1. People are interested in local government and grasp its complexity.
While they hold firm expectations about how government should perform, they temper their views with a reasonable dose of realism.
2. People’s judgments about local government are formed primarily by their own personal experiences.
3. An individual’s personal interaction with government employees, particularly an initial encounter with an agency, defines how that individual judges that agency.
4. People are clear in what they want and do not want during an encounter with government.
5. People assess government services differently from the way government agencies assess themselves.
6. People readily acknowledge
improvements in service delivery when they occur.
7. People believe that some, but not all, government services are better in affluent neighborhoods.
8. People want, like and need information from government.
9. People rarely complain about taxes, but deeply resent poor performance,
“goofing off” or being treated disrespectfully.
10. People ultimately feel powerless to improve the delivery of city services.
Source: Barbara J. Cohn Berman, Listening to the Public: Adding the Voices of the People to Government Performance Measurement and Reporting (New York: Fund for the City of New York, 2005), 8–9. Reprinted with permission.
governments are also using interactive websites to obtain citizen feedback on policy issues confronting the community. Comparable citizen participation is impossible to achieve in a large state or at the federal level.
What appears to be occurring at the local level is that city and county managers and their legislative boards are increasingly using the budget to better understand how citi-zens, rather than internal participants, see government.13 Such a transformation will have a major effect on budget allocations and the relative size of city and county agencies.
In fact, we should anticipate greater diversity among local governments in the type and quality of services provided, particularly as communities develop reputations for having strengths in particular services. And given the powerful differences in service prefer-ences that have been documented among age groups, we should also anticipate further segmentation of communities along generational lines.
Economic influences
A number of factors can affect the economic environment of local government budget-ing: economic cycles, inflation, interest rates, and competition among local governments.
Economic cycles Economic downturns affect local budgets in two main ways. First, revenues may decline, especially such revenues as sales or income taxes, which are more sensitive to economic cycles. Second, during a recession, state and federal revenues are often hit hard, which means that intergovernmental aid to local governments may decline.
The onset, severity, and duration of economic slowdowns are nearly impossible to predict. Any revenue projection, no matter how carefully prepared, is likely to be off if the economy takes an unexpected turn. Because of this irreducible source of uncer-tainty and the widespread requirement for a balanced budget at the state and local levels, budget planners must build in some flexibility, some way of adjusting during the year if revenues fall below expectations or expenditures are greater than predicted. The budget office accommodates unexpected changes by prohibiting departments from spending all their allocations, holding back on permission to hire new staff or make other con-tractual commitments, building reserves or rainy day funds, and authorizing the chief executive to make small cuts in existing allocations without council approval.
Inflation Inflation creates uncertainty in local government revenue and expenditure forecasts. When the cost of living increases rapidly, organized labor exerts pressure to keep wages current with inflation. Because local government is more labor-intensive than the private sector, increases in labor expenditures outpace inflation-driven increases in rev-enues. This is called the relative price effect, and it leaves local governments with the difficult task of reducing public services when demand for those services is on the rise.
Tax limitations may further exacerbate the disparity between income and outflow.
Interest rates Changes in interest rates can also affect the budget, although their effects are not as great at the local level as they are at the national level, where the federal deficit requires continual borrowing. Because they are required to balance their budgets every year, most local governments can usually time the sale of long-term bonds to take advantage of lower interest rates; however, higher interest rates may still adversely affect the budgets of local governments that depend on short-term notes (tax anticipation notes) to meet cash flow needs. When interest rates remain high for long periods, local governments may be forced to borrow at high interest rates rather than delay needed projects indefinitely.
Competition among local governments Because it affects taxation decisions, competition among local governments for new residents or business investment also
exerts an economic influence on local budgeting. One way to obtain a competitive ad-vantage over other jurisdictions is to export the tax burden, shifting it from residents to nonresidents. Such action reduces taxes on residents while allowing service levels to be maintained; the combination of low taxes and high service levels thereby improves the community’s competitive advantage for new businesses and residents. One example of tax exportation is a levy on hotel and motel occupancy, which is paid by visitors rather than by residents. In a community that is home to a regional mall, the general sales tax also serves as a form of tax exportation.
Intergovernmental competition seems to influence expenditure levels as well as taxation decisions. Local governments are aware of their neighbors’ service levels. Thus, improvements in the quality and range of library services in one jurisdiction, for exam-ple, often induce surrounding municipalities to follow suit.
Critics of government often argue that competition forces inefficient businesses into bankruptcy but that there is no comparable mechanism for weeding out inefficiency in government. Competition among governments, however, helps improve management and keeps taxes down without resulting in bankruptcy. Moreover, while businesses are unlikely to share the secrets of their success, governments regularly share innovations and improvements. Local governments do not benefit from the financial failures of other jurisdictions; in the eyes of the public, one city’s failure is likely to redound to the disadvantage of all. Thus, competition among local governments is not zero-sum, except in the case of businesses’ locational decisions; and while that narrow form of competi-tion can be costly and destructive, it seldom affects the more positive forms of compe-tition, which encourage local governments to seek out and imitate good management and budgeting practices.
Social and demographic change
Changes in three social and demographic factors—population, age distribution, and personal income—have significant and lasting effects on local budgets.
Population Basic economic principles suggest that as population increases and fixed costs are divided among more households, the resulting economies of scale will mean lower per-unit costs. Because financial obligations do not decline in pro-portion to population loss, communities with declining populations have difficulty reducing spending. The same amount of infrastructure (roads, streets, lights, traffic signals, storm drainage) must be maintained, while pension commitments and debt service payments (the annual payment of principal and interest on borrowed funds) must now be borne by fewer taxpayers. Similarly, in communities experiencing inordinate popula-tion increases, excess capacity in public services will be quickly exhausted. Streets, recre-ational facilities, and public school classrooms will become congested; and demand for water, sewer services, and waste disposal may exceed capacity, requiring major invest-ment in expanding the physical plant. This suggests that the cost curve with respect to population changes for local governments is U-shaped: highest for those experiencing rapid declines or increases in population, but lowest for those with more moderate rates of change in population.
The cost of local services appears to be affected, not only by the rate of population growth but also by absolute size. Studies have repeatedly found that as jurisdictions grow beyond some minimum threshold, the same services cost more per capita. There are many possible explanations for this phenomenon, including the greater likelihood of crime in large cities, increased fire risks associated with greater population density, the
greater power of unions when the workforce is large, and the difficulty of maintaining adequate oversight in multiple locations, such as warehouses, equipment, and office facilities. The level of complexity of operations may also increase as the population grows.
The age of the city may also explain budget variations. Older housing stock and aging infrastructure add to the cost of older urban areas. Communities experiencing rapid growth now will at some future point face the daunting task of replacing their infrastructure all at once, by which time the tax base (property values) will most likely have peaked and started to decline.
Age distribution Spending for public education, public safety, and recreational services are the budget categories most likely to be affected by the age distribution of the population. Younger families with children push up the costs of schooling; crime, particularly violent crime, is concentrated among persons between the ages of twelve and twenty.14 The number and proportion of elderly residents may also be relevant, not only in terms of service needs but also in terms of residents’ ability and willingness to pay property taxes. Many states provide circuitbreakers or freeze property tax liability for elderly citizens. Despite these tax breaks, however, local governments that have large concentrations of retirees on fixed incomes may have difficulty gaining support for pro-grams that benefit younger families.
Personal income Research consistently shows that growth in personal income sig-nificantly affects the size of local government budgets. Higher-income households often demand more and better services from government, although these same households are more likely to advocate limited government, especially at the state and federal levels. The answer to this apparent contradiction may lie in the relative homogeneity of wealthier communities, where community preferences are easier to identify and satisfy. Charles Tiebout, a noted public finance scholar, conjectured that people vote with their feet by gravitating to communities that offer a package of public services that fit their prefer-ences, a phenomenon known as the Tiebout hypothesis.15 Finding acceptable budget solutions seems to be more complex in heterogeneous communities, possibly because it is more difficult to negotiate the level of agreement required to determine spending levels, budget allocations, and tax rates.
Legal and intergovernmental matters
Legal and intergovernmental factors shape local budgets in three principal ways: through balanced budget requirements, tax and expenditure limitations (TELs), and mandates.
Budgetary balance The legal environment in which state and local budgeting op-erates typically requires budgetary balance—that is, current revenues must equal current expenditures (CR = CE).
On the one hand, this requirement shapes the entire budget process: it makes budget deliberations, especially at the local level, revenue driven, meaning that available rev-enues determine the level of spending. In economic downturns, however, state and federal spending—and, to a lesser extent, local spending—tends to be countercyclical as demands for unemployment compensation, food stamps, and even subsidized student loans rise. Budget deficits (CR < CE) become more commonplace, and governments scrounge around for additional revenues. (Federal law does not as yet require the federal government to adopt a balanced budget, although considerable discussion has occurred during the past three decades on the need for such a constitutional or statutory require-ment.) At such times, TELs reduce governments’ ability to deal with recessions; they
may also exacerbate the intensity and length of economic downturns, much as the ill-advised price controls of the 1970s exacerbated inflationary effects.
On the other hand, the definition of balance is less clear in practice than it may appear.
The most current tally of state practices shows that twenty-seven states have constitu-tional requirements and eighteen have statutory requirements that the legislature adopt a balanced budget.16 The remaining states either have no restriction (North Dakota) or have less strict balanced budget requirements (Vermont and Wyoming have vague references to budget balances). The definition of a balanced budget, moreover, is highly variable and is much looser in some states than in others. For example, in forty-four states the governor must submit a balanced budget, but only thirty-five states have controls in place to avoid a deficit at the end of the fiscal year.17 Fewer than half the states apply the balanced budget test to all funds. Although no current tally exists of the practices among cities, past studies suggest that the requirements for balance widely varies in stringency, with most requir-ing a balanced budget at submission but fewer requirrequir-ing a balance at year-end.18
Requirements for budgetary balance are further complicated by a technical ques-tion: Is the budget balanced on a cash basis (i.e., revenues are recorded when cash is received, and expenditures are recorded when disbursed) or on a modified accrual basis (i.e., liabilities are recognized at the time they are incurred, and revenues are recognized when they are available for budgeted purposes)? This question is important because cash balances can be easily manipulated: to make the budget look more balanced than it is, payments can be delayed until the following fiscal year and revenue collections can be accelerated for credit to the current year.
Tax and expenditure limitations States have always imposed limitations on the tax-ing capabilities of local governments—for example, by capptax-ing the maximum property tax rate. Since 1978, however, when Californians ratified Proposition 13 to roll back property tax rates, local governments have seen a groundswell of measures limiting their revenue-raising capacity. States also limit local governments in the types of revenues they can use. Some states in the Northeast limit municipalities to the property tax. Others give access to a sales tax but place strict limits on the rate that may be levied locally.
Limitations are also imposed on the tax base, most often on the amount of increase in property value subject to taxation. For example, Texas limits annual increases in taxable value to 10 percent. These limitations result in lost local revenues while allowing the state to claim credit for providing tax relief to qualifying households.
Mandates A mandate involves one level of government requiring another level to provide particular services or follow certain procedures, as well as specifying the quality or frequency of service provision. Both the federal and state governments impose man-dates on local governments. The problem is that unless the federal or state government also provides full funding to implement the mandates, local officials may have to cut other services to comply. Federal and state priorities thus preempt local ones.
As long as the level of federal and state funding to local governments continued to grow, mandates did not impose a severe problem. But as reliance on property taxes has moderated and reliance on more economically sensitive revenue sources has increased, local governments have become more vulnerable to recessions, exacerbating the dif-ficulty of complying with mandates. Communities suffering the effects of recessions have sometimes been hit simultaneously by unfunded mandates and cutbacks in state spending.
In response to pleas from local governments, states have tried to curtail unfunded mandates. Their most common response has been to require that proposed mandating legislation include a fiscal note that estimates the cost of the mandate to local ments. By forcing state policy makers to calculate the costs imposed on local govern-ments, fiscal noting exposes the real cost of mandates. However, noting has not been particularly successful in curtailing state mandates. The requirement is too easy to bypass, and costs to local governments are difficult to measure accurately, especially before the legislation is implemented.
A combined effect To summarize, the legal and intergovernmental environment of budgeting has been highly restrictive—forbidding particular revenue sources, con-straining tax increases, requiring balance, and mandating some services and service levels.
Moreover, the unpopularity of the property tax has led to increasing dependence on the general sales tax, but the sales tax is more income elastic (i.e., sensitive to growth or de-cline in the economy) than the property tax. In fact, because sales tax revenue fluctuates more widely than the growth or decline in the economy, it tends to exaggerate the im-pact of recessions on local spending. This combination of factors has created enormous fiscal stress at the local level during the past three decades.
Conclusion
Budgeting in the United States provides local governments with the equivalent of a marketplace where they can decide on the quantity of goods and services that will be produced and how they will pay for them. It fulfills a legal function by giving legitimacy to budget decisions, and it provides a mechanism for holding administrators accountable for providing the services authorized by lawmakers.
Governments produce public goods, but they are also major producers of private goods—
often because those goods lack a profit incentive to attract private investors. Given the nature of public and private goods and services produced by local governments, public sector budgeting is more complex and is subject to more constraints than private sector budget-ing. Budget processes must provide for public accountability: the budget document must be comprehensible to citizens as well as to elected officials; and the budget must comply with a variety of laws, including those that specify the basis of fund accounting and the definition of budgetary balance. Moreover, local governments face a battery of legal limitations that affect spending decisions: TELs, balanced budget requirements, and state and federal mandates.
So that governmental budgeting can take public interests into account, budget pro-cesses must also provide for public participation. Social transformations such as shifts in population, changes in age distribution, and growth rates in personal income shape community values and citizens’ preferences and expectations for local services. Thus, budgeting at the local level is distinguished by citizen involvement through public hearings, focus groups, and citizen surveys. Recent budget innovations have emphasized
“customer satisfaction” as a key measure of good budgeting.
Not surprisingly, economic conditions have profound effects on local budgets as well. Recessions and inflation alter revenues coming in and the cost of providing services. Changes in interest rates directly affect the annual operating budget through debt service requirements, and increased debt service squeezes out funding for other local services. Finally, interlocal competition for business investment influences the tax incentives that local governments offer and thereby alters the revenue available for other services.
1 Bob O’Neill, “Leadership and the Profession: Where To from Here?” Public Management 95 (March 2013):
20–23.
2 Wallace Sayre, “The Unhappy Bureaucrats: Views Ironic, Helpful, Indignant,” Public Administration Review 10 (1958): 245.
3 Bank of North Dakota, “Bank of North Dakota History” (2009), banknd.nd.gov/about_BND/
history_of_BND.html.
history_of_BND.html.