Controls on the Public Purse

The subject title of this symposium is Developments in State and Local Finance: Controls on the Public Purse, which for the purposes of this symposium are broadly defined. The aim is to present developments in public financial management or analysis in response to current or evolving challenges. For this purpose, we seek to identify many changes or new approaches such as performance measurement criteria or meaningful outcomes evaluation techniques. New or proposed solutions to public financial management challenges are especially interesting as well as new challenges themselves. However, we have also entertained the retrospective approach wherein past performance and innovations may now be revaluated from a new perspective informed by the passage of time. By subtitling the symposium, Controls on the Public Purse, we seek to emphasize measures of accountability. This emphasis extends to changes and evolution in tax bases as well as attempts at performance measurement. It also includes consideration of the influence of multiple stakeholders in public financial management and the implications of constraints related to the availability of intergovernmental grants and mandates. Recent news headlines concerning Enron, WorldCom, and Arthur Andersen have focused public attention on accountability and responsibility in corporate financial management. Even Big Eight accounting firms have been driven to bankruptcy by their failure to maintain adequate oversight concerning their auditing responsibilities for firms. In their article “Audit Committees and Accountability in Local Government: A National Survey”, Jonathan West and Evan Berman look at the use of audit committees in local governments as a way to improve local government financial accountability and oversight. They find that currently slightly less than half of cites with population over 65,000 have audit committees. Although audit committees are intended to improve standards and monitor the financial accounting process, the auditing duties are shared between internal auditors, external auditors, finance directors, and the audit committees, where they do exist. In less than one‐third of the cites, the survey found that the audit committee does not review the work of the external auditors. This finding has new implications following the collapse of the Arthur Andersen firm. Other gaps in the auditing process indicated in the survey include the lack of independence of internal auditors from management. The lack of independence for auditors, investment bankers, and market analysts was also critical in the collapse of the firms mentioned. This important public management survey provides several starting points for local governments. It provides questions to be posed to begin to reassess the support and structure of the auditing function as a means to mitigate financial scandals and thereby ensure public accountability. The use of auditing in another sense is the focus of “Silent Threats: Reconsidering the Importance of Non‐Enforcement Auditing Activity.” In this paper Robert Eger, Deborah Knudson, and Justin Marlowe study road tax collections and the effectiveness of voluntary compliance when it is backed by the possibility of an audit of the taxpayer. Unlike the Berman and West study that deals with the auditing function as a tool for improving financial performance and accountability, in this case the importance of the audit is shown to contribute to financial management by insuring compliance with state tax laws. The authors go beyond accountability for collections to a proposal that the public relations function of auditing is integral to achieving objectives. Their research presents a statistical model that incorporates non‐enforcement or indirect enforcement activities as well as the efforts of traditional auditors in tax compliance. A significant contribution to the public budgeting literature is the article “An Analysis of Institutional and Political Factors Affecting State Capital Expenditures.” In this paper by Enamul Choudbury, James Clingermayer, and Carl Dasse state government spending patterns on capital projects are examined. The previous literature on distributive policymaking by legislatures argues that policymaking is driven by a model of rent‐seeking wherein legislators pursue personal electoral benefits through the funding of capital projects that benefits their constituents, i.e., pork barrel spending. The results reported herein identify at least eight institutional characteristics that affect state capital spending. Facing the assumption that capital improvement projects are an executive branch dominated process, this research finds that such dominance is dependent on legislative acquiescence. And in recent years the legislative branch has become more dominant. One conclusion is that legislative organization and career opportunities for legislators affect the degree to which states now emphasize capital spending. The study also reports that there are important differences in time horizons, based on the election cycle, between the upper and lower chambers of the legislature. The upper chambers may be more long‐range in perspective. This has long term consequences for capital projects that are reflected in logrolling. In the upper chamber, colleagues find it easier to form coalitions when their fellow legislators have longer tenure. The research examines whether capital spending increases proportionally with direct spending. It is informed by the assumption that incrementalism may be a valid explanation for state spending on capital projects. The findings indicate that the number of appropriations bills seems to discourage capital spending. Another conclusion is that capital budgeting is not as dominated by the executive branch as commonly believed. Spending on capital projects is also affected by population growth, political uncertainty, the size of the legislative chamber, and financial incentives offered in the federal system. These external variables may encourage capital spending in order to qualify for grants‐in‐aid. Another paper in the symposium also contributes to institutional theory by looking at the influence of federal programs driving mandatory spending. It questions whether mandatory spending that is necessitated by federal policies is uncontrollable. Mandatory spending at the state and local level in the form of entitlements is often characterized as uncontrollable because such spending is driven by eligibility rules. Gabriela Wolfson examines the assumption that “influenced‐spending” is uncontrollable by examining the expansion and growth of the federal Medicaid program. In “Controlling ‘Uncontrollable’ Agency‐Influenced Spending in the United States” she undertakes a comparative study into the implicit and explicit parameters that may constrain agency actors in the state budget process. Wolfson investigates the assumption that agencies will spend proportionally more depending on the relative freedom from constraint of the budget structure. She finds that states that are less restrictive in terms of budget rules exhibit higher proportional levels of Medicaid spending. In answer to the premise that mandatory spending crowds out discretionary spending, the research demonstrates that through more restrictive budget structure and process, seemingly “uncontrollable” mandatory spending can be constrained. Nevertheless, the explosive growth in Medicaid spending is driven by many factors including rising medical care costs, fraud and abuse, and agency—promoted program expansion that results in increasing spending, in part due to incrementalism. Incremental budget making from a retrospective approach studying the Canadian provinces is the subject of Chris Reddick's contribution. In “Long‐Run and Short‐Run Budgeting: Theories and Empirical Evidence for the Canadian Provinces,” he examines data from 1961 through 2000 for the Canadian provinces, which unlike the American states have no balanced budget requirements and do not use separate capital budgets. Although he finds budget incrementalism occurring in nine of ten provinces, in the long run he finds that expenditures force the budgets to balance for all except British Columbia. He proposes a model to answer the question of what are the mechanisms that correct the problem when provincial deficits become too large. At the provincial level, political leaders can manipulate both expenditures and revenues since more of their budget is devoted to local needs and resources. In periods of recession, the findings show depressed provincial revenue flows combined with increased social assistance spending. In this international case there is evidence for increased spending concomitant with reduced income and consumption tax revenues. Instrumentalism theory would call for cutbacks in spending when marginal choices are easier to make because there are fewer resources available. This finding contradicts Wildavky's incrementalism model expecting regular change but finding high volatility in both expenditures and in revenues. Reddick suggests that perhaps his findings support Baumgartner et al. implying that the budgetary decision making process exhibits a constant style but is occasionally distorted by external shocks. The result is periods of stability interspersed with periods of occasional, unpredictable, and dramatic change. Central to Reddick's long‐run analysis are the forces that drive the corrections in response to the periods affected by exogenous shocks. He concludes that either revenue or expenditures can be the driving force to restore balance when there is either budget deficit or surplus. His contribution is to argue for the revenue side of the budget to be added to the analysis of incrementalism. The traditional model of incrementalism focuses only on the expenditure decisions. Long‐run equilibrium is determined by the interaction of institutions that determine budgetary decisions. Budge

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