Category Archives: State & Local Finance

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.

Financial Condition and Population Decline: The Challenge in Attracting Residents

Source: Daniel Hummel, PA Times blog, August 24, 2019

….Shrinking cities are under pressure by their state governments to remain solvent. This manifests itself as a singular focus on this area of public management. This has also led to an increasing reliance on non-governmental entities to provide important community services. Governance in these cities has been described as reliant on collaborations and networks between government, non-profits and businesses in a structured, but non-hierarchical way. This has raised serious concerns about democracy when these entities are providing many of the services that a city government used to provide through accountable and transparent means. It also increases uncertainty in the long-term provision of these services. These are difficult problems without simple solutions, with shrinking cities continuing to lose population…..

Detroit’s “Grand Bargain:” The Role of Philanthropy in Tough Budget Times

Source: Emily Rosenman, PA Times, Vol 5 no. 2, Summer 2019
(subscription required)

In 2014, the City of Detroit closed the largest municipal bankruptcy deal in U.S. history. Referred to as the “Grand Bargain,” it may set a precedent for the role of philanthropic foundations in society. Other cities with dauntingly large unfunded pension liabilities—like Chicago and Philadelphia—should take note of the Detroit experience, especially as the nonprofit sector takes on a larger role in city governance with the advent of public sector austerity. …. The Grand Bargain is a unique illustration of one way philanthropic foundations are taking an increasingly visible role in policy leadership and public finance in post-recession jurisdictions, as well as with cities facing economic distress, unemployment, population loss, distressed property values, declines in state revenue sharing and pension crises. ….

….It is worth noting that many cities face budget holes in part because of depleted tax rolls. Meanwhile, philanthropic foundations exist and are thriving in part because of tax deductions that enable those charitable contributions. Further, the same philanthropic actors that bailed out the City of Detroit are not at all accountable to the city’s voters, an additional layer of complication….

Undercounting Hispanics in the 2020 Census will result in a loss in federal funding to many states for child and family assistance programs

Source: David Murphey, Dana Thomson, Lina Guzman, Claire Kelley, Child Trends, Issue Brief, August 14, 2019

This brief examines the potential reduction in funding to states for five critical federal programs that could result from an undercount of Hispanics in the 2020 Census. More than 300 federal programs allocate funding based on Census-derived data. The five programs we examine serve children and families and account for almost half of all federal funding to states. Hispanics are the largest racial or ethnic minority group in the United States and are especially at risk for being undercounted a problem which research indicates may be exacerbated by ongoing concerns about efforts to link citizenship status to Census respondents. ….

….. The interactive maps and tables below illustrate low, medium, and high estimates of potential losses of federal funding to states for five programs: the Medical Assistance Program (Medicaid, children only), the Children’s Health Insurance Program (CHIP), Title IV-E Foster Care, Title IV-E Adoption Assistance, and the Child Care and Development Block Grant (CCDBG). The low-estimate scenario is based on published research by the Urban Institute, and assumes a Census count that proceeds as planned by the U.S. Census Bureau. The medium and high estimates (based on research published by the Census Bureau and Harvard University researchers, respectively) assume that participation will be reduced due to data-privacy and other concerns resulting from federal efforts to determine the citizenship status of Census respondents. …..

…. Under existing federal funding formulas, a total of 37 states will forfeit a portion of federal funds for the five aforementioned child and family programs as a result of a Hispanic undercount in the 2020 Census. ….

State and Local Financing of Public Schools

Source: Rebecca R. Skinner, Congressional Research Service, CRS Report, R45827, July 23, 2019

The funding of public elementary and secondary schools in the United States involves a combination of local, state, and federal government revenues, in proportions that vary substantially both across and within states. According to the most recent data, state governments provide 47.0% of these revenues, local governments provide 44.8%, and the federal government provides 8.3%. Over the last several decades, the share of public elementary and secondary education revenues provided by state governments has increased, the share provided by local governments has decreased, and the federal share has varied within a range of 6.0% to 12.7%. The primary source of local revenues for public elementary and secondary education is the property tax, while state revenues are raised from a variety of sources, primarily personal and corporate income and retail sales taxes, a variety of “excise” taxes such as those on tobacco products and alcoholic beverages, and lotteries in several states.

The Returns to Lobbying: Evidence from Local Governments in the “Age of Earmarks”

Source: Steven Gordon, Public Finance Review, OnlineFirst, Published July 22, 2019
(subscription required)

From the abstract:
I measure the returns to lobbying for US local governments in terms of federal earmarks. Because a local government’s decision to lobby may be endogenous to receiving an earmark, I instrument for lobbying with local housing prices. Since the time period of my analysis covers the Housing Crisis, I argue that the variation in housing prices over this time was largely exogenous to federal earmark distributions. The strong correlation that I find between housing price growth rates and lobbying provides evidence that local governments lobbied to buffer against impending property tax losses. I find no evidence that lobbying is associated with increased earmark awards overall. However, conditional on selection into receiving an earmark, I do find evidence that lobbying served to increase the size of earmark awards.