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Category 3 – External, Political Causes of Financial Distress

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Public unwillingness to pay taxes
Decline in intergovernmental revenues
Ineffective communication with the public
Interest groups
Decline in local fiscal autonomy
Unfunded mandates
Reduced demand for services

Public Unwillingness to Pay Taxes

Contributed by Mark A. Glaser and Corinne Bannon, Wichita State University

Citizens may be increasingly unwilling to accept responsibility for the well-being of their community and retreat into self-interest. Citizens who have retreated into self-interest:
  • Are less likely to trust government and are unwilling taxpayers
  • Tend to see government performance in a negative light
  • Are less likely to join with government to co-produce community improvement 
  • Are more likely to make demands on government that exceed willingness to pay.

 

Symptoms

  • Tax-demand discontinuity. Citizens who have retreated into self-interest make demands on government that exceed willingness to pay. Individuals who are consumers first and citizens second resist taxation that displaces private consumption.
  • Politics of self-interest. When citizens witness government responding to narrow bands of self-interest, including spending public dollars in ways that benefit the few at the expense of many, they respond by retreating into self-interest.  
  • Public infrastructure. Citizens who are unwilling to accept responsibility for the well-being of community resist taxes necessary to maintain public infrastructure critical to civil society. For example, citizens who do not have children in public schools argue for disinvestment in public education.
  • Media information quality. Deterioration in the quality of information that flows through the media conduit between citizens and government contributes to the growing divide and drives the retreat into self-interest.
  • Disinformation. When government fails to engage and inform citizens it creates a vacuum that is filled by entities with narrow agendas driven by self-interest

Decline in Intergovernmental Revenue

Decline Arrow
Revenue shared with local governments by the state/provincial or federal government may decline as priorities at the state or federal level change or as fiscal stress at these levels trickles down. Local governments with high reliance on shared revenues may be particularly vulnerable to this cause of fiscal distress.

Symptoms
  • Overdependence on intergovernmental revenues. Increasing reliance on intergovernmental revenues (as measured by intergovernmental operating revenues divided by gross operating revenues) over time, or greater dependence on intergovernmental revenue relative to other jurisdictions.
  • Large expenditures for matching contributions. Intergovernmental revenue (particularly grants) often require matching dollar contributions, increased reporting requirements, or unreimbursed overhead costs. Large and growing expenditures on these items may indicate that the programs encouraged by intergovernmental revenue are causing financial distress. 
  • Fixed-term grants. If fixed term-grants for special programs have been accepted, are the programs sustainable after the grant ends? Federal stimulus spending may be an example of this for many jurisdictions.
  • State/federal policy or legislative changes. The policy goals that justify intergovernmental revenue sharing may change, thereby threatening the continuity of revenue sharing.

Ineffective Communication with the Public

Contributed by James Garnett

 

Omitting communication with key constituencies to get direction and muster support can cause fiscal distress. This includes failure to listen to citizen feedback about the kind of community they want, including the appropriate mix of taxes and services, and the kind and quality of services demanded. Failure to inform and educate citizens about the importance of government services reduces public support when cuts are threatened.


Symptoms

  • There is an increase in citizens complaining that their government does not listen to them
  • Stakeholder/citizen support of the agency declines at budget hearings or other public forums, or on surveys or referendums.

Interest Groups

Interest groups can push for new services or expenditures that benefit a relatively narrow segment of constituents and can resist reductions to favored programs. Therefore, interest groups can cause government to take on additional expenditures that do not benefit a broad constituency when times are good and constrain managerial flexibility when times are bad.

Symptoms
  • Low levels of participation by the general public. If the general public does not vote in elections, participate in civic groups, or otherwise get involved in local government there is more room for organized, narrow interests to assert themselves.
  • High levels of decentralization. Multiple centers of power may provide organized interest groups with more access to advocate for their favored policies. These decentralized power centers may be less sensitive to the desires of the general public, especially if the organized interest is that power center’s clientele.
  • Heterogeneous community. If there is wide diversity in the preferences of the community such that at least some segments of the population would not be very satisfied with any given tax-and-service mix, then there is incentive to form a group to lobby for the preferred mix. 
  • Political leaders have little information on the preferences of citizens. In this case, political leaders have nothing to counter the claims of organized, narrow interests that purport to represent a wider constituency.

Decline in Local Fiscal Autonomy

State laws or other legislation can place a variety of constraints on local government revenue options. Declining local fiscal autonomy limits a government’s ability to respond to increasing service demands.

Symptoms
  • Lack of options for new revenue sources
  • Lack of flexibility to change tax rates
  • Lack of flexibility to change the tax base. If economic activities excluded from the tax base are prevalent in the local economy, it could lead to fiscal distress.

Unfunded Mandates

Contributed by Robert E. Lee

 

State/provincial or federal government can impose service requirements on local government without a corresponding allocation of resources. Mandated activities can add to the budget and constrain flexibility.


Symptoms

  • The percentage increase in cost of unfunded mandates is significantly greater than the percentage increase in own-source tax revenue.
  • Discussions about alternative service delivery options or divesting of programs often run into claims that the current process is mandated.
  • The local government is more tightly bound to state policy. For example, cities are generally more autonomous than counties.

Reduced Demand for Service

When the demand for public services decreases, government cost structures are often inflexible and may not be easily downscaled. A decline in school-age population may leave a district with excess personnel and facilities. A state government’s grant program to local governments may shrink as the state’s focus shifts to other policy issues. However, local government may be left with fixed costs in personnel and equipment, as well as local demand and clientele created by the service.

Symptoms
  • Decline in clientele population. A declining clientele population could lead to fiscal distress, especially where revenues are based on population size.
  • Decline in workload. Less workload will lead to less revenue, especially for fee-based services. For example, a declining construction industry will result in less need for building inspections.
  • Declines in leading indicators of demand. Some indicators can predict a decline in the need for government service. For example, fewer new developments catering to young families would foretell less need for K-12 education. An aging population might portend less need for police services. 
  • Change in state or federal policy. A federal or state/provincial government could change a policy that was the basis of revenue sharing with local government. A contemporary example is the federal stimulus package. The federal government is making funds available to local government in response to a perceived, temporary need to stimulate the economy. However, after the stimulus program ends some local governments may be left without a way to continue funding for programs that were started under stimulus.

Continue to Category 4 – External, Economic/Technical

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