State & Local News Vol. 22, No. 3, Spring 1999 Constraints on Urban Communities: A Virginia City’s Fiscal Dilemma By Joe S. Frank As we approach the new millennium, local governments in the Commonwealth of Virginia are still being restrained by a legal doctrine from the last century known as the Dillon Rule.1 In Virginia’s case, the Dillon Rule perspective is a very strong tradition. Unfortunately, this tradition has put Virginia’s cities in a policy straightjacket that threatens this Commonwealth’s long history of progressive government. During the past few years, many people have started focusing on the financial problems facing Virginia’s cities related to the Commonwealth’s unique "independent city" constitutional provisions, and due to the laws and policies of state government.2 Our obsolete city/state arrangements compound difficulties that all American urban areas face. Newport News, Virginia, is a city of 180,000 citizens that grew during the industrial era of the late 1800s and thrived during most of the twentieth century. As a city we succeeded partially as a result of the progressive good government ideas of the early 1900s. Virginia was the home of the first council-manager system of local government. It is a system that proliferated around the Commonwealth and has served Virginia’s cities well. Less widely known is Virginia’s peculiar independent city constitutional provision. At one time, this too was a progressive aspect of Virginia government, which granted cities greater autonomy than counties in areas like schools and road maintenance. Even in 1999, Newport News is very fortunate relative to many of our neighbors in that we have a strong and diversified tax base. However, a disturbing trend has emerged that seems to make balancing our city budget more difficult each year. In the past, a city’s fiscal problems generally correlated with economic downturns. What is alarming today is that even a city with all of Newport News’ strength is facing a growing financial dilemma after several years of unprecedented growth in a low-inflation environment. We must look to the structure of our state-local government system for long-term solutions. The situation Virginia’s urban communities find themselves in has at least three components that are, of course, interrelated. The first is the much-discussed phenomenon of rapid suburban development outside political boundaries of a particular city. As to the second, much of the economic boom of the last several years is occurring in intellectual services such as software and consulting that is largely outside the tax structure available to our cities. Finally, there are state laws and constitutional provisions that exacerbate the above-mentioned trends by hampering creative responses by cities to these trends, and make the impact more severe in our state than elsewhere. Some have called the first problem urban sprawl, and it has been well documented.3 Many of the most well-off citizens in a given region move to the outer fringes of a metropolitan area. This process generates new state and local costs for infrastructure and schools. Retail and other forms of taxable investment quickly follow. For about a generation, Newport News survived this process with relative ease because much of the suburban growth occurred within its political boundaries. At this point in time, much of the "green field" development, both residential and commercial, is taking off in outlying areas that are increasingly outside the political boundaries of our cities. This creates fiscal stress due to lost wealth and taxable assets. Equally distressing is the tendency of outlying suburban areas to block any growth in their lower-income populations through zoning techniques and avoidance of social services in some cases. While understandable from a narrow perspective, this means that cities proportionately are paying more of their region’s share of social obligations, even while their revenue growth is disappearing. While state law takes a "hands off" approach to requiring suburban localities to take on such burdens, the Dillon Rule effect is far more burdensome when it restricts its urban communities from pursuing creative solutions. I have labeled this problem the "paradox of the independent city." On the one hand the state grants cities responsibilities with very limited authority to develop strategic plans of actions. On the other hand, the Commonwealth provides proportionately more support for suburbanizing outlying counties while imposing few requirements to plan for lower-income residents that are always part of a metropolitan area. A newer and less widely discussed trend is also at the heart of our problems. There is growing data that shows that a very large part of the economy is beyond the taxing authority of Virginia’s localities. The urban tax structure is becoming obsolete as an ever higher percentage of economic activity shifts away from real property and industrial machinery toward intellectual work and other services.4 While federal and state income taxes capture revenues from the newer "high-tech" economy, cities have very few options to tap this growth. In the future, city sales tax revenue will also be threatened as mail order and internet retail sales growth continues to expand. As many of the individuals that have prospered in the new economy move their personal residences and taxable property outside urban political boundaries, the combined trends of suburban sprawl and the new economy reinforce and exacerbate our urban communities’ fiscal dilemma. Thus far, the Commonwealth of Virginia has taken only minimal and clearly inadequate steps to address the financial difficulties of Virginia’s cities. Certainly, the recently adopted Regional Competitiveness Act5 creating incentives for regional partnerships is a step in the right direction. Given adequate appropriations, this program will help our urban regions in some areas. However, simply providing more money under the current state-local paradigm will clearly be insufficient. Cities are going to continue in the foreseeable future to be the focal point for urban services and, therefore, for funding needs. Again the Dillon Rule impedes the ability of Virginia’s cities to help themselves. Virginia has also implemented a plan to phase out one of its localities’ traditional sources of revenue, personal property taxes.6 This has been a cause for great concern among Virginia’s cities because it is the only major local tax that has grown at levels consistent with the overall economy. The phase-out plan worked out with the General Assembly appears to fairly deal with urban localities. But Virginia’s localities have been promised substitute revenue from the Commonwealth before, pledges which have not always been kept. So, as a mayor, it is only prudent for me to remain skeptical. During the past three years in Newport News, the personal property tax has grown by 22.5 percent, while real property taxes have only increased by 3.6 percent. You can readily see why the loss of this dynamic tax is a cause for concern. In Newport News, we have been fortunate in experiencing significant sales tax growth during the most recent economic expansion. As I mentioned previously, we have benefited from new economic development within our political boundaries. Some of our neighboring cities have not been so fortunate. While our sales tax growth has averaged 12.7 percent over the last three years, this growth cannot be expected to continue over the long term. Sooner or later Newport News and almost all urban places will also suffer from the movement of its retail base to areas beyond its boundaries. This inevitable fact, along with the shift from the traditional method of shopping in stores toward mail order and internet purchases, and other modalities of economic commerce, means that our sales tax revenue growth, like our neighbors’, will not be as reliable in the future as it has been in the past. Virginia’s cities are still dealing with unfunded state and federal mandates while watching their tax base relocate. These facts, in conjunction with the Commonwealth’s failure to give cities new revenue options and prohibiting annexation of adjoining counties while at the same time taking away some existing financial resources, create a formula for crisis in our urban communities. Local governments in other states face problems similar to those I have described in dealing with aging urban areas, sprawl, and intergovernmental financing formulas. As suggested earlier, Virginia’s problems are compounded by the impact of the Dillon Rule. Even with all of the urban challenges, my impression is that cities in other states have an easier time controlling their own fate because they have more autonomy and flexibility to respond to change. Virginia does not give its cities tools such as the ability to enact a local income tax,7 impact fees,8 and regional incentives. No action is possible at the city level without a specific legislative or charter change approved by our General Assembly and governor. In other words, passivity at the state level condemns a local government even when it is willing to shoulder its responsibilities. More needs to be done. Virginia’s wealthier suburbs and rural areas cannot expect to prosper in the long run if Virginia’s cities are not thriving and competitive with urban areas in other regions and countries. The solution lies in the reform of our state-local relationship. If we can accomplish this, Virginia may once again become a leader in local government reform. Joe S. Frank is mayor of Newport News, Virginia. Endnotes 1. John Forest Dillon was the chief justice of the Iowa Supreme Court approximately 100 years ago, and in his time, was recognized as a leading authority on municipal law and a prolific writer on the issues concerning local governments. Justice Dillon’s writings reflected a deep-seeded suspicion of local governments and its officials. The by-product of his distrust is known as the Dillon Rule and it defines the relationship between state governments and the cities located therein and it interprets the powers granted by states to its local governments as follows: a local government enjoys only those powers granted in express words; those powers necessarily or fairly implied in or incident to the powers expressly granted; and those powers essential to stated objectives that are indispensable to the local government. 2. Va.Const. art. VII; Va. Code tit. 15.2 (1950), as amended. 3. David Rusk, Cities Without Suburbs (1993). 4. John T. Hazel, Jr., Virginia’s Fiscal Dilemma: How to Pay for Prosperity in the Old Dominion, 73 Va. News Letter No. 1, (Jan. 1997). 5. The Regional Competitiveness Act of 1996, Va. Code §§ 15.2-1306-1310 (1950), as amended. 6. The Personal Property Tax Relief Act of 1998, Va. Code §§ 58.1-3523-3536 (1950), as amended. 7. Va. Code §§ 58.1-300 & 58.1-540-549 (1950), as amended. 8. Hylton Enters., Inc. v. Board of Supervisors, 220 Va. 435, 258 S.E.2d 577 (1979). The Virginia Supreme Court ruled that under the enabling zoning statute, which authorized the locality to assure adequate access to a residential planned community, does not imply authorization for the locality to exact payment from the developer for improvement of existing public highways. State & Local Law News home page | Table of Contents