Coping With the Great Recession: Theory and Practice for County Governments

Abstract

This article explores “best” and actual practices of county governments coping with fiscal stress. Using survey results from county commissioners in California and Georgia, it is possible to assess the recession's impact and identify strategies that have been used to deal with revenue shortfalls and how different taxes may have changed these tactics. It becomes clear that reducing expenditures is more commonplace than increasing taxes, and almost no counties are able to “do nothing” as the academic literature prescribes (Marlowe, 2009). Overall, the counties that are most successful at coping with the recession began to take action before they felt the recession's impact and subsequently are able to maintain service levels without dramatic changes to the way they budget.

Keywords:

• local government
• county government
• recession
• budget shortfall
• sales taxes

Notes

¹This is especially true immediately after negative shock because it takes approximately three years for property tax revenues to reflect changes in home values because of sluggish assessment cycles (Lutz, 2008).

²Forty-eight of the fifty states have some sort of balanced budget requirement (Hou & Smith, 2006).

³The survey was sent to one county commissioner from each county. If there was information available on the length of service, the commissioner with the longest tenure was chosen.

⁴A copy of the survey tool is available upon request.

⁵These are the self-reported numbers.

⁶Figure 1 presents the difference in the use of property tax revenue (PTR), general fund revenue (GR), and LOST and SPLOST use.

⁷This may be in part due to LOST revenue decreasing during the recession.

⁸A notable exception is Jung (2002), which looks at special purpose local option sales taxes (SPLOSTs) earmarked for capital projects.

⁹Georgia also has a projected shortfall for fiscal year 2012 of $1.7 billion, but it includes no carry over and constitutes a much smaller percentage of its total budget, 10.3 percent versus 29.3 percent.

¹⁰There is also the possibility for perverse incentives created by soft budget constraints encouraging local governments to incorporate the possibility of “bail out” into their consideration of their budget.

¹¹Intergovernmental transfers are not the only way in which states can affect the fiscal condition of local governments. State laws have a substantial impact on local governments, especially laws, such as Dillion's Rule; tax and expenditure limitations; balanced budget requirements; and laws on the debt level and how local governments are permitted to issue debt (Weikart, 2012). Furthermore, numerous states have financial control boards and state level oversight of local government budgeting, such as the Local Government Commission in North Carolina (Cahill, James, Lavigne, & Stacey, 1994; Weikart, 2012). There is quite a bit that states can do to either improve or worsen the financial situation for their local governments.

¹²Although, many counties do lobby their state governments.

¹³They often cite balanced budget requirements, the timing of their revenue, and bond ratings as their reasons for fund balances (Marlowe, 2012).

¹⁴However, research shows large fund balances do not have much of an impact on bond ratings (Marlowe, 2011).

¹⁵This may only be possible with an unrealistic increase in intergovernmental transfers or the use of a fund balance, since deficits are illegal.

¹⁶Consumption smoothing can be understood as expenditures do not change drastically over time, even in response to the business cycle.

¹⁷Many of the suggestions about long-term planning have been adopted by the responding counties, but that does not help them now. One county reports creating a reserve fund, and two have begun financially forecasting.

¹⁸Very little is specified about how to do this, leaving questions such as the following: What taxes? What are the legal options? How do I convince the public to raise taxes?

¹⁹Cities in California may adopt local income taxes, but counties may not. Georgia does not permit local income taxes at all (Mikesell, 2010).

²⁰The literature is mixed. There is also reasoning that capital can be deferred without any long-term consequences (Hoene & Pagano, 2003).

²¹The remaining 11 percent feel there was no change in how they are providing services from before the recession.