The Fiscal Consequences of Changing Federal and State Revenue Policies: The Case of Small Oregon Cities

This article examines the fiscal consequences for twelve, smallOregon cities of recent changes in federal and state intergovernmentalrevenue policies. Many small local governments have experienceddouble revenue reverses in recent years—reductions inown-source revenues because of economic decline as well as decreasesin intergovernmental revenues, especially federal aid. The twelvesmall cities are compared with all 241 cities in Oregon andthe 136 Oregon cities in the 1,000 to 49,999 population range.Using aggregate and interview data, a major finding is thatalthough stabilization and/or decline in federal-state revenuesharing and entitlement program funds have accentuated difficultlocal revenue situations, economic decline has been the moreimportant contributor to the fiscal stress of the twelve smallmunicipalities. Most of the twelve cities had limited fiscalcapacity—as indicated by low assessed property valuations—makingit difficult to produce sufficient revenue to meet basic publicservice needs. These cities were also unable to get citizenapproval of increases in property taxes.     

The Determinants of the Structure of Rainy Day Funds

This article investigates the factors that determine the configuration of budget stabilization funds, also known as rainy day funds, along their two most important dimensions: deposit and withdrawal requirements. These funds are created to accumulate savings in order to reduce the impact of adverse fiscal conditions during downturns. The effectiveness of such funds depends greatly on their institutional structure, and yet most states choose configurations that compromise their efficacy. Using multinomial discrete techniques, and introducing the ordered nature of the requirements in the analysis, the results of this study indicate that political and institutional factors such as the size of the house of the legislature and some strict institutions are associated with weak budget stabilization funds, while economic factors such as the volatility of state tax revenues are associated with stricter funds.     

Government Finances In Declining Central Cities

The relationship between population decline and changes in therevenue and expenditure patterns of 318 U. S. central citiesduring the 1970s are examined using both static and dynamicmodels. Declining cities experienced less growth in revenues,especially own-source revenues than growing cities. Decliningcities became more dependent upon other governments for fiscalrelief. But declining central cities were more successful atreducing the rate of growth in their expenditures. Populatindecline was not found to have any significant independent impacton changes in municipal taxing and spending levels. A city'sage was the most important predictor of fiscal change.     

Comparing Central City Finances Using Fiscally Standardized Cities

Abstract

Because fiscal institutions and arrangements differ widely across US cities, it has until now been very difficult to conduct comparative analysis of spending, revenues, and debt in US cities. This paper describes a new city fiscal dataset, called fiscally standardized cities (FiSCs), that directly addresses the varying roles of municipal governments, counties, school districts, and special districts in the financing of central cities. By taking systematic account of fiscal data for all the major units of government in large cities over a long time period (1977–2012), the FiSC data permit investigation of a wide range of important comparative policy issues for cities. The article describes the methodology used to construct FiSCs, and gives a number of examples to illustrate the potential uses of the FiSC data. For example, it shows how spending comparisons between cities can be fundamentally misleading unless account is taken of the varying roles of overlapping governmental units. It also demonstrates how the FiSC data can be used to benchmark fiscal data for one city against comparable cities.     

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.     

How Cities in California Have Responded to Fiscal Pressures Since Proposition 13

Fiscal pressures on California cities have been severe since the passage of Proposition 13. Federal and state aid policies have, in fact, exacerbated an already wrenching pattern of revenue losses since FY 77-78. State aid, in particular, has perversely dropped the most for those cities hit hardest by reductions in other revenues outside their direct control. Despite this, California cities have kept total real per capita revenues and expenditures constant over this period by increasing revenues from a variety of local sources—and especially from current service charges for enterprise activities. Furthermore, cities hit hardest by exogenous revenue losses have increased locally raised revenues the most. In short, cities in California have responded to reductions in revenues outside their direct control by increasing revenues from sources within their direct control, rather than by reducing expenditures and their revenue-increasing responses have tended to be in proportion to the losses they have faced in exogenous revenues.     

Coping With the Loss of General Revenue Sharing in Ohio

The authors examine the impact of the loss of general revenue sharing on Ohio local governments. A study of seven large cities and surrounding counties found that the loss of the federal funds did not trigger any fiscal crises: it came as no surprise. Localities engaged in a number of coping strategies including cuts in spending and replacement of lost federal funds from local surpluses, increased debt, and some tax increases.     

Rural local government finance in Kenya: The case of Murang'a County Council

The Murang'a County Council is recognized in Kenya as one of the country's most effective rural local authorities. Compared to other county councils, Murang'a raises substantial revenues and provides a wide variety of services. This case study presents some background on the local economy of Murang'a District, details available information about the county council's excellent fiscal performance, and highlights some of the major factors behind the effectiveness of Murang'a in resource mobilization and service delivery.     

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.     

U.S. Customs Service User Fees: A Variety of Charges and Counter-Charges

User charges, which have become an important revenue enhancement device during the 1980s, have also raised a variety of counter-charges. This study examines three new mandatory Customs Service fees—for processing passengers, conveyances, and merchandise entering the United States and for special services at small airports—along with their differences and changes over time (in rate structure, exemptions, dedicated accounts, and disposition of funds). Despite support for the charges, opposition to some has arisen because of their cost to the private sector, violation of certain assumptions behind user fees, competing international obligations and policies, rival institutional interests and powers of Congress and the presidency, and changing fiscal conditions.     

Fiscal Exchange and Tax Compliance: Evidence From a Field Experiment

Behavioral interventions appealing to taxpayers’ reciprocity often leave tax compliance unaffected. We provide evidence that a “fiscal exchange nudge” increased tax compliance in a setting where one might not expect it: crisis-ridden Argentina. In a randomized controlled trial with over 20,000 taxpayers, a tax bill visually celebrating realized public works benefiting children increased payment rates of tax delinquents by about 20 percent, or almost 40 percent when the bills were delivered in person. Without the appeal, the new bill design generated significantly fewer payments. Changes in the design of the tax bill also increased arrears cancellation. We estimate the ratio of marginal revenues to costs for the fiscal exchange bill to be 18. The factors we associate with the unexpectedly positive impacts are consistent with strengthening an affective response. We find persistent effects of the experiment two years later. The results suggest that communities have more scope to increase tax revenues through non-threatening interventions.     

Defense Business Operating Fund: Description and Implementation Issues

The Defense Business Operating Fund initiative in the Department of Defense (DoD) consolidates existing industrial and stock funds. This initiative is intended to enhance the departmental management of an estimated $81 billion sale of goods and services in fiscal year 1993. Revolving funds have a long history in the department. This article examines the role of revolving funds and their performance in DoD. The potential benefits of consolidation of funds are discussed. Emphasis is given to budgetary, management, and accounting changes intended to enhance management of the funds. The effect of implementation issues on the realization of potential benefits is also explored.     

The Role of Slack in Local Government Finances

The research presented here adopts an organizational approach to develop three regression models that examine why local governments accumulate slack in the form of unreserved fund balances, and what is the impact of slack resources on local governments' short‐term fiscal conditions and decisions about spending and revenues. Using data on Chicago suburban municipalities and their governments, the first model estimates the effects of long‐term and short‐term conditions (fiscal and governing) on unreserved fund balances. The second and third models examine the impact of slack resources and other factors on year‐end deficits or surpluses and changes in spending and own‐source revenues. The results show that ending balances, expenditures (size), and long‐term fiscal conditions have the greatest effect on fund balances, and that slack and current fiscal conditions have the greatest effect on ending balances and changes in revenues and spending.     

The Effects of Political and Fiscal Incentives on Local Government Behavior: An Analysis of Fiscal Slack in China

This study examines the determinants of fiscal slack from the perspective of Chinese local government officials. Given China's rapid economic growth over the past 30-plus years, Chinese local governments reportedly hold huge slack resources that attract public scrutiny. In an effort to improve their fiscal performance, some localities recently established budget stabilization funds, following a top-down initiative. However, it remains unclear to what extent fiscal slack has accumulated and which factors affect slack resource levels of Chinese local governments. By employing a panel dataset (249 prefecture-level cities, 1999–2009), this study finds that political and fiscal factors exert significant influence over local officials’ decisions about slack resource levels. The findings of the study bear implications for establishing fiscal rules and improving the performance of sub-national governments in China and other countries.     

Municipal Expenditures Through Thick and Thin

This article examines changes in the revenue and expenditurepatterns of twelve major cities (six fiscally healthy; six fiscallydistressed) from fiscal years 1964 to 1979. The purpose of theexaminatin is to determine whether resource scarcity resultsin significantly different expenditure patterns, especiallyfor essential services (police, fire sanitation, and sewerage),social services (welfare, health, hospitals, and public housing),capital spending, and personal sevices (salaries). The resultsshow that changes inrevenue patterns are not significantly relatedto changes in expenditrue patterns, with the exception of capitalspending. The results support the theory that cutback budgetarystrategies are not significanely different from expansionarybudgetary strategies. Incrementalism (decrementalism) prevails.     

State and Local Fiscal Sustainability: The Challenges

At the state and local level, fiscal sustainability is the long‐run capability of a government to consistently meet its financial responsibilities. It reflects the adequacy of available revenues to ensure the continued provision of the service and capital levels that the public demands. After examining separate revenue and expenditure trends for state and local governments, this article identifies three specific sets of pressures that affect subnational fiscal sustainability—cyclical, structural, and intergovernmental. It then presents three specific examples of these pressures: Medicaid, pensions and retiree health benefits, and infrastructure. The author asserts that without changes in the fiscal system—in both revenues and expenditures—state and local fiscal sustainability will disappear. It concludes with some potential solutions but argues that the most difficult reform is to ensure that the public understands that there is no such thing as a free lunch.     

Decentralization,Fiscal Independence,and Poverty in the Philippines

Decentralization is a common public sector reform in developing countries. Its basic rationale is that local governments have an informational advantage regarding the needs and preferences of consumers. However, decentralization also has drawbacks. Foremost is the efficiency advantage of the central government in providing public services because of economies of scale and better access to resources. This study looked at the relationship between decentralization and poverty using data from Philippine cities and municipalities. Results suggest that decentralization, as represented by fiscal independence and measured by the share of locally sourced revenues to total local government revenues, is indeed associated with lower poverty. However, this effect is not linear—the marginal effect of decentralization on poverty diminishes as decentralization increases. Moreover, decentralization moderates the positive effect of good governance on poverty reduction and the magnitude of the relationship between poverty and decentralization is stronger in poorer municipalities than in richer ones.     

A Model of Asymmetries in the Flypaper Effect

In this applied research study we examine the changing fiscalrelationship between state and local governments. Our researchquestion is simple: Do local governments treat state aid duringperiods of stability and instability in a systematic manner?Using data on Wisconsin's unconditional shared revenues programfrom 1990 to 2000, we find evidence of a flypaper effect andthat the relationship tends to be asymmetrical. The manner inwhich local governments treat intergovernmental aid is differentbetween periods of increases and decreases in aid. Specifically,using a model that allows for the identification of structureshifts we find evidence of fiscal replacement. In addition,we find that changes in aid impact types of spending differently.When aid is reduced, policymakers appear to be less inclinedto cut police and fire services than they are to cut servicessuch as parks and recreation.     

Fiscal Slack and Counter‐Cyclical Expenditure Stabilization: A First Look at the Local Level

There is a rich literature on how state governments use slack fiscal resources—most often in the form of rainy day funds and budget stabilization funds—to minimize the effect of economic downturns. This paper presents the first known examination of whether slack resources have the same counter‐cyclical effects at the local level. It uses a panel data set to determine whether one particular form of local fiscal slack, general fund balance, stabilizes current annual expenditures among a sample of 103 Minnesota cities from 1990 to 2000. The findings suggest different fund balance portions have marginal but nonetheless important effects on expenditures.     

Revenue Cyclicality and Changes in Income and Policy

The past two recessions have proved alarming to state government finances. In 2001, a relatively shallow national recession led to a severe downturn in state revenues that took three years to unwind. In the wake of the recent economic downturn, signs of fiscal stress are readily apparent. In this paper, we investigate whether the revenue patterns surrounding these two recessions are the result of state government revenues having grown more sensitive to economic conditions. We find that the responsiveness of revenues to measures of business cycle conditions has grown since the 1990s. We use data on state government revenues, state‐specific information on economic conditions, and measures of state policy to examine fiscal performance and budgeting practice over the economic cycle. Our findings suggest that increasing income cyclicality, in particular of investment income, has made state revenues more responsive to the business cycle since the mid‐1990s. We also find that changes in policy making have served to increase revenue cyclicality.