Written by John Rennie Short, professor emeritus of public policy, UMBC

Five years after the start of the COVID-19 pandemic, many U.S. cities are still adjusting to a new normal, with more people working remotely and less economic activity in city centers. Other factors, such as underfunded pension plans for municipal employees, are pushing many city budgets into the red.

Urban fiscal struggles are not new, but historically they have mainly affected U.S. cities that are small, poor or saddled with incompetent managers. Today, however, even large cities, including Chicago, Houston and San Francisco, are under serious financial stress.

This is a looming nationwide threat, driven by factors that include climate change, declining downtown activity, loss of federal funds and large pension and retirement commitments.

Why cities struggle

Many U.S. cities have faced fiscal crises over the past century, for diverse reasons. Most commonly, stress occurs after an economic downturn or sharp fall in tax revenues.

Florida municipalities began to default in 1926 after the collapse of a land boom. Municipal defaults were common across the nation in the 1930s during the Great Depression: As unemployment rose, relief burdens swelled and tax collections dwindled.

In 1934 Congress amended the U.S. bankruptcy code to allow municipalities to file formally for bankruptcy. Subsequently, 27 states enacted laws that authorized cities to become debtors and seek bankruptcy protection.

Declaring bankruptcy was not a cure-all. It allowed cities to refinance debt or stretch out payment schedules, but it also could lead to higher taxes and fees for residents, and lower pay and benefits for city employees. And it could stigmatize a city for many years afterward.

In the 1960s and 1970s, many urban residents and businesses left cities for adjoining suburbs. Many cities, including New York, Cleveland and Philadelphia, found it difficult to repay debts as their tax bases shrank.

In the wake of the 2008-2009 housing market collapse, cities including Detroit, San Bernardino, California, and Stockton, California, filed for bankruptcy. Other cities faced similar difficulties but were located in states that did not allow municipalities to declare bankruptcy.

Even large, affluent jurisdictions could go off the financial rails. For example, Orange County, California, went bankrupt in 2002 after its treasurer, Robert Citron, pursued a risky investment strategy of complex leveraging deals, losing some $1.65 billion in taxpayer funds.

Today, cities face a convergence of rising costs and decreasing revenues in many places. As I see it, the urban fiscal crisis is now a pervasive national challenge.

Climate-driven disasters

Climate change and its attendant increase in major disasters are putting financial pressure on municipalities across the country.

Events like wildfires and flooding have twofold effects on city finances. First, money has to be spent on rebuilding damaged infrastructure, such as roads, water lines and public buildings. Second, after the disaster, cities may either act on their own or be required under state or federal law to make expensive investments in preparation for the next storm or wildfire.

In Houston, for example, court rulings after multiple years of severe flooding are forcing the city to spend $100 million on street repairs and drainage by mid-2025. This requirement will expand the deficit in Houston’s annual budget to $330 million.

In Massachusetts, towns on Cape Cod are spending millions of dollars to switch from septic systems to public sewer lines and upgrade wastewater treatment plants. Population growth has sharply increased water pollution on the Cape, and climate change is promoting blooms of toxic algae that feed on nutrients in wastewater.

Increasing uncertainty about the total costs of mitigating and adapting to climate change will inevitably lead rating agencies to downgrade municipal credit ratings. This raises cities’ costs to borrow money for climate-related projects like protecting shorelines and improving wastewater treatment.

Underfunded pensions

Cities also spend a lot of money on employees, and many large cities are struggling to fund pensions and health benefits for their workforces. As municipal retirees live longer and require more health care, the costs are mounting.

For example, Chicago currently faces a budget deficit of nearly $1 billion, which stems partly from underfunded retirement benefits for nearly 30,000 public employees. The city has $35 billion in unfunded pension liabilities and almost $2 billion in unfunded retiree health benefits. Chicago’s teachers are owed $14 billion in unfunded benefits.

Policy studies have shown for years that politicians tend to underfund retirement and pension benefits for public employees. This approach offloads the real cost of providing police, fire protection and education onto future taxpayers.

Struggling downtowns and less federal support

Cities aren’t just facing rising costs – they’re also losing revenues. In many U.S. cities, retail and commercial office economies are declining. Developers have overbuilt commercial properties, creating an excess supply. More unleased properties will mean lower tax revenues.

At the same time, pandemic-related federal aid that cushioned municipal finances from 2020 through 2024 is dwindling.

State and local governments received $150 billion through the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act and an additional $130 billion through the 2021 American Rescue Plan Act. Now, however, this federal largesse – which some cities used to fill mounting fiscal cracks – is at an end.

In my view, President Donald Trump’s administration is highly unlikely to bail out urban areas – especially more liberal cities like Detroit, Philadelphia and San Francisco. Trump has portrayed large cities governed by Democrats in the darkest terms – for example, calling Baltimore a “rodent-infested mess” and Washington, D.C., a “dirty, crime-ridden death trap.” I expect that Trump’s animus against big cities, which was a staple of his 2024 campaign, could become a hallmark of his second term.

Resistance to new taxes

Cities can generate revenue from taxes on sales, businesses, property and utilities. However, increasing municipal taxes – particularly property taxes – can be very difficult.

In 1978, California adopted Proposition 13 – a ballot measure that limited property tax increases to the rate of inflation or 2% per year, whichever is lower. This high-profile campaign created a widespread narrative that property taxes were out of control and made it very hard for local officials to support property tax increases.

Thanks to caps like Prop 13, a persistent public view that taxes are too high and political resistance, property taxes have tended to lag behind inflation in many parts of the country.

The crunch

Taking these factors together, I see a fiscal crunch coming for U.S. cities. Small cities with low budgets are particularly vulnerable. But so are larger, more affluent cities, such as San Francisco with its collapsing downtown office market, or Houston, New York and Miami, which face growing costs from climate change.

One city manager who runs an affluent municipality in the Pacific Northwest told me that in these difficult circumstances, politicians need to be more frank and open with their constituents and explain convincingly and compellingly how and why taxpayer money is being spent.

Efforts to balance city budgets are opportunities to build consensus with the public about what municipalities can do, and at what cost. The coming months will show whether politicians and city residents are ready for these hard conversations.

This article is republished from The Conversation under a Creative Commons license. Read the original article and see more than 250 UMBC articles available in The Conversation.

A six-person UMBC team built international connections at the “PIWOT – World of Technology” conference, held in late January in Mumbai, India. The conference is organized by the alumni association for graduates of the prestigious Indian Institutes of Technology (IITs), and attracts many of the leaders in science and technology in India and around the world. The CEO of Alphabet, Inc. (Google’s parent company), the co-founder of Sun Microsystems, and the CEO of IBM are all graduates of IITs. 

UMBC was represented at the conference by Anupam Joshi, acting dean of the College of Engineering and Information Technology; Upal Ghosh, professor in the Department of Chemical, Biochemical and Environmental Engineering; Ramana Vinjamuri, associate professor in the Department of Computer Science and Electrical Engineering and director of the NSF IUCRC BRAIN Center; Govind Rao, director of the Center for Advanced Sensor Technology and professor in the Department of Chemical, Biochemical and Environmental Engineering; Karuna Pande Joshi, professor in the Department of Information Systems and director of the NSF IUCRC Center for Accelerated Real Time Analytics; and David Di Maria, senior international officer and associate vice provost for international education at UMBC. 

The UMBC team staffed a well-trafficked booth in the Expo Hall. As an extension of the meeting, they also visited IITs at Mumbai, Hyderabad, and Tirupati, and met with the directors of these institutions to discuss institutional agreements and lay the groundwork for international faculty and student exchanges. 

This year’s PIWOT conference focused on the impact of technology across multiple dimensions of life, from the professional to the personal. Dean Joshi took part as a speaker on a panel about the impact of technology on education. The UMBC booth also displayed the low-cost infant incubator developed by Professor Govind Rao.

Dr. Kyung-Eun Yoon (Assistant Professor, Coordinator of Korean, Dept of Modern Languages, Linguistics, and Intercultural Communication) is hosting a screening of the film, “CHOSEN” for the UMBC community!

Joseph Juhn is a lawyer-turned-filmmaker with passion for diasporic narratives. His latest documentary, "CHOSEN", sheds light on the struggles and triumphs of five Korean Americans who ran for US Congress in 2020, and has been praised by audiences and critics alike since its release in Korean theaters in 2022. 

Take-away snacks from H-Mart will be provided!

This event is supported by the Global Asias Initiative Course Expansion Grant.

Event page: https://my3.my.umbc.edu/groups/globalasias/events/140469