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America's cities on the edge

In crisis: Trenton police on patrol in the Garden State's capitol
Justin Solomon | CNBC
In crisis: Trenton police on patrol in the Garden State's capitol

When a city is badly broken, it can be very tough to fix.

Just ask Darren Green, president of a coalition of community groups in Trenton, N.J., where deep budget cuts in 2011 forced the city to lay off a third of its police force.

"We're at a place now where it's very dangerous to walk the streets," he said, his thoughts periodically interrupted by the distant sound of passing sirens. "The school system is dysfunctional and not working. You have young people who are robbing elders. Young people who are destroying communities. With no leadership and the community in disarray, there's a lot of bad here."

The disarray and mayhem in Trenton is extreme. In August the city set a record for the most homicides in its 221-year history - at least 32 people killed this year — in this city of 85,000. Trenton's mayor, Tony Mack, has asked the state for emergency funding. But his appeal has been undermined by allegations of corruption after a federal grand jury indicted him in December 2012 on bribery charges. Several key members of his administration also have been charged with other, unrelated crimes.

The plight of the Garden's State's capital city is by no means typical of American cities in 2013. For the most part these regional economic hubs held up relatively well after the Great Recession tore one of the biggest holes in local revenues since the Great Depression.

Some, like San Francisco and Boston, blessed with vibrant high-tech industries churning out high-skill, high-wage jobs, all but escaped the downturn. These high-growth local economies have recouped the ground lost to the recession and continue to help push the national recovery forward. Others, like Orlando and Phoenix, which were hard-hit by the housing bust, have pulled themselves up by the bootstraps. They are turning their economies around by building centers of excellence in growth industries like biotech and alternative energy.

Forward-thinking mayors, such as Chattanooga, Tenn.'s, Andy Berke, have made their cities magnets for foreign investment with leading-edge technology like high-speed gig networks. That has helped recast the southern city, formerly known for Moon Pies, as a model hub for the smart grid. Now it is one of the fastest-growing cities in America.

That's good news. The strength of the U.S. economy is based on a network of local economies that house 80 percent of the nation's population and drive more than 90 percent of GDP, according to the U.S. Conference of Mayors and IHS Global Insights. That output amounts to $13 trillion, or nearly one-quarter of the economic output of the 200 largest countries combined.

America has a broader base of large cities than any other developed country in the world. McKinsey Global Institute, in its "Urban America: U.S. Cities in the Global Economy" report, estimates that more than 10 percent of global GDP growth will come from these local economies over the next 12 years.

Mounting fiscal challenges

Today U.S. cities face widely varied prospects for short-term recovery and long-term growth.

Federal funding cutbacks, combined with the economic damage from the Great Recession, continue to challenge Main Street. Eight cities have filed for bankruptcy since 2010, including Detroit; Scranton, Pa.; and Stockton, Calif. That's not surprising, considering that all but four of the 384 local economies tracked by Moody's Analytics' Business Cycle Index had fallen into recession by 2009. Of those, 255 moved into recovery in 2010.

That gradual improvement continues today. But there are laggards. For example, Decatur, Ill.; Michigan City, Ind.; and Utica, N.Y. have economies that are still retracting.

To view a wide version of this visualization, please see: A snapshot of urban America

Mounting fiscal challenges

The fated glory of Detroit: an abandoned building on the outskirts of Motor City
Getty Images
The fated glory of Detroit: an abandoned building on the outskirts of Motor City
"Our regions are competing globally. But they won't be able to sustain that competitive edge if they're burdened by the legacy of aging infrastructure and pension costs." -Michael Nadol, Consultant, PFM Group

The hardest-hit cities find themselves mired deeply in a downward spiral as cuts in services, rising crime rates and falling property values all contribute to the decline (see graphic: The Recession's Aftermath). "If you can't provide the environment for investment, the process of shrinking just continues," said Jeffrey Keefe, a labor economist at Rutgers University. "The people and businesses leave, and there's no inflow of economic resources. So all you're doing is living off external subsidies to provide law and order and some basic education and social insurance."

(Read more:Damage to city budgets: Some was self-inflicted)

Since the Great Recession ended, there are now a half million fewer municipal workers patrolling streets, teaching kids and fixing potholes, according to the U.S. Bureau of Labor Statistics. Their lost paychecks further drained local income and sales taxes.

Lost spending by local governments has held back the national recovery as well. Though much has been made of the economic hit from roughly $85 billion in annual federal budget cuts, state and local spending cuts have been even deeper.

Fueled in part by a surge in real estate taxes, state and local government spending grew by about 6 percent a year from 2001 through 2009. In the past three years, however, that growth has slowed to less than 1 percent a year. The difference amounts to about a $450 billion over that period, data from the U.S. Bureau of Economic Analysis reveals.

The drag on the U.S. economy from the decline of broken cities is also felt in a loss of global competitiveness, according to Michael Nadol, a consultant at PFM Group, a Philadelphia firm that advises cities on financial management.

"We're not just competing city to suburb anymore," he said. "Our regions are competing globally. But they won't be able to sustain that competitive edge if they're burdened by the legacy of aging infrastructure and pension costs."

Washington slept here

Trenton's decline has been slow in coming and will take time to reverse.

The city has deep roots. George Washington is said to have chalked up his first major Revolutionary War victory here. The city briefly served as the nation's capital. For the next century and a half, Trenton grew steadily as a thriving manufacturing hub. The city's Lower Bridge, the first built over the Delaware River, still proudly displays in bright neon lights at night the slogan cooked up in 1917 by the local chamber of commerce: "Trenton Makes, the World Takes."

But Trenton stopped making things many years ago. The city's economic decline has tracked the decades-long ebb of American manufacturing might. Today, state government is the largest employer—but the government presence does little to help balance the city's books.

Some state and federal officials argue that cities need to be run more like a business. But unlike a private business that can exit markets or consolidate product lines when times are tough, a city grappling with a 20 percent drop in revenues can't just decide to ignore every fifth 911 call or plow only 80 percent of city streets.

Perversely, ongoing budget cuts in declining American cities can force up the cost of running local government. High unemployment brings increased demand for social services—from packed homeless shelters to police response to increased crime. Layoffs leave fewer active workers paying into pension-fund coffers, raising the burden on taxpayers to cover retiree benefits. Years of deferred maintenance on infrastructure, such as roads and sewers, only accelerates the need for costlier replacement.

For the most part, though, taxpayers are in no mood to pony up more money to offset those costs. That presents local political leaders with a tough balancing act if they want to develop long-term solutions and continue to serve through the next election.

(Read more: Woes of Detroit hurt borrowing by its neighbors)

Odds of a revival

"Thirty years ago we thought Boston was dead. We thought New York was dead. We thought Pittsburgh was dead. All these places have sprung back to life." -Bruce Katz, Founding director, Brookings Metropolitan Policy Program

In good times, local governments looked to plug budget holes with state aid, which once accounted for as much as a third of local government budgets. But those funds have also shrunk after states took their own income tax and sales tax beating from the Great Recession. Some three dozen states, including California and Colorado, have gone further to tighten local revenues by enacting so-called Taxpayer Bill of Rights laws that cap the level of tax increases local governments can impose. In New Jersey, Republican governor Chris Christie is pushing cities and towns hard to freeze salaries and consolidate services.

Uncle Sam also used to provide federal funds for job training, community development block grants and public housing. But local officials complain that has been replaced by unfunded mandates for clean water and higher test scores for schools.

That has left many of America's most distressed cities to fend for themselves. "The resources are there; the question is whether they can be reallocated from the communities that have resources to those that don't," said Rutgers' Keefe.

It won't be easy for America's most badly broken cities to bootstrap themselves back to prosperity. But with the right political leadership, it's not impossible. In fact, the history of American cities suggests that with time the odds of revival are better than current conditions would suggest, according to Bruce Katz, founding director of the Brookings Metropolitan Policy Program.

"Thirty years ago we thought Boston was dead. We thought New York was dead. We thought Pittsburgh was dead," he said. "All these places have sprung back to life. So if you're left behind in the near term because of misguided political leadership, in 10, 15 or 20 years you might find a very different kind of political environment."

In Trenton, community leader Darren Green agrees. "Trenton is a phenomenal city," he said. "It has a lot of great history; it has a lot of great people. It just needs leadership that is committed, competent and caring."

"We're going to rebuild this city," he said. "I promise you that."

By CNBC's John Schoen. Follow him on Twitter @johnwschoen.

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