Comments on“New Orleans: Political Economy

of Public Money”by Aaron Schneider

James Alm

Purpose of paper: How does the public finance system of New Orleans

affect delivery of public services? In particular, “is there significant public activity…outside the

boundaries of traditional accounting?”

My comments:1. Theoretical framework: When does local

governance really work?2. Empirical framework: Is New Orleans

“different” than other cities in its pattern of public finances?

Theoretical framework: When does local governance really work?

• Aaron’s framework: What are “best practices” in public budgeting, and how does New Orleans compare?

• The underlying notion here is: With these actual practices, can New Orleans deliver services effectively?

Aaron discusses this in the context of some general principles of “international best practice” in public budgeting:• Comprehensiveness• Transparency• Legitimacy• Plus:

oDisciplineo FlexibilityoPredictabilityoContestabilityoHonestyo InformationoAccountability

Here is a slightly different formulation, from the theory of “optimal decentralization” and its implementation.

Why Decentralize?

Economic Reasons – Efficiency Gains/Economic Development• Better matching of services with citizen demands• Self-sorting of individuals by preferred local government• Greater willingness to pay for services• More revenue mobilization• More governmental innovation• Move government “closer to the people”

Political Reasons• More grassroots participation• More local control• Greater ability to accommodate ethnic/religious differences• More accountability – more “democracy”• Autonomy versus dissolution

→Oates’ Decentralization Theory/Subsidiarity Principle

But: Decentralization can create problems:• Creation of more macroeconomic instability

o Loss of central government budget control (e.g., mandated transfers)

o Policy coordination problems (e.g., monitoring)o Moral hazard problems (e.g., bailouts)

• Loss of ability to direct social investment or to achieve national objectives (e.g., “merit goods”)

• Loss of ability to equalize income distribution across jurisdictions

• Loss of efficiency from:o Economies of scaleo Externalitieso Local government capacity

Balancing the various criteria

Economies of scale, spillover of benefits, lack of local capacity, national objectives, macroeconomic stability, and income distribution call for centralization, while diversity – and the efficiency gains from tailoring services to local circumstances – calls for decentralization.

But: When can local governments – like New Orleans – really capture the benefits of local provision by providing services effectively?

Can any local government deliver services effectively? Requirements for effective service delivery

Is there a …?• Locally elected government?• Local appointment of chief local officers?• Locally approved budget?• Absence of mandates on local governments?• Some local government control of revenues?• Some local government power to borrow?• Transparent grant system?• Clear expenditure assignment?• Local government capacity:

• To collect taxes?• To deliver services?• To keep adequate books?

• Central government ability to monitor?

Requirement Yes/No1 There is a popularly elected local government.

2 There are locally appointed chief officials.3 There is a locally approved budget.

4 There is an absence of central government mandates regarding local government employment and salaries.

5 The expenditure assignment is clear.6 Local governments may exert some control on the level of some

revenue sources. 7 Local governments have some powers to borrow.

8 The grant system is transparent, and local governments understand their entitlements.

9 Local governments have the capacity to collect taxes.10 Local governments have the capacity to deliver services efficiently.

11 Local governments have the capacity to keep adequate books of account.

12 The state or central government has the ability to monitor the behavior of local governments.

SCORECARD

So, in the case of New Orleans:

Is there a …?• Locally elected government?• Local appointment of chief local officers?• Locally approved budget?• Absence of mandates?• Clear expenditure assignment?• Some control of revenues?• Some power to borrow?• Transparent grant system?• Local government capacity:

• To collect taxes?• To deliver services?• To keep adequate books?

• State and/or central government ability to monitor?

Empirical framework: Is New Orleans “different” than other cities in its pattern of public finances?

• Aaron’s empirical work suggests the answer may be “yes”, perhaps in part because of its deviations from “best practices”.

• Still…o The data are for 2005.o The regressions and other analyses are suggestive

but not definitive (e.g., additional controls, per capita measures, …)

• Why not look at additional data?

Percentage Change in Local Government Property Tax Collections, 2006-2009, by State (weighted)

Some other considerations:• One has to consider the total number of local

governments in any area, not just the “city” government.

• In 2007, there were 89,476 “local governments” (including public school systems) in the United States.

• Louisiana had 526, placing it 43rd among all states in numbers. (Illinois was 1st, with 6,994.)

• A complete picture of “local government public finances” requires considering this “layer cake” of governments.

Conclusions