Tale of Two Cities: Danville, Petersburg,

Economic Distress and the Fiscal ChallengeGovernor’s Infrastructure Financing Conference

Commonwealth of Virginia

December 15, 2016

• Out of approximately 1,000 cities with a population greater than 40,000, roughly 30 percent – just under 300 – meet the following criteria for being economically challenged:

– Population lost of more than 5 percent between 2000 and 2010

– More than 20 percent (excluding higher education students) living in poverty

– Post-recession unemployment greater than 9 percent

• Each of these cities have unique conditions that have led to economic challenge

– Some have faced economic challenges for decades – these are so-called legacy cities like Flint, Gary and Youngstown

– Some have been slow to recover from the Great Recession and the housing crisis

– Some are big and otherwise prosperous (e.g. Los Angeles) and some are small and face serious, ongoing economic challenges (e.g. Meridian, Mississippi)

– Some are big center cities, while others are inner ring suburbs (e.g. Cleveland Heights and East Providence)

The Problem: Economically Challenged Cities

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About the National Resource Network

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In 2011, the federal government announced

Strong Cities, Strong Communities (SC2)

to deliver solution-oriented assistance to communities

as a means of spurring economic recovery

Community

Solutions

Teams

Fellowship

Program

National

Resource

Network

The National Resource Network

brings together urban experts to

provide comprehensive TA to

economically challenged cities

• Entrenched Poverty

– Sharp reductions in urban poverty are hard to achieve, even in relatively

prosperous cities like Los Angeles, Miami and New York, which still have high

poverty rates.

– An analysis of city-level poverty data from 2000 to 2010 found that 95 of the

160 cities with a population of at least 40,000 residents and a poverty rate of

20 percent or higher saw poverty increase by an average of 4.2 percentage

points. The remaining 65 cities saw an average decline of 2.8 percentage

points and just 21 of these reduced poverty below 20 percent in 2010.

• Limited Investment in the Future

– A Federal Reserve Bank analysis of budgetary trends during the Great

Recession found that local governments in one Federal Reserve district

responded to reductions in state funding and tax revenue by cutting support

for community and economic development, investments necessary for a long-

term turnaround.

– Legacy costs (e.g. pensions and other retiree benefits) and public safety costs

– which can account for half or more of a city’s budget – crowded out

opportunities to invest in the future.

Lessons from the National Resource Network

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• Failure to Prioritize Recovery Strategies

– Most economically challenged cities are ill-equipped to address

simultaneously downtown development, neighborhood quality of life, crime,

health, public education and other challenges.

– An effective turnaround plan offers a focused, phased approach, not a

mythical “silver bullet” solution to increase competitiveness.

• Avoiding Uncomfortable Truths

– Oftentimes, urban poverty and unemployment are overwhelmingly

concentrated in African American and Latino communities but local leaders are

frequently reluctant to acknowledge that these problems are the result of

decades of systematic segregation.

– In cities across the nation where deep divisions already exist, racial inequality

is nevertheless ignored for fear of community divide. This issue may also find

itself at the heart of bureaucratic dysfunction; City Councils may divide along

racial lines or battle mayors of the opposite race. Such conflict makes it nearly

impossible for city governments to concentrate on other challenges.

Lessons from the National Resource Network

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• Low Performing Public Schools

– For many economically challenged cities, the greatest long-term barrier to

competitiveness is the failure of their public education systems to produce the

local talent needed to retain and attract employers.

– Additionally, these cities lack a viable education option for middle class

residents who end up moving to other cities or nearby suburbs. While many

factors affect school performance, those heavily concentrated by high poverty

students face overwhelming barriers to success. And the problem is systemic;

entire public school districts may have 90 percent or more of its students

eligible for free or reduced price lunch.

• Corruption

– In a city where opportunity is limited, resources are few and services are

effectively rationed, the potential for widespread malfeasance is especially

high.

– Sadly, the cost of corruption is greatest for economically challenged cities,

which must contend with already scarce resources and waning public

confidence.

Lessons from the National Resource Network

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• Not every economically challenged city has fiscal problems and not every fiscally

challenged city has economic problems.

• There is, however, a relationship between economic challenges and fiscal

challenges:

– Decline in population, high concentrations of poverty and high unemployment

can greatly affect local tax base

– Economic challenge can also increase the cost of and demand for local

government provided services (e.g. blight and vacant property)

– Limited fiscal resources can reduce the local government’s capacity to

address economic challenges (e.g. investments in infrastructure, schools,

economic development)

– The result can be a cycle of decline

The Fiscal Challenge

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• Cities over 40,000

– Danville

– Hampton

– Portsmouth

– Richmond

– Roanoke

• Cities over 25,000

– Hopewell

– Petersburg

– Waynesboro

• Focus on two of these cities – Danville and Petersburg

National Resource Network Eligible Cities in VA

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• Population peaked in 1990 – at approximately 53,000 – and has declined by nearly 20 percent since with an estimated population of 42,100 in 2015.

• In 2014, more than one in four residents in Danville were living in poverty – including more than 4 in 10 children.

• City’s population decline coincided with job losses in tobacco and textiles, leaving nearly 20 percent of the city’s properties vacant and leading many to refer to Danville as “a mill town without a mill.”

• Danville is disconnected from larger, thriving metropolitan areas and lacks easy interstate highway access. Greensboro, NC is the closest city with a population over 150,000 and is the closest airport – nearly an hour away.

• Danville’s public schools have lower graduation rates than the statewide average. In the Danville Public Schools Class of 2014, 75.7 percent of students graduated on time -- 14.3 percentage points lower than the state average.

• In 2014, Danville had the second highest total crime rate among Virginia’s independent cities.

Danville, Virginia: The Challenge

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• Danville has strong civic partners that have made significant investments in the community.

– The Danville Regional Foundation has been investing and managing a $200 million endowment following the sale of the Danville Regional Medical Center in 2005. These funds have primarily been allocated to economic and community development initiatives, including significant investments in the downtown River District and ongoing pre-K funding.

– Averett University, a regional college with nearly 900 students on campus, and Danville Community College, which serves approximately 6,000 students, are working to explore additional service learning courses to connect students to the evolving workforce opportunities.

• Strong demand for newly repurposed River District properties demonstrates the potential for greater redevelopment in the city. Recent redevelopment of former tobacco warehouses along the Dan River has attracted a number of residents to downtown.

• Millionaire’s Row has been cited as one of the finest collections of Victorian and Edwardian architecture in the South.

Danville, Virginia: The Opportunity

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• Population peaked in 1980, with just over 41,000 residents. By 2010, the population had declined to 32,420 – a drop of more than 20% since its peak thirty years earlier.

• With a poverty rate of 27.5%, Petersburg has more than double the percentage of people living in poverty as the Commonwealth overall (11.5%). The number of people living in poverty in Petersburg has increased from approximately 6,500 in 1999 to 8,700 in 2014.

• Tobacco maker Brown & Williamson was the city’s largest employer until leaving in the mid-1980s

• In 2016, 100% of Petersburg School District students were eligible for free or reduced price lunch and the district lagged behind state graduation rates and the rate of students receiving advanced diplomas

• In 2014, Petersburg’s violent crime rate of 581 per 100,000 residents was nearly 30% higher than the violent crime rate in Danville

Petersburg, Virginia: The Challenge

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• Unlike Danville, Petersburg is in a thriving metropolitan area -

- the Richmond MSA -- and Richmond is less than a half hour

away. There is also regular bus service between Petersburg

and Richmond. The city is on I-95.

• Like Danville, Petersburg has potential partners in higher

education (Virginia State University and Richard Bland

College) and philanthropy (Cameron Foundation).

• The City also has a unique concentration of affordable,

historic housing.

• Presence of a major nearby local employer – Fort Lee – that

could anchor business opportunity and growth

Petersburg, Virginia: The Opportunity

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• Danville– Unassigned General Fund reverses have grown from $20.4 million in

FY2005 to $35.0 million in FY2014, or 55 percent of operating expenditures.

– The City has very strong liquidity, with total government available cash equal to 11.5 percent of total governmental fund expenditures and more than ten times greater than annual debt service payments.

• Petersburg– By mid-2016, a Commonwealth technical assistance team’s review

concluded that the City has exhausted most of its unrestricted reserves.

– In FY 2015, the City’s final budget called for General Fund revenue of $81.4 million and spending of $81.1 million: the CAFR reports that actual revenue was $77 million and spending was $82.9 million.

– The Commonwealth technical assistance team report indicates that, based on General Ledger reports, all funds expenditures exceeded all funds revenue by at least $5.3 million in FY 2016.

Why a Tale of Two Cities? The Fiscal Challenge

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• National Resource Network partnered with the City of

Danville to create a new community development corporation

to drive citywide comprehensive revitalization

• CDC will focus on housing, health, and neighborhood

economic development.

• In conjunction with civic leaders and community stakeholders,

the Network helped identify initial funding for the organization,

appropriate neighborhoods for targeted investment, and an

initial direction and strategies for the CDC that will be

supported by a multi-year commitment from the City and the

Danville Regional Foundation.

What Next for Danville

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What Next for Petersburg

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Reduce school funding to the level required by State law $4,140,000.00

10% reduction in salaries $2,066,666.67

Close a firehouse and reduce staffing $675,000.00

Freeze police hiring and redeploy detectives to patrol $550,000.00

Fund code compliance with CDBG funds $475,000.00

Eliminate funding for museums and tourism centers $300,000.00

Reduce jail population 0

Reduce agency appropriations $230,000.00

Consolidation of planning, economic and community development $120,000.00

Reduce library hours and spending by 25% $112,500.00

Reduce parks programing 0

Eliminate the Office of Hispanic Liaison $75,000.00

Increase the cigarette tax to 90 cents per pack $900,000.00

Add commercial and industrial properties to the tax base $1,000,000.00

Increase refuse management fee to $20/month $472,500.00

Audit tax exempt property $585,000.00

Increase the meals tax to 7.5% $360,000.00

Increase personal property tax to $4.90 $352,500.00

Increase the lodging tax to 10% $127,500.00

TOTAL $12,541,666.67

• Danville addressed the basics first. It adopted fiscally

sustainable approaches to managing local government,

positioning it for turnaround. By building a strong partnership

with local philanthropy, the City can now take on focused

improvement in quality of life.

• Petersburg took a different path. Even as Petersburg was

running annual deficits, it undertook a series of costly, low

return economic development investments – buying a hotel,

supporting a local baseball team and building a new library. It

isn’t necessarily that these were bad investments, but they

were investments that Petersburg could not afford. Before

Petersburg can realize its economic opportunity, it has had to

take drastic steps to stabilize finances.

The Tale of Two Cities

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• Short-term fixes don’t address long-term problems. Even

in economically challenged cities with significant assets, few

have been able to reverse population decline or move

significant numbers of residents out of poverty without fully

committing to a comprehensive turnaround strategy.

• Determined local leadership is essential to recovery. As

much as megatrends such as deindustrialization and

suburbanization may have caused economic decline,

recovery is impossible unless local leadership is ready and

willing to take on tough challenges with strategies that can be

arduous and sometimes politically unpopular to execute.

The Need for a Focused Approach

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• Progress begins with a reality check. However difficult,

leaders must be able to acknowledge the underlying

problems of their city, such as those stemming from a history

of racial segregation, corruption or dysfunctional local

government.

• Economic competitiveness requires collaboration. While

local government leadership is essential, this alone is usually

insufficient. Partnership with other local government agencies

(e.g. school districts, regional authorities and county

governments), the business community, anchor institutions

and philanthropy requires hard work but may prove the most

effective and efficient approach to taking on a city’s most

pressing problems.

The Need for a Focused Approach

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David Eichenthal

Managing Director, The PFM Group

eichenthald@pfm.com

www.pfm.com

www.nationalresourcenetwork.org

For More Information

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