07/14/2010 01:28 pm ET | Updated May 25, 2011

Feud for Thought

One of the biggest, and least discussed, problems with the fiscal difficulties facing states and cities throughout the country is the irrationality they impose on legislators' decision-making processes. Instead of taking into account the increased needs of their citizens, more of whom rely on public benefits during a downturn, legislators face a political problem created by large deficits that have resulted from a sudden and unforeseeable drop-off in revenues. In this context, cutting services -- any services, it seems -- becomes easier than raising taxes.

The stimulus at once helped and exacerbated this problem. State and city budgets both benefited from fiscal assistance provided in the American Recovery and Reinvestment Act. But the insufficiency of the aid -- it simply wasn't enough to plug the enormous holes in state and local budgets -- and its expiration by the end of this year mean that legislators will be dealing with unhealthy budgets throughout 2010 and 2011 and even into 2012.

This can have some very peculiar consequences for spending decisions, including for the very infrastructure projects that are (quite rightly) heralded as investments that can drive economic recovery and longer-term prosperity.

For instance (via Streetsblog), the Staten Island Advance reports that a package of construction projects planned for the Staten Island Expressway (I'll reserve judgment on the merits of the highway project itself) is caught in the middle of a "city-state feud":

Before the work -- to tame traffic on the roadway and cure the "Bradley Avenue backup" -- could begin next year, the project needed a unanimous vote of approval by both [the New York State and New York City Departments of Transportation], the Department of City Planning and the MTA.

But city DOT Commissioner Janette Sadik-Khan cast a "no" vote, to send a message to the state DOT that it needs to come through with the $400 million in federal dollars the city says it's owed for its own local projects.

Facing a state budget crisis that required weeks of emergency budget extenders, New York State chose to cut spending, including large chunks of education aid and, according to Sadik-Khan, to withhold federal transportation money that should have passed through New York State to New York City.

As Nadine Lemmon explains at Tri-State Transportation Campaign, passing stimulus transportation money through the state not only creates delays (of up to a year!), but has put future allocations -- that is, the $400 million Sadik-Khan says the City is owed -- at risk:

Sadik-Khan estimated that $400 million in future federal allocations to the City could potentially be lost and warned that the problems in Albany could lead "[New York State] DOT to attempt to reduce or divert the City's share of Federal highway aid going forward."

The Commissioner's move is the necessary result of a bigger problem with how the stimulus interacted with state and local fiscal troubles. By funneling transportation dollars through states -- and providing fiscal aid only to state governments -- the stimulus not only missed an opportunity to target investment in the dense areas where infrastructure investments have the most bang for their buck, but created a coordination problem in which legislators feeling the strain of budget deficits have an incentive to screw over the level of government below them for no other reason than they can. The fact that cities have lost influence in state legislatures at the same time as they have become more reliant on them made the situation for urban areas all the worse.

Altering federal transportation allocation formulas to target funds to large cities, as Sadik-Khan has proposed, would alleviate this problem for many infrastructure investments. But a revamp of how federal aid is distributed to local governments in times of economic distress is the deeper change that is needed.