Category Archives: State & Local Finance

Stress Testing Your Reserves with Advanced Analytical Techniques

Source: Shayne Kavanagh, Government Finance Review, June 2019

Financial reserves, or “rainy day” funds, safeguard local governments against budget-straining risks like recessions or extreme events that demand a quick and decisive public safety response. The perennial question local governments have about reserves is how much is enough. Too little and you may be underprepared for the risks you face, but too much may mean you’re overtaxing the public or failing to make investments in needed infrastructure or services. …. GFOA recommends maintaining general fund reserves equal to two months of operating revenue — or, put another way, equal to 16.7 percent of annual revenue. ….

Do Targeted Business Subsidies Improve Income and Reduce Poverty? A Synthetic Control Approach

Source: Jacob Bundrick, Weici Yuan, Economic Development Quarterly, OnlineFirst, September 20, 2019
(subscription required)

From the abstract:
Interstate competition for economic development has led many states to adopt targeted economic development incentive programs known as deal-closing funds. Deal-closing funds allow state officials to provide discretionary cash grants to select businesses to attract and retain economic development projects. However, whether these targeted business subsidies increase prosperity in the local economy remains unclear. The authors use evidence from Arkansas’s Quick Action Closing Fund to analyze how effective deal-closing funds are at increasing incomes and decreasing poverty. Specifically, the causal effects of the Quick Action Closing Fund on Arkansas’s county-level per capita personal income and poverty rates are estimated using a synthetic control approach. The results largely suggest that the business subsidy program fails to increase incomes and lower poverty rates over the long term, at least at the county level. These findings should serve as a caution to policy makers who wish to improve incomes and poverty rates with targeted business subsidies.

Behavioral Health Provider Participation in Medicaid Value-Based Payment Models: An Environmental Scan and Policy Considerations

Source: Melissa Bailey, Rachael Matulis, Kelsey Brykman, Center for Health Care Strategies, September 2019

From the abstract:
Health care payers are increasingly shifting from fee-for-service payment systems that reward volume to adopt value-based payment (VBP) models that promote high-quality, cost-effective care. While increased access to and coordination of behavioral health services is a policy priority for federal and state policymakers, the extent that the behavioral health system is engaged in VBP is less well understood than its physical health counterpart. In partnership with the National Council for Behavioral Health, the Center for Health Care Strategies (CHCS) conducted interviews with representatives from behavioral health associations, community-based behavioral health providers, state agencies, Medicaid managed care organizations (MCOs), and other subject matter experts to understand the successes and challenges associated with implementing VBP in Medicaid behavioral health care.

Informed by these interviews and a review of state program guidelines, quality measures, and MCO contracts, this report provides: (1) an overview of the behavioral health system’s engagement in VBP in the U.S., with a focus on 11 states; (2) lessons on implementing VBP from the perspective of behavioral health providers; and (3) policy recommendations for how state and federal policymakers, MCOs, and other stakeholders can support the adoption of VBP within behavioral health care. It also identifies nine key themes that support successful behavioral health VBP design and implementation to inform efforts in states across the country.

Local Governments’ Responses to Revenue Changes: The Effects of Unreserved General Fund Balances

Source: Min Su, International Journal of Public Administration, Latest Articles, September 10, 2019

From the abstract:
Volatile revenues affect the quality and consistency of municipal service provision. This article investigates how cities use unreserved general fund balances to mitigate annual expenditure fluctuations when confronted with volatile revenues. Based on the analysis of a panel dataset of over two thousand American cities from 2003 to 2011, the fixed-effects regression results suggest that unreserved general fund balances reduce municipal expenditure fluctuations on a year-to-year basis. The expenditure-smoothing effects were more pronounced when municipal governments experienced large revenue changes. Results are robust when excluding large cities, using different cutting-points to define ‘moderate’ or ‘large’ revenue changes, and in recession and non-recession years. This article contributes to the local expenditure stabilization literature by recognizing the unreserved general fund balances’ expenditure-smoothing effects during ‘non-rainy days.’ It adds empirical evidence to the organizational theory that financial slack works as a crucial buffer against external changes and provides managerial discretion to local administrators.

Investigating Sales Tax Revenue Competition Among Principal Cities and Their Neighboring Cities in Texas

Source: Michael Overton & Julius Nukpezah, International Journal of Public Administration, Latest Articles, September 9, 2019

From the abstract:
While research has explored the economic importance of principal cities on regional economies, little is known about the short-run and long-run dynamic relationships between principal cities and their neighboring cities as it pertains to their sales tax revenue elasticities and the subsequent affect this has on horizontal tax competition. Using vector error correction models on data from six principal cities in Texas, the findings of this study suggest that the relationship between principal and neighboring cities is highly dynamic and unique for each principal city. The study recommends that local economic policies should reflect these unique relationships.

Addicted to Fines

Source: Mike Maciag, Governing, September 2019

Small towns in much of the country are dangerously dependent on punitive fines and fees.

….Throughout the country, smaller cities and towns generate major dollars from different types of fines, sometimes accounting for more than half of their revenues. Some places are known for being speed traps. Others prop up their budgets using traffic cameras, parking citations or code enforcement violations.

To get a picture of just how much cities, towns and counties rely on fines and fees, Governing conducted the largest national analysis to date of fine revenues and the extent to which they fund budgets, compiling data from thousands of annual financial audits and reports filed to state agencies.

What we found is that in hundreds of jurisdictions throughout the country, fines are used to fund a significant portion of the budget. They account for more than 10 percent of general fund revenues in nearly 600 U.S. jurisdictions. In at least 284 of those governments, it’s more than 20 percent. Some other governments allocate the revenues outside the general fund. When fine and forfeiture revenues in all funds are considered, more than 720 localities reported annual revenues exceeding $100 for every adult resident. And those numbers would be even higher if they included communities reporting less than $100,000 in fines; those jurisdictions were excluded from our analysis. In some places, traffic fine revenue actually exceeds limits outlined in state laws…..

….The fact is that fines and fees are a volatile revenue source, and the towns that rely the most on them face an increasingly uncertain fiscal future…..

Distributional Impacts of State and Local Tax Policy in a Heterogeneous-agent Model

Source: Jorge A. Barro, Public Finance Review, Online First, Published September 8, 2019
(subscription required)

From the abstract:
This article presents a dynamic heterogeneous-agent life-cycle model with housing demand to evaluate the economic implications of reforming US state and local personal tax structures. Because of the extensive reliance of state and local governments on income, sales, and property tax revenue, those three taxes are explicitly modeled to generate a baseline and varied to evaluate alternative policy proposals. The results of the model show that the sales tax burden falls evenly across the distribution of income earners, while the property tax burden falls more heavily on the highest income earners. By design, the model’s income tax is progressive, so the tax burden shares rise with income. Results also show that the property tax generally improves utilitarian social welfare relative to income and sales taxation, but the magnitude of these gains depends on the availability of a state and local tax deduction on federal income taxes.

The Effects of Performance Audits on School District Financial Behavior

Source: Paul N. Thompson, Mark St. John, Public Finance Review, Online First, Published September 8, 2019
(subscription required)

From the abstract:
Performance audits are a form of weak financial oversight intended to curb inefficient spending and help alleviate financial problems. This study examines the effect of these performance audits on school district finances in Ohio, where performance audits are used on their own and within the context of the state’s fiscal stress labeling system—a strong financial oversight system. Using a difference-in-differences analysis, we find school districts do reduce expenditures as a result of these performance audits. These changes in financial behavior are found even for performance audits in nonfiscal stress districts, suggesting that weak oversight programs may be an effective means toward changing fiscal behavior. Despite the financial changes in nonfiscal stress districts that receive audits, there appears to be little impact on school district proficiency rates. These results suggest that audits may provide a useful mechanism for changing financial behavior of school districts without much associated efficiency losses.

How Local Economic Conditions Affect School Finances, Teacher Quality, and Student Achievement: Evidence from the Texas Shale Boom

Source: Joseph Marchand, Jeremy G. Weber, Journal of Policy Analysis and Management, Early View, August 29, 2019
(subscription required)

From the abstract:
Whether improved local economic conditions lead to better student outcomes is theoretically ambiguous and will depend on how schools use additional revenues and how students and teachers respond to rising private sector wages. The Texas boom in shale oil and gas drilling, with its large and localized effects on wages and the tax base, provides a unique opportunity to address this question that spans the areas of education, labor markets, and public finance. An empirical approach using variation in shale geology across school districts shows that the boom reduced test scores and student attendance, despite tripling the local tax base and creating a revenue windfall. Schools spent additional revenue on capital projects and debt service, but not on teachers. As the gap between teacher wages and private sector wages grew, so did teacher turnover and the percentage of inexperienced teachers, which helps explain the decline in student achievement. Changes in student composition did not account for the achievement decline but instead helped to moderate it. The findings illustrate the potential value of using revenue growth to retain teachers in times of rising private sector wages.