Changes in Federal Aid and City Finances: A Case Study of Oregon Cities

Federal aid was not found to stimulate spending for cities inOregon during 1984–1989. Oregon cities relied primarilyon their own-source revenues to finance spending increases.The exception was capital spending, where receipt of federalaid in 1989 positively influenced the rate of spending change.This most likely reflected lower spending by those cities thatdid not receive competitive federal grants. The amount of federalaid received is greatly influenced by the grants skill availableto the community. Growth in total direct current spending wassignificantly associated with increases in user fees and charges.A closer look at specific spending categories revealed a hierarchyof reliance on cities' own-source revenues. Cities increaseduser fees and other benefit charges where possible, and seeminglyonly resorted to property-tax increases when these other revenueswere inappropriate.     

Audit Recommendation Follow-Up Systems: A Survey of the States

This article presents the results of a survey of audit recommendation follow-up systems currently utilized by state governments. The lack of empirical research on audit recommendation follow-up systems represents a void in the public sector financial management literature. To fill this void, the authors developed a survey instrument, which was mailed to each state auditor's office having primary responsibility for following up on audit recommendations made during the annual Comprehensive Annual Financial Report (CAFR). The purpose of the study is three-fold: (1) to describe the major elements of state government audit recommendation follow-up systems currently in use, (2) to encourage managers, analysts, and others working at all levels of government to access policies and procedures for audit recommendation follow-up within their own organizations, and (3) to encourage other researchers to explore these systems in greater depth and detail, particularly their uses in financial management, reporting, and other decision-making activities. U.S. Government Auditing Standards (commonly called The Yellow Book) requires auditors to communicate their findings and provide recommendations that lead to improvements in government operations and programs. Government managers and officials must follow up (monitor) on audit recommendations to ensure their effective implementation. This research represents an initial effort to develop a profile of the characteristics of state government audit recommendation follow-up systems currently in use.     

Fiscal Structure and the Post-Proposition 13 Fiscal Regime in California's Cities

Two and a half decades after the passage of Proposition 13 in 1978, California state and local governments continue to feel the intended and unintended effects of tax and expenditure limitations. While considerable time has passed since voters enacted Proposition 13, the effects of the property tax revolt continue to be dramatic. This article examines the fiscal structure of California's city governments from 1972 to 2002. The analysis reveals that California's cities have become less reliant upon property tax revenues and more reliant upon charges and fees, and have not increased reliance upon sales tax revenues as much as expected.     

Political Competition and Policy Adoption: Market Reforms in Latin American Public Utilities

This article shows that political competition generates incentives that affect the pace of adoption of market reforms in the context of policy convergence. Previous work shows the effect of financial and technological pressures in promoting policy convergence and the impact of institutional constraints on shaping the pace of policymaking. Controlling for these effects, this article demonstrates the policy effects of political competition and ideological polarization even at a time when ideological policy differences seem to be fading due to policy convergence. This article studies policy adoption using duration analysis for the 18 countries of Latin America during the 1985–2000 period when most of the market reforms in public utilities were adopted.     

Reporting on the Control Structures of Local Government Under the Single Audit Act of 1984

One of the major objectives of the Single Audit Act of 1984 (SAA) is to improve the financial management of local governments (Public Law 98–502, 98 Stat.2327). The purpose of this study is to examine how local governments have responded to the SAA and to provide some evidence concerning the extent to which the SAA is accomplishing its stated objectives. This study examines what auditors have reported with respect to the control structures of local governments and considers the extent to which control structures changed over the first four reporting years under the SAA. Differences in the frequency of reported weaknesses are examined across the four years and between types of government-counties and cities-and types of auditors- large and small public accounting firms and state auditors. The study also considers the extent to which reported weaknesses were corrected. The research findings reveal that auditors reported considerably more control weaknesses in counties than in cities, and the frequency of control weaknesses reported declined significantly over the first four reporting years under the SAA for city governments but remained relatively constant for county governments. In addition, there were significant differences in the frequency of control weaknesses reported related to the type of auditor.     

Is E-Government Promoting Convergence Towards More Accountable Local Governments?

ABSTRACT

This article analyzes how extensively European Union local governments are using their websites to disseminate financial information in order to evaluate whether electronic-government (e-government) is promoting convergence towards more accountable local governments. We also posit and test various hypotheses about the influence of internal and contextual factors on Internet financial reporting (IFR) practices. Results show that the public administration style, the size of the city, and the audit of financial information by private firms are significant explanatory factors of IFR practices. Our findings also suggest that multilateral organizations are overly optimistic about the possible convergence in transparency and financial accountability through the use of common modes of IFR. That is, the introduction of information and communication technologies without the corresponding institutional reform is leading to limited success of IFR.     

Economic Conditions and State and Local Education Revenue

This article uses information on state and local education spending from 1989–1990 through 2005–2006 to examine the impact of economic conditions on the pattern of real revenue per student. We find that typical economic and other observable education demand determinants are significant in explaining the pattern of real revenue per student before and after the 2001 recession. We also find that there is no economically significant change in how governments responded to economic conditions after the 2001 recession. Finally, our results provide strong evidence that local governments attempted to offset state declines in revenues by increases in local revenues.     

Factors Influencing the Use of Performance Data to Improve Municipal Services: Evidence from the North Carolina Benchmarking Project

Many local governments measure and report their performance, but the record of these governments in actually using performance measures to improve services is more modest. The authors of this study examine patterns of performance measurement use among a set of North Carolina cities and conclude that the types of measures on which officials rely, the willingness of officials to embrace comparison, and the degree to which measures are incorporated into key management systems distinguish cities that are more likely to use performance measures for service improvement from those less likely to do so.     

Crowding out Citizenship

The currently accepted theory of collective action presumes that individuals are helplessly trapped in social dilemmas. This has led to a form of policy analysis that presumes external authorities must solve all collective-action problems. The presumed universal need for externally implemented incentives is based, however, on a single model of rational behavior. This model has been shown to be an inadequate foundation to explain extensive empirical findings from the field and the experimental laboratory related to nonmarket settings. Thus, it is necessary to adopt a broader theory of human behavior that posits multiple types of individuals – including rational egoists as well as conditional cooperators – and examines how the contexts of collective action affect the mix of individuals involved. I will briefly review the empirical evidence related to intrinsic motivations and how external incentives may crowd out or crowd in behaviors that are based on intrinsic preferences. I then discuss the delicate problem of designing institutions that enhance citizenship rather than crowding it out. The penchant for neat, orderly hierarchical systems needs to be replaced with a recognition that complex, polycentric systems are needed to cope effectively with complex problems of modern life and to give all citizens a more effective role in the governance of democratic societies.     

The Political Importance of Financial Performance

Asset mobility is thought to constrain taxation, as firms with mobile assets can avoid taxation by locating their assets in low-tax jurisdictions. Firms with immobile assets then face higher taxes. By considering the political incentives that accompany widespread financialization, we identify a new limit to the targeting of immobile firms: Publicly traded firms with immobile underlying assets lose more value in financial markets when taxes are increased, as shareholders anticipate that these underlying assets cannot be withheld from taxation. When governments care about this loss in value, their incentive to tax immobile, publicly traded firms declines. Political concern for financial performance therefore limits the extent to which immobile assets can be targeted for taxation. We argue that broad-based participation in the stock market and democratic political institutions increase political concern for financial performance. We discuss the implications of the theory and findings for policy autonomy, firm ownership, and economic voting.     

The effect of predatory rent-seeking on household saving and portfolio choices: A cross section analysis

The existence of predatory behavior, when measured by the number of lawyers per capita and the crime rate, seems to have an impact on saving and investment behavior in U.S. households. Where the risk of redistribution are lowest, the incentives to save are higher and, a fortiriori, the willingness to invest in highly vulnerable financial instruments is enhanced. Either because of low saving rates or because of disintermediation, households in states where the risks of redistribution are greater avoid accumulating financial assets.Recent years have seen a considerable decline in the U.S. saving rate. There is also evidence of large differences in saving rates from one country to another, with U.S. households among the lowest savers. Yet not all of these variations have been explained satisfactorily in empirical studies based on conventional theory. Perhaps one explanation which has been inadequately studied is the reduced expected retirement time horizon whether it be due to objective conditions such as retirement age and life expectancy or to uncertainty. Some reasons for myopic planning horizons are macroeconomic instability (McCauley and Zimer, 1989), the possibility of nuclear war (Slemrod, 1982, 1986 and 1989); Henderschott and Peek, 1985 and 1987); and the fear of socio-political conflict (Stewart and Venieris, 1985). I have suggested and tested here yet another factor: the fear of future redistribution. Using differences in interest income across U.S. states, this paper shows that fear of redistribution does seem to have a large influence on saving behavior.     

Enron/Andersen: Crisis in U.S. Accounting and Lessons for Government

Accounting and auditing play a key role in the belief of ordinary taxpayers and investors in their institutions. This is equally true of the private and governmental sectors. The Enron/Andersen scandal, regrettably, is not an isolated case, but rather merely indicative of underlying, structural flaws in our financial systems. Moreover, there is evidence that some of these flaws may be present in governmental accounting and auditing. The Sarbanes‐Oxley Act of 2002 is an attempt to address these problems in the private sector, but does not address concerns in the public sector. Public sector accounting issues that need to be addressed and monitored include substandard audit work and related liability issues, the appropriate funding of GASB so as to ensure its independence, auditor fees, and auditor independence questions including protection of elected and appointed state auditors.     

Electoral Institutions and Electoral Cycles in Investment Incentives: A Field Experiment on Over 3,000 U.S. Municipalities*

Through a field experiment and audit study, we test how the electoral calendar affects the use of local economic development policies. We explore how electoral timing along with local political institutions and party composition affect local governments’ offers of investment incentives to outside firms. We legally incorporated a consultancy and, on behalf of a real investor in manufacturing, approached roughly 3,000 U.S. municipalities with inquiries. The main experimental results show no greater tendency to offer incentives for investment anticipated prior to than after elections—a null result that is estimated with high precision. Limiting the sample to municipalities that specialize in manufacturing, the relevant subgroup, suggests that election timing matters in this most likely set of locales. Some observational findings include additional evidence on how direct elections of executives and partisanship correlate with incentive offers.     

THE USE OF BARGAINING GAMES IN LOCAL DEVELOPMENT POLICY

Granting location incentives is a common city policy to attract new businesses, despite the frequent belief that the benefits are too generous. Can cities do a better job determining when to agree to these concessions and when to refuse? I argue that analyzing the concession decision with a simple bargaining game illustrates: (1) that the negotiation strategy a city uses should be based on the characteristics of the firm in each case and (2) that even poor cities with few attractive location features can avoid making large concessions. Development experiences in Miami‐Dade are used to illustrate the model.     

The Regulation Dilemma: Cooperation and Conflict in Environmental Governance

Across the United States and around the world, businesses have joined voluntary governmental and nongovernmental environmental regulations. Such codes often require firms to establish internal environmental management systems to improve their environmental performance and regulatory compliance. Meanwhile, governments have been offering incentives to businesses that self-police their regulatory compliance and promptly report and correct violations. This article examines how governmental regulatory enforcement can influence firms' compliance with mandatory and voluntary regulations. Cooperative regulatory enforcement—in which firms self-police their environmental operations and governments provide regulatory relief for voluntarily disclosed violations—yields optimal win–win outcomes, but only when both sides cooperate. If firms are likely to evade compliance, governments are better off adopting a deterrence approach. If governments insist on rigidly interpreting and enforcing laws, firms may have incentives to evade regulations and not voluntary codes. Cooperation is possible through credible signals between firms and government.     

The globalized, generous welfare state: Possibility or oxymoron?

Abstract. Arguments about the incompatibility of globalization and generous welfare spending have given way to more nuanced analyses of how domestic-level institutions mediate the impact of globalization. This article discusses and compares two models – the labour-partisan politics model and the labour-monetary politics model – that identify national-level institutions that are said to make it possible for states to combine generous welfare spending and good economic performance. The empirical analysis shows that the labour-monetary politics model performs better for the period 1973–1989. However, institutional conditions that existed during these years are shown to be rather poor predictors of economic performance in the 1990s. The article goes on to discuss what this suggests for the continued viability of generous welfare spending and argues that while globalization might undermine some institutional settings conducive to continued generosity, there is evidence that other ones remain viable.     

The Mechanisms of Policy Diffusion

Local policy adoptions provide an excellent opportunity to test among potential mechanisms of policy diffusion. By examining three types of antismoking policy choices by the 675 largest U.S. cities between 1975 and 2000, we uncover robust patterns of policy diffusion, yielding three key findings. First, we distinguish among and find evidence for four mechanisms of policy diffusion: learning from earlier adopters, economic competition among proximate cities, imitation of larger cities, and coercion by state governments. Second, we find a temporal component to these effects, with imitation being a more short‐lived diffusion process than the others. Third, we show that these mechanisms are conditional, with larger cities being better able to learn from others, less fearful of economic spillovers, and less likely to rely on imitation.     

Life at the Bottom of the Fiscal Food Chain: Examining City and County Revenue Decisions

Any shifting of responsibilities from the state or federal governmentsto local governments would fall mostly on the shoulders of general-purposegovernments, namely, cities (municipalities) and counties. Thisstudy explores city and county revenue decisions associatedwith general funds—the governmental fund most likely tobe affected by state requirements for greater local financingresponsibility for new or devolved programs. The results suggestthat state control over local revenue authority affects decisionsregarding the imposition of financial burdens on residents,and that intergovernmental aid to cities and counties does notnecessarily mitigate those burdens. Despite evidence of healthyfinancial reserves, especially for cities, shifting responsibilitiesfrom the state to city or county governments could place citiesand counties in difficult fiscal positions. Given the importanceof own-source revenues to current budgets, and in view of thequestionable impact of intergovernmental aid on city and countyresidents' revenue burdens, questions persist about the abilityof city and county governments to maintain (and, if necessary,to expand) services during economic recession.     

Drivers of Policy Instrument Selection for Environmental Management by Local Governments

Local governments commonly pursue environmental objectives that exceed state and federal minimum requirements. Although research informs our understanding of factors that lead cities to adopt such policy goals, the underlying mechanisms employed to achieve them are not well understood. This article examines factors that drive the choice of policy instruments that cities use to pursue local environmental objectives. The literature links the structure of the local governing body, characteristics of the community and target populations, and the nature of the policy problem to instrument selection. Building on this, the authors model the dynamics shaping cities' use of regulations, financial incentives, or combination thereof, to pursue a variety of different environmental objectives. Results indicate that community racial composition and political leaning influence instrument choice when policy targets the public at large. Alternatively, when policy targets particular stakeholder groups, such as developers, the characteristics of the local governing body are of greater importance.     

Intergovernmental Cooperation in the Provision of Public Safety: Monitoring Mechanisms Embedded in Interlocal Agreements

This article examines how monitoring mechanisms embedded in interlocal agreements (ILAs) are associated with vertical and horizontal intergovernmental relations. The authors hypothesize that ILAs established by local governments with higher‐level governments are likely to rely on a clearly specified set of rules to establish an administrative structure, whereas ILAs established by local governments with other local governments rely on associational benefits to ensure that policy preferences are aligned across multiple political boundaries. The article examines ILAs established by small town, county, and municipal governments in Denton County, Texas, for the provision of emergency medical, police, and fire services. Findings show that more than half of the ILAs specified a financial reporting system, but an almost equal percentage did not contain features requiring financial records to be available for audit by a third party. Quadratic assignment procedure correlation analysis confirmed the presence of cross‐monitoring mechanisms and showed that the patterns of ILAs tend to cluster around a geographic space.

Practitioner Points

• Monitoring mechanisms embedded in interlocal agreements (ILAs) matter, highlighting the important managerial functions played by frontline officers drafting ILAs.
• The rules embedded in ILAs are important not only for encouraging intergovernmental cooperation but also for reducing the risks associated with contract failures.
• With the increasing number of ILAs, local government officials need to consider various types of ILAs that are suitable to meet jurisdictional interests and policy preferences.