Executive Summary

In response last year, HUD's 1997 State of the Cities report found both cause for optimism and reason for concern. The good news was that after two decades of decline, America's cities were on the rebound. A strong national economy -- combined with the innovation of a new breed of mayors and the success of the Administration's targeted first-term urban agenda -- left many cities fiscally and economically stronger than they had been in years. The bad news was that these same cities faced several structural challenges -- on concentrated and growing poverty, on the job disparity between cities and suburbs, and on middle-class migration from the cities -- that could eventually undermine the long-term success of urban America. This report finds that these problems didn't happen overnight, and they won't be solved overnight -- but they must be addressed if America is going to thrive in the 21st century.

This second annual report, The State of the Cities 1998, picks up where last year's report left off. It does so at a time of renewed appreciation for the role cities play in our national success.

As the President noted in his 1998 State of the Union Address, "Cities are the vibrant hubs of great metropolitan regions." This fact was illustrated in a recent report by the U.S. Conference of Mayors and the National Association of Counties, which showed that metropolitan areas have generated 86 percent of the Nation's total economic growth since 1992, 84 percent of all jobs -- and are home to 85 percent of our people. Perhaps more than ever, the fates of city and suburb are closely tied.

It is now -- when the economy is humming, our communities are growing, our Federal budget is balanced, and our Nation is at peace -- that we should examine the state and fate of America's cities. How America responds to the challenges articulated in this report will depend in large measure on how Congress responds to an Administration budget that goes a long way toward meeting those challenges. This report has three main findings:

• Finding #1: Driven by a robust national economy, cities are fiscally and economically the strongest they've been in a decade.

• Finding #2: Despite recent gains, cities still face the triple threat of concentrated poverty, shrinking populations, and middle-class flight that began two decades ago.

• Finding #3: Cities face three fundamental opportunity gaps -- in jobs, education, and housing -- that are critical to reducing poverty and attracting and retaining middle-class families.

These three findings and President Clinton's response to each are outlined in more detail below.

Finding #1: Driven by a robust national economy, cities are fiscally and economically the strongest they've been in a decade.

Time magazine recently said that "the U.S. now enjoys what in many respects is the healthiest economy in its history, and probably that of any Nation, ever." Driven by a prudent strategy of fiscal accountability balanced with targeted investments, the national economy is experiencing an unprecedented run of economic expansion. The budget deficit had 11 zeroes at the beginning of 1993, but the budget is now in surplus, with surpluses projected for the next 5 years. More than 16 million new jobs have been created in the past 5 years, and unemployment is at a 28-year low. Since 1993, incomes have been growing for all income groups but fastest for those at the bottom of the income ladder. And low interest rates combined with steady economic growth last year produced the highest homeownership rate in history.

While significant gaps remain, cities now are sharing in America's economic comeback:

• National economic progress is steady and strong.
  • The economy has produced 16 million new jobs and record low unemployment. Incomes are rising, particularly among those at the bottom of the economic ladder.

  • Regional economies, with cities at their center, are now the primary engines of national prosperity.

• Jobs are growing and unemployment is falling in central cities.
  • Central city employment is on the rise. Between 1993 and 1998, the number of employed workers living in central cities increased by 10.4 percent, or by almost 3.7 million people.

  • Central city unemployment rates have fallen. Unemployment in central cities fell to an average of 5.3 percent in March 1998, down from 8.2 percent in March 1993. In some cities -- such as Austin, Charlotte, Phoenix, and San Jose, for example -- unemployment is now under 4 percent.

  • Increased job opportunities in the cities. From 1991 to 1994, only 13 percent of the new low-skilled jobs were created in central cities. From 1994 to 1995, that number jumped to 34 percent.

  • Central city poverty rates are falling. Poverty rates for central cities have fallen from 21.5 percent in 1993 to 19.6 percent in 1996. For African-Americans, who have historically experienced high rates of poverty, central city poverty rates have fallen from 35.8 percent in 1993 to 31.0 percent in 1996 -- the lowest level in 22 years.

• Cities are improving as places to live.
  • Many downtowns are experiencing a new renaissance as centers of tourism, sports, entertainment, and the arts. Cities as diverse as Baltimore, Cleveland, Denver, San Antonio, Seattle, and Washington, D.C., are becoming new destinations for tourists and residents of the larger regions.

  • Virtually every city in America has a stronger balance sheet today than it did a decade ago. A recent survey by the National League of Cities found that two-thirds of participating cities reported that they "were better able to meet city financial needs" in fiscal year 1997 than in the previous year -- and all but 3 of the 77 largest cities had investment-grade bond ratings that enabled them to borrow funds at favorable rates.

  • Crime rates -- particularly for violent crime -- have plummeted for 6 years straight. Nationwide, violent crime dropped an estimated 27 percent between 1991 and 1997 and by 19 percent in large cities between 1993 and 1997. During the first 6 months of 1997 alone, the rate dropped by 6 percent.

  • Public perceptions are changing. In a recent survey by Money magazine, the Washington, D.C., metro area was listed as the most "livable" community on the East coast -- countering the trends over the past 10 years, when small towns often received the most attention. And U.S. News and World Report recently called attention to the growing number of "smart cities" that are leaner, more strategic, and more focused on sustainable growth.

• Homeownership is on the rise.
  • City homeownership rates are at their highest level in 15 years. While there is still more work to do to reduce the homeownership gap between central cities and suburbs, half of all central city households owned homes in 1997 -- representing an increase of approximately 1 million new homeowners since 1994.¹

  Administration Response: The President plans to continue on the course of fiscal prudence, in three ways: (1) by preserving any budget surpluses until Social Security is reformed for the 21st century; (2) by adhering to a strategy of targeted investments in America's people and communities; and (3) by continuing to reinvent and streamline the Federal Government to be a better, more effective partner for America's communities.

Finding #2: Despite recent gains, cities still face the triple threat of concentrated poverty, shrinking populations, and middle-class flight that began two decades ago.

• Central cities' share of metropolitan populations continues to decline. Although most central cities continue to grow slowly, only 11 of the 30 largest cities in 1970 have more people in them today than two decades ago. These population losses frequently translate into a shrinking municipal tax base. Population changes often reflect regional variation. While older industrial cities in the Northeast and Midwest -- including Philadelphia, Washington, Detroit, and Chicago -- continue to see their populations shrink, more "elastic cities" in the West, such as Las Vegas, Albuquerque, and Phoenix, continue their sharp population climb.

• Middle-class families are still leaving central cities. Since 1970, nearly 6 million middle-income and affluent families have left central cities. At the same time, between 1985 and 1995, the number of high-income families (defined as 150 percent of median) that located in suburbs grew by 16 percent, compared with just 2 percent for central cities. When asked why people are leaving cities, two answers most commonly cited are the poor quality of urban schools and the relatively high rates of urban crime.

• Poverty in cities is higher than in the suburbs. While overall poverty rates have dropped, poverty is more concentrated in distressed urban areas. Despite a drop in central city poverty rates between 1993 and 1996, 1 in every 5 urban families lived in poverty in 1996, compared with fewer than 1 in 10 suburban families. And there is a growing dichotomy in rates of minority poverty. While the rate of African-American poverty is at its lowest level in history, poverty in cities disproportionately affects minority populations -- 72 percent of the poor in cities are minority.

• Poverty remains highly concentrated in certain neighborhoods. The persistence of discrimination in the housing market leads to discrimination in our cities. Even if people are not poor themselves, they are likely to live in tracts of concentrated poverty. Indeed, almost one in four African-American and Hispanic residents of central cities live in census tracts where more than 40 percent of their neighbors are poor, compared with only 3 percent of the white urban population. Such high-poverty areas are often plagued by severe social dysfunctions such as violent crime and drug abuse, as well as family problems such as teenage pregnancy.

Administration Response: A three-part strategy concentrated on using incentives to bring jobs and businesses back to central cities, improving urban schools, and promoting homeownership and affordable housing is articulated in detail in the following section.

Finding #3: Cities face three fundamental opportunity gaps -- in jobs, education, and housing -- that are critical to reducing poverty and attracting and retaining middle-class families.

(A) Cities Face a Jobs Gap

While more jobs are being created in cities, there is still a sizable but manageable mismatch between the number of low-skilled jobs and the number of low-skilled urban residents who need work. The coordinated efforts of all levels of government, along with the private sector, are needed to address this challenge.

• The challenge facing America's cities. While projecting job gaps is difficult, one effort to do so is a forthcoming report from the U.S. Conference of Mayors (USCM). With job forecasts prepared by Regional Financial Associates, the USCM projects that there could be two job seekers for each low-skilled job in 74 urban counties over the next 5 years, with substantial variation among areas. This report further estimates that across these 74 urban areas, the number of current welfare recipients who will need jobs over the next five years could exceed the growth in low-skilled jobs by 353,000.

  Projections of these job gaps vary; in any case, the challenge is to create the kinds of jobs needed in the places where people need them most and to help urban residents take advantage of these job opportunities. This challenge is not insurmountable. For example, in the period 1991 to 1994, only 13 percent of the new low-skilled jobs were created in central cities, compared with 34 percent from 1994 to 1995.

• Minority youth unemployment remains high. The unemployment rate for minority youth (ages 16 to 19) was 26 percent in central cities in May 1998 -- five times the Nation's overall unemployment rate.

• There is a wider wage gap. While progress has been made on the wage gap over the past few years, we haven't regained what we lost over the past 20 years. Over the past two decades, earnings inequality widened as the inflation-adjusted wages of low-skilled workers declined and the wages of high-skilled workers increased. According to a recent report by the U.S. Department of Labor, from 1982 to 1996, the inflation-adjusted hourly wages of workers in the top one-tenth of the workforce increased from $24.80 to $25.74 an hour while wages for workers in the bottom one-tenth of the workforce fell from $6.28 to $5.46. Adjusting for benefits added further to the growth of earnings inequality.

• People can't get to the jobs. Transportation to entry-level jobs in the suburbs is a substantial barrier. In Boston, for example, 98 percent of welfare recipients live within one-quarter mile of a bus route or other mass transit stop, but only 58 percent of potential entry-level jobs in the Boston metro area are within 1 mile of mass transit.

• The lack of affordable child care hits central cities hard. Safe and affordable child care is necessary to allow parents to work. However, nation-wide, only 10 percent of the families who qualify for Federal child care assistance receive help. Many cities have tens of thousands of families on waiting lists for child care assistance.

Administration Response: The President's budget includes several important initiatives aimed at reducing the low-skilled jobs gap by creating jobs where people live and by connecting people to the places where jobs are being created. To create jobs, the President has proposed a new Community Empowerment Fund, administered by HUD, which will help create an estimated 280,000 jobs alone. He has also proposed increased funding for Community Development Financial Institutions Fund and creation of a second round of Empowerment Zones. And he has proposed extending the welfare-to-work tax credit, the work opportunity tax credit, and the brownfields tax incentive.

In addition to these budget initiatives, the President has called on the private sector to expand its efforts in response to welfare reform. In May 1998, he challenged the private Welfare to Work Partnership to double its number of business partners to 10,000 and to double the number of people these businesses hire from the welfare rolls to 270,000 in 1998.

To connect welfare recipients to jobs, the President has proposed $283 million for 50,000 Welfare-to-Work Housing Vouchers. His Access to Jobs transportation initiative to help welfare recipients and other low-income workers get to their jobs was recently enacted as part of the Transportation Equity Act for the 21st century (TEA21) -- the reauthorization of ISTEA². In addition, the President recently released the first round of 49 Welfare-to-Work competitive grants from the U.S. Department of Labor to help local communities move the hardest to place welfare recipients into employment. Welfare-to-Work funds are also being provided to local communities through formula grants to States, which are in turn administered by local Private Industry Councils.

The President has proposed other job support and workforce development initiatives that would enhance employment opportunities. He has proposed a $250 million Youth Opportunity Areas Initiative to increase employment for out-of-school youth in high-poverty areas. In addition, the President has proposed investing more than $20 billion over 5 years in a new Child Care Initiative to expand the availability, affordability, and quality of child care. The President also has proposed a G.I. Bill for America's Workers to consolidate and streamline activities in the Job Training Partnership Act and empower adults to make better choices for job training services.

(B) Cities Face an Education Gap

Urban schools are failing to prepare an alarming number of America's children to meet the challenges of the new high-technology economy, and -- disproportionately -- minority children are paying the highest price. In many cases, the poorest schools are serving the children with the greatest needs, and have the fewest resources -- both financial and functional -- to do so. More than 81 percent of urban schools have a student population that is at least 70 percent poor and 50 percent minority. In addition, many urban schools have trouble recruiting teachers to keep class sizes small and teaching quality high -- and too many schools have seen standards erode as systems of "social promotion" graduate students who lack basic skills.

• Basic achievement is lagging -- especially in high-poverty inner-city schools. In both 1994 and 1996, 60 percent of the children in urban school districts failed to achieve basic levels of competency in reading and math on the National Assessment of Educational Progress.³ For children in high-poverty urban schools, outcomes were even worse: 77 percent failed to achieve basic competency levels in reading, and 67 percent failed to achieve basic levels of competency in math.

• Low graduation rates in urban high schools. In the Nation's 20 largest urban school districts, more than half of all students never graduate. For millions of urban youth, finishing high school and attending college seems an impossible dream -- this in an era demanding high skills for high wages.

• School violence is concentrated in large urban schools. Though school violence is not just an urban problem, violent attacks and fights are much more common in city schools, especially large ones, than they are in suburban schools. In a national survey, 1,800 urban schools reported more than 5,400 fights in which weapons were used during the 1996-97 school year.

• Many urban schools are crumbling. A sizable proportion of urban schools are literally falling apart. A recent General Accounting Office (GAO) study found that 38 percent of central city schools (serving more than 5.5 million students) had at least one inadequate building and two-thirds (with more than 10 million students) had at least one inadequate building feature, such as a roof or plumbing.⁴

Administration Response: Urban education is a major priority in the President's budget. Proposed initiatives include the creation of Education Opportunity Zones to direct $1.5 billion over 5 years to low-achieving school districts in high-poverty areas; Federal tax credits to pay interest on an estimated $22 billion in School Modernization Bonds to rebuild and repair schools; $413 million for America Reads, a national campaign to increase children's literacy; $140 million for High Hopes to launch a national effort to help young people prepare for post-secondary education; and $7.3 billion over 5 years to raise educational achievement by hiring new teachers and reducing class size in grades 1 to 3.

With so many of the better jobs in today's economy requiring post-secondary education, Administration policies, including HOPE Scholarships and Lifetime Learning Credits, the largest Pell Grant in history, and universal eligibility for subsidized loans, have made financial access to post-secondary education possible for everyone.

(C) Cities Face a Housing Gap

The Nation's affordable housing crisis has reached record levels, especially in central cities. At the same time, while homeownership is at its highest level ever, the central city homeownership rate continues to lag significantly behind the suburbs.

• Urban homeownership -- including middle-class homeownership -- lags behind the suburbs. Homeownership rates are 70 percent in suburbs but just 50 percent in cities. According to data from the 1995 American Housing Survey presented in the Harvard University Joint Center for Housing Studies' annual report, The State of the Nation's Housing 1997, central city residents of all income levels are less likely to own a home than suburban residents with similar incomes. The Harvard report found, for example, that among moderate-income households, 71.3 percent of suburban residents own a home compared with just 51.8 percent of central city residents at the same income level.

• Racial discrimination at all income levels adds to the urban homeownership gap. The Harvard University Joint Center data also document that African-American and Hispanic households of all income levels are less likely to own a home than white households of the same income group. This racial gap persists, even among households with incomes that are 20 to 50 percent higher than area median. While 78.3 percent of white households in this income group owned homes, the share for African-Americans is only 62.7 and for Hispanics, only 64.5 percent. Home Mortgage Disclosure Act (HMDA) data show substantial differentials in the mortgage denial rates between whites and minorities -- and between city and suburban residents. The Harvard study concludes that such differentials result in part from "prejudicial lending and housing market practices still plagu(ing) some areas of the country."

• Worst case housing needs are at a record high. Despite robust economic growth, between 1993 and 1995, a record 5.3 million very low-income renters paid more than 50 percent of their income for rent or lived in substandard quality housing -- commonly referred to as "worst case housing needs."

• Central cities are hardest hit. Households with severe housing problems are disproportionately found in central cities: 18 percent of central city renters -- a total of 2.8 million families -- have severe housing problems.

• Worst case needs increasingly affect the working poor. Between 1991 and 1995, worst case needs for families with at least one person earning a full-time paycheck rose by 265,000 families -- an increase of 24 percent.

• There has been a sharp decline in affordable housing. Between 1993 and 1995, there was a loss of 900,000 rental units affordable to very low income families -- a reduction of 9 percent. There was an even greater reduction of 16 percent in the number of units affordable to extremely low-income renters, who are people earning less than 30 percent of an area median income.

• Congress has provided no new housing vouchers to families on the waiting list for housing assistance since 1994. Until then, for as long as housing records have been kept -- no matter what state the economy was in or who occupied the Oval Office -- America had always increased its supply of affordable housing.

• Homelessness continues to plague our Nation's cities. Driven by a lack of affordable housing, inadequate access to decent jobs, and a myriad of problems ranging from mental illness and substance abuse to domestic violence and outdated or non-existent job skills, homelessness continues to be a challenge to cities across the Nation. Best estimates suggest that 600,000 men, women, and children are homeless on any given day, with several times that many persons experiencing homelessness each year.

Building Safe, Secure and Sustainable Communities

In addition to closing opportunity gaps in the areas of jobs, housing and education, the President's FY 99 budget includes several important initiatives that will strengthen the environment and improve the quality of life in our cities. These include cleaning up and redeveloping brownfields; improving access to health care; continuing support for local efforts to prevent and reduce crime; and ensuring that there is a level playing field and equal opportunity for immigrants and minorities.

Conclusion

In our cities, we still see America's greatest problems. The great progress we've made in the past few years causes us to believe we can solve the remaining problems if we direct sufficient attention, commitment, and resources to doing so.

After more than two decades of wrenching change that undermined both the economic and social foundations of America's cities, 1998 finds most cities as financially strong as they have been in years. America's central cities -- and the metropolitan areas that surround them -- have helped fuel the most aggressive economic expansion in our Nation's history. Jobs, homeownership, and consumer confidence are all up. Crime, unemployment, and inflation are all down.

At the same time, many of the old challenges remain -- poverty, middle-class flight, and shrinking populations. The divisions in urban America are still strong, but they are no longer strictly black and white. Urban America today is Korean, Dominican, Mexican, and Latvian, among many others -- the greatest influx of new immigrants in nearly 100 years. Today, more than 100 languages are spoken in Los Angeles schools, and 140 different racial and ethnic groups live in Detroit and Wayne County, Michigan, alone. The complexity of this new melting pot casts a light on three serious but surmountable gaps facing cities at the turn of the 21st century -- namely, how we work, how we are educated, and how and where we live.

The primary observation of the President's "One America" Race Initiative -- that the great unfinished work of democracy is the creation of a true union, a single society -- takes on new urgency as well. Thirty years ago, there were 10 people working for every 1 person living on Social Security. Within 10 years, there will be just three people working for every one person living on Social Security -- and those three people are more likely than ever before to speak a different language at home or come from a different country. At a time when fewer than 50 urban school districts are educating nearly half of our minority population we had better be sure as a Nation that our people are trained and educated to carry the workload in the 21st century. By default, we must be more unified than ever before. Our common future depends on it.

With this new urgency comes new opportunities. Our economic success has given us two great gifts. First, it has helped show us what is possible. For example, since 1994, we've added 1 million new homeowners in urban America. The combination of a good economy and a national homeownership strategy supported the success. This report identifies serious remaining challenges and at the same time, offers answers which have a proven track record.

The second great gift is that our strong economy has created a unique window of opportunity to address the challenges that face us, and the President has moved aggressively into that window -- proposing the most wide-ranging budget for cities in more than a decade. This program will go a long way toward addressing the challenges articulated in this report. It is a program that recognizes that government alone cannot solve every problem, that it must be a good partner with the private sector. Ultimately, it is a program that recognizes we will only succeed if we are together -- not city or suburb, not black or white, not rich or poor -- but One America.

Rarely has the Nation ever been better positioned to tackle the challenges of rebuilding and re-energizing our nation's proud cities. If we are not now ready to take on these challenges when the budget is in surplus, unemployment is at record lows and the stock market is at record highs, when will we be ready?

Alternatively, if we have the courage and foresight -- both as a Nation and on Capitol Hill -- to address these challenges head-on and to enact many of the ideas and FY 1999 budget initiatives proposed by the President, we can ensure that America's cities have not only a proud past but a bright future. And we don't have a moment to waste. Our cities and their people are waiting.