The role of intergovernmental aid in defining fiscal sustainability at the sub-national level

Abstract

The concept of fiscal sustainability has become increasingly used over the last 20 years. However, much of the literature on fiscal sustainability at the sub-national level ignores the role of intergovernmental fiscal relations. To address this gap, this paper discusses a sufficient condition for sub-national fiscal sustainability and examines the importance of intergovernmental aid in determining that sustainability. Using panel data of counties and municipalities in the US, and using unit root and cointegration analytic techniques, this paper finds different levels of fiscal sustainability between counties and municipalities. We also find that intergovernmental aid plays an important role for fiscal sustainability for both counties and municipalities.

Is a Good Normative Model of Public Spending Run Backward a Good Positive Model?

“…The standard advice offered by specialists in public financial management to governments that face a hard budget constraint (meaning that they can neither force central banks to buy their bonds nor expect a higher jurisdiction or authority to rescue them from fiscal distress, see Ji, Ahn, and Chapman ; Rodden, Eskeland, and Litvack ) is that they should use debt and, especially, savings to smooth their spending over time. The Government Finance Officers Association recommends, for example, that municipalities maintain reserves equal to at least 16 percent of revenues, plus an additional buffer, as a means of coping with revenue volatility and various other contingencies.…”

How Do Different Types of Local Governments' Sustainability Programs Relate to Their Environmental Outcomes

“…Related to a debt limit provision, some states have a debt limit provision in their fiscal rules, which imposes legal constraints on local governments related to borrowing to cover their chronic deficits. The fiscal constraints, therefore, exert legal pressure on local governments to be more fiscally balanced (Mahdavi & Westerlund, 2011), thereby reducing county governments' likelihoods to conduct investments (Ji et al, 2016) for sustainability programs. The presence of the debt limit provision was coded 1 if a county government had the debt limit provision in its state fiscal policy, and 0 otherwise.…”

“…A second instrumental variable is a local government's fiscal independence or the extent to which a government secures a financial base from its own revenue sources (e.g., taxes, public service fees and charges) rather than intergovernmental revenue transfers (Ji et al, 2016). Securing greater revenue from their own revenue sources enhances local governments' autonomy to initiate new urban policies and services that are not earmarked by intergovernmental revenue (Ji et al, 2016), such as sustainability programs. Fiscal independence was calculated by subtracting the intergovernmental revenue from the general revenue and, then, dividing the remaining revenue by the general revenue of the locality by relying on the U.S. Census Bureau's 2007 Government Finance data.…”

Drink what you can pay for: Financing infrastructure in a fragmented water system

“…As regulatory violations by themselves are not found to matter for incidences of new capital debt issuance, policy makers are advised to develop mechanisms to enhance the fiscal capacities of less affluent jurisdictions and to offer them the ability to improve service performance. Ji et al (2016) offer recent evidence that intergovernmental aid is instrumental for local government sustainability. This should be a reason for expanding mechanisms such as the Texas DWSRF and EPAP programmes.…”