Abstract
Local governments serve a pivotal role in the delivery of public services. However, since the late 1970s, their ability to deliver essential public services has been curtailed by widespread adoption of limits on taxing and/or spending authority. Studies show these limits fundamentally altered the fiscal landscape of municipal governments. Using data on county governments for the period 1970–2004, this analysis shows TELs had a negative impact on unrestricted cash reserves. This has wide-ranging implications on fiscal performance including the government’s ability to cope with negative revenue and expenditure shocks and their ability to retain resources for strategic purposes.
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Notes
- 1.
Of the 50 states, six do not report any limits on local government taxing or spending authority. They include Maine, New Hampshire, Tennessee, Virginia and Vermont (Anderson 2006; Mullins and Wallin 2004). Utah has the least stringent TEL—that is the full disclosure or truth in taxation requirement. Research shows the full disclosure requirement has resulted in uniformity in assessed values in Utah (Cornia and Walters 2005).
- 2.
Municipal governments in New York may override their expenditure caps for one-time needs (e.g., legal settlements, limited pension growth) with a 60 % majority vote. For more, see: http://governor.ny.gov/citizenconnects/reforminggovernment/guide-to-the-property-tax (accessed July 28, 2014).
- 3.
See summary of scope of data in the existing literature in Sect. 8.2.3.
- 4.
In its annual survey of government finances, the Census Bureau collects data on cash and security holdings held for debt service purposes, as proceeds of bond issues, as liquid assets in trust systems, and unrestricted cash holdings. In this study, I have developed a proxy measure of reserves using the unrestricted cash holdings together with the proceeds of a bond issue (pending disbursement).The measure, previously explored in Gore (2009), has been found to be correlated with widely used measures of slack resources.
- 5.
In the fund statements, fund balance represents the difference in reported assets and liabilities. Fund assets generally include cash, short-term investments, receivables, inventory, and prepaid expenses. Fund liabilities include accounts payable, employee compensation payable, any deferred revenue, short-term loans and long-term obligations due in the next 12 months. If assets exceed liabilities, the government will report a positive fund balance. If assets are less than reported liabilities, the government will report a negative fund balance and is generally considered to be cash insolvent. Fund balance is also a long-term measure of budget solvency. Governments reporting revenues that exceed expenditures for prior budget periods generally report a positive fund balance, particularly if their liabilities do not relate to short-term borrowing for cash flow purposes.
- 6.
The Governmental Accounting Standards Board (GASB) recently amended fund balance categories to include non-spendable, restricted, committed, assigned, and unassigned. Non-spendable fund balances include assets that are precluded from conversion to cash (e.g., inventories, permanent funds). Restricted includes funds restricted by enabling legislation. Committed includes funds restricted by those with the highest level of decision-making authority. Assigned represents current commitments already made by management while unassigned includes amounts available for any purpose (GASB 2009).
- 7.
Liquidity here includes the proportion of fund balance reported as cash and cash equivalents. For a full discussion of GFOA recommendations see http://www.gfoa.org/determining-appropriate-level-unrestricted-fund-balance-general-fund (accessed July 28, 2014).
- 8.
See https://www.census.gov/econ/overview/go0400.html (accessed October 31, 2014). Specifically (also see http://www2.census.gov/govs/class06/ch_7.pdf accessed July 18, 2014).
- 9.
Unlike Gore (2009), proceeds of bond issues pending disbursement are included in the measure of cash reserves. Data shows bond proceeds were limited to a small portion of the sample. Excluding bond proceeds, cash reserves as a percent of total expenditures were 35.82 %. Including bond proceeds, cash reserves were 39.26 %. Since funds would inevitably be available for operating purposes (e.g., capital outlays) they were included in all the analyses. Capital outlays were included in the model as an explanatory variable.
- 10.
Gianakis and Snow (2007) found free cash flows were correlated with budget stabilization funds. However, in an economic downturn, governments were more likely to draw on their free cash flows first, before (re)allocating resources in their budget stabilization funds.
- 11.
Data used in this study is that of county governments. Of all general purpose governments, county governments are the fastest growing (Lobao and Kraybill 2005). They have long been an important administrative arm of state governments responsible for essential services including public assistance, law enforcement, court systems, voter registration, etc. (Benton et al. 2007). They have also been assigned discretion over the administration of essential programs (Lobao and Kraybill 2005). Counties have also evolved to provide a wider menu of services that were traditionally the responsibility of smaller governments (Benton et al. 2007). Given the dynamic nature of their responsibility and the static nature of the geographical boundaries, county governments offer an interesting environment to test the impact of TELs on cash reserves. Excluded from the sample are county governments in Connecticut and Rhode Island which exist strictly for statistical and geographical purposes. Counties in Alaska were excluded because the state is generally considered to be an outlier.
- 12.
Because the Census Bureau does not collect any data on liabilities, I define this measure as a gross measure of free cash flows. In other words, the measure is net of restrictions (i.e., sinking funds or trust funds) but would likely include cash flows designated for budget period liability payments (e.g., accounts payable) or designated for certain activities (e.g., pay-as-you-go spending). The measure is also more limited than the traditional measure of fund balance as it excludes receivables due from other funds, other governments, and taxpayers.
- 13.
Months of cash is a measure often used to assess duration of operations if all sources of revenue were delayed, exhausted, or currently unavailable and all expected expenditures were incurred as budgeted.
- 14.
Another form of slack that is not adequately addressed in the TEL literature is the difference between the rate or caps and actual property tax rates or property tax revenues. For example, if the current rate is far below the cap, the local government has slack taxing capacity. Gianakis and Snow (2007), for example, found the presence of this form of slack was correlated with budget stabilization funds—the relationship between the TEL slack and the free cash flows was weak.
- 15.
The direct legislation provisions enable voters to directly or indirectly amend their state constitutions or statutes. Direct legislation includes a broad array of provisions including statutory and constitutional direct and indirect initiatives, legislative referendums and popular referendums. For the purposes of the model specified in this paper, I limit my interest to voter initiative provisions - whether direct or indirect, statutory or constitutional (Boehmke 2005; Kioko and Martell 2012; Waters 2003).
- 16.
Kioko and Martell (2012) found voter initiative provisions were not valid instruments in their study of the impact of state-level TELs. They argue initiative processes have been used to alter the direction of state and local government policies (Waters 2003), as such voter initiative provisions were an important explanatory variable that could be used to not only explain the presence of the endogenous variable, but also have an independent effect on taxing and spending levels. While initiatives have been shown to have a substantive impact on taxing and spending levels, I do not expect them to have any impact on reserves. In other words, voters have approved measures that would alter the course of government taxing and spending levels, but there are no measures that have been proposed to alter the level of reserves.
- 17.
The index infers the ideological position of the electorate from the distribution of votes in congressional races as well as the Americans for Democratic Action (ADA) and AFL-CIO Committee on Political Education (COPE) score for members of congress.
- 18.
Results from the first stage regressions are available from the author.
- 19.
The fixed effects model was specified as follows \( {Y}_{it}={\beta}_0+{\beta}_1{X}_{it}+{\beta}_2{\mathrm{TEL}}_{it}+{\mathrm{CD}}_i+{\mathrm{TD}}_t+{\varepsilon}_{it} \)
where X it is our vector of explanatory variables (R, D), TEL it is the policy variable of interest that is suspected to be endogenous, CD i and TD i are the county and time fixed effects, and ε it is the error term.
- 20.
For example, if when reporting to the Census Bureau the government aggregates unrestricted cash of governmental activities together with cash reserves for their business-type activities. Alternatively, cash reserves could include designated purposes which we are unable to clearly identify relative to fund-based data.
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Appendix: Results from the OLS regression (1970–2004)
Appendix: Results from the OLS regression (1970–2004)
Expectation | Model A | Model B | Model C | Model D | Model E | |
|---|---|---|---|---|---|---|
Property tax rate limits | +/− | −0.318 (0.882) | ||||
Property tax levy limits | +/− | −0.613 (0.759) | ||||
Limit on assessed values | +/− | −0.867 (1.126) | ||||
Binding limit (rate and assessment, levy and cap) | +/− | −1.876* (0.974) | ||||
Property tax limit (rate, levy, or assessment) | +/− | −0.414 (0.835) | ||||
Population (log) | − | 5.054*** (1.807) | 4.990*** (1.799) | 5.113*** (1.801) | 5.129*** (1.802) | 5.024*** (1.800) |
Density | + | 0.0152*** (0.00533) | 0.0152*** (0.00534) | 0.0153*** (0.00536) | 0.0153*** (0.00538) | 0.0152*** (0.00534) |
Total expenditures (per capita) | − | −0.0290*** (0.00476) | −0.0290*** (0.00475) | −0.0290*** (0.00475) | −0.0290*** (0.00476) | −0.0289*** (0.00476) |
Income (per capita) | − | −0.000149 (0.000203) | −0.000151 (0.000203) | −0.000158 (0.000202) | −0.000161 (0.000203) | −0.000145 (0.000203) |
Hirschman–Herfindahl index (HHI) | + | 0.157*** (0.0201) | 0.157*** (0.0203) | 0.158*** (0.0202) | 0.158*** (0.0201) | 0.157*** (0.0202) |
Property tax revenue (per capita) | + | 0.0279*** (0.00672) | 0.0278*** (0.00670) | 0.0278*** (0.00669) | 0.0276*** (0.00665) | 0.0279*** (0.00672) |
Sales tax revenue (per capita) | + | 0.0602*** (0.0108) | 0.0599*** (0.0106) | 0.0603*** (0.0106) | 0.0602*** (0.0106) | 0.0599*** (0.0109) |
Income tax revenue (per capita) | + | 0.0166 (0.0183) | 0.0170 (0.0183) | 0.0158 (0.0183) | 0.0140 (0.0183) | 0.0171 (0.0182) |
User charges and fees (per capita) | + | 0.0167*** (0.00464) | 0.0167*** (0.00464) | 0.0167*** (0.00464) | 0.0168*** (0.00464) | 0.0167*** (0.00464) |
Federal aid (as a % of total revenues) | +/− | 0.173*** (0.0517) | 0.171*** (0.0518) | 0.172*** (0.0519) | 0.174*** (0.0518) | 0.172*** (0.0519) |
State aid (as a % of total revenues) | +/− | 0.0176 (0.0305) | 0.0180 (0.0305) | 0.0171 (0.0306) | 0.0165 (0.0306) | 0.0173 (0.0305) |
Full-faith and credit Debt (per capita) | − | 0.000564 (0.000587) | 0.000563 (0.000586) | 0.000561 (0.000584) | 0.000558 (0.000582) | 0.000563 (0.000586) |
Short-term debt (per capita) | +/− | 0.0229** (0.0109) | 0.0229** (0.0108) | 0.0229** (0.0109) | 0.0230** (0.0109) | 0.0229** (0.0109) |
Capital outlays (as a % of total expenditures) | + | 0.105*** (0.0251) | 0.105*** (0.0251) | 0.105*** (0.0251) | 0.105*** (0.0251) | 0.105*** (0.0251) |
Utility (per capita) | + | 0.0246*** (0.00877) | 0.0247*** (0.00881) | 0.0247*** (0.00885) | 0.0251*** (0.00888) | 0.0246*** (0.00878) |
Administrative costs (% of total expenditures) | + | 0.610*** (0.0644) | 0.608*** (0.0643) | 0.609*** (0.0646) | 0.608*** (0.0645) | 0.611*** (0.0643) |
Complexity in service delivery | + | 1.654*** (0.263) | 1.667*** (0.264) | 1.653*** (0.263) | 1.649*** (0.263) | 1.656*** (0.263) |
Constant | −32.16* (18.62) | −31.56* (18.58) | −32.87* (18.60) | −32.92* (18.61) | −31.80* (18.60) | |
County fixed effects | Yes | Yes | Yes | Yes | Yes | |
Time dummies | Yes | Yes | Yes | Yes | Yes | |
Observations | 75,917 | 75,917 | 75,917 | 75,917 | 75,917 | |
Adjusted R-squared | 0.033 | 0.033 | 0.033 | 0.033 | 0.033 |
Heteroscedastic-consistent standard errors reported in parentheses.
*p < 0.10, **p < 0.05, ***p < 0.01
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Kioko, S.N. (2015). Impact of Tax and Expenditure Limitations on Local Government Savings. In: Hou, Y. (eds) Local Government Budget Stabilization. Studies in Public Budgeting, vol 2. Springer, Cham. https://doi.org/10.1007/978-3-319-15186-1_8
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