Municipal Enterprises: Exploring Budgetary and Political Implications

Abstract

Public enterprises are business-type activities which are supported by or owned and run by government agencies, which set prices (fees) and charge for goods or services. Enterprises are different from other governmental services because they support themselves in whole or in part from fees or income they generate. Accounting for enterprises must record revenue generated by an entity, account realistically for expenditures, and apply the revenue generated against its costs. This paper explores the political implications of the use of public enterprises at the municipal level. They account for a major portion of the budgets of many cities,' but little is known about them.2 Most of the literature on public enterprises deals with public authorities, which are off budget and primarily for the purpose of raising capital. Municipal enterprises may be on or off budget and may or may not be for the purpose of raising capital. Hence what is known about public authorities may or may not apply to municipal enterprises more broadly. Second, many services can be offered either free (paid for by general taxation) or for a fee, and either directly, as general government services, or by contract.3 The choice of whether to offer a service as a public enterprise, directly or by contract, has a number of budgetary and political implications. First, public enterprise funds increase the complexity of the budget and reduce its capacity to act as an instrument of public accountability. One of the ways this happens is through interfund transfers. If enterprise funds are included in the budget and other funds are hard pressed, there may be a temptation to borrow from the cash flow of the enterprise funds.4 Sometimes these interfund transfers are formal, recorded, and repaid, but sometimes they are not. Interfund transfers in general reduce the interpretability of the budget, and unrecorded transfers may make portions of a budget unintelligible. Since officials cannot freely shift revenues about, they sometimes shift expenditures to make any fund running a deficit look more balanced. Or they may make in-kind rather than dollar transfers. When this occurs it is difficult to detect. Or they may shift expenditures from one fund to another to ease pressure on unpopular tax sources. If it is politically easier to raise water rates than property tax rates, some general fund expenditures may be shifted to the water fund.5 When this happens, the information content of the budget is reduced. * This paper explores the political implications of the use of public enterprises at the municipal level, using survey data from Illinois cities. The dependent variables include the number of enterprises cities have, the dependence of cities on income from enterprises, and the choice of which enterprises to provide. The paper explores why some cities have enterprises to handle parking, garbage, and economic development. Conclusions are that cities experiencing fiscal stress avoid enterprises, and more-reformed cities use enterprises more frequently. Particular enterprises have their own political and financial characteristics and are more likely to be used by cities with matching political characteristics. The paper concludes with suggestions for future research.