Municipal Finance Series

Travis St. Clair outlines how fiscal problems at the local level often stem from short-term fiscal and electoral incentives as well as voters’ limited attention. He reviews potential solutions to improve the financial transparency and long-term planning of local governments.

Kent Hiteshew and Ivan Ivanov write that the United States municipal bond market suffers from fragmentation, poor liquidity, and inadequate disclosure due to the dominance of small, infrequent issuers who struggle to meet regulatory disclosure requirements. They argue that greater involvement of state-backed municipal bond banks could help address these issues by pooling smaller issuances, reducing borrowing costs, and streamlining disclosure obligations for local governments.

New research from Renping Li finds that consolidation among investment banks has produced higher underwriting costs for local governments in issuing muni bonds. Importantly, Li says these costs are not offset by efficiency gains and that the result is a deterioration in local government finances.

Many cities across the United States are experiencing structural budget deficits. However, in part due to salary and benefit promises to public-employee unions, there is little capacity to control spending. Local politicians have few electoral incentives to push back against union bargaining demands to address these rising costs.

Municipal and state governments provide input to the organization that creates their accounting standards. Such input by stakeholders can be helpful, but their influence has produced some accounting rules that diverge from both economic reality and private sector rules. These deviations allow governments to understate budget liabilities, including pensions plans, and put at risk the financial health of states and cities across the United States.

Local governments in the United States spend trillions of dollars each year delivering essential services and infrastructure, with enormous implications for our economy and quality of life. Chris Berry and Justin Marlowe examine the links between municipal governance structures and fiscal outcomes, revealing the state of municipal finances today.