lecture six: expenditures and debt

what average expenditures do state and local governments invest in?

• social services and income maintenance ¼

• education ¼

• hospitals

• transportation

• public safety

• utility expenditure

• insurance trust

  *the south tends to spend least per capita —> texas is a low tax/low spend state which we are proud of*

how does the texas state law limit taxing, spending, and debt?

• pay as you go (except when borrowing is authorized)

  -total appropriations for government operations can’t exceed biennial revenue estimate

• growth limits on some appropriations

  -just because there’s money to spend it doesn’t mean it needs to be spent - welfare spending can’t exceed 1%

• debt limits

  -new debt can’t exceed 5% of annual amount in that capital fund for previous 3 years (hard to borrow)

• income tax outlawed in 2019

what does equity mean and how is it applied?

• equity asks:

  -do people get the benefit for which they paid for?

  -did residents pay for the benefit they are now getting?

• equity is often an issue with capital goods as they are used over long periods of time

• raises many questions regarding the fairness of taxes/fees

why do states and localities borrow?

• all governments borrow money

  -BUT debt is used to purchase capital goods NOT for operating funds —> debt is an INVESTMENT

• borrowing shifts costs from “pay as you go” to “pay as you use”

what does “pay as you go” mean?

all bills paid before something opens/is able for usage

• result: some pay, but do not get/others get, but do not pay

• creates equity issue

• people who payed don’t get to use as much as people who didn’t pay

what does “pay as you use” mean?

it means to borrow up front and pay back as the building/thing is being used

• as more people are contributing to the pay, this system is MORE EQUITABLE

• those who get, pay/those who pay, get

details of borrowing:

• debt always linked to capital projects being funded (has to be beneficial)

  -unlike federal government

• capital budget is separate from operating budget

  -financed through borrowing so excluded from “balanced budget” requirement

  -still appears under operating budget as “debt service”

• governments borrow via selling bonds

• local governments historically go into more debt than states and receive a lot of hate but it’s because they are responsible for many social investments

• texas is average for debt

what do high levels of local debt tell us?

• depends!

• state leaders (conservative) perspective:

  -local leaders (liberal) are poor fiscal managers who take on unnecessary and excessive risk

• local governments view point:

  -absolutely necessary to provide for real needs

  -state doesn’t offer much help

  -low risk due to extremely low interest rates

why do local governments in texas have few other options other than to take on more debt?

• state of texas caps local sales tax at 2 cents - can’t increase sales tax

• property taxes are notoriously difficult to raise and are already high —> higher ups also make it difficult to do