Block Grants Should Reward Efficient Cities A City Found To Be Extremely Wasteful Should Receive Less Aid Even If Its Poverty Rate Increases.

Posted: March 19, 1995

Block grants to states - a portion of which will wend their way to cities - are an active item in the current policy debate and there are compelling reasons for the nation's political leadership to use these grants to design a new urban strategy.

The GOP, in particular, has not been identified as a close friend of urban America. And cities, for their part, have rarely been shining examples of efficiency.

But a new strategy is needed to address skewed national responsibilities. Cities now suffer under unendurable fiscal and social strains associated with bearing a disproportionate share of the nation's poverty and immigration burdens.

Block grants, properly allocated, can help, but a major question remains: What will be the allocation criteria?

Audits should be employed: A city found to be extremely wasteful should receive less aid via the block grant even if its poverty rate increases. And incentives for continuous improvement - a hallmark of successful organizations - should play a key role in restructuring America's intergovernmental aid flows.

Of major importance in this day of fiscal austerity is that the restructuring not begin with an increase in aggregate aid to cities. Holding fixed the total dollars flowing to local jurisdictions will force public officials to make the necessary trade-offs among the services that receive their limited resources.

But no city alone should pay for public services that are also the responsibility of citizens beyond its boundaries. The costs associated with being the home to the vast majority of the nation's poor and new immigrants are prime examples.

While the national poverty rate has remained roughly constant since 1970, the average poverty rate in the 20 largest cities has risen by 25 percent. This means that just over one in five residents of these cities now lives in poverty - a sharp contrast to just 30 years ago when poverty was much more

concentrated among the elderly and in rural areas.

High immigrant flows have also been a special burden for a few large metropolitan areas - 59 percent of all immigrants who entered the United States within the last decade live in just nine counties. The local jurisdictions in which these newcomers reside spend a large proportion of their budgets to support them. The estimate for Los Angeles County for 1990 is $870 per immigrant, or 26 percent of its total operational budget.

The cost in economic terms of doing nothing is enormous. If urban decline continues, a conservative estimate is that the wealth loss in the aggregate property values of the nation's nine largest cities would be at least $160 billion, assuming only a 10 percent decline. That's roughly the cost of the savings and loan bailout.

The financial fallout from such a decline would affect not only urban residents, but their suburban neighbors as well. What is often overlooked is that a large portion of the commercial properties in cities are either financed or owned by institutions such as banks, life insurance companies and pension funds, most of whose beneficiaries and shareholders live in the suburbs.

In Philadelphia, for example, about 40 percent of the 65 largest downtown office buildings are owned by firms or institutions headquartered outside the city. Clearly, when property values in a city go down, it is not just the economy of the city that is affected.

Moreover, the social costs of urban neglect may be even higher than the economic ones. High crime rates, low educational achievement, and high rates of teenage pregnancy are among the serious social problems found in disproportionate shares in cities with intense concentrations of the poor.

Immigration into urban areas often exacerbates the strain on social services, leading to an increase in urban ills. The social costs of large numbers of the poor and new immigrants are not restricted to urban areas alone. The entire country's social fabric is weakened.

Empowerment zone legislation was passed last year. But on the whole, empowerment zones are ineffective in expanding urban economies. Incentives, not federal or state micromanagement, are the best way to encourage efficient delivery and financing of local public services.

An "urban audit," similar to the Federal Reserve Board's audit of the national banking system, should be employed. The audit would enter the block grant allocation formulas, would measure the relative public service costs that cities bear for the nation, and would rate the efficiency of municipal government in dealing with those burdens. The more efficiently run of two cities with the same poverty rate would receive more aid.

This would permit federal dollars to be targeted to areas most affected by the changing demographics of poverty and immigration, allowing these cities to deal with the social and fiscal consequences of these changes earlier - and, hopefully, more effectively.

And it would minimize waste and inefficiency by local officials while encouraging a policy of continuous improvement in providing local services.

A city found to be extremely wasteful would receive less aid via the block grant even if its poverty rate increases.

By rewarding the most efficient - and penalizing the less efficient - the overall level of efficiency in municipal government should increase over time, as voters would be able to replace local leaders responsible for low scores on the audit that cost their cities money.

Mayors and city council members would also be given an incentive to negotiate harder with public employee unions, since overpaying municipal workers with wages or benefits to buy political support will have a clear cost with the rest of the electorate.

A meaningful, expenditure-neutral fiscal lifeline to large cities can be implemented if the new criteria for aid allocation are applied to the full complement of intergovernmental revenues flowing to localities - money for roads, sewers and the like - not just for programs traditionally thought of as urban aid, such as the grant programs of the Department of Housing and Urban Development.

The political leadership in Washington has laid out an ambitious agenda for restructuring federal-state relationships. It must now also focus on restructuring the federal relationship with America's great cities.

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