State and Local Finances

A multidimensional research initiative spanning America's fragile infrastructure systems debuts today at the Urban Institute with transportation planning expert Sandra Rosenbloom as its director.

Funding and investing in infrastructure are not only about finding adequate resources to meet the demands of citizenry, but rather requires understanding of how infrastructure fits into the broader functions of government. This brief examines the key role of pricing infrastructure projects and how the total cost of a project (including lifetime maintenance costs) should be included in funding decisions. Current federal and state policies often encourage new building rather than maintenance and care of existing infrastructure. The role of public-private partnerships in infrastructure projects is also sometimes more about political rather than economic considerations. The author presents options to better coordinate infrastructure financing and payments across levels of government.

Decentralization projects in developing and transitional countries are typically accompanied by efforts to increase the own-revenue powers of local governments. Both the literature of fiscal federalism and the practices of donors and domestic reformers often see the strengthening these powers as critically important to the success of local government reform initiatives. The recent history of Albanian intergovernmental finance reform, however, suggests that there can be too much of a good thing: Placing the enhancement of local government tax powers at the center of decentralization projects can not only crowd out—theoretically and practically—critically important efforts to develop stable, predictable, and adequate transfer systems, but can also be politically self-blocking. In this paper, we use the Albanian case to illustrate why in developing countries with highly skewed tax bases there are good reasons to focus first on stabilizing transfer systems, and only secondarily on expanding local government own-revenue powers.

Over the past 10 years, the international development community has often treated decentralization and local governance issues through a narrow lens, focusing exclusively on the devolution of financial resources within the context of elected local governments. This paper seeks to define a more detailed metric of (local) public sector finances, which recognizes that the central authorities in each country interact with residents, civil society, and the private sector in three ways: through the direct or delegated delivery of public services (by central government entities); through deconcentrated departments or jurisdictions; and/or through devolved local governments. Formulating a detailed methodology for measuring local public sector finances will serve as a foundation to better understanding of the production function of public sector outputs and outcomes.

The charitable property tax exemption can have significant revenue implications for municipalities with large nonprofit sectors and heavy reliance on the property tax. Interest in policies to offset these revenue implications has grown because of the growth of the nonprofit sector in recent decades and the fiscal crisis currently facing many local governments. This policy brief discusses some of these policies, including nonprofit payments in lieu of taxes (PILOTs), municipal service fees, heavier reliance on user fees and special assessments, in-kind contributions from nonprofits, state aid to municipalities hosting tax-exempt nonprofits, and local control over the charitable property tax exemption.

This commentary reflects on a profound impact that the fiscal crisis has on management of public property and overall lack of advanced asset management practices at local governments even though 65-99 percent of the value of the wealth owned on the taxpayers' behalf is concentrated in public land, built-up property and infrastructure.

Land assets have become an important source of financing capital investments by subnational governments in developing countries. Land sales, often with billions of dollars per transaction, rival and sometimes surpass subnational borrowing or fiscal transfers for capital spending. However, the use of land-based revenues for financing infrastructure can entail substantial fiscal risks and requires development of ex ante prudential rules for land financing comparable to those governing borrowing. This paper is part of a larger effort at the World Bank to develop knowledge products on subnational finance and fiscal reforms.

The article discusses the impact that the current international public finance crisis (which coincided with the downturn of real estate markets) has had on government property assets and related services, primarily at the level of sub-national governments. Using examples mainly from North American and European Union countries, the article illustrates how the crisis amplified the risks to which government assets have been exposed, even in more ordinary situations. The central challenge: will governments be able to mobilize the economic value of their assets strategically, to mitigate the crisis impact, or will the government property be wasted on temporary fixes?