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Revenue-raising Capacity By NORMAN WALZER and STEFAN LUTZ* The 1981-82 national recession strained the finances of many Illinois municipalities causing some to face significant budget difficulties. While unemployment rates have returned to more traditional levels, certain cities, particularly those based on manufacturing, still face problems balancing budgets. Changes in unemployment rates and revenues in response to the recession show how well the city economy has performed compared with cities of similar size and location. In 1987, a comparison of the revenue-raising capacity of Illinois municipalities was initiated to examine how city economies had performed following the recession.1 The response indicated that the analysis was useful and this article is an update. Changes in Unemployment The effects of the recession varied widely by Illinois municipality. In this analysis, cities are grouped into Chicago suburbs, independents, and St. Louis area suburbs. The classification system makes sense for Illinois and captures differences among cities in economic conditions and structure.2 In the depths of the recession (September 1982) Chicago suburbs ranged from an unemployment low of 5.0 percent in Highland Park to a high of 15.8 percent in Maywood (Table 1).3 The average unemployment in Chicago suburbs was 9.9 percent in 1982. By June 1989, the average unemployment rate in Chicago suburbs was 4.3 percent, including a low of 2.1 in Highland Park and a high of 10.1 in Maywood. Table 1. Estimated Unemployment Rates and Trends
Source: Illinois Department of Labor, Bureau of Employment Security, unpublished data.
*Director and research associate, Illinois Institute for Rural Affairs, Western
Illinois University. The authors thank Poh P'ng for helpful comments. Independent cities were affected much more by the recession but since that time many have responded quite well. The average unemployment rate in the depths of the recession was 14.5 percent, including a high of 22.1 percent in Rockford and a low of 4.9 percent in Normal. In 1989, the unemployment rate averaged 6.4 percent in independent cities including 2.7 percent in Normal and 11.5 percent in Danville.4 The economic change relates to many factors, including relative importance of manufacturing and services and one might expect suburbs to respond more rapidly to the economic expansion than independents. February 1990 / Illinois Municipal Review / Page 15 However, the ratio of unemployment in independents to Chicago suburbs was 1.46 in 1982 and 1.49 in 1989 indicating that independent and suburban cities, on average, have had comparable improvements following the recession. Not all cities participated equally in the economic expansion since 1982. For example, North Chicago had an increase in unemployment from 8.1 in 1982 to 9.7 in 1989 but no other cities in Table 1 report a similar experience. Cities with relatively high incomes in 1979 and those with a better educated labor force had lower unemployment rates in 1977, 1982, and 1989. A strong positive relationship exists between percentage employed in manufacturing and unemployment rate in 1982 and a strong negative relationship exists with percentage employed in services. It makes sense that service-oriented cities had smaller percentage changes in unemployment following the recession. That, indeed, is the finding of a correlation analysis. No correlation was found between the percentage employed in manufacturing and the percentage change in unemployment between 1982 and 1989 but a strong negative relationship exists between percentage employed in services and change in unemployment. In other words, service-based economies performed better in the post-recessionary period than manufacturing. This should not be a surprise. Representative Tax System Since 1962, the Advisory Commission on Intergovernmental Relations has compared the revenue-raising capacity of States using the Representative Tax System (RTS) and Revenue Raising System (RRS) approaches.5 These methods, in simple terms, compare the revenue-raising powers of States if they all imposed the same tax rates. The analysis does not indicate amount of revenue collected; rather it compares the capacity for raising revenues. A similar approach is used for Illinois cities larger than 25,000. Two periods are compared — 1977 and 1986 which is the most recent year for which complete information is available. In RRS analyses that follow, revenues that could have been collected by each city, at the statewide average tax rates and the statewide per capita intergovernmental aid, are presented. In cities above 100.0 on the scale, the fiscal resources are better than in similar cities statewide. The indices in Table 2 are calculated by applying the statewide tax rate for each of 13 tax funds used in cities larger than 25,000 to the equalized assessed valuation in each city.6 Per capita sales taxes also are included. In constructing Index One, the average per capita intergovernmental revenue was applied to each city.7 Revenues that would have been collected under these assumptions are then divided by the average of the cities. The result is multiplied by 100. Index Two differs from Index One by the inclusion of actual intergovernmental revenues received by cities with all other calculations being the same. Thus, Index Two illustrates the relative importance of Federal and State aid in determining revenue-raising capacity. In comparing cities based on Index One in Table 2, one must remember that these figures show how much could have been collected at statewide tax rates. Addison, for example, went from 113.4 percent of the statewide average in 1977 to 122.6 percent in 1984, and to 125.6 percent in 1986. Table 2. Revenue-Raising Capacity
Source: Calculated from Illinois Office of the Comptroller, unpublished information, respective years. Page 16 / Illinois Municipal Review / February 1990 Several suburbs performed particularly well. Northfield went from 150.6 percent of the statewide average in 1977 to 217.3 percent in 1986 but with a peak in 1984. Northbrook, on the other hand, had a continuous increase from 149.2 in 1977 to 206.1 in 1986. Naperville peaked in 1984 at 143.5 and declined, relatively to the statewide average between 1984 and 1986, dropping to 136.5 percent. Some suburbs experienced declines relative to the statewide averages. Bolingbrook was at 80.5 percent in 1977 and decreased to 65.6 percent in 1986. Dolton, Harvey, Morton Grove, and Park Grove reported similar trends. Independent cities did not perform as well as suburbs. In fact, 22 suburbs (71 percent) improved in relative standing, while only one downstate city (Quincy) improved. Several downstate cities stand out. Bloomington, while losing relative to the state, remained above the average. Decatur, at the statewide average in 1977, declined to 79.6 percent by 1986. A similar trend also is found in Elgin, Galesburg, Kankakee, Moline, Pekin, Peoria, Rockford, and Waukegan. When intergovernmental revenues received by each city are included (Index Two), with few exceptions such as Galesburg and Kankakee, the trends did not change. The index is hard to interpret because Federal intergovernmental assistance is difficult to assess due to the lumpiness of the grants and differences in aggressiveness with which city officials pursue grants. A large Federal grant in a specific year distorts comparisons. The finding that independent cities did not respond as well relative to the statewide average should be no surprise. Many cities experienced business losses and, as noted earlier, some still have unemployment rates above the suburbs. Tax resources in North Chicago, in 1986, were well below the statewide average. This also was true in East St. Louis. Among independent cities, Bloomington and Springfield, both relying heavily on services, performed well compared with their peers. The large student population in Champaign makes comparisons with other cities difficult. Summary The recession affected Illinois municipalities to differing degrees. In general, Chicago suburbs out-performed independent cities for several reasons. Suburbs, typically, have a more service-oriented economy, have had lower unemployment rates, and have access to a wider variety of employment opportunities. Independent cities, on the other hand, have had larger concentrations of poverty residents, higher unemployment, and businesses with older facilities making them less competitive. Effective city management requires information about how well the economy, as measured in public resources, has performed in the post-recessionary period. The relatively simple technique presented in this article provides basic information on these trends and can be of assistance in comparing performance with cities of similar size in Illinois. •
1. See Mary Edwards and Norman Walzer, "Revenue-Raising Capacity of
Illinois Cities," Illinois Municipal Review (April 1986), pp. 17-20.
2. This classification system was used in Norman Walzer and Glenn W.
Fisher, Cities, Suburbs, and Property Taxes, (Cambridge, MA: O, G, and H
Publishers, 1981).
3. Norman Walzer, Effects of Recession on Illinois Municipalities
(Springfield, IL: Illinois Municipal Problems Commission, 1983).
4. Comparing unemployment rates is difficult because some residents
drop out of the labor force after becoming frustrated. It is not possible with
existing data to correct for these changes.
5. State Fiscal Capacity and Effort, 1986, (Washington, D.C.: U.S. Advisory Commission on Intergovernmental Relations, 1987), M-165.
6. The following funds are included: corporate, bond and interest. IMRF,
fire protection, fire pension, police protection, police pension, library, garbage
disposal, audit, street lighting, public benefits, and streets and bridges.
7. Intergovernmental revenues include Federal Revenue Sharing (discontinued in 1987), state motor fuel taxes, state income taxes, and Federal or state
grants. February 1990 / Illinois Municipal Review / Page 17 |
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