Week 8: Issues in State and Local Public Finance

• Guest Speaker: Betty Masuoka, Assistant City Manager, City of Sacramento

– City revenues and expenditures

– Major financing issues facing the City

• ICMA Case Studies

• School Finance

• E-commerce

• Eight-week evaluation

Case Study -- Developing the Tax Base

Substantive Issues

• Competition for economic development, tax rates

• Strategies: annexation, attracting industry and jobs, redevelopment (tax increment financing, enterprise zones)

Process/political Issues

• Long-run v short-run benefits

• Expertise v politics; professional v political incentives

• Old v new organizational culture -- professionalism

• Ethics (of omission and/or commission)

• Political Skill to avoid untenable choices

Case Study (cont.): LeBlanc’ s Choices

1. Present his cost-benefit analysis to Board in low-key way

2. Present his analysis to Board and express concern

3. Let someone else make presentation and keep quiet or don’t attend Board meeting

4. Revise cost-benefit analysis with rosier numbers

Could he have avoided this situation?

Case Study: Estimating Revenues

Substantive Issues

• City finances are heavily dependent on state economy

• There is always uncertainty in making revenue projections

• There are more and less sophisticated ways to estimate revenues. Is more “rationality” always best?

Process/political Issues

• Politicians need to explain and communicate to citizens

• Conventional wisdom can be powerful

• There are political consequences to being right

• Ethics – when there’s no clear right or wrong

Case Study (cont.): Questions Raised

• How useful to the city manager is the consultant’s report?

• How should the manager deal with the uncertainty reflected in the range of revenue estimates?

• How should he present the information to the Council?

• What recommendations should he make with regard to layoffs and reserves?

Issues Raised by School Finance Generally

• Role of government

– promote equality -- defined as:

• opportunity/quality/outcomes/revenue per effort?

– public v private education

– local choice issues

• Accountability

– shows complexity of performance measurement

– inputs and outcomes of public education

– cause/effect knowledge

• Nature of citizen involvement in education issues

Effect of Serrano and Proposition 13 (PPIC Study)

• Decline in per pupil spending– due to end of subsidy by non-residential property owners?

• State finance has resulted in less inequality in revenue, but:– performance has declined – housing choices still reflect preferences for “better” schools

• Are problems caused by State financing of schools?– Do other factors affect performance?– Do other factors affect housing choice?

• Impact of financing v governance on school quality– disconnect between financing and governance– move to local financing or state control; not mixed

Taxation of E-Commerce

• Sales Tax and Income Tax issues• “Nexus” -- connection between state and taxpayer

– consumption v production/performance– physical v economic presence

• Reasons to support internet taxation– states have legitimate claim to revenues

• Reasons to oppose internet taxation– tax increase; hinders business climate

• Other issues– Enforcement issues– Definitional issues -- new kinds of transactions/services

Preview of Week 9

Part III: Practical Applications in Budgeting

• Back to Rubin, Ch 5 on tradeoffs and competition for $$

• Practical chapter on budgeting in local government

• Department of Finance – Budget analysis– BCPs

• In class project on budget justification/analysis

• Class notes may not get posted (I’m in St. Louis until Tuesday)