Advancing Urban Policy:
Public Budgeting & Finance  December, 2013

This edition of Advancing Urban Policy, the monthly e-newsletter of the Maxine Goodman Levin College of Urban Affairs at Cleveland State University, features research and thought leadership from across the country related to Public Budgeting & Finance. It highlights articles on online access to government spending data, local government budgeting challenges and opportunities, spending on infrastructure, Capacity Optimization Fees, pensions, the federal budget and deficit, the EPA's budget history, and more...We plan to ring in the new year with Advancing Urban Policy articles related to Economic Development (January), followed by Community Development (February) and Nonprofit Management (March). Your ideas and submissions are welcome. They may be sent to:


Edward (Ned) W. Hill, Ph.D., Dean


P.S. Please see an important announcement related to the Albert A. Levin Chair of Urban Studies and Public Service at the end of this newsletter.



State and Local Government  


Budgeting Challenges and the Need for Strategic Planning


Local governments develop budgets in order to monitor progress toward their goals, help control spending, and predict cash flow. The central challenge that municipal officials face is mapping out the future, something that can never be done with perfect precision. The ever-changing fiscal challenges that local governments continue to encounter make developing effective budgets both more difficult and more important. Governmental entities continue to face tough fiscal challenges including economic stagnancy, rising costs, and underfunded state mandates resulting in expenses far outpacing revenues. Municipal officials continue to be frustrated about rising mandate costs from the federal and state government combined with an unwillingness to grant other revenue options. As the fiscal crisis continues to impact local government, challenges that are directly linked to this crisis can be identified:


  1. The difficulty of balancing local budget realities with decreased revenues, increased service demands, and the costs of unfunded state and federal mandates. 
  2. The dramatic cost of infrastructure and associated costs.
  3. The ongoing structural fiscal problems related to pensions. 


Pew Study: The Impact of State and Federal Cuts on Cities


A new study from the Pew Charitable Trusts reveals another way the recession uniquely impacted cities. Researchers looked through the financial reports of the country's 30 largest cities and revealed how each of them was affected by and responded to the recession. One of the most fascinating findings was just how significant an impact the cuts to intergovernmental aid had on cities. In nine cities, cuts to intergovernmental aid - money cities get from the state and federal governments - drove their post-recession revenue declines, according to Pew. "Intergovernmental aid is an important revenue source for all 30 cities, but in nine--Baltimore, Boston, Cleveland, Houston, Las Vegas, Minneapolis, Philadelphia, Phoenix, and the District of Columbia--reductions in these receipts primarily drove falling revenue," according to the report.

Pension Obligation Bonds and Government Spending


The financing of public employee retirement benefits has received attention as increasing pension and health care expenditures stress already strained public budgets. Although these concerns are frequently attributed to current economic events, the funded status of public pension systems has been a major policy consideration since the 1970s, when the estimated ratio of public pension assets to liabilities was approximately 50 percent. Because governments finance pension expenditures from general fund revenue, other programs funded from the operating budget compete with pensions for resources.


As demonstrated in recent years, unfunded pension liabilities tend to increase during fiscal downturns. Strategies for addressing the unfunded liabilities of public pensions, therefore, directly influence spending within government operating budgets. This paper examines the use of pension obligation bonds (POBs) as a financing strategy to address unfunded pension liabilities. In particular, it analyzes whether and how the use of POBs alters spending patterns within school districts.  

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Assessing Participation in the State-Sponsored Local Government Investment Pool during the Recession: An Examination of North Carolina Counties


Investment opportunities for local governments decreased dramatically from 2008 to 2011 due to diminishing revenue streams. Economic downturns in many communities forced local governments to draw down reserves in order to provide key social services, sustain normal operations, and pay down debt service. In the midst of these challenges, more innovative cash management practices become necessary to offset the loss of revenue. For local governments with cash reserves, the state-sponsored local government investment pool is usually a safe option for local governments that need additional deposit and withdrawal flexibility. Under these conditions, local governments can utilize the pools to maximize investments in the short-term to cover costs which occur later in the fiscal year or withdraw funds in favor of more lucrative securities.


This study examines county government participation in the state-sponsored investment pool, the North Carolina Capital Management Trust (NCCMT), during the recession years. Using panel data of all 100 counties in North Carolina with additional survey data from finance officers concerning annual practices between fiscal years 2008-2011, findings suggest that county sales taxes were the most influential revenue stream on NCCMT cash portfolio participation while the accumulation of alternative revenue sources decreased participation. The findings also determined that the NCCMT was the safest investment option for idle local government funds during the recession. 

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Diversity and Default Risks of Municipal Bonds  

This paper identifies important distinctions among different types of municipal debt, highlighting the difference between general fund securities-backed only by the spending power of the municipalities' general fund-and general obligation (GO) securities. Author Robert Doty highlights the importance in evaluating municipal bonds, of considering whether state law permits local governments to file for bankruptcy and whether state law gives general obligation bondholders the protection of a statutory lien if the local governments attempt to file under Chapter 9. According to Doty, "it will be necessary to monitor the July 2013 Detroit bankruptcy closely to determine the long-term prospects for general obligation bonds not secured by statutory liens in states permitting local bankruptcy."


Bart Hildreth, a specialist in municipal securities, reacts to Doty's analysis in a discussion paper. Hildreth writes, "Robert Doty makes us confront another overstatement. This time, it is about our misuse of that little topic called 'general obligation' bonds. Again, too many of us have been too cavalier in our definition of general obligation bonds. Doty throws water in our collective face by calling to our attention a distinction between 'general obligation securities' and 'general fund securities.'" 

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Federal Spending and Deficit


Budget Office Warns that Deficits Will Rise Again Because Cuts Are Misdirected


Annual federal deficits will continue to fall in the short term, the Congressional Budget Office reported in its yearly long-term outlook, because of the recent spending cuts in military and domestic programs and rising tax collections in a recovering economy. The report projected the deficit in 2015 to be equal to 2.1 percent of the economy's output, or just one-fifth of the peak shortfall at the height of the recession in 2009.  But starting in 2016, deficits are projected to rise again as more baby boomers begin drawing from Medicare, Medicaid and Social Security - the fast-growing entitlement programs.


Size and Reach of Federal Government Are Not Exploding


As a new budget conference committee seeks agreement on spending and tax priorities for the next decade, some policymakers and commentators who believe that future deficit reduction must come solely from spending cuts will likely repeat the claim that the federal government is exploding in size.  The data do not support such a claim. To be sure, total federal spending as a share of gross domestic product (GDP) rose considerably in 2008 and 2009 and remained high in 2010 and 2011, in part because GDP was unusually low due to the Great Recession and its aftermath.  But spending dropped significantly in 2012 as a share of GDP and, as the latest Congressional Budget Office (CBO) data indicates, this downward trend is expected to continue over the next five years. 


Total spending has already fallen dramatically from its 2009 peak, in part because most of the 2009 Recovery Act was designed to be temporary.  Most importantly, the government outside Social Security and Medicare is already significantly below its historical average size and will continue to shrink as the economy recovers. The bottom line is that if one measures the size and reach of the government by non-interest spending as a share of GDP, one finds that the government has indeed expanded, but modestly rather than explosively - and that all of the expansion is the result of the impact on Social Security and Medicare of rising health costs and the aging of the population.  Federal program spending outside of those two programs is already declining significantly as a share of GDP and will continue to do so as the economy recovers.



Federal Spending by the Numbers


In 2013, federal spending approached $3.5 trillion and the deficit dropped to "only" $642 billion. Some are using this small improvement in the nation's fiscal situation to avoid further budget tightening. But, according to this report, this is the wrong conclusion to draw. Following four years of trillion-dollar deficits, the national debt will still reach nearly $17 trillion and exceed 100 percent of gross domestic product (GDP) at the end of the year. Publicly held debt is alarmingly high at three-quarters of GDP.


Deficits fell in 2013 because taxes were raised, the economy saw slight improvement, and spending cuts from sequestration and spending caps under the Budget Control Act of 2011 took effect. However, the nation should not take this short-term and modest deficit improvement as a signal to grow complacent about reining in exploding spending. Though deficits will decline for a few more years, existing spending cuts and tax increases will not prevent them from rising soon, and within a decade exceeding $1 trillion once again. Driving this is federal spending which, despite sequestration cuts, will grow 69 percent by 2023. 




Federal Budget Cuts and Sequestration


When legislators in Washington talk about how taxpayer dollars are spent, they generally think in terms of two types of programs - "mandatory" and "discretionary." Mandatory programs include Social Security, Medicare, Medicaid, and Supplemental and Nutrition Assistance Program (SNAP).The funding for these programs generally flows automatically and is not determined by annual appropriations bills. Funding for discretionary programs is set each year through the annual budget process. That is, Congress retains complete discretion each year on whether and at what level to fund programs in the discretionary category. Discretionary programs are generally described as: "defense discretionary," which includes the Pentagon's budget and related military programs; and "nondefense discretionary" or NDD, which includes everything else. NDD programs include medical and scientific research, education and job training, infrastructure, public safety, public health, environmental protection, housing, and social services.


Despite the vast array of important services provided through NDD spending, it remains a small and shrinking share of the federal budget and overall economy. Historically, NDD represented less than one-fifth of the entire budget, and less than 4 percent of the country's economy (GDP).  NDD has been cut dramatically and disproportionately in recent years as lawmakers work to reduce the deficit, even though experts agree these programs, which are shrinking as a share  of our economy, don't contribute to  our nation's mid- and longer-term debt  problem.  Between fiscal years 2010 and 2011, NDD programs were cut by 7 percent on average, with cuts to some programs deeper than 50 percent.


Major deficit reduction legislation that was enacted in 2011, known as The Budget Control Act, established caps restricting how much funding Congress could allocate to discretionary programs each year over the next decade. As a result, by 2023 these caps will cut $1.6 trillion from defense discretionary and NDD programs combined, relative to the inflation- adjusted 2010 funding levels. By fiscal year 2017, NDD spending will equal a smaller percentage of the economy than ever before, with data going back to 1962. The Budget Control Act also directed a congressional Joint Select Committee on Deficit Reduction to identify an additional $1.2 trillion in budgetary savings over 10 years. The Budget Control Act included a provision that called for automatic cuts in both defense and non-defense programs - called sequestration - if the Congress did not reach an agreement on this level of deficit reduction. These cuts have real consequences in the lives of Americans. Public services are cut, investment in research and technology is cut, and help for struggling Americans is cut. These cuts also affect the broader economy, reducing job growth and creating a drag on an economy still struggling to recover from the Great Recession.


Faces of Austerity provides a snapshot of austerity's impact across sectors, featuring more than 40 stories of individuals living with federal budget cuts in 22 states, nationwide, and overseas.




Policy to Rein in Federal Spending


Congressional Budget Office Recommendations for Reducing the Deficit: 2014 to 2023


Congress faces an array of policy choices as it confronts the dramatic increase in the federal government's debt over the past several years. To help inform law-makers about the budgetary implications of various approaches to changing federal policies, the Congressional Budget Office (CBO) periodically issues a compendium of policy options that would affect the federal budget as well as separate reports that include policy options in particular areas. This volume presents 103 options that would decrease federal spending or increase federal revenues over the next decade. The options cover many areas-ranging from defense to energy, Social Security, and provisions of the tax code. The budgetary effects identified for most of the options span the 10 years from 2014 to 2023, although many of the options would have longer-term effects as well.

Solutions for America: Reining in Runaway Spending and Deficits


According to the Heritage Foundation, even after the recession, runaway spending is expected to keep annual budget deficits over $1 trillion, which could result in sharply higher interest rates, tax increases, and long-term deficits:


Soaring Spending. Federal spending per household, which has already surged from $25,000 to $31,000 since 2008, would reach $36,000 by 2020 under President Obama's budget (adjusted for inflation). If spending rises $11,000 per household, taxes will eventually have to follow.


Debt and Taxes. Even with $3 trillion in tax increases over the next decade, the President's budget would double the national debt to more than $20 trillion ($138,000 per household) by 2020.


Spending Is Driving Long-Term Deficits. Even if all of the tax cuts are extended, revenues will exceed their 18 percent of GDP historical average by the end of the decade.


This article suggests enacting spending caps, reforming entitlement programs, privatization of services, and empowerment of State legislature as strategies to reduce the deficit.


White House Reports Progress Made toward Reducing the Deficit 


Upon taking office, President Barak Obama faced an annual deficit of $1.3 trillion, or 9.2 percent of GDP, and a 10-year deficit of more than $8 trillion. While the Recovery Act and other measures added to the short-term deficit, these critical measures were temporary and did not have significant deficit effects beyond the recession.   


Short-term and long-term measures have been taken to restore accountability and fiscal responsibility. The PAYGO legislation was signed into law, which temporarily increased the deficit to arrest the economic freefall. The principle behind PAYGO is simple: all new, non-emergency entitlement spending and revenue losses must be offset by savings or revenue increases, with no exception for new tax cuts. Fiscally responsible heath care reform recognized the recognized the role that rising health care costs play in our long-term fiscal future, which is estimated to reduce the deficit by more than  $1 trillion over the next two decades. Finally, the Budget Control Act of 2011 (BCA) was signed into law, which established discretionary spending caps that put into effect nearly $1 trillion of discretionary spending cuts. These caps impose very tight constraints on discretionary spending, and meeting them will take difficult decisions and trade-offs. 


Environment and Public Finance


COFee: A Market Driven Solution to Today's Clean Water Challenges


Implementation of cost-effective strategies is at the forefront on today's clean water challenges. This article, co-authored by Levin College's Kevin O'Brien, discusses Capacity Optimization Fees (COFee) as a market-driven solution to this challenge. Waste water treatment is regulated under the EPA's Clean Water Act. Treatment facilities require a National Pollutant Discharge Elimination System (NPDES) permit that regulates point sources that discharge pollutants into water. Assuming that a facility's NPDES permit is current or will not require a change in the treatment process in the near term, it is always better to productively use each unit of treatment capacity before reaching the common threshold of 85 percent usage when planning for additional capacity is required. The threshold point at which a publically owned treatment works (POTW) would begin the expensive and time consuming task of treatment system expansion. COFee is a financial management technique that would move a system toward a goal of 84.99 percent treatment system capacity and thus help avoid the threshold in the short term.


A permitted industry can discharge up to 115 percent of their annual peak discharge level. If, for example, their permitted level is 125 percent of their peak, then the COFee is assessed on the discharge above 115 percent up to the 125 percent permitted level. Essentially, the COFee is charged for the difference between the higher permitted level and the demonstrated maximum use of the treatment system. In this example, the industry has 10 percent more capacity than it potentially needs - and this is 10 percent of their permitted discharge level that could be used by another customer. The "incentive" then, is to offer the unneeded or excess capacity to a participating industrial discharger through the capacity exchange (market function). The innovation of the Capacity Optimization Fee within the broader policy of incentives for industrial customers has become an innovative approach to solidifying the connection between wastewater infrastructure and economic development. The COFee system concept demonstrates how a financial management mechanism can transform how communities achieve the goal of providing the best service to the most customers at the least cost for the longest period of time.




The EPA's Budget from 1970 to 2010: A Lifecycle Analysis


In this article, the authors examine and explain what has happened to the Environmental Protective Agency (EPA) over the 40-year period from its birth in 1970 to 2010. Qualitative and quantitative methods were used to test hypotheses that follow from two broad categories of theoretical agency lifecycle models found in the political science and public administration literature.


The first category of theoretical agency lifecycle models proposes that the changes mature federal agencies experience in their vitality and influence overtime are generally incremental, and that these incremental changes have an internal momentum apparently unaffected by outside. In contrast, the second category of theoretical agency lifecycle models proposes that the vitality and influence of agencies vary in response to external drivers, such as partisan political factors, economic conditions, public attitudes, triggering events, and so forth.In the case of the EPA, the principal indicator of the agency's vitality and influence is its operating budget, which includes core activities such as research, regulation, enforcement, and facilities management, but excludes expenditures for Superfund and for grants or revolving fund outlays to states, municipalities, and tribes.  


Changes in the EPA's operating budget were reviewed using three approaches; First, predictions regarding general development paths for the agency were offered using qualitative assessments along with the theoretical models introduced above. Second, the results of regression analyses in which the hypothesized relationships between trends for the EPA's budget are presented. Changes in various political, economic, and other variables that can be expected to influence the agency's budget under externally driven theories are also discussed. Third, these qualitative and quantitative assessments of the overall 40-year life history of the EPA were supplemented with more narrowly focused case studies of selected fiscal years in which the EPA experienced unusually large changes in its budget, either positive or negative, compared to the years immediately prior.  

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How the 50 States Rate in Providing Online Access to Government Spending Data


Every year, state governments spend tens of billions of dollars through contracts with private entities for goods and services, subsidies to encourage economic development, grants, and other forms of spending. Accountability and public scrutiny are necessary to ensure that state funds are well spent.  In recent years, state governments across the country have created transparency websites that provide checkbook-level information on government spending - meaning that users can view the payments made to individual companies and details about the goods or services purchased. These websites allow residents and watchdog groups to ensure that taxpayers get their money's worth from deals the state makes with companies. 


In 2013, for the first time, all 50 states provide some checkbook-level information on state spending via the Internet.  In 48 states, all except California and Vermont, this information is now searchable. Just four years ago, only 32 states provided checkbook-level information on state spending online, and only 29 states provided that information in searchable form. This report, U.S. PIRG Education Fund's fourth annual evaluation of state transparency websites, finds that states are closer than ever before to meeting the standards of "Transparency 2.0" - encompassing, one-stop, one-click checkbook transparency and account ability. Over the past year, more states have opened the books on public spending and several have pioneered new tools to further expand citizens' access to critical spending information. Many states, however, still have a long way to go to provide taxpayers with the information they need to ensure that government is spending their money effectively.




Financing America's Infrastructure Needs


In 2005, an EPA advisory panel (EFAB) issued a white paper on financing infrastructure over the useful life of the assets. The paper wasn't widely distributed or broadcast for the general public at the time, but EPA's senior managers hailed the analysis and called for further study of industry practices. Who would have known that within three years of its writing, the municipal finance world would be severely challenged? More than ever, the concepts and analysis of EFAB's useful life financing are worth reconsidering now.


The Governmental Accounting Standards Board (GASB) Statement 34, issued in 1999, specifies that governments' financial statements must show a value for their infrastructure investments and the costs associated with depreciation of those assets. Today local governments continue to struggle to fully fund capitalization and replacement of infrastructure assets. Resistance to full cost pricing, increases in user fees, and the perceived inequity of today's customers paying for reinvestment in facilities that prior generations of users wore out are significant barriers to GASB 34 implementation. This article, co-authored by Levin College's Kevin O'Brien, proposes that financing infrastructure throughout the duration of its "useful life" helps solve the problem of system reinvestment. And with interest costs as low as they are presently, there hasn't been a better time to borrow for infrastructure development in a long time. Benefits of useful life financing include; inter-generational, reduction of annual debt expense, and creating opportunity for reinvestment.  


Useful life financing of infrastructure needs to be added to the toolbox of public finance tools. Decision makers should demand that traditional capital financing terms be modified to the intergenerational benefit of their communities where it can be calculated to be cost effective. While more work needs to be done to make useful life financing a standard practice and not an exception, the concept is sound and the financial advantages are real.



Savings on Infrastructure Spending


Infrastructure quality is a key component of maintaining a competitive economic advantage regionally and globally for all segments within U.S. public finance (USPF). Standard & Poor's Ratings Services assesses a wide variety of public and nonprofit entities, and one of several rating factors linking all segments in USPF is economic competitiveness and the economic strength underlying the region an entity serves. Governments that fail to maintain and invest sufficiently in new infrastructure undermine their economic bases and potential for growth. In addition, deferral of capital needs poses credit risk in the long term.


From a credit perspective, maintaining or improving infrastructure can provide a regional and greater global economic advantage because the positive effect is often reflected in an area's gross domestic product, wealth and income levels, and the employment base over the long term. According to the World Economic Forum, the U.S. ranked seventh in competitiveness in 2012, falling from second in 2009. The World Economic Forum ranked 144 countries by assessing several economic factors. The U.S. ranked 25th in quality of infrastructure, 34th in health and primary education, and 140th in macroeconomic environment. Physical infrastructure lays the groundwork for economic development. Furthermore, the American Society of Civil Engineers (ASCE) assigned a grade of "D+" to the quality of infrastructure in the U.S. in its 2013 infrastructure report card. The ASCE study estimated that the nation's quality of transportation, energy, water, and public facility capital needs required an investment of $1.6 trillion to achieve a grade of "B" using its definitions.




Levin College Opening:

Albert A. Levin Chair of Urban Studies and Public Service

Application Deadline: January 6, 2014  


The Albert A. Levin Chair of Urban Studies and Public Service was endowed in 1969 by the family of the late Albert A. Levin, an attorney, real estate developer and civic leader, in honor of his commitment to downtown Cleveland. The Levin Chair was the first endowed professorship in America combining classroom teaching with direct public service. The successful candidate will contribute to the College's national ranking in urban policy/city management and support the university's engaged learning mission.


The holder of the Levin Chair is expected to collaborate with Levin College faculty members on their ongoing research in the broad areas of city and local government management and urban public policy. In addition, he or she is expected to facilitate research and engagement with partners in the region. The Levin Chair holder will teach two courses per academic year, including the Levin Chair Seminar in city management or local government. This is a two-part position. The core is a tenured full professorship with a competitive nine-month salary. The appointment to the Levin Chair position is to a five-year renewable term that funds research support, travel, and research assistance from the Levin Chair endowment. The renewal of the Chair is subject to a review in the fourth year of the appointment.  The start date is August, 2014.  Hiring is contingent on maintaining existing levels of funding from the state of Ohio. Offer of employment is contingent on satisfactory completion of the University's verification of credentials and other information required by law and/or University policies or practices, including but not limited to a criminal background check.


Minimum qualifications: (a) an earned doctorate or appropriate professional degree; (b) a substantial record of published work based either on research or reflections on practice; (c) career experience in city management, urban policy, or a related field; and (d) a record of direct involvement in public service achievement.


Preferred candidates will have (a) an outstanding record of published work based either on research or reflections on practice; (b) significant public service leadership experience; (c) a track record in securing funded research or community-based projects; and (d) a proven record of teaching excellence at the undergraduate and graduate levels.


Applicants should submit a cover letter with a personal statement specifying their history of research and public service outreach, curriculum vitae, and the names, addresses, phone numbers, and emails of five references. These materials should be submitted to the Search Committee at Mailed or emailed application materials will not be accepted. Administrative questions may be directed to


Advancing Urban Policy: Public Budgeting & Finance was created with counsel from Benjamin Y. Clark, Ph.D., and Kevin O'Brien; compiled by Jessica Murphy, graduate assistant; edited by Roslyn Miller, consultant. Inclusion in Advancing Urban Policy is for informational purposes only and does not imply endorsement by the Maxine Goodman Levin College of Urban Affairs or Cleveland State University. 


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