by Paige Terryberry
Senior Analyst for Fiscal Policy, John Locke Foundation
Recently the John Locke Foundation team met with candidates running for local office. We highlighted critical principles for local government’s fiscal health and sustainability.
A principled foundation for governing at any level should rest on the precepts of transparency, restraint, and simplicity. Transparency ensures an engaged public and allows voters to hold local officials accountable for their actions. Because the scope of local government is limited, restraint is vital to ensure government adheres to its proper role. When government issues any tax, regulation, permit, etc., it should be as simple as possible for the taxpayer, entrepreneur, or business to comply. Complicated asks from government burden those who make government possible.
Below are five specific guidelines to local governing:
Most people do not object to paying taxes if they think their money is properly spent.
Unlike some federal or state taxes, local governments collect taxes for services that directly benefit the taxpayer. Property and sales taxes, for example, parallel the benefits received. Property taxes help pay for essential water and sewer services in the home and law enforcement who protect property and lives. Local taxes fund local services like fire departments, education, etc. Poorly structured taxes require individuals to subsidize something that does not benefit them.
Other existing taxes depend on the locality. Fees and taxes related to construction, hotel stays, recycling, waste, and utilities, for example, may not be necessary, but they allow local governments the autonomy to form a comparative advantage in their region.
Any conversation on increasing taxes must be subsequent to a careful audit of existing revenue’s use.
Through restrained spending, local governments can earn the trust of taxpayers. To paraphrase Milton Friedman, government spending, even at the local level, is a tax. Restrained spending also requires weighing one-time projects against recurring ones. Once a spending program is underway, it is nearly impossible to curb. One-time spending respects workers’ tax dollars through fiscal restraint. Local governments’ use of American Rescue Plan Act (ARPA) funds serves as a litmus test for principled spending. Unabated government spending will have detrimental effects on growth.
In the same way, spending for programs or projects should broadly benefit the tax base. Otherwise, user fees can be utilized to recover the full costs of a service that benefits a select group.
Given the limited resources facing local governments, local leaders must prioritize their budgets to address the essential requirements in their already limited domain. Local governments cannot rightly declare a starved budget while also pouring money into downtown parks, convention centers, athletic stadiums, or municipal golf courses, for example, that would shut out private ownership of such facilities or private investment in the area to meet a market interest. Taxpayer money should not be used for vanity projects. If irresponsible spending leads to the locality taking on debt, the local government’s role is to make all debt and any repayment plans transparent to voters.
The nonprofit group Truth in Accounting recently released its annual Financial State of the Cities report, revealing that most major cities did not have enough money to pay their bills. How could this be? Through accumulating unfunded retirement benefit promises.
As I wrote last month:
Though each city has some manner of a balanced budget rule, accounting tricks such as counting borrowed money as income, hiding current bills by punting them to the next fiscal year, and excluding the true retirement cost of state employees cause confusion and may allow cities to manipulate their bottom line.
The state of North Carolina has $35.6 billion in unfunded pension and promised health care obligations for state retirees.
Local governments often have unfunded liabilities, too. Management of retirement benefits is critical for a local government’s fiscal future.
The risks of unmanageable liabilities are threefold: citizens are jeopardized with higher taxes to pay for such liabilities, government employees may receive less than their expected compensation upon retirement, and local government’s ability to provide services may be damaged because the cost to provide benefits crowds out other budget priorities.
Local governments may consider Health Savings Accounts or Health Reimbursement Arrangements to manage retiree benefits. These options lower overall health care costs and better address individual, medical needs. Governments may also consider tightening eligibility criteria by lengthening the vesting period (the years of service required to receive any benefit) or providing coverage until a certain age or point in time (when an individual is eligible for Medicare, for example).
A government could also save money by outsourcing services to contractors who require a flat fee, rather than a salary and indefinite retirement benefits.
At the state level, legislators determined in 2017 to disallow free health coverage upon retirement for new state employees hired after January 1, 2021.
Government attention to ballooning retiree liabilities is crucial to any bottom line.
Efficient and up-to-date services and infrastructure attract businesses. Low property and sales taxes and minimal business regulations and fees contribute to the business-friendly climate. Local governments should pursue economic growth policies and not engage in corporate welfare.
There is no such thing as a free economic development grant. Yet North Carolina diverts hundreds of millions in taxpayer money to private businesses to attract growth. These grants promise shiny new buildings and jobs, but they harm existing businesses and taxpayers. Economic incentives redirect taxpayer monies to politically favored corporations. Moreover, the return on investment to a locality is not worth it.
Local government leaders are not economic planners. Instead, leaders should act as ambassadors and communicate their comparative advantage to interested businesses. Rather than seek to dispense favors to specific businesses, local leaders should create an environment welcoming to all investment and job growth.
Most of government’s problems can be solved through privatization. With some essential services, government can partner with the private sector to find the most efficient options. With nonessential services, government must let private corporations thrive.
Using competitive sourcing, local governments can take bids from private providers to select the best and most affordable services. Local governments privatize water, wastewater, and other essential services to save time and money. And, as mentioned above, paying private contractors a flat fee avoids the long-term liabilities that come with government employees.
Governments overreach when they engage in activities that are offered or could be offered by private businesses. Local government-run community centers, for example, unnecessarily compete with private entities like the YMCA. Government creation of stadiums, community centers, athletic fields, and equestrian centers undermines entrepreneurs and threatens existing businesses and the workers they employ. If a local government can provide all of these things, where is the line?