Pawns or rooks? Local government responses to economic shocks, 1977-2011

1. Pawns or rooks? Local government responses to economic shocks, 1977-2011 Michael Craw Institute of Government University of Arkansas, Little Rock mccraw@ualr.edu

2. Research question • Local governments have an ideal position to respond to local needs during a recession • But CW holds that local governments also face significant economic constraints that limit responsiveness • What explains variation in local government expenditures over differing economic conditions?

3. Theory 1: Local governments as pawns • Local government own-source revenues are strongly tied to the state of the economy • State intergovernmental revenues similarly are tied to the state of the regional/national economy • Implication: local government revenues, and hence expenditures, may decline as tax base declines

4. Theory 2: Local governments as rooks • Local governments face significantly increased demands for services during times of economic distress • Hence seek additional revenue streams when tax base falls in order to continue services • Demand for and participation in intergovernmental revenues may therefore increase as tax base falls, offsetting declining own-source revenues

5. Total and general local revenues, 1977-2011 (2009 $000s) Source: Census of Governments Annual Government Finances Survey http://www.census.gov/govs/local/

6. Sources of local general revenues, 1977-2011 (2009 $000s) Source: Census of Governments Annual Government Finances Survey http://www.census.gov/govs/local/

7. Sources of local general revenue, 1993 and 2009 Source: Census of Governments Annual Government Finances Survey http://www.census.gov/govs/local/

8. Local direct general expenditures, 1977-2011 (2009 $000s) Source: Census of Governments Annual Government Finances Survey http://www.census.gov/govs/local/

9. Local direct general expenditures by function (excluding education), 1977-2011 (2009 $000s) Source: Census of Governments Annual Government Finances Survey http://www.census.gov/govs/local/

10. Distribution of direct general expenditures by function, 1993 and 2009

11. Empirical questions • Pawns, rooks or both? • To what extent do local general expenditures respond to changes in own source revenues, state intergovernmental revenues, and GDP? • To what extent do local own source revenues and state intergovernmental revenues respond to changes in local general expenditures? • Data source: Census Bureau’s annual summary of state and local government finances

12. Methods • Endogenous variables: • Direct general expenditures • Own source revenues • State intergovernmental revenues • Exogenous variable: GDP • All variables differenced to become I(0) • Testing criterion: Granger causality • Statistical model: vector autoregression

13. Results: Equation 1

14. Results: Equation 2

15. Results: Equation 3

16. Granger causality tests • Equation 1: Direct general expenditures • Own-source revenues: p < 0.001 • State IGRs: p = .028 • Equation 2: Own-source revenues • Direct general expenditures: p = 0.744 • State IGRs: p = 0.503 • Equation 3: State IGRs • Direct general expenditures: p=.054 • Own-source revenues: p= .089

17. Conclusions • Local governments have traits of pawns: • Lagged own-source revenues and state IGRs Granger cause expenditures • Own-source revenues and state IGRs in turn are caused by GDP • Direct general expenditures fail to Granger cause own-source revenues • But they may be rooks in the intergovernmental arena: • Direct general expenditures may Granger cause state IGRs: a drop in local expenditures may be followed (with a lag) by an increase in state IGRs