Also Called Municipal Finance
Public finance (also known as municipal finance) has two main definitions. The first is financial management for governments and government entities. These can include towns, cities, counties and states, as well as the public authorities that manage such entities as (when they are publicly owned in the sense of being controlled by government rather than by private owners), for example:
- School districts
- Turnpikes and other toll roads
- Bridges and tunnels
- Public transit systems, such as rail, bus, subway and ferry lines
- Municipal water systems
- Sewer systems
- Garbage and waste pickup
- Publicly owned electric utilities
- Publicly owned stadiums, arenas, racetracks and sporting facilities
- Parks and recreation areas
The second is the branch of investment banking and securities underwriting that specializes in raising funds for governments and public authorities through the structuring and marketing of bond issues.
Governmental Financial Management
The aspect of public finance that encompasses financial management with governmental bodies, agencies and authorities calls for people with expertise as, for example:
In funding government operations, financial managers in the employ of government bodies often must work with elected officials to set policies and legislation regarding various funding sources, most notably:
- User fees and tolls
Gamesmanship in Public Finance
An old, familiar feature of budget exercises within governmental bodies is use of the Washington Monument Ploy to protect headcount and spending while wearing down public opposition to increases in tax rates, user fees and/or tolls.
while wearing down public opposition to increases in tax rates, user fees and/or tolls.
Municipal Consolidation and Mergers
In a number of states, the proliferation of layers of government and/or small entities at each level often is blamed for rapidly increasing costs of government that far exceed the generalized rate of inflation for goods and services in the private sector. A popular proposed remedy is to consolidate or merge small towns and school districts, among other public bodies, to eliminate redundant administrative overhead and empty building space, thereby decreasing costs. Similarly, there are moves afoot for small towns and other jurisdictions lacking scale to outsource or share services, such as garbage pickup, road maintenance and snow plowing, to spread the capital cost of expensive vehicles and equipment that often sit idle. Moreover, neighboring towns may seek to share police, fire and rescue services in a similar cost reducing attempt.
Recent research, however, indicates that municipal mergers and consolidations not only may fail to meet expectations as strategies for cost savings but may even have the opposite of their intended effects. See "When Civic Mergers Don't Save Money," The Wall Street Journal, August 29, 2011.
They conclude that a group of several small governments can end up costing less, collectively, than a single larger government combining all their functions for these principal reasons:
- Small governments tend to employ fewer highly paid professionals such as lawyers.
- Small governments tend to have lower pay scales and benefits (like health insurance and pensions) for comparable positions.
- Small governments usually have more positions filled by low wage part timers.
Another aspect of small governments not mentioned in the article is that they are more likely than larger jurisdictions to depend on unpaid volunteers to deliver key services, such as fire fighting and ambulance, rescue or EMS squads.
Moreover, the researchers quoted in the article find that, when governments merge, the pay and benefit packages for the retained staff tends to rise to the level offered by the highest paying government prior to the consolidation.
Additionally, the "harmonization" of staff and services also tends to result in increased services (and thus greater costs) for residents of the areas with the lowest level of services beforehand. In the end, the savings produced through reduction of duplicative managers, administrators and equipment is more than offset by increased compensation for the vast majority of workers.
The Illinois Cost of Government Study
A study of public finance in the state of Illinois shows that, compared to average salaries in the townships, county employees earn 35% more, municipal employees get 46% more and state employees receive 49% more. Townships have 77% of their positions filled by part-timers, as opposed to 25% in municipalities, a mere 9% in counties and 31% in the state government. Not surprisingly, then, total spending in the townships rose by only 17% from 1992 to 2007, versus 50% in municipalities, 66% in counties and 51% in the state government. Another factor is that the townships usually have significantly fewer employees per resident than other layers of government.
As in other states, costs in Illinois school districts are rising very fast, up 74% in the 1992 to 2007 period. Average school district salaries are 25% higher than township salaries, and 23% of their headcount is part time.
Innovations: Among the recent innovations in public finance are social impact bonds, which are being used to fund cutting edge programs, but which transfer the risk of failure from taxpayers to private investors.