America’s Major Cities Face Looming Financial Crisis

As the sovereign currency issuer, the U.S. federal government possesses the ability to print money as a way to manage its debt. However, doing so would lead to inflation and recklessness, reminiscent of the Weimar Republic after World War I. Alternatively, an approach rooted in low inflation and responsible fiscal management could potentially reduce or even eliminate the national debt. It requires leaders to understand their role as stewards of the republic, rather than its owners.

Unlike the federal government, America’s states and cities lack the luxury of printing their own currency. Consequently, major cities must carefully balance their budgets with real money year after year. While these cities can take on debt, responsible financial practices dictate that this debt should be incurred solely for long-lasting capital investments. For instance, issuing revenue bonds for infrastructure projects such as toll bridges ensures that bond repayments can be made through specific funding sources, such as toll revenues.

However, what happens when cities require additional funds for everyday expenditures like overtime payments following an unexpected blizzard? In such cases, cities resort to issuing general obligation bonds or tax anticipation notes. General obligation bonds are not tied to any particular project but rather represent debt that cities commit to repay using general tax revenues. Tax anticipation notes, on the other hand, resemble commercial paper and serve as short-term obligations backed solely by a state or municipality’s future tax revenues. These notes may also be issued in anticipation of future bond issuance to address urgent needs like bridge repair, enabling the city to pay for relevant plans, engineers, and legal services.

Many of America’s cities flourished on the back of thriving industrial sectors, each centered around a core manufacturing facility. Akron, Ohio thrived on tire manufacturing; Buffalo, New York; Pittsburgh, Pennsylvania; and Gary, Indiana, relied heavily on their steel mills. Detroit, famously known as Motown, grew prosperously due to the automobile industry. Baltimore, too, thrived because of its ports. These industrial hubs provided jobs to thousands of workers and supported other businesses, resulting in substantial economic growth.

However, the environmental movement of the 1970s led to the imposition of stringent regulations like the Clean Air Act and the National Environmental Policy Act, which increased costs for the manufacturing industry. Furthermore, the entry into the World Trade Organization and the North American Free Trade Agreement in the 1990s prompted companies to shift their heavy manufacturing operations, along with their supply chains, overseas. This offshoring phenomenon, combined with the rise of container ships, resulted in the decline of manufacturing jobs and the creation of what is now known as the ‘Rust Belt.’ Workers who once held well-paying manufacturing positions found themselves forced to accept minimum-wage jobs in the retail sector. Factory buildings were shuttered or converted into residences, contributing to the economic decline of major cities.

In 2020, the COVID-19 pandemic brought about another significant challenge for America’s major cities. Government-enforced lockdowns accelerated the trend towards remote work, impacting professionals, analysts, and bankers who increasingly relied on virtual meetings through platforms like Zoom. While the shift towards remote work was already on the horizon due to the internet-savvy generation’s rise to influential positions, the pandemic forced companies to adopt this method before city infrastructures could adequately adjust.

New York City, the nation’s largest and most economically diverse metropolis, serves as an example of the challenges major cities now face. The vacancy rate in office buildings has reached 20%, with projections indicating this level will persist through 2026. Even with occupied office spaces, much of Manhattan, the city’s business hub, remains empty as employees only report to the office three or four days a week. As office leases expire, the vacancy rate may spike further, adversely affecting property values and property tax revenue. A Stanford study estimated that work-from-home policies have saved Manhattan workers approximately $12.4 billion annually, resulting in substantial sales tax revenue losses for the city.

New York City faces unique fiscal challenges aggravated by its progressive political climate and ambitions that often surpass its financial means. The city must allocate billions of dollars to accommodate and support the welfare, housing, education, and healthcare needs of thousands of asylum seekers welcomed by progressive leaders. However, New York lacks the resources to meet these demands adequately. A WalletHub survey ranked the city 147th out of 149 American cities in terms of management quality, highlighting its financial instability, economy, and debt per capita. Additionally, high-net-worth individuals managing trillions of dollars have relocated from New York City to jurisdictions offering lower taxes, cheaper rents, and a better quality of life.

The ramifications of New York City’s economic decline will reverberate throughout the national economy. Lenders, the municipal bond market, and too-big-to-fail commercial banks with investments in New York City’s mortgage obligations and commercial loans will all be adversely affected. The city’s looming fiscal challenges can potentially trigger a financial crisis comparable to the 2008–09 collapse of Lehman Brothers. Moreover, the obligations related to pension and retiree healthcare expenses pose immense burdens on New York City and other major urban centers. However, transparency and a standardized system that allows investors, creditors, and citizens to assess and understand the fiscal performance of cities is essential. By openly evaluating cities based on objective criteria, cities can be encouraged to improve their fiscal management and mitigate the losses suffered by citizens and stakeholders.