go•ern- menl.s' credit ratings will crude, and they will he forced to resort more and more to short-term financing, which will make lung -term planning for an esti. nosed $501) billion in capital ne,•ils in the Mffls 4111 but imlxossible. In New york, the state legislature has approved $1100 million in borrowing low. er for ,he New• 5'ork City subway sys- tem, hill State Comptroller Edward V. Regan says t hat t he burrowing "is out of the Munstiun" so lung as rales for 20 -year municipal hands are as high as 12.-3':, the current average yield. In Massachu- se,is. Development Secretary Byron J. Matthews stns: "I can't think of one project in the state that has moved for. ward under a general capital improve- ment Mud for the last several months," and Boston has been virtually shut out of the long-lerm hand market because of its own fiscal problems. Chicago cannot States and cities are being crowded out of the capital markets ... State and local share of new capital raised In U.S. float notes for its transit system, and even Denver, a high-growth city in a booming region, is holding back $19 mil- lion in bonds for water system improve- ments. The amount of long-term bunds issued in the lax -exempt municipal market ,en- compassing states, cities, and all local thi and regional agencies) s year is ex- pected to register the largest drnp in a decade, from $48.3 billion to about $•It billion. More important, the amount of ,hat financing used to meet basic infra- strurture needs, surh as waterworks. sewers, trans)iortation, and schomis. has been aixut $10 billion a %-ear for more than a decade. The other $:10 billion or so goes to areas not crucial to local govern- menls' basic mission—for example, con. struction for private industry, financing fir single-family housing, and building lancer plants for use by the private sector. With competition in the tax-exempt market increasing, states and rities have witnessed an unprecedented erosion in their credit ratings. Except for a techni- cal change within one grade level, down. gradings in credit ratings by Moody's Investor Services have exceeded upgrad- inks this year for the first time in it least a decade. This means even higher ... and asiag their borrowed money tem to meet basic auris so i percentage of state and local flnancinq ' \ used for Infrastructure and schools b EN. 10 r '19 °Y EF,. n 0 rt "zz 1970 ♦,anent Data: Fu M Bn.M Bum, ow afl,mna 151 BUSINESS WEEK: October 26. 1981 A Pmafft Data: ROIL Sam"J" �., Bw M,M. MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES MOINES SPECIAL REPORT 4 93 vi STATE AND LOI:AI. GOVERNMENT IN TROUBLE rates (fir many issuers and, ultimately, .more fiscal problems. "1'm lerrihly worried about the slate of the municipal market." says .lames J. Lowrey. a New York -based adviser to municipal issuers. Lowrey predicts that the insolvency or near-insoliley -in plares such as New York City, Chicago, and Cleveland in recent years may be repeated :,gain and again elsewhere as cities find loth their revenues and avail- ahle credit squeezed. Eventually, the logjam of pent-up bor. rowing demand should break; financing for critical infrastructure such as water- works and mass transit cannot be put off forever. Bad stale and local horruwers who do venture into the long-term mar- kets are finding that the days of deep - discount numey—at rates suhsL•mtially below the private sector's lwrruwing costs—are gone. Indeed, the tax-exempt rates paid 6c state and local borrowers for long -lean bonds have recently ex- reedetl sV,' of the rest of comparably rated taxable corporate bonds—far higher than the 05'; historical standard. Vying with the big boys Thr spread has narrowed Ikx•ause of fundamental changes in imrstnr prefer- ences and federal tax Ixlicy, which go far beyond the cyclical trend of higher interest rates. Even if interest rates moderate, the structural changes in de- mand for state and local debt, generally referred to as municipal hands, or "munis." will have serious implications for the ability of local governments to raise capital. Until now, their borrowing problems have attracted little attention. Indeed, on the surface, the muni market appears to be M,oming. Although states' and cities' long-term financing is down this year, it still exceeds corporations' long- term borrowing:, and individual investor demand is robust. But the future of the municipal bond looks bleak. The municipal market's most funda- mental problem is simply that the sup- ply of available credit is not keeping up with borrowers' demands. Salomon Bros. credit sage Henry- Kaufman says that municipalities face "crowding out" from the long-term capital markets by the huge borrowing needs of the federal government, widely expected to total $50 billion in the fourth quarter alone. "National policy now ... pits states and municipalities squarely against the economy's most powerful borrowers, the federal government- and large business corporations," says Kaufman. "In this kind of struggle, state and local govern- ments cannot win." Corporations and SPECIAL REPORT the federal government, Kaufman con - ;ends, can virtually "raise money at will" in the markets, although they may have to pay more, while Ineal issuers or(- fettered refettered by interest rate ceilings, enter referendums, legislative authorizations. and political pressures. Although annual municipal borrowing has risen by $20 billion in the past 111 Years. it has not kept up with intlatiun. Net new capital raised by sloes and localities hos fallen sharply ns a perevnt• age of the entire U.S. capital markets Ichatrl, page 151I—a trend that ramonly he intensified in the future by the It-- r - al goternnienCs soaring borrowing needs. A less apparent trend is what KauG man calls "crowding in"—Ihe rapid sylvania. That still letoes la X-ex1911p1 Inns of more than $10 million fora list of quasi -private purpose,—pollution-con- trol additions to industrial plants. for instance—that account for perhaps •�,': of all long-term municipal lin twine. ••The nmjor it. ion far this deradr in public Iinance is who will get The tax- exempt money—the local hainhurger chain or the lural highway system.' says Ronald Forbes, head of the Muttivipul Finance Study Group of tht, State Vni- versily of New York at Albany. The 1),-ncer Water Rna rd's livauu•e dirrrtor. liolwrt E. Wiedenta nn, brnmauls the IWO- lifwrating uses for lav-exenqu bands. .-Anytinu• volt have more of sn ovild"Ll W., going lu drive up the inivres rales;' he says. But issuing urns is one of the ..................:....:: �I li cl mass. - Still's ■■■._Ot;g;s A 17} s'il'l 1 M1712, Matthews of Boston, which has been virtually shut out of long-term bonds; Nationwide, that market Is expected to show its biggest drop in a decade this year. growth in the use of tax-exempt bonds to finance projects that have little to do with traditional state and city responsi- bilities. The most controversial of the nontraditional borrowing uses has been tax-exempt industrial development bonds (Ines). Although Congress re- stricted Inns in 1969, state -authorized development agencies are still allowed to act as Issuers of tax-exempt bonds to finance private industry construction— the ostensible public purpose being the jobs and economic growth thereby ere- nted. In the past five years states have eagerly jumped on the Inn bandwagon, paying little heed to the competition that these issues provide for the general financing done by local governments. President Reagan has vowed to curb such bonds, and Administration sources hint that they will seek to end the tax exemption on interest on issues of tinder $10 million, which have financed a string of McDonald's restaurants, K mart stores, and oven a topless bar in Penn - MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES I40INES fete things thnt states can do, short of diiect tax abatement, to attract busi- ness. "We're willing to let the federal government make some tough [budged decisions that will have an impart on the states," says Governor Christopher S. "Kit" Bond of Missouri. 'But now it seems that they're trying to take it away on the borrowing emi." Bond i, especial - Iv upset about a recent Internal Revenue Service ruling that individual municilutl- ities could not escape the $10 million small -issue ceiling by lumping together smaller issues in one offering. No matter what the fnte of Inns, ;late and local governments will still find themselves competing for credit against powerful, independent public authnritiea whose borrowings are also jamming the market. One of these, the 1Cashingion Public Power Supply System IWPP9,1, has recently become the largest single issuer of tax-exempt debt. Ironically, while most independent authorities have been strong borrowers because their BUSINESS WEEK: October 26. 1981 155 /V/ N r. STATE AND LOCAL GOVERNMENT IN TROUBLE bonds were secured by user fees, wppss is having colossal problems that threat- en the entire municipal market. Construction delays and cost overruns at two of five nuclear power plants wpPss is building have become severe, and the authority has found the bond markets clnsed to these two projects. A state commission seems close to winning approval for mothballing the project for 30 months, but bondholders will he left in the lurch—uncertain of whether the authority can be hailed out or return to the markets in time to meet debt service after 199:1. ' Owing in part to investor apprehen- sions alout the authority, wPPss paid a record 15: when it borrowed in the bond market for its three less -troubled plants in September. "This kind of thing has a ripple elferl." says one mnnicipal bond dealer. "The WPPss rale drives up everylsxly else's rate—particularly an issuer in Washington:' Indeed, Moody'.s dropped the state of Washington's bond rating a notch on Oct. 7, which could drive up the rost of a planned one-year note ulrering by $1 million. Moody., cited revenue shortfalls, but bond deal- ers feel the fears of slate liability for wppss also nmy have been an ingredient in the do%%ngrading. The crowning blow The Reagan Administration has dealt a severe, if unintended, blow to the municipal bond with its new tax policies. Interest from municipal bonds is, of course, free of federal income tax. But with personal income taxes scheduled for a 297 reduction by 1984, individual investors hap that much less reason to seek tax-exempt income. The reduction from 707 to 507 in the top rate for unearned income, moreover, means that interest from competing investments, such as high -yielding money market mu- tual funds, will also be taxed less for many investors, and there is more incen- tive to seek capital gains in common stocks or real estate. For many municipal issuers and deal. ers, the crowning blow came with the authorization of the new, tax-free All Savers certificate. Because the one-year deposits will compete directly with mu- nicipal debt of equal or similar maturity, dealers and issuers alike fear that inter. est costs will he driven up significantly. The Municipal Finance Officers Assn. estimates that states and cities will pay up to an extra $1.1 billion in finance costs in the first year of All Savers, and they are lobbying hard to prevent the program's renewal after that. Says Michigan's deputy budget director. Douglas Roberts: "Nobody's going to buy 158 BUSINESS WEEK: October 26, 1961 four] notes below the 12.17 [All Savers] rate." Adds Paul R. Thompson, finance director of Detroit: "All Savers drives another nail in the coffin of the tax- exempt market for municipalities." The Reagan -instilled disincentives to municipal investment come at a time when the market is depending more and more on individuals to soak up municipal paper. Individuals, who have historically bought about 257 of all new municipal issues, have increased their share of the buying to between 507 and 757. in 1981, attracted by high yields. Part of the problem is that institu- tions such as commercial banks and property and casually insurers have all but left the market, either because they have found other ways to shelter their States and cities face paying skyrocketing rates for tax-exempt municipal bonds just when cuts in federal aid start to take hold profits or because they have little left to shelter. Thus, if the Reagan tax pro- grams make municipal bonds less at- tractive to individuals, municipalities will have to raise interest rates as an incentive. That means the historic rela- tion between municipal and corporate rdtes may be skewed for good. "We have legislated away, without knowing it, the subsidy for municipal financing," says Felix G. Rohatvn, chairman of New York's Municipal As- sistance Corp., which has helped pull the nation's largest city from the brink of insolvency. "We are raising money at essentially taxable rates, and that's a very fundamental change. Even if the rates come down in general, municipal rates will stay at a par with taxable ones." Rohatyn adds that "we could never have brought New fork City back to fis- cal health under the financing conditions prevailing today"—words with a fore- boding ring for cities that are struggling to get back on their feel. "New fork had its crisis early," he says. "But for cities like Cleveland, Chicago, Detroit, St. Louis, Buffalo, and Philadelphia, there MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES 140INES will be worse troubles in the 19FOs." With the pressures building, states and cities are resorting to more short. term debt and a host of "creative financ. ing" gimmicks. Issues of debt obligations maturing in less than one year are expected to he about $:10 hiflion this year, a record 427 of the total. The city of Columbus. Ohio, and the stale of Con. necticut have broken ground by issuing tax-exempt commercial paper—a trend likely in he picked up elsewhere. In one issue, New Yurk's MAC gave bond buyers the option to buy more bonds at fixers interest rates in the future—desirable to investors if interest rales go down. And the state of Washington planned to sell $400 million in one-year notes on Oct. 15. giving buyers the option to sell them back at face value after a month—desir. able to investnrs if interest rales go up. The Impact of a default In one of the most innovative new financing plans, New York City's Metro- politan Transportation Authority OITAI intends to sell buses and rail cars to investors and then lease them hark for system use. The plan allows the NIL\ u, put up only 907 of the cost of the new equipment, with the investors supplying the remaining 'Lo'.: —in elreet rutting the system's borrowing demands for capital expenditures. But these may be nothing more than desperation moves. "Local issuers can never rely on short-term obligations for capital projects—anti that's the bulk of their borrowing need," says Salomon's Kaufman. These projects require ad- vance cost knowledge, for the long haul, which short-term notes do not provide. Options granted on bond issues can backfire, depending on interest rate movements. Equipment leasing remains subject to IRs scrutiny and may have limited applications outside urban tran. sit. "The reason I fear for municipal issuers is that they really don't have a wide range of financing choices available to them," says Kaufman. Most serious of all, credit market ana- Ivsts now believe that the chances for a default by a major municipal issuer— the wppss, for instance—are as high as they have been since New York City's euphemistic "moratorium" on interest payments in 1975. The fact that inves- tors have always looked upon the munic- ipal bond as one of the safest invest- ments would only serve to increase the shock value of a failure. If such a default came without warning, it could frighten lenders to the point of holding back cred- it in general—to corporations and indi- viduals as well—with an unfnthnmahly adverse impact on the economy. SPECIAL REPORT /G 93 a'— STATE AND LOCAL GOVERNMENT IN TROUBLE Reductions in federal grants to state and local govern- ments are coming al a time when many cities and states are alrendy finnn- rially strapped and facing slow growth or even declines in revenues from tither sources. Revenue losses are nal a new problem for many cities, par- ticularly the older ones in the Northeast and Midwest. Indeed, the rate of I,Tnw•th in state and local receipts from all sources during the 1970s slowed to less than half the rate during the 1960.4. For the 1990s. the Reagan Administration's cutbacks will intensify this already, de- veloping trend and place increasing pres- sure on the nation's cities to find the wherewithal to continue to provide basic public services for their residents while financing economic and community de- velnpment. Although grants to cities and states represent only 14.2% of the federal budget, they are the target of one-third of the Administration's sweeping hudget cuts. Funds for these ,programs have been slashed by 14% for fiscal 1982- 25% after inflatinn—and the Adminis- tration's new program to contain the deficit threatens a further 12. reduction. Even excluding the latest proposal, by 198:1 revenue dependency on Washington will have dropped 28% from the peak in 1978 (chart). Localities will be forced to pick up the greatest slack in the area of social services, where more than half of the total budget reductions for fiscal 1982 will hit two broad functions. Income security and health programs, including fool stamps, child nutrition, medicaid, Aid to Families with Dependent Children (AFDC), and Trade Ad- justment Assistance, will lose about $13 billion. Programs for education, training, and employ- ment, such as the Comprehensive Employment & Training Act and public service employment, will be cut by about $7 billion. In addition, the responsibility for administer- ing many of these programs will be transferred to the local level from the federal government. Although most of Reagan's cuts are in social services, they will 162 BUSINESS WEEK: October 26, 1981 nevertheless have a devastating effect on the infrastructure. The reason is that. while local politicians want to IooM infrastructure spending, they find unem- ploymem. loss of income. and loss of rite services even more devastating polideal- ly. If the Reagan crunch conics, says Executive Deputy Mayor Rudy Nothen- lerg, the city's chief financial b1 icer. then San Franrisro s first priority would lie its "defense department"—that is, police and lire prulertion—publir trans- loriation, and the municipal hospital for the indigent, even if that meant skimp- ing tin infrastructure repair. In New York City, too, Reagan service cuts could cost the infrastructure dearly. "Our first priority, if the cuts go through, must IN, the life-suplvwl services: police, fire pro- Icctiun. health services, and transit ols•r- alions;' saps City Comptroller Ilarrison J. Goldin. "The infrastructure would have to is, allowed to deteriorate even further—which would be disastrous." The efrecl of these revenue losses across the various areas of the country is regionally neutral, according to an April, 1981, report by the 011ice of Manage- ment & Iludget. However, in a private study, Andrew J. Momly, director of metropolitan forecasting at Chase Econ- ometric Associates, concludes: "The im- pact of the Administration's budget ruts will vary considerably acrnss stales and will depend upon the type of programs that are cul." If that is true. some cities could be hit hnnl—particularly in the highly urhanized and older indusu•ink ized states in the Slid-Ad:mtir, New England, and Fast North Central re- gions. To cope with these losses, city Mlivi:ds fare a limited set of traditional rmenue- raising alternatives. In the current cli- mate of fiscal restraint, politicians are reluctant to advocate higher taxes, and many cities do not have taxing awhori- ty. Most cities have tax limitations that preclude new tax revenues. Stnrevcrr. many states• such as Michigan and Ohio. are financially hard pressed themselves and are unable or unwilling to olrer cities much relief. Because approxi. mately 30 states '*piggyback" their tax rates to the federal tax structure, the Administration's new tax cuts mean less revenue for those states. Accelerated de. preciation and other tax-exempt inennte, such as that from All Ravers certificates• will cut further into stale cotters. Adjustment will he particularly difficult for the older cities in the Northeast and Midwest where rev. enue growth has sufreresd from a declining industrial hale that has gradually eroded the area's tax base along with the credit rminus of some of the major cities (table. page 163). Cleveland, which lost 2,3% of its population in the 1970s and defaulted on its debt in 1978, is a prime example. The city ex- pects to lose nearly $31) million for infrastructure repair and millions more for community development projects, and Cuyahoga County will forfeit an additional $40 mil- lion for a number of welfare prn- grams, 601 to 70'L of which goes to Cleveland residents. Cleveland officials are concerned about the long-term impact. "While the city today is in a strong financial pnsi- tion, we are not able to pick up the cutbacks in social and welfare pro- grams." says William J. Reiely, Cleveland's finance director. Cui - rently, the unemployment rate among the city's Nock teenagers is MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES MOINES SPECIAL REPORT /i 93 STATE AND LOCALGOVERNMENT IN TROUBLE about 60 according to Larry A. Retal. iick, executive vice-president of the Ur. ban League of Greater Cleveland, and he fears that conditions may be ripe for unrest. In Boston, the federal cuts fall on top of the revenue -slashing effects of Propo- sition 214, approved last November. which reduced property taxes to 21/:'a of fair market value. cut the automobile excise tax by 50^. and gave renters a state tax exemption equal to half of their annual rent. Property taxes were the major source of revenues for the city, and losses resulting from Proposition 21h will amount to $100 million this year out of a budget of about $1 billion. Now the federal cutbacks will trim a further $50 million. mostly from economic develop- ment projects and employment training programs. In an effort to make do with less, David S. 1lundel, Boston's intergovern. mental relations director, says the city has developed three basic strategies. First, it is continuing to finance the most efficient programs. Second, it is at. tempting to bolster charitable contribu- tions and now requires many job -train. ing programs to get matching funds from private industry. Finally, the city has proposed a variety of increases in taxes and fees, such as a boost in park. ing-violation rates and a condominium - conversion tax. This third route might prove fruitless, however, because any changes in city taxes require state ap- proval, and Governor Edward J. King has vowed to veto any tax increases. Mundel adds that there is a general mis. conception that budget cuts will trim only the fat and sloth out of public ser. man Resources Dept., 53,000 people in vice. "But given the size of these cuts," Dallas -Fort Worth will be forced off he says, "we're forced to do less." lion- AFDC, and 175,000 will be dropped from del notes that there is a basic difference the food stamp program. between what Boston and the federal These and other problems that state government are experiencing. The leder- and local governments are experiencing al government is only slowing down its in adjusting to the Administration's cut- rate of growth, he says, but Boston is backs cast doubts on the success of the actually growing smaller. White House's block -grant programs. The .administration plans to consolidate the funding for a numberof similar cate. gorical programs into broad block grants while giving states the responsibility to administer the programs and to spend the money as they see fit. But it will not he that easy. First, the states have fewer federal funds to handle the increased responsi- bility. Second, states complain that the promised flexibility to spend the money as they wish is not there. And third, the cities are concerned that thev will get lost in the allocation shuffle and that worse, not better, relations with state governments will result as municipali- ties right for their share. Chicago's Budget Director F. Tim zoo, and other cultural facilities to peo- ple who come to Denver from all over the state. "We are going to have to live with these kinds of arguments on a con. tinuing basis," says Randy W. Harrison of the Colorado Commission on State dt Local Government Finance. Denver offi. cials are choosing to raise user fees in an effort to regain revenues and make the problems more visible to the public. As of Oct. 1, for instance, an out -of -city res- ident must pay $100 for a library card. Many cities in Texas and ocher ener. gy-rich Southwestern and Mountain states, which receive payments from en. ergy-severance taxes, are in a better position to adjust to the loss of federal money, but that does not mean the cuts will go unnoticed, particularly in social services. Statewide. Texas has lost $40 million in funding for social programs, and the Dallas -Fort Worth area alone has forfeited 3S million. According to William E. Buchanan of the Texas Hu. Witsman worries about the state and local bureaucracy that might grow up around the block grants. "I am not opposed to the notion of block grants, but I am opposed to them going through the states. That is a contradiction of phi. losophy, layering a new level of bureau. cracy on top," he says. Witsman fears that administration costs might eat away money the city, could use. George A. Athanson, mayor of Hartford. Conn., foresees cities fighting states and inner. city groups fighting city hall. "Mean- while," he says, "Reagan will be sitting at Camp David saying, 'Isn't it wonder- ful, our national government is not in. terfering."' Indeed, Bernard L. Weinstein, profes- sor of economics at the University of Texas at Dallas, believes that the cut. backs will profoundly change the rela. tionship between federal and state gov. ernments and, in particular, between the states and the cities. "My major can. Credit ratings of the nation's 29 largest cities City Rating Dallas..............Au Houston ...........Ass Indianapolis ........Ass Los Angeles..:..... Ana Atlanta.............Am Columbus, Ohio .... As Denver.............Am Kansas City, Mo.....As Memphis ........... As Mllwsukee.......... An city Rating Nashville ............. A& Phoenix.............An Phllederphla ....... San Antonio ......... As San Diego ........... An Son Francisco....... As San JOsa, ............ Am Seattle ..............As Naw York .......... Baltimore ...........A 1 EI Paso .............A 1 Jacksonville......... A 1 Newer cities hurt, too While the problems will be most acute in the older cities, newer areas also will feel the revenue bite. Because of the red. eral cuts, state tax relief, and a sluggish economy. Colorado will barely manage a balanced budget this year after expect. ing a 3144 million surplus. As a result. the state will not be able to replace the $155 million in federal cuts to various state and local agencies. Infighting has begun because Colorado's inability to help Denver has exacerbated state vs. local tensions. City officials argue they should not have to bear the entire bur- den of providing health care, museums, a SPECIAL REPORT MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES 140INES city Rating Chicago ........... A Now Orleans ...... A St. Louis.......... Bea t Phllederphla ....... Baa Pittsburgh......::. Bas Cleveland ......... Ba 1 Boston............ as Detroit ............ Be Naw York .......... 8 om Abair a 1meTaa sw cern," he says, "is that Washington has pushed this stud without thinking about what the responsibility' of each level of government should be. Who should do what City officials from both North and South also express concern that the Rea. gan cuts will create more problems than they will solve. Many' view the transfer of federal responsibilities to cities that are ill-equipped to handle the new bur. den as merely a shift of the financial stress on the federal government to the cities, and many feel that the Adminis. tration has moved too far too fast. "We are undertaking a major federal policy without understanding its impact on the cities," says Anita A. Summers. adjunct professor at the Wharton School of the University of Pennsylvania. Sum. mers emphasizes that this impact de- pends crucially on the untested axioms of supply-side economics. "If the supply. side theory does not work, then I think the Northeastern cities will receive a severe blow, if not a mortal blow," she maintains. BUSINESS WEEK; October 26. 1981 163 // 9/f STATE AND LOCAL GOVERNMENT IN TROUBLE JA 3Jr I. P. resident Reagan's econnm- ic policies may, in the long run, revitalize the If. S. economy and bring new fiscal health to the states of the Northeast and Mid- west. But for the time being those poli- cies will intensify the war between the energy -rich and energy -poor stales. While that war has some of the charac. teristics of the Sunbelt vs. F'rostbtlt fights of the 1970s, neither the align- ments nor the issues are the same. Some Sunbelt states, notably Florida, have de. veloped typically Northern urban prob- lems, while such frosty places as Wyo- ming and, above all, Alaska, are rolling in energy wealth. The growing impor- tance of energy will change the nature of the intensifying competition among states for industry and jobs. Without access to federal government funds and a relatively weak tax base, even many states of the Old South. which had been able to attract industry from the Northeast and Midwest with generous tax-forldveness incentives, will find themselves at a disadvantage. Like the states in the Frostbell, they can ill afford to give up tax revenues if they no longer have Washington financing to help with building roads, sewers, and basic facilities. Energy -rich states do not have to worm, about such trade-offs since they have abundant revenues. The Administration and representa- tives of the energy -poor states, mainly those concentrated in the Midwest and Northeast. have engaged in a healed argument about whether the Reagan tax and budget cuts discriminate among re- gions. The Office or Management & Budget has published a study arguing that the benefits of tax reductions and the pain of budget cuts are evenly dis- tributed around the nation. But Repre- sentative Carl D. Pursell (R -Mich.). chairman of the bipartisan Northeast - Midwest Congressional Coalition's budget task force, counters: "If you look at what is.happening in the distribution Now the states rate in the straggle to attract industry Bated ON per ceplle tae oepecity In 1979 Below PMm1`891 Aterage Good ^Eznllent �l 108 BUSINESS WEEK: October 26, 1981 DW A*" Qwri n w Mrrp,wmwew ArYOnw MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES 1401NES SPECIAL REPORT /17.7 a^— STATE AND LOCAL GOVERNMENT IN TROUBLE of dollars in the budget, there's a major transfer of money to the Sunbelt." Regardless of who is right, .some states are much better equipped than others to offset federal spending cuts with state funds. The massive runup in energy prices since the mid-1970s has greatly increased the disparity in the fis- cal capacity of states. Energy producers dominate the list of states with the larg. est and fastest-growing per capita tax bases (map, page 166), according to a comprehensive measure of income devel- oped by the staff of the Advisory Com- mission on Intergovernmental Rela- tions. Taxes and decontrol Last year, seven states received more than 20';, of their revenues from sever- ance taxes levied on the production of minerals, mainly oil, gas, and coal. A decade agn, only one state— Louisiana— relied so heavily on energy taxes. Sever- ance taxes, which range as high as Mon- tanan 30% levy on coal, have become a major bone of contention in interstate relationships. The Midwest Governors Conference estimates that residents of its I:I memlx-r Stites paid S701 million in severance taxes to other states in 1979 and will pay more than $2.5 billion in 19&5. Accelerated decontrol of natural gas prices, which the Administration will soon recommend, will exacerbate the sit- uation. The Northeast -Midwest Insti- tute, the research arm of the congres- sional coalition, estimates that, with de- control, severance tax receipts will total $280 billion through this decade. "Noth- ing scares us more right now than natu- ral gas decontrol." says Rhode Island Governor J. Joseph Garrahy. The 13 Midwestern governors, Il of whom are Republicans, recently voted unanimously to oppose immediate decontrol of natural gas. The energy -consuming states also feel that severance taxes put them at a dis- advantage in attracting and keeping business and jobs. While they are being forced to raise taxes to make ends meet and are running the risk of driving employers away, the energy producers are able to rely on revenue sources that do not increase the cost of doing business in their states. "It's going to become apparent that Texas, Louisiana, and Montana, for example, are using their energy revenues competitively," says Representative Barber B. Conable (R- N. Y.), ranking Republican on the House Ways & Means Committee. The energy -poor states, which find themselves squeezed between Washing- ton's budget cuts and what they view as 170 BUSINESS WEER: October 26, 1981 rapacious tax policies by energy-produe- ing states, are bunt on retaliation. Al their August meeting, the Midwestern governors set up one task force to study a "soil -depletion tax," in effect a sever- ance tax on food production, and another to consider how the region's abundant water resources could be used to squeeze money out of the water -poor West. "The fear is that we're going to get into a war with the energy -rich states," says Rhode Island's Garmhy. "You'll have states coming up with all kinds of schemes to tax each other, and it will be bloody murder." Consuming states are attempting to slop energy -rich states from imposing severance taxes. Earlier this year, the Supreme Court denied a bid by Com- monwealth Edison Co. in Chicago, joined by several state and local governments, to have Montana's coal tax declared an unconstitutional restraint on interstate commerce. But in its decision, the court made it clear that Congress, if it wished, The South's rise does not mean the old problems of regional disparity have disappeared; Northerners .say. they have just been redistributed could restrict the states. A number of bills have been introduced in Congress to do just that, although the prospects for passage are bleak. Another idea gaining force is a federal severance tax with the proceeds earmarked for expanded reve- nue sharing. "I don't see anything else that will reduce the threat," says Tom Cochran, executive director of the Northeast -Midwest Institute. But many state and local politicians, looking at the federal government's own fiscal plight, are dubious about any new money com- ing from Washington, despite Reagan's promise to return revenues to the states. "As sure as we're talking, the only way we'll see anything returned is with equal or greater budget cuts," says Maryland House of Delegates Speaker Benjamin Cardin, a Baltimore Democrat. Faced with their limited ability to get directly at severance taxes, many con- suming states are looking for ways to MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES MOINES grab their share of the oil bounty. Last year, New Jersey imposed a special tax on petroleum refiners, while New York and Connecticut attempted to levy gaso- line excise taxes that could not be passed through to retail buyers. All three taxes were struck down by the courts. New York is trying to redraft its tax to meet the legal requirements, while Connecti- cut is considering taxing oil companies on a share of their total profits rather than just their income earned in the state. The common problems of energy -con- suming states are pushing them into joint efforts. Such long-standing re{tinn- al blocs as the Midwest Governors Con- ference are becoming more assertive. Regional congressional groups, such as the New England Congressional Caucus, are stepping up their activities. Florida Governor Robert Graham is pushing for a Southern "common market" to roordi- nate regional taxation and development policies. The New England Energy Con- ference is negotiating for Canadian gas and hydroelectric power. The Midwest- ern governors are planning a similar agency both to negotiate for their energy needs and to develop the region's real and grain resources as synthetic fuel feedstock. Harsh political realities But these regional arrangements can do no more than nibble at the edges of the problem. Politicians from energy - consuming states believe that solutions must begin with the federal government. And they see precious little sign that the Reagan Administration is interested in addressing the issue. "Our major problem is in getting the federal government to recognize that there is a problem," says Senator David Durenberger (R -Minn.), chairman of the Senate subcommittee on intergovern- mental relations. "there are people in the White House who think that all the problems of regional disparity have been solved because the South is going to rise again." Faced with these harsh political reali- ties, the energy consumers are reduced to fighting a rearguard action against measures that will make their problems worse. The one thing they are dead set against is any further transfer of federal responsibilities to states without a corre- sponding shift of revenues, and this bodes ill for Reagan's latest budget -cut- ting proposals. "If we turn back more responsibility for welfare to the states, we'll have a world-beater of a problem," says Durenberger. "Every state just does not have the fiscal capacity to pick up the cost." SPECIAL REPORT / /!0 13 STATE AND LOCAL GOVERNMENT IN TROUBLE ,. .,. : �. r 8.1,1111414 M resident Reagan's program of fiscal austerity is put- ting many state and local governments in what ccun- onlists regard as the worst of all worlds: that of hav- ing to cut spending and raise taxes at the same time. Such policies are a double whammy for both business and cnnsum- em. Iligher taxes, of course, discourage consumers from buying and business from investing. And cutbacks in state and local government spending, which totaled S:I55 billion in 1980, will simply mean less demand for many goods and services. The growing fiscal squeeze on state and local governments will further re- duce that sectors role as a major source of ecunumir growth. Burne by the baby boom and the spread of suhurbia, state and lural government spending in the postwar period grew by leaps and hnunds in response to the demand for roads, hridges, schools, hospitals, water, and sewage treatment—as well as police and fire protection and social services. Spending by state and local government far outpaced that of the overall economy (ar almost P,5 years, and by 197;1 it accounted for 15:: of gross nation- al product. That trend was brought to an abrupt halt during the 1974.75 re- cession. The importance of the state and local sector in the econo- my has been shrinking since the mid-1970s as stagflation has cut into the growth of real incomes and the public has demanded low- er taxes and fewer services. Rea- gan's fiscal austerity, which will cut Washington aid to state and local governments heavily, is ex- pected to accelerate that trend (chart). Both monetarist and supply-side advisers of Reagan argue that this will have little impact on the eenn- omy because the reduction of the state and local sector will free resources for the private sector. The resurgence of capital invest. ment and business activity in gen- eral caused by reining in govern. ment will more than offset the cuts in spending, in their view. And an analysis by the Office of Management & Budget in April 172 BUSINESS WEEK: OCtoDer 26. 1981 concluded that the cuts in stale and local government spending would not prevent the economy from hitting the Adminis- tration's growth targets. Weighing the Importance of govern, ment spending is, of rourse, a major unresolved issue among economists. Tm- ditiunal Keynesians such as Oeorge Per- ry of the Brookings Institution believe thatit is trry important. "The reduction in state and local spending—the result of cutbacks in federal spending—consti- tutes one of the things that is comribut- Ing to an emerging recessinn, • he sats. A political dilemma But even many conservative econo- robas maintain that the cutbacks in state and local government spending will have some impart on overall economic growth• at least in the short run. As Rudolph Penner, of the American Enter- prise Institute, put it in a recent article: "There is a great deal of controversy as to whether one dollar of grants provokes more or less than one dollar of state and kcal expenditures, but there is no doubt that total spending rises as a result bf the grant system." Federal grants to state and local gnvernment will drop h% - about $10 billion over the next three }ears under Reagan's prugr:un. 1t'ash- ington aid will also he rut back substan- tially in other areas. The dilemma for many .states :md local governments is that it will not he easy p litically to cut many services. In some areas, such as education, when• demand is weakening because of the end ofthe ha6}' boom, further restraint will be relatively Cosy. Most economists agree that a major factor influencing the growth of state and local spending in the postwar period has been the need to "ed- ucate the baby;' as Penner puts it. But spending on education has slowed dra- matically in the last decade vs the hahv huom was absorbed, and demographics indicate that this trend should continue at least for much of thds derade. The shift to an older population that began in 'the 19701; and is expected to continue into the 1990s, could, however, have an equally dramatic impact on the demand for other state and local govern- ment services. In the past decade the fastest•growing areas of state and local BeaLaa's program Will lorther ffllrink the economic impact of state and local "aft. State Cod local ,pending as a percent D1 GNP t: 14 . r I; e rte' e r 1910 190 e 10te IM tela ♦ HR,nI MV: Dm Rwd+:M Inc. E MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES 1101NES government spending have been for health care, including hospital construction, and for social and other welfare services. This has been in large part a response to the enormous growth in the 65. and -over age group. But these are also some of the servires hit hand by the Administration's cuts. At the same time, the transfor. motion of the baby boom genera- tion into young adults is expected to keep the demand for housing strong, even though it is in a depression now because of high interest rates. Even if much of the new housing is multifamily and built in older suburbs, as many economists believe. the demand for acerin —Ing, police and fire pro. tection and administrative ser- vices, also among the fastest. growing in the past decade, is like- ly to continue. But in many ser - .s needed to support housing, such as aid for sewers, rands. and water installations, Washington aid is being slashed. And this reduction is taking place at a time when such vital undernin- SPECIAL REPORT /(Q 14g ningsare in a rapid state of decline. The business community as a consum- - er of state and local government services will also be hurt by such cutbacks. "State and local governments account for about 85% of capital construction, often with government aid, and that is going to shrink," notes Manuel Carballo, a lecturer on public policy at Harvard University. "Yet already sewers, roads, water systems are in a very sad state of repair. Things that businessmen rely on as staples are going to be jeopardized." Offsetting the benefits The husiness community, as well as the young adults and the older popula- tion. have considerable political clout. Politicians around the country are al- ready finding themselves in the uncom- fortable position of having to cut popular services or raise taxes. Conservative Re- publican Governor John Rhodes has stirred up a political storm in Ohio's Republican -controlled state senate by proposing to raise taxes to avoid a budget deficit. A great number of economists believe that states and cities will have no choice but to raise taxes. Many are prohibited by law from running deficits, and it is increasingly difficult for almost all state and local governments to borrow in the financial markets. As American Enterprise Institute's Penner put it in his article: "It may seem implausible to assume that total tax bur- dens will be increased rapidly in an era that is supposed to be characterized by new conservatism and virulent tax re- volts. In particular, it may be quite unreasonable to assume that the state and local sector will grow rapidly rela- tive to net national product when so many states are passing constitutional limits on tax rates and spending. Yet the recent history of New York State and New York City has taught us that it is not difficult to get around constitutional limits, and at the federal level President Carter felt it permissible to recommend in his IRRI budget one of the largest tax increases in recent peacetime history." There is little chance that Reagan will back off the recent tax cuts, which are the centerpiece of his whole program. But increases in state and local govern- ment taxes will certainly offset some of the benefits of federal tax cuts. And if the end result of the efforts of state and local governments to cut some spending while maintaining or increasing others is a net decline in outlays, as many econ- omists believe, the combination will have a significant impact on overall economic growth. SPECIAL REPORT MICROFILMED BY 'JORM MICRO_ LAB CEDAR RAPIDS -DES I40INES /6 93 -- STATE AND LOCAL GOVERNMENT IN TROUBLE e• r s t r p y t'; 'w he state and local squeeze is creating an explosive po- litical situation that fs sending many politicians running for cover. Mayors and governors of both par. ties are slashing budgets and hoping that President Reagan's promised "American economic renaissance" mate. realizes—and soon. If it does not, Demo. crats threaten to turn next year's elec- tions into a referendum on Reagan eco- nomic policies that could undo impres- sivP r;nl' ienlitimi gains at the grass roots. Traditionally, most stale and Iocal— and many congressional—elections have hinged on mostly narrow local issues. But because Reagan'., program to reduce the size and role of government is begin. ning to have a dramatic impact on states and municipalities, the distinction be. tween purely local concerns and national issues is blurring. For the Democrats, the spreading tur. moil over state budget shortfalls, service reductions, and offsetting tax increases is viewed as a potent new issue with which to shackle GOP officeholders in 1982. Says Democratic pollster Patrick Caddell: '"Phe White House is making a lot of state and local races intn national contests keyed to economic perform., ance." To Republicans, the fiscal crunch gripping the cities and states presents a potentially worrisome problem. Says GOP *MlIater Robert Teeter: "People say they want to reduce government spend. ing, but we are about to find out what happens when they are directly affected by a cut in services." Adds Richard S. Williamson, assistant to the President for intergovernmental relations: "We realize there are going to be dislocations in the states. But the smart Politicians who stress fiscal man- agement are going to survive." William. son also admits, however, that the politi- cal futures of grass-roots Republican of- ficeholders and that of President Reagan are now inextricably linked. "Never be- fore," he says, "has the party's future been tied so closely on the success of one man's program:' In some states, danger signs are al. ready flashing for the Republicans. In Virginia and New Jersey, the only states electing governors this fall, Republican candidates who closely identified them. 176 BUSINESS WEEK: October 26, 1981 selves with President Reagan's economic Policies are trailing badly. The GOP's biggest potential trouble spot, however, is the Great Lakes region, where the fiscal squeeze is most severe, and where six key Republican governor- ships from Minnesota to Pennsylvania are up for grabs in 1D92. "It's all start- ing to come home to the Cc) P Midwestern governors," says Democratic Pollster Peter Hart. "Democrats have an excel. lent chance for a Pickup here... if they can convince voters that Reaganomics is shifting a burden from the federal level totes t level." In Minnesota, first -term Governor Al- bert H. Quie has seen his political for- tunes plummet over his handling of the Unless Reagan's `renaissance' materializes, Democrats may turn next year's local elections into a national referendum states budget. Even before Reagan look office, Minnesota u'as in severe fiscal bind because Quie's 1979 scheme index- ing the state income tax to inflation had cut deeply into revenues. Quie has been compelled repeatedly to propose new spending cuts as tax receipts fell short of his predictions, and his approval rating in statewide polls has nosedived. "Our governor is in deep trouble;' admitsSen- ator David F. Durenberger (R -Minn.). "Everyone wants to run against Al Quie." Although Michigan's Republican Gov- ernor William G. Milliken has not yet decided whether to seek a fourth term or to run for a Senate seat, budget -cutting has taken its loll. Milliken's success at building a bipartisan coalition including black voters and union members has enabled him to roll up big majorities in a MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES MOIRES heavily Democratic state. But as he is forced to propose hundreds of millions of dollars in cuts in the state's .$.1.8 billion budget, signs of strain are apponring. Says Donald F. Ephlin, a United Auto Workers vice-president: "Some of the governor's Political charm has worn off.' Should Milliken seek reelection• he could face a tough opponent in Reprnsrn- tative James J. Blanchard (D-ltich.t, who is expected to contrast his leading role in pushing the Chrysler bailout through Congress with Millikens sup. port for budget cuts and his plan to oRer business $300 million in inx breaks. Trumpets one Democratic strategist: "Michigan is now among the top five prospects for a Democratic pickup in When cuts hit home In Illinois, Republican Governor James R. Thompson is Putting his try for a third term on the line with his unswerving support for Reagan econom- ic Policies. Former Governor Dan Walk. er has already announced his intention to challenge Thompson in 1982. And ex. Senator Adlai E. Stevenson Hl, who is expected to jump into the race, is run. ning about even with Thompson in early polls. "Thompson has said that as long as the cuts are evenhanded across the 50 states, he is not going to speak out against Reagan's spending -control pro. gram," says Illinois State Senate Presi. dent Philip J. Rock (D -Oak Park). "Once the cuts hit home, though, he is going to be stuck [defending] them." Pennsylvania GDP Governor Richard L. Thornburgh is also gambling that public acceptance. of reduced spending goes beyond rhetorical support. Thorn- burgh has been forced to seek across the -of $1i52rmillonin spending cuts to Offset the Ins.fed- federal grants and a reduction of $115 million in business tax revenues stemming from changes in''fed- Oral tax IBws. Thornburgh won with only a 537r, ma- jority in 1978. He could clearly be hurt if the Philadelphia black voters who pro- vided his margin of victory desert him next year over reduced social spending. "We have begun to shave programs that were formed when we labored under the false pretense that there were unlimited SPECIAL REPORT /6 93 I t STATE AND LOCAL resources," says Thornburgh. "The vast majority of blacks are taxpayers" whose support for his policies, he insists, is "very high." GOP moderates who have been more or less forced to get in step behind Reagan's economic policies, despite private mis- givings, are not the only politicians feel- ing the heat. Ohio Governor James A. Rhales, long a stalwart of the roP'.s con- serative wing, has touched off a rebel- lion among Republicans in the roP•cun- trolled state senate over his request for "temlmrar.v" tax increases totaling $1.3 billion over two years. Rhodes, who has made It career out of attacking Demo- crats for raising taxes, saw his plan rejected for lack of support and has now lost the initiative to Democratic legisla. tors who are pushing an alternative tax package. Republicans are not the only Potential victims of voter backlash to a new wave of fiscal (listress. In Alassachusetts, con- servative Democratic Governor Edward Republican governors feeling the p Rhodes was outvoted on a state fax GOVERNMENT IN TROUBLE ceived as a long-term plan to cure infla. tion.... But at the moment, all that we can do is duck and wait for the program to take effect." The costs of recession If public patience wears thin, though, it is clear that Republicans, n•he have built their platform on the promise of prosperity, stand to lose the most. Al the party's low ebb in 1974, in the wake of the Watergate scandals; the GOP held IS governorships and controlled at least one house in only 11 legislatures. Ina re- markable revival, the party has fought back to win 2,3 governorships and gain control of at least one house in 21 lVgis- latures. fait year, the Republicans won control of the Senate and now need'a net gain of only 27 House seats in 1982 to take over the House for the first time since 1964. If the states' and cities* fiscal plight is alleviated by a buoyant econo- my, says the rOP's Mahe, "1952 could be �W!IllkeOs gerf ,i1�Michiganfor backing tax urea Igo, and Pennsylvania's Thoon urgh may be deserted by blacks In next year's elections. King, who pushed the state's Prop) ition 21h tax -limitation proposal, has paid a severe price politically for ensuing cuts in ser -vices. Notes Stanford University Political scientist Seymour Martin Lip - set: "King got elected to cut the budget did what he promised—and he's getting shellacked." Nor do some GOP governors, such as Pennsylvania's Thornburgh, feel that cuts In state spending are an absolute formula for disaster at the polls. "1 see a willingness to give the President's poli. cies a chance," Thornburgh save. Adds GOP political strategist Eddie Mahe Jr.: "1 am optimistic that even if people are hurting, they may back what is per. out, could hurt GOP candidates in indus. trial states and the Deep South. C.J. JicLin Jr., president of Black F.Iecrral Democrats of Ohio, predicts that black voter turnout in his slate will rise .a^ to 12'7 next fall. "My constituents h:nv a fear of the future econontirally," he says. "They are beginning to realize the value of the vote." Although minorities and the urban poor may take their grievances In the ballot box next November, few political leaders or social scientists see that un- happiness spilling over into the streets. "The long hal summers of the I9tiOs occurred when the Democrats were in Power and were perceived as sympathet- ic to blacks," says Stanford's Lipset. "But it is clear that we're in for a lot more hollering all around." President Reagan's White ]louse strategists are well aware that his radi- cal reordering of state -federal relation- ships is producing new tensions. But. they remain convinced that the Prt•si- 178 BUSINESS WEEK: October 26. 1981 the realigning election we did not quite manage in 1980." But what if the her. alded surge of growth fails to appear? Says Representative Jack F. Kemp (R.N. Y.): "If we're in a recession in 1982 .. Republicans are in trouble." The risk to Republicans grappling with fiscal distress in the states is that the Reagan program will energize their Opposition. ' Those on the short end of the stick—the victims of budget cuts— are going to turn out in higher num. bers," predicts Senator Carl Levin (D -Mich.). And even a marginal spurt in '82 political participation by blacks, a group whose political potential has never been fully realized because of low turn. MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES IAOINES dent's economic recoveq• program will soon take hold and cure many states' problems before the economy )to cnmes a cutting issue in the 1982 elections. "Rea - Ran, like Dwight D. Eisenhower, will see his popularity stay, fairly high no matter what happens to his economic program:' says one White House aide. "What hap- pens to other Republicans around the country will be interesting to observe." Just how interesting remains to be seen, and some Republicans are visibly nervous. "The President is in for the long haul," says Representative Ralph S. Regula (R-Ohia), a Reagan loyalist. "Of course, that isn't going to help Republi- cans who are up in 1982." SPECIAL REPORT /w/ 93. STATE .ND LOCAL GOVERNNEN IN TROUBLE POLICIES TO HELP THE STATES AND CITIES CURE THEIR ILLS hatecer the pnmoisa of President Reagan's eco- nomic program in the long run, the short-term reality for most of the nation's state and local govern- ments is a period of austerity and uncer- tainly over how to redefine their own rules and cope with greater responsibili- ties. These may be more than problems of adjustment as Washington's hudget- ary and tax ruts ripple through to Local jurisdictions in reduced federal aid and. for many, a smaller tax base. There is a strong sense among local officials that elements of the Administration program are in flat contradiction with each other and the overall economic goals. "You can't just turn over fiscal re- sponsibility to the local governments without giving them the fiscal capacity uI meet the new demands," says econo- mist Roger Vaughan, deputy director of New York State's Office of Development Planning. The results of this fiscal squeeze must inevitably be felt in the services, social programs, and capital spending administered by the states and cities. Governor Hugh L. Carey of New York compares the federal cutbacks to walking out of a restaurant without pay- ing the hill and claiming that this re- duces the price of food. Ideas abound among economists and other public affairs experts for amelio- rating the plight of the cities and slates: LOCAL TAXING POWER. The liscal rapacity of slate and lural governments could le strengthened through both the taxation and burrow- ing routes. The states should be able to make ef- fective use of some user fees, excise taxes, and highway tolls now pre- 'I emptied by Washington. A On the financing side, .g the state's plight clean}• has been exacerbated hp the All Savers certificates. A Continuing this device be- yondma'would compoundidea the disaster (or the munic- ipals market. ket An olddidea NI make local financing more vonlpetitive would be in give states and cities the option of issuing taxable bonds, whose m•reesarilp higher interest rates would be subsidized by the federal government—a method that many Cas experts say would he less costly to Washington than Ln -exempts At the same time, Washingnun should eliminate or set some limits on industrial revenue bonds In prevent abuses. NEW TAX CONCEPTS. %I el rol oli last areas that contain decaying central cities could share in overall growth through develop- ment of regional tax plans. ht tb,• Min. neaptdis-St. Patti area, for example, 1.11 communities contribute taxes on in- creased property values into a common pool, which redistributes the nuney haled on population. Potential warfare between the engirt -y - rich states and the eneriw Consumers could he halted by plaving a federal limit on state severance taxes for end, oil, and natural gas. A complement would he a federal severance tax on these resources, particularly those pnolured on federal lands, to fund revenue -shoring for the energy -poor saes. A windfall profits lax nn natural gas, when it is decon- trolled, could do the sane. A RECONSTRUCTION SANK. A new age'n. cy—perhaps on the lines of Herbert lloover's Reconstruction Finance Corp.—could be created hI provide rapi. tal for the revitalization of ILS. indus- try, the cities, and the nation's deterin- rating infrastructure of roads, bridges, and other public plant. "At present there is no instrument capable of dealing with a problem like Chrysler or New York City, except on an ad hoc basis, in front of congressional Committees," says Felix C. Rohatyn, who helped New York solve its financial crisis as head of the Nlunici- pul Assistance Corp. OIAC1. While Roha- lyn dues not want government bureau- crats to gel into the business of picking "winners" and "losers," he believes such a structure, "publicly accountable but operated outside of politics," is needed to generate the massive injections of per- manent equity capital required to rein- vigorate much of U.S. enterprise that may not henefil directly from the Tax Reduction Act of 1981. A NATIONAL CAPITAL BUDGET. Public works spending in the 11. S. could de rationalized by creating a national capi- tal budget. The nation lacks any compre- hensive framework fur deciding what should get built or financed by what jurisdiction of government, much less an inventory of public facilities, an assess- ment of their condition, or estimates of projected capital needs and maintenance costs. A multiyear capital budget might lead to increases in public works spend- ing when lawmakers contrast the out- lays for, say, a Tennessee-Tonibighee Waterway (page 581 with the little or nothing being spent for coal ports, but it would also give government a way to control a large part of its domestic non- defense spending. A COMMITMENT TO HUMAN J CAPITAL A new commit— mat could be made to hu- man capital development parallel to that just made to physical capital through the 1981 tax act. With fed- eral job and other pro- grams toeing pared, the higgest danger is that many working poor will decide they cannot afford to work, dropping them into the welfare trap. The Administration should consider alternatives to turn welfare recipients into taxpayers and main- tain a skilled labor force. One such alternative, suggested by New York's Vaughan, would be a dedi- cated fund for training New York's Vaughan: II local governments are to have more control, they will need the "fiscal capacity to meet the new demands." 188 BUSINESS WEEK: October 26, 1981 MICROFILMED BY JORM MICROLAB CEDAR RAPIDS -DES 140114ES SPECIAL REPORT f - J programs financed on the lines of the unemployment insurance system as "an earned entitlement." It could be paid for by a national payroll tax on workers and employers, taking a plethora of current programs out of the general revenue sys- tem and permitting some consolidation. STRENGTHEN PRIVATE PARTICIPATION. The private sector's role in providing services now handled by government could be strengthened. For several years, the American Enterprise Institute has sponsored a project to explore and ex- pand the role of "mediating structures" in U.S. society—the family, churches, neighborhood ethnic organizations, and other groups whose roles have often been taken over or even impeded by govern- ment in the last 50 years. AEI President I William J. Baroody Jr., who notes that his organization is launching a new study for the White House of private - sector efforts to solve social problems and how its successes might be repli- cated throughout the nation, sees the need "for an appropriate balance of roles and missions between government and the traditional private structures." At the same time, however, Robert Wood- son, a black scholar who heads Ants neighborhood revitalization project, warns that "budget -cutting, and volun- .tarism alone do not constitute a social Iwlicyti' Woodson does not see withdraw- al of government support as a panacea but wants instead to see such aid get to the neighborhood level and "not the mid- dle-class providers who now direct ser- e vires to the poor." The public-private partnership idea is now being promoted by such groups as the National Alliance of Business, the Committee for Econom- ic Development, the American Council of Life Insurance's Clearinghouse on Cor- porate Responsibility, and John W. ' Gardners Independent Sector. If the Reagan Administration's bud- get problems force it to turn to revenue- , raising ideas. Congress will get the op- portunity to reconsider parts of the new tax law that critics assert will worsen the imbalances between declining indus- I tries and regions of the U. S. and those now on a strung growth track—particu- larly the new accelerated depreciation and leasing rules. But short of such a retreat on the President's program, op- tions still abound for ameliorating the new crisis of the cities and states. With- out such concessions to reality, Reagan's new federalism may amount to little Mort, than a political slogan. ■ Reprints of this Special report are available. For Information and prices, cl Business Week reprints at B09.448•I700. E.I.E5550. or wrlla Buameas Week Reprints, P.O. Boa 457, Hiphts• I town. N. J. 08520 SPECIAL REPORT MICROFILMED BY DORM MICROLAB CEDAR RAPIDS - DES MOINES /69,3