Travis St. Clair

The United States faces an infrastructure gap of nearly $3 trillion, with significant consequences for its economic competitiveness and public service provision. As state and local governments build and maintain the majority of the nation's infrastructure, understanding the factors that lead subnational governments to engage in capital spending is critical to supporting economic growth and standards of living. This paper explores a number of factors associated with state and local capital spending since 1977, including population demographics, federal stimulus, interest rates, political ideology, fiscal rules, and geography. In aggregate, spending has increased by 50 percent in real per-capita terms, though it has fallen as a share of total government spending. Federal assistance alone accounts for a large share of the variation in capital investment, while fiscal rules and political factors exhibit little explanatory power. These findings are consistent with a model in which capital investment is shaped primarily by cost pressures rather than economic returns or ideology.

Between 2020-2021, the U.S. federal government passed four major pieces of legislation that included nearly $1 trillion in aid to state and local governments. One concern with distributing federal stimulus in the form of intergovernmental transfers is that subnational governments may use the aid to pay down unfunded pension liabilities or other debt rather than preserve employment. We examine the effect of fiscal stimulus passed in response to Covid-19 on public pensions. To address concerns about endogeneity, we use a difference-in-difference design and an instrumental variable estimator that relies on variation in congressional representation. We find that “excess” pension contributions increased, primarily in governments with low funding ratios, but that these increases represented less than one percent of total federal funding. We also find that governments reacted to pandemic aid by adopting more conservative assumptions for the calculation of pension liabilities.

State governments in the United States offer a wide range of tax incentives to encourage the use of green technologies and support the energy transition away from fossil fuels. These tax incentives offer a politically palatable middle ground that subsidizes more environmentally friendly policies while also giving the appearance of reducing taxes. In this paper, we evaluate the extent of climate-related tax expenditures (i.e. the amount of foregone revenue from tax preferences) at the state level by collecting data from U.S. state budget documents and classifying and comparing the different types of tax expenditures across various dimensions. Our analysis yields three key findings: (1) ‘climate-friendly’ tax expenditures at the state level account for only about 0.1% of aggregate state tax collections and are negligible relative to federal incentives historically, (2) energy subsidies make up more than half of the incentives in dollar terms, and (3) both climate and fossil fuel subsidies exhibit substantial longevity due to the infrequency with which governments revisit or re-evaluate them. While these results suggest that there may be opportunities to better utilize tax incentives for climate policy, tax expenditures must be integrated more strategically into the broader landscape of budget and tax policy to efficiently advance climate goals.

Public sector organizations frequently face increased demand for their services during economic downturns at the same time that their revenues decline. This problem is particularly acute for nonprofit organizations, who cannot rely on involuntary taxation in the same manner that governments can. In this paper, we document the business cycle risk that nonprofit organizations are exposed to, paying particular attention to the extent that various types of nonprofit revenue covary with economic conditions. We find that aggregate donation revenue is procyclical while program revenue is counter-cyclical. Furthermore, nonprofits that expand their share of revenues from donations will cause their revenue portfolio to become more procyclical, while those that expand their share of revenues from program revenue will experience the opposite. The results highlight a previously unexamined source of risk for nonprofits and emphasize the need for reserve policies that are attentive to organizations’ exposure to economic conditions.

Immigration raises important political and economic questions, yet there remains considerable disagreement about its short- and long-term consequences. This paper examines the fiscal consequences of immigration for local governments. Previous work has highlighted the gap between the long-term economic benefits of immigration and the short-term fiscal burden posed by recent arrivals, however several influential estimates based on cash-flow accounting suffer from potential bias. I use a quasi-experimental approach to re-examine a famous case: the large wave of Cuban refugees that landed in Miami in 1980, otherwise known as the Mariel Boatlift. Using a synthetic control design, I find that per-pupil education costs increased in Miami in the aftermath of the Boatlift, financed by an increase in state transfers. These effects persisted for at least ten years. The results shed light on the heterogeneous impacts of immigration over time and space.

This paper provides estimates of the supply elasticity of municipal debt by exploiting a discrete jump in interest rates created by the Tax Reform Act (TRA) of 1986. In order to qualify for bank financing of tax-exempt debt, governments can issue no more than $10 million of nominal debt per year. Using bunching methods, I quantify the intensive margin responses to the notch for counties, municipalities, townships, special districts, and school districts. The estimates indicate that the average marginal bunching government lowers its borrowing by approximately 5 percent in response to a 8-17 percent increase in interest costs, implying an overall price elasticity of -0.3 to -0.6. The behavioral response of special purpose governments is nearly twice as large as that of general purpose governments. The results have implications for the optimal financing of public infrastructure.

How do parents react to different types of information about school quality? This paper exploits New York state’s fiscal monitoring program to compare the effect of two different types of quality labels on school district outcomes: one reflecting budget solvency, the other reflecting economic and demographic pressures. Using a regression discontinuity design, I examine the effect of fiscal and "environmental'' stress labels on property values, school enrollment, graduation rates, and test scores. While fiscal stress labels have no effect, environmental stress labels – indicating social, economic, and demographic pressures, such as a high percentage of disadvantaged students – cause enrollment and property values to decline, especially in wealthier districts. Parents of school-age children are insensitive to fiscal indicators of school quality but respond at the margin to demographic indicators.

Climate hazards can compound existing stresses on the revenues and expenditures of local governments, revealing potential risks to fiscal stability. Incorporating these risks into local budgeting and strategic planning would encourage a more complete accounting of the benefits of climate adaptation and risk reduction efforts.

Public pension systems in Latin America have historically suffered from low coverage, with a relatively small percentage of the labor force eligible for benefits in retirement. In recent years, many governments have implemented reforms aimed at expanding the percentage of citizens that are benefit-eligible. In this paper, we classify and evaluate pension reforms in four Latin American countries, focusing specifically on policies aimed at expanding coverage among the large share of Latin Americans that operate as self-employed workers. The reforms that we examine range from those linked to simplified tax regimes to those that provide pension-specific subsidies. With the exception of a 2006 reform in Costa Rica that subsidized pension contributions at progressive rates, we find no evidence that any of these reforms increased coverage. Our results highlight the opportunity costs to low-income workers of paying into the system, which include foregoing eligibility for less generous, non-contributory pensions.

Using Form 990 data reported by public charities, we document significant bunching of nonprofits at near-zero net assets, the threshold for insolvency. Bunching occurs despite the fact that creditors cannot force insolvent nonprofits into involuntary bankruptcy. We show that the extent of bunching is greater among organizations that rely more heavily on contribution revenue, and that by inflating their net assets, bunching organizations are able to increase their contribution revenue relative to firms that report negative net assets. Charitable donors appear to use the net assets threshold as a heuristic for a charity's financial health; nonprofit managers, in turn, respond to the preferences of their donors.

Revenue uncertainty is a common concern among public administrators, but little research examines its effects on service delivery. Using a novel empirical strategy to capture how revenues deviate from administrators' expectations, we estimate the impact of revenue uncertainty on Ohio public school districts' educational effectiveness. We find that errors in districts' revenue forecasts have a significant negative impact on student achievement, beyond what one would expect based on changes in spending levels. In particular, a one percentage point increase in error involving revenue shortfalls leads to a decline in student achievement growth of between 0.004 and 0.02 standard deviations during the following school year, which equates to about 2-8 days of learning. These effects are concentrated in urban school districts with low fund balances (below 22 percent of annual revenues) and high enrollments (more than 1,730 students). We also find that revenue shortfalls lead to teacher attrition and to districts placing new tax levies on the ballot.

In the wake of the economic downturn of 2008–2009, researchers and policymakers have focused considerable attention on the extent of unfunded liabilities in US public sector pension plans and the implications for the long term fiscal sustainability of state and local governments. In response to the growth in liabilities, many states have introduced legislation that cuts back on defined benefit (DB) plan commitments, in some cases even shifting the pension system from a DB to a defined contribution or hybrid plan. This paper explores the factors that have led states to engage in pension reform, focusing particular attention on one factor that has only recently gained attention in the research literature: contribution volatility. While unfunded liabilities have significant long-term solvency implications, in the short term fluctuations in the amount of required contributions pose substantial difficulties for the ability of plan sponsors to balance budgets and engage in strategic planning. We begin by quantifying the volatility in the required contributions US states were expected to make between 2001 and 2013 and comparing the volatility of pension spending to other relevant tax and spending measures. Next, we describe the various types of pension reforms that states have implemented and examine the fiscal pressures facing those states that have engaged in reform. States with greater fluctuations in their required payments have been more likely to reduce benefits and increase employee contributions; they have also been more likely to institute these reforms sooner.

State governments in the United States are well placed to identify opportunities for mitigation and the needs for adaptation to climate change. However, the cost of these efforts can have important implications for budgets that already face pressures from diverse areas such as unfunded pensions and growing health care costs. This paper evaluates the current level of spending on climate-related activities at the state level and provides policy recommendations aimed at improving financial management practices as they relate to climate risk. An examination of state budgets reveals that climate mitigation and adaptation activities represent less than 1% of spending in most states. However, state governments are not clearly demarcating climate expenditures, hindering the identification of climate-related budgetary risks. In the absence of guidelines, these longer-term fiscal outlays may remain chronically underfunded in favor of more near-term spending priorities.

Metropolitan economies sometimes experience economic adversity, with resulting serious impacts on the area's residents and institutions.  The causes, nature, and length of these regional economic problems vary.  The question we address in this book is why some regions are resilient in the face of economic adversity, while others are not.  In particular we examine the role of public policy and intentional activity in achieving resiliency; what strategies and policies can regions pursue to help bring about economic resilience and long-term economic health and what are the implications for economic development policymakers and practitioners. Our analysis covers the period from 1978 to 2014.  We separate out the Great Recession years and their aftermath (2007-2014) in order to assess the effect of this severe and prolonged shock. We also look closely at six American metropolitan areas to determine what strategies they employed, which of these contributed to economic resilience, and which did not. 

Climate change poses a real and meaningful threat to economies, industries, and companies at global, national, and local levels. The physical impacts of climate change create multiple, well-documented risks to people, governments, and business, but the risks are not limited to physical damages: other important risks include loss of competitiveness and value associated with the transition to a low carbon economy, and legal liability for the mismanagement of such risks. These risks are particularly relevant to public pension funds, which have long-running, predefined obligations to beneficiaries and need to sustain growth over longer time horizons.

In recent years, the financial community and many state governments have begun working to understand the nature and extent of the climaterelated risks to which their investments are exposed. Major efforts have been undertaken to promote climate risk assessments and to establish standards for related disclosures; many thought-leaders now argue that climate risk management is mandated by fiduciary duty. Stockholders, including major pension funds, are pushing companies to quantify their emissions and “stress test” their exposure to climate risks. Such risks accrue to all investors; fiduciaries need to understand the implications of these risks for their portfolios.

This is particularly true of state pension systems, and this report highlights the importance of incorporating such risks in the context of Maryland’s State Retirement and Pension System (SRPS). The Maryland SRPS currently manages over $47 billion in assets on behalf of over 380,000 members across numerous state and local government agencies. While some other state pension systems are beginning to systematically address their climate risk exposure, SRPS has implemented only some of the important policies and actions related to climate risk management.

Fortunately, industry leadership groups, working with diverse stakeholders, have begun developing best practices for managing climate risk. These include clearly articulating a fund’s investment philosophy and governance principles with respect to climate change, conducting a climate risk assessment, leveraging stockholder privileges to engage with corporate boards, and reallocating assets. Each of these practices requires, and is strengthened by, transparency of strategy and action. While SRPS has embraced some of these best practices, it has only partially implemented others. We highlight that the State of Maryland could benefit from (1) clarifying its investment principles, (2) undertaking a comprehensive climate risk assessment, and (3) increasing its corporate engagement and transparency.

The report offers several policies the Maryland State Retirement and Pension System could adopt in order to address its climate-related financial risks, and in doing so seeks to start a conversation and initiate a process of stakeholder engagement that can illuminate how the State might proceed in incorporating climate impacts into its investment strategy.

Nonprofits in the United States must comply with various state and federal regulations to maintain their tax-exempt status. Despite persistent calls to increase accountability in the nonprofit sector, there is little research examining the burden imposed by existing regulatory requirements, especially at the state level. This paper uses a bunching design to estimate the avoidance behavior exhibited by tax-exempt charities in response to New York State's audit requirements. There is clear evidence of bunching in response to the requirement that nonprofits above certain revenue thresholds file financial statements reviewed by or audited by an independent certified public accountant. Measuring the extent of bunching around the revenue notches yields estimates of the average revenue that nonprofits either forego or fail to report in avoidance of the requirements. Results from dynamic estimation show that charities near the threshold for a review engagement report approximately $1,300 less revenue than otherwise predicted by a counterfactual; charities near the threshold for a full audit report approximately $1,400 less. The results have implications for the optimal design of state-level financial regulations.

We explore the conditions under which short, comparative interrupted time-series (CITS) designs represent valid alternatives to randomized experiments in educational evaluations. To do so, we conduct three within-study comparisons, each of which uses a unique data set to test the validity of the CITS design by comparing its causal estimates to those from a randomized controlled trial (RCT) that shares the same treatment group. The degree of correspondence between RCT and CITS estimates depends on the observed pretest time trend differences and how they are modeled. Where the trend differences are clear and can be easily modeled, no bias results; where the trend differences are more volatile and cannot be easily modeled, the degree of correspondence is more mixed, and the best results come from matching comparison units on both pretest and demographic covariates.

Recognizing that cross-sectional data are often insufficient to address the identification problems associated with estimating the effect of government taxation or spending, economists engaged in public finance research often utilize longitudinal data that span the period over which a policy change occurred. As economic data have proliferated over the last decade, uses of the difference-in-differences design and its variations have become more numerous. Nevertheless, published research that invokes difference-in-differences commonly fails to present evidence and reasoning that enable the reader to properly evaluate the causal claims under investigation. In this paper, we examine the threats to internal validity that exist when using difference-in-differences for causal inference and review variations of the design that can be used to address these threats. Next, we survey the public finance literature in order to examine the ways that these threats are addressed in practice. We conclude by proposing a number of recommendations for researchers to consider as they implement difference-in-differences as an empirical strategy.

Although evaluators often use an interrupted time series (ITS) design to test hypotheses about program effects, there are few empirical tests of the design’s validity. We take a randomized experiment on an educational topic and compare its effects to those from a comparative ITS (CITS) design that uses the same treatment group as the experiment but a nonequivalent comparison group that is assessed at six time points before treatment. We estimate program effects with and without matching of the comparison schools, and we also systematically vary the number of pretest time points in the analysis. CITS designs produce impact estimates that are extremely close to the experimental benchmarks and, as implemented here, do so equally well with and without matching. Adding time points provides an advantage so long as the pretest trend differences in the treatment and comparison groups are correctly modeled. Otherwise, more time points can increase bias.

Despite the shortfalls in public employee pension funds, there is little known about the effect of fiscal institutions on pension funding. This paper focuses attention on the link between pension contributions and budget stabilization funds (BSFs) over the period 1997–2008. It employs the Blundell–Bond (1998) estimator in order to address the concern that the deposit and withdrawal rules that drive the management of BSFs may be endogenous to state pension contributions. Empirical results suggest that BSFs with strict deposit rules are associated with higher pension contributions, while strict withdrawal rules are associated with lower contributions.

The Full Birth History has become the dominant source of estimates of fertility levels and trends for countries lacking complete birth registration. An alternative, the ‘Own Children’ method, derives fertility estimates from household age distributions, but is now rarely used, partly because of concerns about its accuracy. We compared the estimates from these two procedures by applying them to 56 recent Demographic and Health Surveys. On average, ‘Own Children’ estimates of recent total fertility rates are 3 per cent lower than birth-history estimates. Much of this difference stems from selection bias in the collection of birth histories: women with more children are more likely to be interviewed. We conclude that full birth histories overestimate total fertility, and that the ‘Own Children’ method gives estimates of total fertility that may better reflect overall national fertility. We recommend the routine application of the ‘Own Children’ method to census and household survey data to estimate fertility levels and trends.

Much of the research on tax and expenditure limitations (TELs) focuses on the impact that limits have on the size of the public sector or the distribution of expenditures at the state and local levels. While these results shed light on the extent to which TELs succeed in reducing government spending, they do not have much to say about the impact of TELs on government budgeting or financial planning, despite the fact that voters support TELs in the hope of reducing government inefficiency (Courant, Gramlich, and Rubinfeld 1980; Ladd and Wilson 1982). This paper examines the effect of TELs on the stability of government revenues; sound tax policy entails controlling the volatility of revenues in order to plan more effectively for the future. Using panel data from Colorado's Division of Local Government as well as the Census Bureau's Annual Survey of State and Local Government Finances, this paper examines the impact of Colorado's 1992 Taxpayer's Bill of Rights (TABOR) on local government finances. Results from difference-in-difference estimation suggest that TELs increase revenue and expenditure volatility.

The mission of the Urban and Regional Policy and Its Effects series is to inform policymakers, practitioners, and scholars about the effectiveness of select policy approaches, reforms, and experiments in addressing the key social and economic problems facing today’s cities, suburbs, and metropolitan areas.

Volume four of the series introduces and examines thoroughly the concept of regional resilience, explaining how resilience can be promoted—or impeded—by regional characteristics and public policies.

The authors illuminate how the walls that now segment metropolitan regions across political jurisdictions and across institutions—and the gaps that separate federal laws from regional realities—have to be bridged in order for regions to cultivate resilience.