The architecture of state and local government finance [electronic resource]
Keywords: Political Science.

As is it is often remarked, a necessity of democracy is a series of nested, even recursive, delegations from citizens to policy makers. The relationship between citizens, as the collective holders of sovereign authority, and their agents, who make, execute, and oversee law and policy in their name, is fraught with peril. There is always the prospect that agents will take actions that harm the principal, with such actions creating an agency loss. It is often costly for political principals to design and build the political architecture to mitigate these losses. Free, fair, and frequent elections are the most important means by which citizens seek to influence their agents. State and local governments provide a unique window into this relationship. For many states and localities, voters can directly pass legislation by initiatives or referendums. While direct initiatives often seeks to supplant legislation, executive orders, or court rulings, the implementation and oversight of these initiatives is, ironically, almost always left to the agents whose actions the initiative sought to supplant. Analysis of the causal effects of enacted initiatives is difficult. States differ enough from one to the other, and from one time to another, making it difficult to create any general knowledge about the effect of policy choices on state and local governments. To combat this, I use synthetic controls (Abadie2010) in order to better create counterfactual predictions for what would have happened had a state or locality pursued a different policy. This method aids the creation of comparison groups by manufacturing control groups out of weighted sums of all available comparison states across a variety of independent variables. I then compare the actual fiscal behavior of state and local governments to the predicted, but unobserved, synthetic counterfactual fiscal policy in order to estimate the effect of a change in policy within a state. In the first chapter of what follows, I examine the fundamental problem of causal inference, and identify the strengths and weaknesses of synthetic controls as tools for policy analysis. In this chapter I discuss some of the difficulties with performing general policy analysis, including overfitting of outcomes in the control group, sample trimming to achieve covariate balance, and performing analysis under multiple treatment interference. In Chapter 2, I apply synthetic controls to estimate the effect of one modern approach by which citizens influence over the legislative process has limited their representatives: the enactment of state "Budget Stabilization Funds" (BSFs). BSFs seek to force state governments to gather surplus revenues during good times into a fund that can be drawn later during bad times, when revenues slacken and when it is most difficult to borrow the funds needed by the government for recovery. It has been deemed that "strict" funds whose deposit and withdrawal rules are mathematical formulas designed to limit discretion in their use, are effective in reducing expenditure, deficits, and expenditure volatility over time. I analyze the effectiveness of the "strictest" measures using the synthetic control method. The analysis indicates no significant effects on expenditures, deficits, nor expenditure volatility in the post-implementation period nor the 2000-2001 recession, when most states first activated their funds. I conclude that these funds, by design, do not effectively limit the discretion of political actors to deposit or withdraw funds. As such, Budget Stabilization Funds do not overcome the agency problems they need to for true effectiveness. In Chapter 3, I model, in part, how cities grow and change in response to population and economic growth, and changes in tastes and demographics. Specifically I present a new way to think about local public goods provision. Local governments are important to the provision of public goods. Budgetary initiatives at the state level often trap local governments in a fiscal vise, squeezed on one side by the desires of their citizens for public and club goods and on the other side by declining state revenue sharing. As a result, many municipalities have turned to alternative methods of financing, such as implementing special taxing districts at neighborhood levels. These special taxing districts have unique democratic features, such as first mover agenda setting and weighted voting and their implementing legislation often allows governments to act as perfect price discriminating monopolists when setting tax levels. In the end, these changes have enabled savvy political actors to fracture cities into many mutable and often overlapping districts by taxing individuals to maximum allowable levels and jury-rigging elections to ensure that these districts are passed through popular vote. This results in gentrification and differentiation in demographics and a general increase in the provision of select public and club goods for certain affluent subsections of the population.