Intergovernmental Aid Research Articles

Is the treatment of intergovernmental aid symmetric?

In this note we use a variable parameter model to test for asymmetries in the treatment of intergovernmental aid. The central question is whether local government officials treat intergovernmental aid differently during periods of aid certainty and uncertainty. We find evidence of fiscal replacement for 94% of Wisconsin municipalities and fiscal inducement for only a small handful of municipalities. The lower the dependency on shared revenues, the higher the odds that the municipality will replace lost shared revenues with own source revenues.

Do Multimember Districts Lead to Free‐Riding?

We studied the effects of districting on intergovernmental aid by state governments to local governments in the United States. We found that metropolitan areas receive relatively more aid when represented in the state legislature by an at‐large delegation than when divided into single‐member districts. This suggests that the free‐riding that may occur with at‐large representation is more than counterbalanced by other factors. The estimated effects are robust to the effects of other confounding factors as well as the choice of estimators.

The effect of state education finance reform on total local resources

Both the federal government and the states use intergovernmental grants to try to change the composition of local spending across different programs, as well as the distribution of resources across localities. Many states are now under court order to use state education grants to reduce local disparities in education spending. While a substantial body of literature suggests that these court orders increase the level and progressivity of state education spending, there is little evidence on their broader effects on the total resources available not just for schools in low-income districts, but for other programs across all localities. We find that states finance the required increase in education spending in part by reducing their aid to localities for other programs, particularly for wealthier areas. Thus, while court-ordered school finance equalizations do increase total state aid to localities for education, they do so at the expense of drawing state intergovernmental aid away from programs like public welfare, health, hospitals, and general services. These findings provide insight into the effectiveness of using earmarked funds to achieve redistribution.

A Model of Asymmetries in the Flypaper Effect

In this applied research study we examine the changing fiscal relationship between state and local governments. Our research question is simple: Do local governments treat state aid during periods of stability and instability in a systematic manner? Using data on Wisconsin's unconditional shared revenues program from 1990 to 2000, we find evidence of a flypaper effect and that the relationship tends to be asymmetrical. The manner in which local governments treat intergovernmental aid is different between periods of increases and decreases in aid. Specifically, using a model that allows for the identification of structure shifts we find evidence of fiscal replacement. In addition, we find that changes in aid impact types of spending differently. When aid is reduced, policymakers appear to be less inclined to cut police and fire services than they are to cut services such as parks and recreation. Copyright 2006, Oxford University Press.

Spatial Diversity in Local Government Revenue Effort under Decentralization: A Neural-Network Approach

Decentralization reflects a global trend to increase the responsiveness of state and local governments to economic forces, but it raises the challenge of how to secure redistributive goals. Theoretically, as the equalizing impact of federal aid declines under devolution, we expect subnational state-level government policy to become more important, and geographic diversity in local governments' efforts to raise revenue to increase. In this paper we explore the impact of state fiscal centralization and intergovernmental aid on local revenue effort with the aid of Census of Governments data for county areas from 1987 for the Mid-Atlantic and East North Central region of the United States, with particular attention paid to rural counties. The 1987 period was chosen because it is the first year in which state policy trends diverged from federal decentralization trends and both state aid and state centralization increased while federal aid to localities continued to decline. Using a neural-network approach, we explore the spatially differentiated impact of state policy and find complementary responses in effort among some localities and substitution responses among others. Classification-tree analysis of this diversity suggests that decentralization and the competitive government it promotes are likely to exacerbate inequality among local governments.

The Median-Voter Model versus the Bureaucracy Model of School Finance Equalization Aid

The median-voter and budget-maximizing bureaucracy models imply different effects from intergovernmental aid. In this article, the author uses data from an ambitious school district equalization program in Connecticut to test these models. Finding no clear winner in terms of explanatory power, he uses the results of both models to examine the impact of the equalization aid. The estimated models yield a mean price elasticity of public school expenditure of -0.39 and income elasticities of 0.49 and 0.57 for the median-voter and bureaucracy models, respectively. Simulations indicate that the Connecticut school finance equalization and Education Enhancement aid resulted in a reduction in the standard deviations of per pupil spending across districts of 29% to 33% and halved the standard deviation of net school mill rates.

Goal Conflict and Fund Diversion in Federal Grants to the States

Researchers using fiscal choice models have had limited success predicting fund diversion in federal grant programs. The application of a principal‐agent framework to questions of fiscal federalism offered a potentially valuable alternative approach, but the traditional model employed by Chubb (1985) neglected potential variability in the degree of goal conflict between principals and agents. This article proposes an expanded framework, which incorporates the possibility of variation in goal conflict between participants in intergovernmental aid programs. The theory suggests that the level of policy congruence between recipient jurisdictions and the national government will determine the amount of grant funding diverted away from targeted policy areas. Findings from analyses of grant programs in two distinct policy areas support the hypothesis that grant effectiveness is partially a function of goal congruence. The relationship between intergovernmental partners is interactive, with the degree of policy agreement determining fund diversion in subnational jurisdictions, as well as the effectiveness of federal oversight activities. The findings have important theoretical implications for understanding both fiscal federalism and principal‐agent relationships more generally.

Municipal Capital Spending during the “Boom”

This article analyzes municipal governments, capital spending, and revenue‐raising decisions between 1993 and 2000, an era of unprecedented economic growth. It finds that, as anticipated, greater‐than‐expected revenues allowed many cities to advance projects from their capital improvement plans to their capital budgets. Moreover, the article concludes that growth in cities' own‐source‐revenue‐generating capacity and transfers from carryover or ending balances from earlier years, rather than debt issuances and intergovernmental aid, seem to be the most important fuel for the remarkable growth rate in capital spending.

Urban Malls, Tax Base Migration, and State Intergovernmental Aid

Decentralized systems of government finance give rise to fiscal disparities due to interjurisdictional variations in tax bases and expenditure needs. Intergovernmental aid is used to address such disparities. This article explores changes in local tax capacity and intergovernmental aid resulting from urban shopping malls that extract retail sales and sales tax revenue away from surrounding areas, especially rural counties. A model is developed and estimated to determine the impact of urban malls on local government sales tax bases, controlling for sales tax rate differentials and other factors. The results reveal a 15.9% decline in the sales tax base for counties in close proximity to two newmalls. The analysis is extended to examine impacts of changing local tax capacity on state education aid. Based on the programconsidered here, less than 20% of the loss in own-source revenue is recovered through increased aid.

Life at the Bottom of the Fiscal Food Chain: Examining City and County Revenue Decisions

Any shifting of responsibilities from the state orfederal governments to local governments would fall mostly on the shoulders of general-purpose governments, namely, cities (municipalities) and counties. This study explores city and county revenue decisions associated with general funds-the governmental fund most likely to be affected by state requirements for greater local financing responsibility for new or devolved programs. The results suggest that state control over local revenue authority affects decisions regarding the imposition offinancial burdens on residents, and that intergovernmental aid to cities and counties does not necessarily mitigate those burdens. Despite evidence of healthy financial reserves, especially for cities, shifting responsibilities from the state to city or county governments could place cities and counties in difficult fiscal positions. Given the importance of own-source revenues to current budgets, and in view of the questionable impact of intergovernmental aid on city and county residents' revenue burdens, questions persist about the ability of city and county governments to maintain (and, if necessary, to expand) services during economic recession.

From revenue sharing to deficit sharing: general revenue sharing and cities

Once hailed as a revolutionary change in U.S. federal aid policy that would return power to state and local governments, Revenue was politically dead a decade later. Bruce A. Wallin now offers the only complete history of the General Revenue Sharing program - why it passed, why state and local governments used it the way they did, and why it died. He examines its unique role in the history of U.S. federalism and explores its relevance to intergovernmental aid policy at the turn of a new century. This book is crucial to understanding the changed environment of U.S. intergovernmental relations in the 1990's and makes a strong case for reconsidering a program of federal unrestricted aid.

Implications of the Balanced Budget Act of 1997 for the "Devolution Revolution"

From an economist's perspective, the fiscal and administrative goals of the so-called devolution revolution include less federal intergovernmental aid, especially iffiscally equalizing; the substitution of block grantsfor matching grants; greater administrative flexibility for the states; and fewer underfunded mandates. This article uses these devolutionary yardsticks to analyze the major provisions of the federal Balanced Budget Act of 1997. These provisions fall far short of a devolution revolution. The act increases the level of federal assistance, leaves Medicaid as an open-ended entitlement, and preserves a strong role for the federal government in shaping intergovernmental grants. The article discusses the political forces moderating the act's devolutionary impact.

The effect of intergovernmental aid on city property taxes: new results for minnesota

An earlier study found that certain Minnesota state aid programs stimulated city property tax levies to a high degree. If this is accurate, it suggests potentially serious problems with state property tax relief efforts. This article re-examines this question and finds that most aid programs have little direct effect on property tax levies. However, certain aid formulas that reduce the effective price of property taxes do indirectly stimulate property taxes. Therefore, states need to be careful in designing aid programs intended to reduce property taxes.

Federal Block Grants and State Spending: The Alcohol, Drug Abuse, and Mental Health Block Grant and State Agency Behavior

With renewed interest in block grants as a way to channel federal funds to states, several questions arise about the effect of block grants on state spending. A central question about the block grant form of intergovernmental aid is whether states spend the funds on the intended services or use budgetary strategies to appear to be in compliance with maintenance-of-effort provisions but then reallocate block grant funds from the targeted program. We studied the effect of the Alcohol, Drug Abuse and Mental Health block grant program on state substance abuse expenditures by analyzing spending data from the fifty states between fiscal years 1987 and 1992. Our findings suggest that this block grant has stimulated state spending, but this effect may be relevant only since 1990, and differs among states.

Structural Shifts in the Treatment of Intergovernmental Aid: The Case of Rural Roads

AbstractThe effects of structural shifts in the treatment of intergovernmental aid during the 1980s are tested using a sample of 1,929 rural counties with local road responsibilities. A dynamic model is used to test the hypothesis that local public officials treated intergovernmental aid differently after the Reagan/Bush policy of Fiscal Federalism was implemented. Empirical findings from the dynamic model are that Federal aid was much more stimulative at the end of the decade than in earlier years but the effects of state aid remained the same throughout the 1980s. These differences are attributed to a perception that Federal aid is less certain and more transitory than permanent.

Capitalization, Equalization, and Intergovernmental Aid

This article makes a simple but heretofore unappreciated point: In urban areas, voter movement will cause equalizing intergovernmental aid (such as state education aid) to be capitalized into the value of housing. Because poor voters are likely to be renters, they will have to pay for better schools created by state aid through higher housing costs. To establish this point, the article describes a very simple model of an urban area with two communities and three income groups. In the case of an urban area in which the central city is not large relative to the metropolitan region, the welfare effect of intergovernmental aid on poor voters is completely offset by higher housing costs. Rather than increasing the total resources available to poor people, intergovernmental aid amounts to a Hicksian price adjustment that leaves the poor no better off than before. The article then discusses real-world complications to the model, including alternative decision-making mechanisms and preferences, and concludes that capitalization is an important overlooked feature in education grant systems.

On the Measurement and Causes of Technical Inefficiency in Local Public Services: With an Application to Public Education

Local governments (including school districts) face increasing fiscal stress due to rising costs and little growth in intergovernmental aid and property tax revenues. In this tight fiscal environment, the measurement of and identification of causes for technical inefficiency in the provision of local public services becomes all the more important. Although there is a growing body of literature on the estimation of technical efficiency using linear programming methods, the production models underlying these estimates often are not consistent with the process of local public service provision. In particular, previous studies have not properly controlled for socioeconomic variables that affect service outcomes but are beyond the control of local government officials. Further, the public choice literature theoretically modeling inefficient behavior by bureaucrats devotes scant attention to empirical analysis of the underlying causes of technical inefficiency in the public sector. The major objective of this article is to present a modified linear-programming method for estimating technical efficiency that distinguishes discretionary inputs and socioeconomic variables affecting public production. This method is applied to examining the level and possible causes of technical inefficiency in the provision of public education in New York State.

IS LOCAL GOVERNMENT REVENUE RESPONSE TO FEDERAL AID SYMMETRICAL? EVIDENCE FROM PENNSYLVANIA COUNTY GOVERNMENTS IN AN ERA OF RETRENCHMENT

Previous empirical studies have made little attempt to test whether the fiscal response to intergovernmental aid is asymmetric. This paper tests the asymmetric response hypothesis for 66 Pennsylvania county governments over the 1978-88 period. This marked a period of retrenchment in which counties experienced frequent annual reductions in federal aid. The local government revenue response to federal aid was found to be asymmetric. The reduction in federal aid induced a reduction in own-source revenue. The results support the notion that taxpayers prefer fiscal restraint when permanent loss of aid occurs.

The Bureaucratic Entrepreneur: The Case of City Managers

Unelected bureaucrats regularly influence the implementation of public policies. Some entrepreneurial bureaucrats play an even more important role in shaping policy agendas and in formulating new policy. Such bureaucratic entrepreneurship, however, generally has been treated by scholars as a chance occurrence rather than as a phenomenon that can be explained systematically (Wilson, 1989). We conceive of bureaucratic entrepreneurs as actors who help propel dynamic policy change in their community.(1) Like other entrepreneurs, they engage in the act of creative discovery by creating or exploiting new opportunities to push forward their ideas (Schneider and Teske, 1992; Kirzner, 1973; Schumpeter, 1942). While some social scientists have started to develop more systematic theories of entrepreneurship, most studies still rely heavily on biographical studies of leaders whose actions produced innovative or unexpected policy changes (Caro, 1974; Lewis, 1980; Doig and Hargrove, 1987; Kirhheimer, 1989; Weissert, 1991). According to Wilson, such studies show that the personalities and actions of individual executives are critical to explaining innovative bureaucratic change. In turn, Wilson (1989, p. 227) argues: It is not easy to build a useful social science theory out of |chance appearances'. However, we believe that the emergence of entrepreneurial city managers in the decentralized American system of local government can be related systematically to community characteristics (see Mohr [1969] who relates bureaucratic innovation to organizational characteristics). Suburban governments have been buffeted by major changes in recent years, including reductions in intergovernmental aid, citizen demands for new services and lower taxes, questions about the value of growth, and the increasing costs of basic service delivery. Many of these factors require local governments to respond with innovative policies. As a result, some entrepreneurial leaders in government have begun to introduce and implement new policy ideas, improve the efficiency of existing programs, and redirect bureaucratic behavior to meet these challenges. Osborne and Gaebler (1992, p. 16) argue that of all levels of governments in the United States, local governments have been the most innovative, propelled by the combination of property tax revolts, cuts in intergovernmental aid during the early 1980s, and the 1982 recession. As we shall illustrate, sometimes city managers emerge to play this entrepreneurial role in local government. Recently, scholars have analyzed the process of policy innovation in state and local governments, documenting a bottom-up process of political and managerial entrepreneurship in American government (Eisinger, 1988; Altshuler and Zegans, 1990; Golden, 1990; Sanger and Levin, 1992; Osborne and Gaebler, 1992). These studies are concerned mostly with policy innovations. In contrast, our focus is on the actors who promote and implement such innovations. In local government, entrepreneurial leadership is most likely to come from elected politicians in the community, such as mayors and council members. But high-level bureaucratic employees, such as city managers, also emerge as entrepreneurs. Because most of the entrepreneurial bureaucrats that we identified in our research were city managers, we focused specifically on them. City managers, as the chief operating officers of their communities, are a well-defined professional group, and they share similar training in public administration (Kammerer, 1964). The activities of city managers were fairly comparable in the suburban communities in our sample. Explaining the Emergence of Entrepreneurial Managers City managers work in complex environments. Local economic and fiscal conditions are constantly changing, and the preferences and policy demands of politicians and citizens also change. Local bureaucrats and politicians may present roadblocks to city managers trying to change policy directions. …

The political economy of city life cycles: a comparative analysis of services, expenditures and revenues

This paper updates and expands Norton's 1979 study of the political economy of city life cycles in thirty jurisdictions. Using 1970 and 1976 fiscal data, Norton had found that older cities of the Northeast and North Central states provide a more extensive range of services and have a stronger commitment to social welfare functions than younger cities of the South and Southwest. A thirty-five city survey using 1991 data generally confirms his findings. We found significant differences in the service mix, spending patterns and revenue sources of older and younger cities. Older cities offer a broader mix of services with the most dramatic differences among redistributive and safety functions, and notable differences in the public works and administrative services categories. Older cities expend more per capita on local services and exhibit different spending priorities. They spend propor-tionately more on redistributive services, eg. health, hospitals, welfare and housing. They also spend more per capita on police, fire and education. On the revenue side, older cities depend more on commercial property taxes, while newer cities rely more on residential property taxes. The most significant difference on the revenue side, however, concerns the greater reliance of younger cities on locally generated non-tax sources (eg. user fees), whereas older cities remain more dependent on intergovernmental aid.