🏁State Politics and the American Federal System Unit 8 – State and Local Government Budgets

Key Concepts and Terminology

• Operating budget covers day-to-day expenses and short-term financial obligations
• Capital budget focuses on long-term investments in infrastructure and assets
• Fiscal year is the 12-month period used for budgeting and financial reporting purposes (often differs from the calendar year)
• Revenue consists of funds generated through taxes, fees, grants, and other sources to finance government operations and services
• Expenditures are the funds allocated and spent by the government to provide services, programs, and infrastructure
• Balanced budget requires that total revenues equal or exceed total expenditures within a given fiscal year
• Deficit occurs when expenditures exceed revenues, resulting in a shortfall that must be addressed through borrowing or other means
• Surplus arises when revenues exceed expenditures, providing additional funds for future use or debt reduction

Budget Cycle and Process

• Budget preparation involves estimating revenues, assessing needs, and proposing allocations for the upcoming fiscal year
  • Typically begins several months before the start of the new fiscal year
  • Involves collaboration between executive and legislative branches
• Budget adoption requires legislative approval of the proposed budget, often involving negotiations and amendments
• Budget execution is the implementation of the adopted budget throughout the fiscal year
  • Involves monitoring revenues and expenditures to ensure adherence to the budget
  • May require adjustments due to unforeseen circumstances or changes in priorities
• Budget auditing and evaluation assess the effectiveness and efficiency of budget execution and identify areas for improvement
• Public participation and transparency are essential to ensure accountability and align budgetary decisions with community needs and priorities

Revenue Sources

• Property taxes are levied on real estate and serve as a significant source of revenue for local governments
• Sales taxes are imposed on the sale of goods and services and are collected by state and local governments
• Income taxes are levied on individual and corporate earnings and are a major revenue source for state governments
• User fees and charges are collected for specific services or access to public facilities (parking fees, building permits)
• Intergovernmental transfers include grants and aid from federal and state governments to support local programs and services
• Bonds are debt instruments issued by governments to finance long-term projects and infrastructure investments
  • General obligation bonds are backed by the full faith and credit of the issuing government
  • Revenue bonds are backed by specific revenue streams generated by the funded project

Expenditure Categories

• Education is a significant expenditure for state and local governments, including funding for K-12 schools and higher education institutions
• Public safety encompasses spending on police, fire protection, and emergency services
• Transportation and infrastructure include investments in roads, bridges, public transit, and utilities
• Health and human services cover programs such as Medicaid, public health initiatives, and social welfare assistance
• General government expenses include administrative costs, employee salaries and benefits, and debt service payments
• Economic development initiatives aim to attract businesses, create jobs, and stimulate local economies through incentives and partnerships

Fiscal Federalism and Intergovernmental Relations

• Fiscal federalism refers to the division of fiscal responsibilities and resources among federal, state, and local governments
• Federal grants provide financial support to state and local governments for specific programs and initiatives (Medicaid, transportation projects)
  • Categorical grants are restricted to specific purposes and often require matching funds from recipients
  • Block grants provide more flexibility in how funds can be used within a broad policy area
• Unfunded mandates are federal or state requirements imposed on lower levels of government without providing adequate funding to implement them
• Tax and expenditure limitations (TELs) are constitutional or statutory provisions that restrict the growth of government revenues or spending
• Vertical fiscal imbalance occurs when the revenue-raising capacity of a level of government does not match its expenditure responsibilities

Budgetary Challenges and Constraints

• Economic downturns can lead to reduced revenues and increased demand for government services, straining budgets
• Pension obligations and retiree healthcare costs pose long-term fiscal challenges as the population ages and life expectancies increase
• Infrastructure maintenance and replacement require significant investments to ensure public safety and economic competitiveness
• Unfunded liabilities are future financial obligations (pension benefits, retiree healthcare) that lack sufficient funding to cover the expected costs
• Tax base erosion can occur due to factors such as population shifts, changes in economic activity, or tax exemptions and incentives
• Balanced budget requirements limit the ability of governments to engage in deficit spending and may necessitate spending cuts or tax increases during economic downturns

Policy Implications and Decision-Making

• Budgetary priorities reflect the values and goals of policymakers and their constituents
  • Allocating resources among competing needs and demands requires careful consideration and trade-offs
• Performance-based budgeting ties funding to measurable outcomes and encourages efficiency and effectiveness in government programs
• Participatory budgeting engages citizens in the decision-making process, allowing them to propose and vote on specific projects or initiatives
• Fiscal sustainability requires long-term planning and responsible management of resources to ensure the ongoing provision of essential services
• Equity considerations involve assessing the distributional impact of budgetary decisions on different populations and communities
• Intergovernmental collaboration and partnerships can help address regional challenges and optimize the use of limited resources

Case Studies and Real-World Examples

• Detroit's municipal bankruptcy in 2013 highlighted the challenges of pension obligations, declining revenues, and infrastructure needs in a city facing economic decline
• California's Proposition 13 (1978) limited property tax increases and shifted the state's revenue structure, influencing budgetary decisions and local government finance
• The Great Recession (2007-2009) strained state and local government budgets, leading to spending cuts, layoffs, and deferred investments in infrastructure and services
• Oregon's Measure 5 (1990) and Measure 50 (1997) implemented property tax limitations, affecting the funding of education and other local services
• Denver's participatory budgeting initiative allows residents to propose and vote on projects funded through a portion of the city's budget, promoting citizen engagement and transparency
• The Flint water crisis (2014-2019) underscored the consequences of inadequate infrastructure investment and the impact of budgetary decisions on public health and safety