Local Government Responses to State Fiscal Controls: The Effects of Fiscal Preemptions on the Methods of Local Service Delivery

Abstract

This study aims to investigate how local governments strategically respond to fiscal controls imposed by state governments. Specifically, we explore the effects of state fiscal preemptions on the way local governments deliver public services—that is, contracting out. Using negative binomial regressions, we found that state fiscal preemptions increase the tendency of local governments to contract out public services. However, the dynamics of contracting out depend on the local government’s current municipal fiscal status and the type of service provider. When local governments perceive a high level of fiscal stress, they tend to take a passive stance to contracting out. Moreover, the relationship between fiscal preemptions and contracting out varies contingent on the type of service provider. In sum, the findings suggest that local governments actively respond to institutional limitations on municipal fiscal activities in order to overcome supply and demand challenges, although the choice of service delivery method varies depending on fiscal conditions and the type of service provider.

Keywords:

• contracting out
• local service delivery
• state fiscal controls
• state fiscal preemptions

Notes

1 Unlike state government powers, there is no dialogue in the Constitution about local government powers. It was not until the early 1900s that Judge John F. Dillon formally stated the powers local governments can possess (Svara & Nelson, 2013; Swindell et al., 2018). According to the commonly cited judicial principle known as “Dillon’s Rule,” local governments have no inherent right to self-govern and are empowered only when the state specifically delegates the power to them (Stahl, 2020). This ruling has long served as a basic principle that defines the state–local relationship, and the final authority that determines whether a local government can exercise the power is granted to courts (Stahl, 2020; Swindell et al., 2018). While Dillon’s Rule strictly restricts the level of powers delegated to local governments, several groups of progressive reformers have sought to advocate a competing doctrine—known as “home rule”—that provides greatest flexibility and discretion to local governments. Nevertheless, courts have generally defined the powers of local governments narrowly, and the burden to prove that local governments meet the condition to exercise these powers lies with local governments, when challenged in courts (Stahl, 2020; Svara & Nelson, 2013).

2 Broadly, preemption can be conceptually understood as a legal relationship between different tiers of government. Compared to other countries, such as the UK and other European countries, state preemptions in the US reflect the unique context of this country where governments are highly decentralized (Kim et al., 2021).

3 While the introduction of fiscal rules aims to alter budget outcomes by constraining governments’ fiscal flexibility, the empirical literature is ambivalent about whether TELs reduce the levels of taxes and expenditures (e.g., Brooks et al., 2016; Eliason & Lutz, 2018; Kousser et al., 2008).

4 For a more comprehensive analysis of the stringency of fiscal preemptions, see Wen et al. (2020).

5 As the perception of fiscal stress is subjective, one consideration for empirical studies is whether to use a comprehensive single measure or separate objective financial measures (Lee et al., 2021; Maher & Deller, 2013). While previous studies have widely used various objective measures, the important empirical question of whether these measures coincide with local officials’ perceptions of fiscal conditions has not been comprehensively answered. Based on extensive objective financial measures that included such broad categories as expenditures, revenues, and property taxes, Maher and Deller (2011) found that objective fiscal indicators did not coincide with local officials’ perceptions of fiscal health. We also checked the correlation between perceived fiscal stress and two objective financial indicators (i.e., general fund revenue per capita and outstanding debt level per revenue) and found that there are no statistically significant correlations, lending support to the findings of Maher and Deller (2011). As our study focused on contracting decisions made by local officials, it was particularly important to consider the perceived level of fiscal stress upon which their policy decisions were based.

6 The IRR for a one unit change in $x_i$ is $e^{{\beta }_i},$ rather than the coefficient ${\beta }_i.$ The IRR is interpreted as the factor change in expected count for a unit increase in X (Feiock et al., 2017).

7 It should also be noted that governments take various policy actions simultaneously when they face fiscal constraints. For example, when they are subject to property tax limits, they may choose to shift to other revenue sources or diversify their existing sources (Kousser et al., 2008). However, the literature has produced conflicting results on the relationship between TELs and the shift of revenue sources (Kim, 2019; Mullins, 2004; Sun, 2014; Wang, 2018; Wen et al., 2020).

8 It is likely that certain types of local services necessitate more oversight and are subject to larger principal–agent problems. Using zero-inflated negative binomial regressions, we replicated our analysis by seven service types (i.e., (1) public works/transportation, (2) public utilities, (3) public safety, (4) health, food, and social services, (5) parks and recreation, (6) community development, and (7) support functions). An overarching implication is that a much more nuanced interpretation may be needed regarding the interplay between contracting decisions, type of service providers, perceived level of fiscal stress, and service types. In particular, the findings suggest that special attention may be merited for public utilities and parks and recreation services, whose natures are different and incur different levels of transaction costs. Taking our findings as a point of reference, we encourage future research to further develop this relationship both theoretically and empirically. The tables by service type are available upon request.

Additional information

Funding

This work was supported by the research fund of Hanyang University [HY-202100000003137].

Notes on contributors

Jinsol Park

Jinsol Park is an assistant professor in the Department of Public Administration at Inha University. Her area of research includes local government administration, public performance and management, and public budgeting and finance. Her research has appeared in journals including the Journal of Public Administration Research and Theory, Public Management Review, Local Government Studies, Public Money & Management, etc.

Sung-Wook Kwon

Sung-Wook Kwon is an associate professor in the Department of Political Science at Texas Tech University. He has conducted research in the areas of urban management, local and regional governance, and interlocal collaboration, including the topics of economic development, service delivery, environmental sustainability, and land use.

Donwe Choi

Donwe Choi is an assistant professor of the Department of Public Administration at Hanyang University. He obtained his Ph.D. from the Askew School of Public Administration and Policy at Florida State University. His research interests involve generational theory, hybrid organizations, publicness, public value, and co-production.