While the stimulus package directed about $140 billion to state governments, the recovery act sent very little money directly to cities: much city aid was funneled through state governments. Providing money directly to cities in a subsequent stimulus package would not only mitigate procyclical state fiscal policies, but would generate longer-term dividends for federalism.
Targeting aid directly at cities would free up state money to balance budgets in the exact same way that aid to states would prevent cuts in state funds for city schools and other urban programs. The countercyclical effect is the same: federal funds prevent service cuts at a time when they are most needed. In fact, the effect is even enhanced if state governments - which ... are disproportionately influenced by rural areas - enact more severe cuts for more populated urban areas than for suburban and rural ones ....
Directing stimulus funds to cities would make mayors and city governments less captive to their state governments, which currently hold cities' budgeting - and thus policymaking - processes hostage. One of the worst examples of this came when Mayor Bloomberg budgeted 14,000 teacher layoffs in case significant state education funding was withheld.
Another DMI blogger explains how the trickle plays out in west coast cities:
Unfortunately, the sacrifices that statehouses are asking city and county governments to make will only prolong the country's economic slump and hinder long-term growth. California is planning on keeping $900 million in gas tax revenue from cities and counties, keeping construction crews out of work and prolonging critical repair work that will lead to deteriorating transportation infrastructure. The state is also looking to keep $1.3 in property taxes that was set to go towards local redevelopment agencies. While most private construction has hit a standstill, these public-private partnerships are still supporting construction projects. In Los Angeles, this would mean putting 2,300 construction jobs at risk.