Fiscal Issues and Geeky Stuff

My new blog site

2008-07-02T15:55:00.009-05:00

Dear readers, my blog has been moved to a new site that is hosted by the University of Minnesota:

"Fiscal Issues and Geeky Stuff"

Thanks for your attention!

Regression-based inequality decomposition in R

2008-07-01T10:09:00.010-05:00

In a previous blog I posted the R functions to decompose Gini coefficients based on a weighted average of pseudo-Gini (Fei et al 1978; Shorrocks 1982). Another way to decompose inequality is a regression-based approach proposed by Morduch and Sicular (2002) following the logic of Shorrock's theorem in his classic 1982 paper.

1. The R function I created:

decomp <- function(M) {

n <- length(M$coefficients)

cov <- cov(M$model[,1],M$model)

var <- cov[1]

cof <- M$coefficients

share <- cov[2:n]*cof[2:n]/cov[1]

decomp <- rbind(cov[2:n],cof[2:n],var,share)

rownames(decomp) <- c("covariance","coefficient",

"variance","contribution")

decomp

}

2. An example in R results:

> M <- lm(PCEP2~PCGDP2 + POPDEN + PRIMERT, data=data)

> decomp(M)

PCGDP2 POPDEN PRIMERT

covariance 209.4603179 -0.23886994 -0.69024676

coefficient 0.2973024 -32.81779552 -17.33004045

variance 423.0538678 423.05386785 423.05386785

contribution 0.1471989 0.01852999 0.02827537

> #. A test: The sum of contribution equals to the R square.

> sum(decomp(M)[4,]);summary(M)$r.squared

[1] 0.1940043

Excel2LaTeX: tricks in my Mac

2008-06-29T22:29:00.008-05:00

This is the official introduction to Excel2LaTeX (2.0):

"It's difficult to create tables in LaTeX, especially if some columns are calculated. Excel2LaTeX tool will allow you to transform the current selection from Excel to Latex. Most of the formatting will be kept (bold, italic, border lines, multicolumn cells, etc.). The LaTeX code can be copied to the clipboard or saved as a LaTeX file, which then can be included in an existing LaTeX document using the input command."

However, the program seems to written primarily for Windows. For several reasons, it took me quite a while to get it work in my MacBook Pro. These tricks may be helpful for you too.

The Visual Basic add-in doesn't work for Mac Excel 2008. You may use Mac Excel 2004 for the purpose.
I place the downloaded file "Excel2LaTeX.xla" under "/Applications/Microsoft Office 2004/Office/Add-Ins."
I manually open the xla file once in order for Excel 2004 to recognize the location for the add-in file; only then can I turn on the Excel2LaTeX button under Toolbars.
After converting a selected area in Excel to LaTeX codes, additional tricks are needed to apply the codes. To use the clipboard function, I have to copy things to TextEdit and then recopy them to TeXShop to get them work -- otherwise, TeXshop is confused with some "invalid character." To use the "Save to File" function, I change "Desktop\Sheet1.text" to ":Desktop\Sheet1.tex" in order to get the file landed correctly in my Desktop.

Calculating decomposition of Gini coefficient in R

2008-06-26T12:17:00.000-05:00

I am working on several projects on fiscal disparities. The level of inequality can be measured by summary indices such as the Gini coefficient, but I like to move a step forward and decompose the aggregate inequality value into its relevant component contributions.

Take income inequality as an example. One way of factor decomposition is to separate the effects of multiple income streams that form the total income. It has been proposed that a Gini coefficient can be separated as multiple components based on a weighted average of pseudo-Gini (Fei et al 1978; Shorrocks 1982). With this method, for each revenue stream, we can calculate its absolute contribution, relative contribution, and marginal effect (Lerman and Yitzhaki 1985) to the inequality (Gini) of total income.

How to do this in R? Failed to find any package ("library") that can do it directly, I decided to create the function on my own by revising R codes from known packages such as ineq and reldist. It turns out to be easy and really fun!

The formulas:

An simulated example:

Archive: Weird computer problems and fixes

2008-06-24T13:14:00.000-05:00

I got weird computer problems from time to time. Fortunately, most often I could fix them after searching on the Internet for a while. The least thing I want to happen is forgetting these solutions when I encounter the same problem again. These "wired" problems tend to be rare, but it can be indeed nerve-racking when they do show up.

1. Excel crashes with an error message "SYLK: File format is not valid" -- Excel cannot open a text or CSV file when the first two characters of the file are the letters ID (uppercase). See the link for more explanations. [06/24/2008]

2. Excel 2004 (Mac) crashed every time I opened it, as it kept opening a corrupted "recovered" file and then quitting automatically. I couldn't solve the problem even after removing and reinstalling Excel. The problem was finally fixed after I deleted "com.microsoft.office.prefs.plist" under "Users/~/Library/Preferences." Later I got to learn that it is a common solution when MS Office crashes. [06/24/2008]

3. Vmware Fusion: Windows XP failed to find shared folders. The fix is simple: go "Start" -->" Run" --> "\\.host" and press enter. [06/24/2008]

Recourses about R

2008-06-20T11:15:00.003-05:00

Collected resources about R:

The ultimate source: CRAN
Download and install: MacOS X, Windows
To search R-related topics: CRAN-Google
An Introduction to R: [browse HTML | download PDF]
R Graphics by Paul Murrell: Example figures with codes

New partnership between a county and school system

2008-06-17T11:52:00.006-05:00

As far as I know, most school districts in North Carolina are not "independent" ones; instead, they get direct funding from county governments along with other sources of revenue. NC school districts however may retain their authorities in education decision-making independent of county governments.

North Carolina NBC affiliate WNCN-TV (6/17, Hall) reports that Wake County and the county's public school systems are considering a new partnership, in which the county would take responsibility for the building and maintenance of school facilities, "if the schools receive more funding to focus on student achievement."

Without further financial details, the report is confusing to me in many ways. I wonder how exactly it will change the local funding mechanism and what are the incentives for both county and school districts to participate.

The resurrection of urban living

2008-06-17T10:56:00.004-05:00

The Wall Street Journal (6/16, A18, Karp) reports, increasingly, people want to live in urban areas, a change of "a half-century-long pattern of how and where Americans live," due to demographic changes and economic trends such as higher gasoline prices.

"The generational demands" of housing location from both baby boomers and millennials (those "born between the late 1970s and mid-1990s") are "in perfect sync." Getting ready to retire, baby boomers are looking to downsize their homes and simplify their lives in urban condos. Likewise, millennials are attracted by higher-density urban living, as a way of "rebelling the suburban cul-de-sac culture that pervaded their youth."

Additionally, the subprime mortgage crisis and high gasoline prices are "delivering further gut punches by blighting remote subdivisions nationwide and rendering long commutes untenable for middle-class Americans," when the used-to-be drivable surbub has become "for many a mile too far."

Some conceives that the drive for urban living may reverse the trend of urban sprawl and push for New Urbanism practices in land use and construction. Traffic behaviors will change accordingly: with the hasten demand of urban living, Americans may mimic "a European preference of public transportation."

Outsourcing red-light traffic control

2008-06-17T10:45:00.006-05:00

The Wall Street Journal reports that many cities are overburdened by "time-consuming and complicated tasks" and thus elect to outsource these duties to companies. Typical examples include "auctioning off unclaimed stolen goods, unloading unwanted supplies and collecting unpaid traffic fines."

In Columbus, Ohio, Redflex Traffic Systems Inc. is hired to handle "the entire process" of running the city's red-light cameras, "including capturing the visuals of the violator, cross-checking with databases from motor-vehicle departments, verifying that a violation was committed," and "mailing out the citation and collecting the fine." In exchange, the company "receives about 40 percent of the actual fines collected."

My China research archive

2008-06-09T12:33:00.010-05:00

1. Statistical data:

China data online by the China Data Center, University of Michigan
Some population data throug IPUMS
清华同方: CNKI 知网 databases & CNKI China Yearbook Full-text Databases
National Bureau of Statistics of China
East Asian Library Websites in North America
WangfangData (万方数据)
Jingji Xuejia (经济学家)

2. Spatial data:

National Fundamental GIS (国家基础地理信息系统)[For map of China, I normally Mercator projection]
China Dimensions Data Collection (use Import Utility to covert ".e00" into ARC/INFO coverage (readable for ArcView)

3. Research centers:

Center on Chinese Education, Columbia University

More to come...

Financing the Nation's Infrastructure

2008-06-09T09:41:00.002-05:00

The July issue of Budget & Tax News of the Heartland Foundation features spotlight discussions on "Financing the Nation's Infrastructure," in particular roads and bridges.

Spatial data mining in local finance

2008-06-06T13:28:00.006-05:00

Data mining is the automatic process of sorting through large amounts of data and discovering patterns. It has been described as "the nontrivial extraction of implicit, previously unknown, and potentially useful information from data" (Frawley et al 1992). For an introduction to data mining, see presentation slides on the website of Professor Robert Stine, from whom I learned the topic at ICPSR.

Spatial data ming is the application of data mining techniques to spatial data, with the objective to discover spatial patterns. Still at the early stage of development, spatial data mining is considered a new field with boundaries yet to be defined. In general, spatial data mining focuses more on large data sets and tend to be exploratory in nature, with heavy reliance on newly developed computational powers (Professor Guo).

In a recent project I am using exploratory spatial data analysis (EDA) to visualize and analyze spatial patterns of inter-local fiscal relations with a comprehensive database that include hundreds of fiscal variables for all local governments in Georgia. This may be an example of spatial data mining in the study of public finance and local government management. I am eager to meet others with similar interests. (Click here to get my presentation slides on ABFM 2007.)

Some resources about spatial data mining:

More to come...

The birth of a new city: Menifee, CA

2008-06-05T12:55:00.006-05:00

The Californian (6/5, Redfern) reports that a new city named Menifee was created in Riverside County after sixty-one percent of voters who cast ballots in the existing communities of Menifee (a community), Sun City, Quail Valley, and a part of Romoland approved the proposal to incorporate.

The new city will have about 60,000 people in an area of roughly 49-square-mile. The effort to hold this incorporation referendum was approved last year by the Riverside County Local Agency Formation Commission, largely based on a 10-year financial analysis done by a consultant. That analysis determined the new city would be financially viable and "able to provide residents with the same level of services without raising taxes." [How would this work out?]

In contrast, the Press-Enterprise (6/5, Trone, McKinnon) reports that some residents have voiced fears that incorporation could bring higher taxation and that the timing for cityhood is not right because of the current economic downturn.

The graph is from The Inland Empire News (6/4).

To contract, or not to contract? The case of Compton City policy department

2008-05-28T10:33:00.007-05:00

California's Compton Bulletin (5/28, Eaton) reports that the Compon City is considering whether to bring back a "city-based police department."

The original city policy department was disbanded in 2000 after some "corrupt practices were uncovered." The Sheriff's Department in the county assumes responsibility for policing the area since then.

Major Eric Perrondin, however, has never been a fan of the Sheriff Department. "I think that the best law enforcement you can have is your own because they will be accountable to you," Perrodin said, "outsiders, when you pay them, they don't listen to you." Perrodin feels as though the city is constantly being "disrespected" by the Sheriff Department that "has separate policy and protocols from the city, which prevents the city from intervening in certain situations."

The city council has approved spending nearly $1 million to study "alternative options for coordination and delivery of city police services." Other than bringing back the policy department, the Compton City may also join it up with the Compton Unified School Distrct and Compton Center police to form a metropolitan police department.

[There are many studies about why and how governments contract out services. This is an unique case of a government deciding to opt out or alter a previous contracting relationship. ]

Information for authors: PA and PBF journals

2008-05-27T05:35:00.000-05:00

Public Administration:
        •        Journal of Public Administration Research and Theory
        •        Public Administration Review
        •        American Review of Public Administration
        •        State and Local Government Review
Public Budgeting and Finance:
        •        Public Budgeting and Finance
        •        Public Finance Review
        •        Journal of Public Budgeting, Accounting, and Financial Management
        •        Municipal Finance Journal
Public policy:
        •        Journal of Policy Analysis and Management
        •        Policy Studies Journal
Others:
        •        Urban Affairs Review
        •        Nonprofit and Voluntary Sector Quarterly
        •        Transportation Research Board (conference and journal)

More to come...

Family fishing resources in Twin Cities

2008-05-26T17:10:00.009-05:00

Last Saturday's fishing in Como Lake was my first try in Minnesota. Three little channel cats in about an hour -- not too bad for a rookie angler like me. Now I am counting for the the pollen season to finish soon; then I can hang around some lakes in late afternoons and train my boy to be a little "fisher."

Here are a bunch of related webpages:

More to come...

My own rules of time management

2008-05-23T13:39:00.010-05:00

To better get things done, I am trying TheDailyGrind widget to keep track of my time. Rather than recording all working projects, which I tried and failed before, now I just organize them in categories:

Planning time: early morning, late afternoon before leaving office, or anytime when I check Oracle Calendar or iCal ... NO more missed appointments.

Productive time: precious minutes that I should be using for writing, teaching preparation, or any last-minute deadline rush ... they are simply too many!

Administrative time: dealing with "Action" emails, attending meetings, and managing all sorts of official chores.

Slack time: reading, notes taking, writing blogs, making phone calls, or dealing with "Action" emails ... this is my break.

Garbage time: checking emails, reading news, instant messaging, listening to podcasts... endless ways to easily run out of my time!

Not to mention, this post is written in my "slack time."

How to become a "Budget Hero"?

2008-05-21T15:39:00.005-05:00

Check out the cool game of "Budget Hero" produced by American Public Media.

What is the motivation behind the game?

-- "Budget Hero seeks to provide a values- and fiscal-based lens for citizens to examine policy debates during this election year. Partisan messages tend to cloud the real issues at play during campaigns, and most candidates are loath to attach detailed financial impacts to solutions which make up their platform. Budget Hero provides an interactive experiences involving policy opinions that have been extensively researched and vetted with nonpartisan government and think tank experts to enable players to objectively evaluate candidates."

Using LaTeX in Mac

2008-05-21T11:24:00.000-05:00

Collected resources about using LaTeX in Mac:
        •        What is LaTeX? -- A document preparation system
        •        A good introduction: LaTeX and OSX
        •        Basics: LaTeX documentations
        •        Setup: Obtaining TeXShop and TeX Live & The MacTeX distribution
        •        Citation: RefWorks & BibTeX & BibDesk for citation management
        •        LaTeX tables: a simple tutorial, Excel2LaTeX; From R to LaTeX
        •        Running TeXShop with Chinese
        •        An online LaTeX tutorial in traditional Chinese
        •        Excel2LaTeX (It doesn't work for Mac Excel 2008)
        •

Bridge's Private Ownership Raises Concerns

2008-05-19T15:32:00.002-05:00

In "Bridge's Private Ownership Raises Concerns," The New York Times (Davey, 10/12/2007) reported a debate over a privately owned bridge over the Detroit River between the US and Canada.

The bridge is called the Ambassador Bridge. As the busiest commercial border crossing in North America, it is owned not by either country, not by the cities of Detroit or Windsor, Detroit’s Canadian neighbor, and not by some public bridge authority. It is owned by one man, Manuel J. Moroun from Detroit suburbs, who is believed to be "making billions of dollars on that bridge.” It is predicted that the bridge would reach its capacity around 2015, and thus a new $1 billion crossing will be built there. Mr. Moroun proposes to make the new bridge himself. The offer seems tempting particularly because of the economic crisis in Michigan. However, concerns have been raised over national border security, the safety of the nation's bridge, and enforcement of relevant standards and regulations.

The Fed to study economic bubbles

2008-05-16T10:00:00.009-05:00

The Wall Street Journal (5/16, A1, Lahart) reports that the Federal Reserve, the nation's chief bubble watching agency, has hand-picked a "band of young scholars" in Princeton University to study economic bubbles. The journal notes that the importance of understanding bubbles -- how they start, how they evolve, and how they deflate -- has been evident by "the damage done by the housing and credit bubbles."

So far, the study group has concluded "that the Fed can and should try to restrain bubbles, rather than following former Chairman Alan Greenspan's approach" of "watchful waiting while prices rise, and then cleaning up the mess after a bubble bursts.

Data archive for spatial pattern analysis

2008-05-09T08:16:00.005-05:00

AI-GEOSTATS: A European Union Directorate General web service for geostatistical and spatial statistics
Census Bureau Factfinder: Free decennial census population and social characteristics data
Center for International Earth Science Information Network (CIESIN): Clearinghouse for environmental data, metadata, and data tools
Digital Chart of the World Server (Penn State): International boundary files
Geography Network: Clearinghouse for free and fee-based geographic data
GeoStat: Geospatial and Statistical Data Center at the University of Virginia
GIA Core at Penn State's Population Research Institute: houses an array of geospatial data holdings on international and US topics
National Historical Geographic Information System: NHGIS is a project to create and freely disseminate databases incorporating all available aggregate census information for the United States between 1790 and 2000 in a format for GIS processing
Social Explorer: Produce and visualize interactive maps using US Census data for different geographic units from 1870 to 2000
SAL Data: Sample data for teaching and research with GeoDa from the Spatial Analysis Lab at the University of Illinois
USGS National Geospatial Data Clearinghouse: Geospatial data from the US Geological Survey

(The list is compiled by CSISS.)

Iowa considers fees to provide property tax relief

2008-05-09T07:33:00.005-05:00

Iowa's Des Moines Register (5/8, Clayworth) reported that the Iowa state Legislature "likely will consider allowing local governments to substitute certain types of fees for property taxes" in a review next year of "one idea for property tax relief," which provided "more choices for local governments."

The Register notes that Iowa's property tax system has long been criticized as complicated and unfair. The state is about to complete a two-year legislative study of the issue. The idea to raise fees for property tax relief gained prominence four years ago when Des Moines took the first step to increase a "franchise fee" on gas and electricity bills.

In Des Moines roughly 40 percent of all property is owned by government or nonprofit organizations and thus exempted from the property tax. On the contrary, virtually all utility users pay the franchise fee, which city leaders have long argued is more fair. The fee increase however is facing a legal challenge after a resident sued the city, calling the fee an illegal tax-- because the city treated much of the money collected by the higher gas and electric as a general revenue "to lower tax rates, hire more police officers and extend library hours."

[In an earlier legal case about user fees in Michigan, Bolt vs. City of Lansing, the court ruled that a stormwater charge were instead a tax and, therefore, unconstitutional.]

Peoria (AZ) to explore privatizing jail services

2008-05-08T08:26:00.005-05:00

The AZcentral.com (5/7, Chan) reported that the city of Peoria is considering privatizing jail services, because of "the cost to put people in county jails on the increase each year." Maricopa County, where the city is located, is predicting an 8 percent increase in the jail incarceration fee in fiscal year 2009 for Peoria, a $108,000 jump to $383,000. City Manager Terry Ellis said he would "convene a strategic work group" to explore the idea, and Peoria would likely need to partner with another city to interest a private provider.

Vallejo City (CA) declared bankruptcy

2008-05-08T08:04:00.004-05:00

The New York Times (5/8, A24, McKinley) and Bloomberg (5/8, Marois) reports that Vallejo City, California, declared bankruptcy Tuesday, "to seek protection from creditors because it ran out of money to pay for basic services (Bloomberg)." The AP (5/7) added that city officials in Vallejo "hope, if a judge rules in their favor," that Chapter 9 bankruptcy protection will allow the city "to restructure union contracts and other debts in a way that allows the city to turn itself around."

Bloomberg notes that "cities and towns rarely go bankrupt. Since 1937, there have been 543 municipal [among a total of 80,000 or so] bankruptcies, two-thirds of which were small tax districts." The largest and most well-known case in US history was the the Orange County (CA) bankruptcy in 1994. Sajan George of Atlanta, who worked as consultant on the case before, noted that "is not a death knell, and should not be equated with that (AP)." After emerging from Chapter 9 protection, George said "Orange County is thriving."

Vallejo is the first California city facing effects of the recent housing downturn. However, "what worries some experts is that some of the problems" facing Vallejo "are all too common," including "a steep decrease in property and sales taxes and transfer fees, as a result of weakness in the housing market." Vallejo Councilwoman Joanne Schivley predicted that "there are a lot of other cities that [will] probably be in the same boat shortly (New York Times)."

JOBZ: Minnesota's Economic Development policy

2008-05-06T09:35:00.009-05:00

Minnesota's Job Opportunity Building Zones (JOBZ) program is a signature piece of Gov. Tim Pawlenty's rural economic development efforts.

According to the fact sheet, JOBZ are located trhoughout Minnesota, expect the seven-county Minneapolis-St. Paul metropolitan area. A qualified business located in a JOBZ signs a Business Subside Agreement (BSA) with the appropriate local government and enjoys substantive tax benefits.

For related policy issues, click here to listen the MPR audio story: JOBZ, one years old, is popular and still controversial (2004), and read two recent articles below:

Value capture: Presentation at the Citizens League's Policy Forum.

2008-05-05T15:33:00.007-05:00

On May 6, the Citizens League organized a policy forum on "Transparent Funding Options for Meaningful Transportation Choices." Held at the Minneapolis Central Library, the event featured David Levinson as the "mind opener" and then Tyler Duvall at U.S. DOT as the keynote speaker. Finally, a panel of managers and scholars including me shared perspectives on transportation choices and funding mechanisms, followed by a more focused discussion on value capture.

Please click here for my presentation on value capture.

Value creation by transportation improvements

2008-05-04T08:13:00.006-05:00

Empirical evidence has mounted about value created by transportation improvements, through increasing land or property price, enhancing business activities, or promoting economic development in general. The research priority today is not whether in some individual cases transportation creates value, but a synthesis or knowledge accumulation of "how?" -- under what circumstances would a type of transportation improvement create what level of value to whom, in what area, and in what time period?

For the purpose of value capture, we need a practical model to assess transportation value creation, which may include the following dimensions.

Type of transportation improvement: Are we talking about highway, transit, or streetcars? Does the improvement involve new station, new routes, or extended network?

Beneficiary: Who gets a major part of the value creation? Providers, developers, or land owners?

Area: Different types and level of value may be around transportation nodes, corridors, networks, or some specific areas measured by distance or time.

Time: Immediate value may be created right after transportation improvement, subsequent value may be realized when the enhance accessibility is fully recognized; induce value may be later created with successful high-density mixed-use development.

Circumstances: Value creation tends to be affected by many other factors, including market condition, regulation environment, current accessibility, development density, or topology, etc.

Value capture for transportation in Minnesota: The rationale

2008-05-04T07:37:00.007-05:00

A good way to understand "value capture" is to compare it with other types of transportation finance.

For decades in transportation finance we have been trying to better relate benefits to costs through dedicated revenues. Gas tax is levied on the benefits enjoyed by motorists; congestion price is collected on the social costs (congestion and pollution) led by motorists; and in the case of transit, fare structure has often been re-designed to improve its match with riders' benefits. However, transportation improvements not only bring benefits for motorists and riders, but also create value for landowners, developers, etc. It would be great to recover this value to supplement transportation finance -- this is the idea of "value capture."

In the recent transportation bill the state legislature launches a project to study value capture, which is "financing new and improved transportation infrastructure in Minnesota through capturing the value of the benefits created." Take two notes for this broad definition. First, value capture has potential for all transportation infrastructure, not just transit, of which value capture is most often discussed. This is understandable because transit cannot make use of gas tax and is not quite suitable for congestion pricing either. Second, the value of transportation improvement need not be restricted to land value , the typical target of value capture.

Value capture: A benefit receipt tax?

2008-05-03T12:38:00.004-05:00

Among the ideas proposed by Citizens League on transportation policy (in 2005 and 2008) is a "benefit receipt tax," which will be collected at the point of sale of land that benefits from a transportation improvement.

Bob DeBoer in Citizens League shares an example of a land sale based on a highway improvement where the assessed value was in the $500,000 range and the land sold for over $3 million. In such a case a benefit receipt tax "based on a percentage of the amount above the assessed value" may be an effective way of "value capture" to partially recover "the level of benefit that should help pay for the transportation improvement."

This sounds a great idea. But the first concern I have is about the timing of sale. Over time the assessed value would catch up with the market value and make the value gain less discernible. So the benefit receipt tax may just deter or delay the sale of land. It probably makes more sense to have an annual levy based on the the assessed (land) value rather than to have an one-shot collection at the point of sale.

Value capture: A land tax for transit?

2008-05-03T12:02:00.013-05:00

"A land tax for transit is fair, because transit service increases land values, and those who benefit the most pay the most."

A recent issue of monthly publication of the Heartland Institute, "Public Transit Creates Value but Fails to Collect," calls for the use of a land value tax to supplement transit funding in order to "avoid (or minimize) service cuts and fare increases" as many transit agencies around the nation "have been in financial difficulty for a long time."

The essay compares the land value tax to more commonly used alternatives like sales tax or automobile registration fee. The question is whether we want consumers, motorists, or landowners to pay the transit subsidy. "To some extent these are the same people, but the economic impacts of taxing them aren't the same." A sales tax may burden the poor people the most and drive commerce out . Increase automobile registration fee may be less regressive than a sales tax, yet it is unfair for low-incomers cannot afford to live in the areas with good transit service, and hard to prevent evasion by people who register their cars elsewhere.

A land tax is considered a much better choice. It is not regressive "because many poor people own no land at all, and if they do own land it is of relatively low value;" it can't be evaded "because land is visible and real estate tax information is public;" it is fair "because transit service increases land values and those who benefit the most pay the most;" and it can't drive away jobs "because it isn't a tax on economic activity."

The essay was based on the Henry George School's recent Research Note #5A: "Retrieving Transit's Benefits":

http://www.heartland.org/article.cfm?artId=22499.

Resources for transportation finance research

2008-05-03T10:14:00.004-05:00

1. Transportation Research Board's Publications Index: http://pubsindex.trb.org

2. Transportation Research Information Service (TRIS)

3. NCSL's website on transportation funding

More to come soon...

Illinois to outsource pathhole repairs

2008-04-30T08:11:00.004-05:00

The Chicago Tribune (4/29, Channick) reported that, "overwhelmed by the depth and breadth of potholes, the Illinois Department of Transportation is turning to outside contractors to help with repairs."

IDOT has the capacity to dispatch 60 patching crews a day, but it has been receiving up to 500 pothole complaints a day "during a long winter of brutal freeze-thaw cycles and near-record snow." Unable to keep up, officials took the unusual step of bidding out eight contracts for Cook and five collar counties this month, with about $25.5 million to be spent on contracts for the work.

I am currently working on some projects to model governmental outsourcing. This case is unique in two ways. First, it is the state that contracts with local governments to provide a service, due to state's diseconomies rather than economies of scale. Second, the purpose is to improve responsiveness rather than to save money. Essentially it resembles a case of devolution in market style.

Illinois to outsource pathhole repairs

2008-04-30T03:16:00.000-05:00

David Walker's new positions

2008-04-28T21:02:00.007-05:00

With the title of "America's Prophet of Fiscal Doom,"U.S.News (04/11, Pethokoukis) reports an interview with David Walker, who resigned from the high-profile position of U.S. comptroller general, GAO, on March 12th to head the Peter G. Peterson Foundation. Walker explains his leaving for the belief that "we have a closing window of opportunity to make changes in order to avoid a major crisis" and thus he aims to lead the foundation "address key sustainability challenges that threaten the future of Americans."

Laterly, FedSmith.com (04/24) reports that Walker joints the Partnership for Public Service, which has a mission is "to revitalize our federal government by inspiring a new generation to serve and by transforming the way government works."In welcoming Walker to the board, Max Stier, president of the Partnership said: "David Walker represents public service at its best. He's intelligent, tenacious, honest and 100 percent committed to doing right by the American people. I know he will do great things in his new position as the head of the Peter Peterson Foundation, and I am proud to welcome him to the Partnership's board."

The fiscal state of states

2008-04-28T08:11:00.006-05:00

Last Friday (04/25) Arturo Perez from NCSL present a newly-released survey of state budget conditions in a practitioner panel, "The Fiscal State of States," WSSA 2008 (Denver). The picture is gloomy nationwide for most states in the coming 19 months. States that are hit the hardest include New York, California, Florida, and Arizona, etc, most of which are suffering from the burst of housing bubble. A couple of states are exceptions: Alaska, Wyoming, and North Dakota see surprisingly large budget surplus due to oil reserves.

For more information, see the Stateline.org report (04/28, Prah), 23 states face budget gaps in '09.

International Conference on Funding Transportation Infrastructrue

2008-04-27T21:58:00.006-05:00

Just heard from Professor Levinson that the 4th International Conference on Funding Transportation Infrastructure will be hosted in UMN in summer 2009.

Links to previous conferences:

Workshops on Advanced Spatial Analysis

2008-04-26T18:29:00.009-05:00

July is a wonderful time to visit Santa Barbara, again. This summer I will be there attending a one-week advanced workshop on "Spatial Pattern Analysis," organized by the Center for Spatially Integrated Social Science with NIH funding.

Two years ago I was there for the SPACE workshop, also organized by CSISS but with NSF funding. Woke up by sound of rolling sea waves, we hiked to the mountains or practiced surfing on the beach in early mornings, but worked like crazy during the days. (Click here for my presentation at the end of the workshop.) Riding a rented bicycle all over the campus with a heavy backpack, I felt myself getting back to the "good old" college days.

Time to renew those memories.

Paul Lingenfelter's work on higher education

2008-04-26T18:15:00.004-05:00

On April 25, Dr. Paul Lingenfelter, Executive Director of SHEEO, delivered a great speech on "funding public higher education" in the Public Budgeting and Finance section of WSSA 2008, Denver. Before I get his agreement to share the presentation file, you can click here to read many of his articles, speeches, and presentations.

The possible merger of two towns

2008-04-17T09:05:00.003-05:00

New Jersey's Examiner (4,17, Meggitt) reports the community reactions to a possible merger of Allentown Borough and Upper Freehold Township, as Gov. Jon Corzine "wants smaller municipalities in the state to merge and share services to cut costs."

Some citizens argue against the governor's "fiscal fallacy" that "bigger is better, less costly and more efficient," which may not be supported by "New Jersey Politics." Additional concerns are raised about the pooling of resources -- one school district in the merger would benefit while the other would have no incentive to support such a unification.

A supporter of the merger claim that New Jersey's "multi-municipal mania" and "home rule obsession" are making the state "a high-cost place to live and nearly impossible place to retire." Nevertheless, he doesn't think that the merger would be more efficient than the extensive service sharing that is currently existing between the two towns.

How may a city die?

2008-04-14T07:55:00.006-05:00

According to the AP (4/14), the Virginia city of Bedford was incorporated about forth years years ago. Now, city officials are having second thoughts about returning the city to town status in hopes "that it will improve services" [?].

The city of 6,300 people already "shares services of the sheriff, judges, and court systems [possibly with the town?]," and "it contracts with Bedford County for schools, social service, and health services." The AP notes that City Manager Charles Kolakowski "said the city has signaled its intentions to give up its independent jurisdiction." [Is it due to financial difficulties or coordination problems?]

If Bedford makes the switch, it would become just the third city in the state to revert to a town in the past 20 years. (Courtesy of ICMA Newsletter.)

Financial struggles for New York schools

2008-04-14T07:45:00.008-05:00

New York's Post Star (4/13, Aquije) reported on the financial struggles faced by school officials in many local districts as enrollment and available funds dwindle, "while the budgets and numbers of teachers" swell. "Education officials point to various obligations that drive budgets...higher, even when enrollment sinks." Those obligations include teachers' health benefits and retirement, the rates of which usually rise each year, and salaries, which "are the largest expense for any school budget" -- accounting for about 80 percent of school budget, these personal costs are extremely hard to decrease without cutting jobs. Schools also incur expenses through state and federal mandates that require special education programs, the purchase of environmentally friendly cleaning supplies, and annual audits. (Courtesy of ICMA Newsletter.)

Intermediate School District in Minnesota

2008-04-12T13:55:00.004-05:00

Just like Michigan, the state of Minnesota has intermediate school districts (ISD), which may be less known by many people. Michigan ISDs are considered a type of local governments, with theirs own property tax levy and governing bodies, and their responsibilities in "coordinating independent school districts." For Minnesota ISDs, I have yet to find out whether they are individual local governments as well or simply function as consortiums or partnerships of their member districts.

As an example, Minnesota ISD 287 was created by thirteen area districts (Bloomington, Brooklyn Center, Eden Prairie, Edina, Hopkins, Minnetonka, Orono, Osseo, Richfield, Robbinsdale, St. Louis Park, Wayzata, and Westonka) to "provide educational services and programs that complement and support their own programs." These services may include Administration, Special Education, and Teaching & Learning.

Line-item veto for the President?

2008-04-07T09:26:00.005-05:00

I came across this webpage on Minnesota Budget Project about a proposal in 2006 to give the President line-item veto. Although it is a bit outdated, the article makes good sense to me.

The line-item veto is the power of an executive to nullify or "cancel" specific provisions of a bill, usually budget appropriations, without vetoing the entire legislative package. This power is held by governors in all but seven US states, albeit with wide variety in its details. Presidents of the US, however, do not have this power except for a very short-period. In 1996, President Clinton was granted this power by the Line Item Veto Act, passed by Congress in order to control "pork barrel spending" that favors a particular region rather than the nation as a whole. The line-item veto power, however, was ruled unconstitutional in 1998. Since then, a constitutional amendment to give the President line item veto power has been considered periodically. This webpage in MPB talks about a recent attempt in 2006, the Gregg bill, initiated during the Bush administration.

Proponents of the bill suggested that giving the President this new authority to single out specific items in appropriations bills would force Congress to become more fiscally disciplined. However, critics pointed out that the Gregg bill had gone well beyond the traditional concept of the line-item veto in the states (such as this recent case in Minnesota) and attempted to grant the President unprecedented authority, for instance, by withholding appropriations even after a line-item veto has been defeated by the Legislature, or by bundling together line-item vetoes from separate appropriations bills in order to make it more difficult for the Legislature to override.

Critics contend that this proposal would provide the President excessive bargaining power well above political considerations [of the Congress] and consider this notion "unsupportable." It would be "an invitation to mischief" and we should find "better ways to achieve accountability" if the goal is indeed to prevent wasteful “pork barrel” spending or to reduce federal budget deficit.

Bond interests, bond yields, and the yield curve

2008-04-06T20:42:00.008-05:00

A municipal bond issued by a government is an agreement that the government will pay back certain amount of long-term debt to investors on a specific (maturity) date.

Interests of bonds are reflected either explicitly by coupons when bonds are sold by their par values, or implicitly by the difference between par values and their discounted selling prices. Bond interests constitute the major cost of borrowing for a bond issue, but there are additional costs for the issuer (government) including the payments for professional services by bond counsels, financial advisers, or underwriters.

The yield of a municipal bond is the rate of return an investor will receive by holding the bond to maturity. It is determined based on the actual market value of a bond rather than its par value. For instance, the "current yield" of a bond calculates the percentage return that the annual coupon payment provides the investor based on the the price the investor pays for the bond (See the following equation from Investopedia).

Although a bond may carry a fixed coupon interest rate over its term, its actual bond yield fluctuates with that of all other bonds currently offered in the market and have similar credit quality and maturity.

The yield curve is the relation between the bond yield and the time to maturity of the bond. The yield on the Y axis is often, but not always, an increasing function of t on the X axis. (See the figure above from wiki.)

Transportation finance from an intergovernmental perspective

2008-03-28T15:02:00.004-05:00

The National Academy of Public Administration and six national associations representing state and local officials have released a report that explores, from an intergovernmental perspective, options to strengthen the nation’s transportation finances.

The report, Financing Transportation in the 21th Century: An Intergovernmental Perspective, is the product of the Intergovernmental Forum on Transportation Financing, which was convened in January 2007 to consider "the current status of surface transportation financing, the appropriate roles of each level of government and the governing policies and financing agreements that may be needed."

In addition to this Forum, there are two separate SAFETEA-LU commissions that were established by Congress to address related issues of transportation finance. For their reports, click here.

Funding transportation with value capture in Minnesota?

2008-03-21T14:15:00.008-05:00

An innovative way of transportation financing is through value capture, which involves (partial) recovery of value gains associated with transportation improvement. In the recently passed transportation finance bill, the state legislature is launching a study to assess the feasibility of using value capture in Minnesota to supplement transportation funding. Following is a tentative outline of questions that I think should be addressed in this study:

Measuring value gains of transportation

Theoretical frameworks of value gains
Empirical evidence about value gains
Practical ways to measure value gains

Strategies of value capture: rationales, applications, and issues

Tax-based approaches: special assessment, split-rate property tax, or TIF
Fee-based approaches: development impact fees or development exactions
Market-based approaches: selling, leasing, or joint-developments

Recommendations for Minnesota

Criteria for evaluation
Evaluating possible policy options
Policy recommendations

Value capture: The Vancouver example

2008-03-20T10:44:00.003-05:00

The Vancouver Sun (Shore, 03/19/2008) reports that Metro Vancouver's Transportation Authority is launching a real estate division that could produce up to $1.5 billion in revenue over the next 10 years, modeled on an agency that has reshaped Hong Kong. Under the plan, enabled by a 10-week-old provincial legislation, TransLink will purchase land along new rapid transit routes and around stations and ramp up the value of the land through denser zoning and partnerships with land developers to create high-density commercial and residential developments.

To fund infrastructure improvements, "value capture" may be done in three broad ways: tax-based approaches such as special assessments or split-rate property taxes, fee-based approaches such as development impact fees, or direct value capture through "getting involved to a greater degree in real estate development," such as the Vancouver example above.

(Thanks Bob for suggesting this case.)

States facing "the worst deficits"

2008-03-18T11:40:00.001-05:00

The AP (3/18) reports that states are confronting "the worst deficits they've faced in a decade or more" as the economy worsens. In response, states may "take away government health insurance and benefits from millions of Americans,"including children, the disabled, and the elderly. Also facing cuts are "aid to schools and universities," as well as state workforces. The AP notes that states are even considering "releasing prisoners before their sentences are completed."

Nevertheless, few states are considering [general] tax increases to close budget gaps. Instead, they may increase lottery ticket sales, promote Indian gambling, or further raise taxes on cigarettes and alcohol. As AP points out, those types of revenue-generating mechanisms tend to be regressive, "disproportionately hit the pocketbooks of the same poor and working-class that would be hurt by the spending cuts."

(Courtesy to ICMA Newsletter.)

China's one-child policy: to change, or not to change?

2008-03-17T17:54:00.004-05:00

China's one-child policy has hit headline news recently with inconsistent voices from different officials (and at different timings) about possible relaxation of the policy in the near future.

China to Reconsider One-Child Limit (New York Times, 02/29/2008)
China Sticking With One-Child Policy (New York Times, 03/11/2008)

My interpretation from these conflicting news: Yes, China is reconsidering the policy (and with good reasons, I believe); however, it is not yet the time for the government to open that information to the public.

Civic Education Video Collection: State Budgeting

2008-03-15T23:27:00.006-05:00

From Website of Minnesota Senate Office, Civic Education Video Collection:

2005: Funding Capital Improvement Projects (.rm, 00:03:00)
2004: The General Fund (.rm, 00:03:00)
2004: Budget Forecasting (.rm, 00:06:00)

Videos about Education Finance in Minnesota

2008-03-15T23:04:00.006-05:00

From Website of Minnesota Senate Office:

Video of Capitol Reports (Saturday, June 02, 2007; 00:28:32)

Education funding is always the top priority for state lawmakers when they set the state’s budget. According to the biennial 2007-2009 budget, about $13.7 billion dollars over two years will be directed towards early childhood through high school education programs. Host Jannell Trobec interviews House Education Finance Chair Mindy Greiling and Senator David Hann about the new funding initiatives.

Video of Capitol Reports (Saturday, October 13, 2007; ?)

School districts across the state are seeking support from voters to increase education funding through their property taxes. Students, teachers and administrators in the White Bear School District offer their perspective on the status of education funding in Minnesota. Plus, Assistant Senate Majority Leader Tarryl Clark and Education Commissioner Alice Seagren talk about past and future state efforts to fund our public schools.

How Does Minnesota Compare?

2008-03-14T16:28:00.005-05:00

Minnesota Center for Public Finance Research (MCPFR) publishes a series of reports called "How Does Minnesota Compare," which is designed to provide just one snapshot of the fiscal picture of Minnesota, in particular how Minnesota's overall tax collections or spending compare to the other states. You can click below to watch videos of Capital Reports about the two last tax comparison reports.

Video of Capitol Reports (Saturday, July 8, 2006)

Segment 2 – Minnesota’s state and local tax collections during Fiscal Year 2004 ranked lower compared to other states than in previous years. Minnesota Taxpayers Association’s Executive Director Lynn Reed explains the latest study. (8:00 minutes, 12:40/20:50)

Video of Capitol Reports (Saturday, October 23, 2004)

Lynn Reed, Executive Director of the Minnesota Taxpayers Association, presents Minnesota's tax and spending rankings in 2004. (12:45 minutes, 0:30/13:15)

The Way We Tax

2008-03-14T15:59:00.006-05:00

The Governing.com did a great job in The Way We Tax, A 50-State Report(2003), which evaluates the way each state raises its revenues. The two charts above compare state tax burdens per capita or as a share of personal income -- I just love the balance of colors.

For more comparison studies, see other grading-the-governments reports by the Government Performance Project.

Percent Change in Federal Grants, 1960-2006

2008-03-14T15:01:00.003-05:00

From Robert Tannenwald's article, Are State and Local Revenue Systems Becoming Obsolete?

State and Local Tax Burdens, 1959-2000

2008-03-14T14:58:00.002-05:00

From Robert Tannenwald's article, Are State and Local Revenue Systems Becoming Obsolete?

State and Local General Revenues, 1977-1999

2008-03-14T14:46:00.011-05:00

From Robert Tannenwald's article, Are State and Local Revenue Systems Becoming Obsolete?

Flyer for the Global Policy Seminar

2008-03-14T12:26:00.008-05:00

Flyer for the upcoming Global Policy Seminar: China's Population Policy (March 25, 2008)

The one-child policy in China was introduced in 1979 to alleviate the overpopulation problem. In the past three decades the policy has successfully reduced the population growth and fertility rate in China. However, the policy is controversial both within and outside China because of the manner in which the policy has been implemented; because of unindented consequences such as the imbalanced sex ratio at birth; and because of concerns about negative economic and social consequences with an aging population. In this seminar I will present the policy's background, related issues in particular the imbalanced sex ratio at birth, and current discussions about the policy's future direction.

A "poster child" case for Value Capture

2008-03-13T08:49:00.009-05:00

Stone's Throw is a 619 acre master planned community located in the fastest growing corridor in the State of Minnesota. It will have +/- 136 acres of commercial, retail, office, industrial and mixed use property types right around a proposed I-94 interchange. The mixed use land is for sale under an "Exclusive Investment Offering" -- this can be an example of "value capture," a source of public finance by capturing part of benefits that will incur with the construction of the interchange.

Before knowing more about this project, one question that occur to me is the timing of this "offering." Is it better to sale the parcels now, or to hold them until later? Would all the parcels be sold one time or bit by bit gradually? Some may say that the government may have to sell the land earlier in order to have money for construction. However, as long as there is a reasonable expectation of future revenue, the government can still borrow money through municipal bonds to be repaid by proceeds of future sales -- if the later- or gradual-offering is shown to be a better approach.

(Thanks, Bob, for suggesting this case.)

For our Public Affairs in 2020 meeting

2008-03-12T14:23:00.005-05:00

Draft script for our Public Affairs in 2020 meeting:

While the world is becoming increasingly globalized, I am focusing on local government fiscal issues. Global devolution pushes more responsibilities down to lower levels of government which are closer to our daily lives. They need our help to become more responsible, viable, and accountable!

We are moving toward a new system of governance, in which governments will redefine their relations with taxpayers, with other governments, and with nonprofit or private organizations. To meet these challenges, I am doing research on how local governments get alternative sources of revenue; how they relate to each other in the overlapping and fragmented governmental system; and how they may develop alternative modes of service delivery including contracting out, privatization, or public-private partnerships. I apply the research framework across states and even beyond, because diverse contexts provide comparative perspectives to enhance our knowledge.

In terms of research methods, I am trying to integrate traditional statistical models with GIS-based spatial data analysis. I like to incorporate these skills into teaching and pass them on to students. Location matters for all social phenomena; spatial thinking with advanced modern technologies helps for understanding and solving our policy problems.

[revised on 04/07]

What makes Wilmington, Delaware, so special?

2008-03-12T12:14:00.003-05:00

Why incorporate in Delaware? A key factor of the state's attractiveness to businesses is its pro-business finance laws. For example, there is no Delaware corporate income tax for corporations that are formed in Delaware so long as they do not transact business in Delaware. In addition, shares of stock in Delaware corporations are not subject to Delaware taxes if the owner lives outside the state. For those reasons, many companies like to establish their headquarters in Delaware and the state receives a large percentage of its revenue from corporate registration fees. In 1988, the Delaware legislature enacted a law which required a would-be acquirer to capture 85 percent of a Delaware chartered corporation’s stock in a single transaction or wait three years before proceeding. This law strengthened Delaware's position as a safe haven for corporate charters during an especially turbulent time filled with hostile takeovers.

As the most populous and readily accessible city in Delaware, Wilmington has become a national financial center for the credit card industry, in part because in 1981 the state has eliminated the usury laws enacted by most states, thereby removing the cap on interest rates that banks may legally charge customers. Many major credit card issuers, including Bank of America (formerly MBNA Corporation), Chase Card Services (part of JPMorgan Chase & Co., formerly Bank One/First USA), and Barclays (formerly Juniper Bank), are headquartered in Wilmington. The Dutch banking giant ING Groep N.V. headquartered its U.S. internet banking unit, ING Direct, in Wilmington.

Do bond rating agencies discriminte municipal bonds?

2008-03-12T11:47:00.003-05:00

Thanks Jeff for suggestion this article: States and Cities Start Rebelling on Bond Ratings (03/03/08, Creswell and Bajaj).

Issued by state or local governments, municipal bonds are generally much safer than those issued by corporations. The level of safeness is call "credit quality," the extent to which a bond issuer will be willing and able to pay back its debt. This is reflected by bond ratings assigned by several bond ratings agencies. The ratings will in turn affect the interests (borrowing cost) for the payback of these bonds.

In recent weeks, some governmental officials complain that ratings firms assign municipal borrowers low credit scores compared with corporations. And it is the taxpayers who ultimately pay the price, in the form of higher fees and interest costs on public debt. Bond rating agencies, however, have their rationales for the practice of double-standards.

Data of local finance and education performance, North Carolina

2008-03-12T09:06:00.004-05:00

Post-Proposition 13 revenue-raising strategies

2008-03-11T21:54:00.004-05:00

Thanks Jan for suggestion this article on Planetizen.com: How We Pay For Growth.

On June 6, 1978, the voters of California passed Proposition 13, a citizen initiative that cut property taxes by more than half. The original intent was to reduce the size of government by controlling the amount of property tax levy. "But it is not the basic impulse of government to cut its own size," or as I like to argue, nor do governments have the capacity to "do something for nothing." Since then, "local government agencies throughout the state have gone into survival mode in two different ways."

"First, they have intensified their competition with one another for the revenue sources available." According to the report, the revenue competition has led to the plethora of outlet malls, entertainment retail centers, and regional malls, and even "the boomlet in the creation of new cities" in the last twenty years.

"Second, they have been endlessly inventive in finding new sources of revenue that are not subject to Prop. 13's limitations." Those "post-Proposition 13 revenue-raising strategies" include parcel taxes, Mello-Roos taxes, development impact fees, or special assessment districts.

Minnesota's local sales tax

2008-03-11T09:35:00.004-05:00

Comparing with many other states, Minnesota’s local governments have much higher reliance on local property taxes, less so on local sales and use taxes. As of 2004, general local sales taxes exist in only 10 of Minnesota’s 853 cities and in only one of the 87 counties (Cook County).

In 1971, while the state general sales tax rate was increased to 4 percent as part of the “Minnesota Miracle," the legislature enacted a prohibition against new or increased local taxes on sales or income (M.S. 477A.016). According to the report, "Minnesota's Local Sales Tax (2004)," state policymakers have been reluctant to provide broad authority for local-option sales taxes or other local revenue sources out of concern over the uneven distribution of revenues across communities. However, this concern may not be necessary. My recent article on Public Budgeting and Finance shows that, in Georgia, although local options sales tax (LOST) is more unevenly distributed than property tax, adding LOST to the property tax has actually reduced the original level of fiscal disparities -- because the two taxes have different patterns of spatial distribution.

NCSL's reports on state and local taxation

2008-03-11T08:50:00.006-05:00

The Foundation Fiscal Partners is a group of members of the National Conference of State Legislatures (NCSL) Foundation for State Legislatures. Since 1991, the group has been working together to examine specific areas of state fiscal policy and then make recommendations on these state fiscal policy issues. These reports on their website are very helpful for our course of State and Local Public Finance:

A Guide to Property Taxes, in three parts: An Overview (May 2002), Property Tax Relief (November 2002), and The Role of Property Taxes in State and Local Finance (August 2004).
The Appropriate Role of User Fees in State and Local Finance (July 1999)
Critical Issues in State-Local Fiscal Policy: A Guide to Local Option Taxes (November 1997)
Critical Issues in State-Local Fiscal Policy: Sorting Out State and Local Responsibilities (July 1997)

Local Option Sales Tax in North Carolina

2008-03-10T16:09:00.003-05:00

North Carolina allows counties (but not cities) to levy four local option sales tax (LOST) upon the approval of public referendum. The four LOST are the Article 39 one-cent tax, the Article 40 half-cent tax, the Article 42 half-cent tax, and the Article 44 half-cent tax. The 100 NC counties now levy the full amount -- 2.5 percent. As the state levies a 4.5 percent sales tax, the total sales tax rate is now 7 percent statewide (except in Mechlenburg County which levies an additional 0.5 percent LOST for mass transit only).

The LOST proceeds are collected by the state, piggybacking on state sales tax, and then allocated to the 100 counties after subtracting administrative costs (slightly less than one-half of 1 percent). Net proceeds of the Article 39 tax are allocated to the county in which the sales taxes were collected. For the Article 40 and 42 taxes, however, net proceeds are placed in a statewide pool and allocated among the counties on a per capita basis. The proceeds of the Article 44 tax are divided in half; one half based on point of sales and the other half on a per capita basis.

Once the proceeds are allocated to the counties, the amounts are further divided among government units in a county, based on either per capita or ad valorem (property) bases, to be determined by the county commissioners. For the 2005-2006 fiscal year, 58 counties use the per capita formula and 42 use the ad valorem one.

After the distribution, cities are allow to use their share for any public purpose that they are authorized to undertake. Counties may do the same with the proceeds of the Article 36 and Article 44 tax. The proceeds of the other two taxes for counties, however, are partially earmarked until at least 2011: 30 percent of the Article 40 tax and 60 percent of the Article 42 one must be used for school capital outlay or for debt service on county borrowing for school projects.

Who gets "LOST"? One major policy issue about local option sales tax is the distribution of proceeds -- among counties, between a county and cities within which, between general purpose or special purpose, etc. The formulas that are used have significant implications on the distribution of fiscal capacity.

LLC vs corporation

2008-03-05T09:41:00.003-06:00

A Limited Liability Company (LLC) is a relatively new business structure in the US allowed by state statutes since 1970s. Owners of an LLC are called members, which in most states may include individuals, corporations, other LLCs and foreign entities. Many states including Minnesota also permit “single member” LLCs with only one owner.

Similar to a corporation, owners of LLC have limited personal liability to for the debts and actions of the company. But a LLC functions more like a partnership and so is more flexible in management and free from some paperwork requirements. One significant advantage of LLC is that it allows for pass-through taxation, that is, the profits will be allocated to members and be taxed on their individual income level only. This avoids the double taxation of typical business profits that are subject to both (federal and state) corporate income tax and individual income tax (once the profits are allocated).

LLC has its disadvantages too. Many states levy a franchise tax or capital values tax on LLCs as a "fee" for them to benefit from the privilege of limited liability. It may be more difficult for an LLC to raise financial capital as investors may be more comfortable investing funds in the better-understood corporate form. In addition, a few types of businesses, such as banks and insurance companies, generally cannot be LLCs, and there may be addition restrictions in some states.

Deconstructing the transportation finance bill

2008-03-04T09:15:00.002-06:00

Gather (Raabe, 03/03) reports that Minnesota House Legislators Denise Dittrich, Kathy Tingelstad and Melissa Hortman answered questions about the newly effective Transportation Finance Bill (HF2800) in a well-attended Town Hall Meeting in Senate District 47 on March 1. They explained specifics including what exactly is in the bill, how it is being funded and what compromises were agreed upon in order to get a transportation bill of any kind passed.

It is well known that the bill will adds $6.6 billion to state transportation funding in the coming decade through increase gas tax, metro sales tax, and vehicle license tab fee. Yet few may know that the bill also includes 40 additional state troopers, qualifies the state of Minnesota for $160 million in federal matching funds and includes tax credits for the lowest income bracket.

Before it was passed, the bill went 17 revisions and many compromises have been made. Take several examples. The wheelage tax and indexing were taken out of the bill. The increased gas tax is still below the proposed $.10 tax that was vetoed back in 2005. A tax credit was included to accommodate the Governor's position that the "gas tax is regressive." The proposed metro sales tax for transit was decreased from .5% to .25%. In addition, the bill includes the bonding that the Governor asked for, as well as the Urban Partnership Agreement.

It is estimated that the bill will create approximately 33,000 new jobs, and will reduce the cost of congestion, which amounts to $790 a year for the average driver and 43 hours of delays.

Q&A's interview of David Walker

2008-03-03T16:45:00.003-06:00

This is an one-hour video that I often show to students in PA5003. David Walker is the Comptroller General of the Government Accountability Office (GAO), which was previously called General Accounting Office. In this C-Span interview, he talked about the operation of GAO, his position as the Comptroller General, and his deep concerns about US government's financial management in particular the increasing national debt.

Grading the States 2008

2008-03-03T13:26:00.005-06:00

Today, the Pew Research Center released the Grading the States 2008, which is the new report of the Government Performance Project in assessing the quality of management in the 50 states. The report’s findings are generated from extensive interviews and surveys of state-level managers and opinion leaders. The performance scores are based on four categories of criteria:

managing fiscal resources from budgeting to procurement ("money"),
recruiting and retaining highly qualified, productive public employees ("people"),
maintaining and improving transportation facilities ("infrastructure"), and
using information and technology to measure performance and communicate more effectively with the public ("information").

Overall state performance in 2008 ranged from A- (Utah, Virginia, and Washington) to D+ (New Hampshire). The national average among the 50 states was B-, which is also the score for Minnesota.

Among four criteria, the only one that Minnesota gets below average is infrastructure (C+). This is not surprising at all with the collapse of I-35 Interstate Bridge. Although the tragedy is now believed to be caused by a design flaw common for all bridges built around 1960s, it has raised a big public profile and has led to closer scrutiny of the state's efforts in capital budgeting, asset management, and infrastructure maintenance and renewal.

For more about the state's performance report card, see here.

IRS filling status: Head of Houseold

2008-02-28T21:17:00.005-06:00

Head of Household is a confusing filing status in federal income tax codes. According to IRS Publication 504, you can file as head of household if you meet three criteria:

You are unmarried or “considered unmarried” on the last day of the year.
You paid more than half the cost of keeping up a home for the year.
A “qualifying person” lived with you in the home for more than half the year (except for temporary absences, such as school). However, if the “qualifying person” is your dependent parent, he or she does not have to live with you. (You must be able to claim an exemption for your father or mother. Also, you must pay more than half the cost of keeping up a home that was the main home for the entire year for your father or mother. You are keeping up a main home for your father or mother if you pay more than half the cost of keeping your parent in a rest home or home for the elderly.)

If you qualify to file as head of household, your will receive a higher standard deduction than if you file as single or married filing separately, and your tax rate usually will be lower too.

Obama's proposal of "National Infrastructure Bank"

2008-02-27T11:41:00.005-06:00

The Chicago Sun-Times (Pallasch, 02/13) quotes Obama's big spending plans:

“I’m proposing a National Infrastructure Reinvestment Bank that will invest $60 billion over 10 years,” Obama said. “This investment will multiply into almost half a trillion dollars of additional infrastructure spending and generate nearly two million new jobs — many of them in the construction industry that’s been hard hit by this housing crisis.”

For more about the proposal, see the post on professor David Levinson's The Transportationist.

It is good to know that the proposed "Infrastructure Reinvestment Bank" will inject additional funding (through bonds) to the much-needed transportation improvements. The key question, however, is about "the repayment of those bonds."

Although the plan claims to "align the financing of infrastructure investments with the benefits they create," but it is not truly a "bank" that can be "self-financing" through market mechanisms. Instead, the financing package will be "backed by the full faith and credit of the Federal Government" -- so it is essentially a general-obligation bond to be paid back from the general fund budget. Financially, it is equivalent for the federal government to incur yet an additional amount of $60 billion deficit that is guaranteed to be balanced in 50 years. The fact that the repayment would be in the format of "tax credits" rather than interests does not make any true difference for both investors (govt bond interests are tax exempt anyway) or the federal government (tax credit is simply a different form of expenditure like interest payment).

Some may like the proposal as it moves from pay-as-you-go financing to debt-financing and become a de facto national capital infrastructure budget. But the arguable merit of a national capital budget is further complicated by the incontrollable federal deficit that looks to go worse in the foreseeable future.

Mike Huckabee's "Fair Tax" proposal

2008-02-27T11:26:00.005-06:00

Presidential candidate Mike Huckabee proposes a "fair tax" plan that would eliminate all federal income and payroll taxes, shut down the Internal Revenue Services, and then replace with a national sales tax. He claims that the plan would be fair, revenue-neutral, and economically efficient.

But could the plan really work? Listen to the NPR story.

AMT for personal income tax

2008-02-25T09:09:00.003-06:00

Alternative Minimum Tax (AMT) is part of the federal income tax system. There are AMTs for both personal income tax and corporate income tax. The focus here is the AMT for personal income tax, which has received increased attention in recent years.

The regular way of federal tax calculation allows for many "tax preference items" to reduce personal tax liabilities. These items include long-term capital gains, accelerated depreciation, certain medical expenses, percentage depletion, certain tax-exempt income, certain credits, personal exemptions and the standard deduction. It has been long noted that people with extremely higher income get disproportional benefits to evade tax burden because they have more access to these "loopholes." The alternative minimum tax (AMT) was thus created by the Tax Reform Act of 1969 to ensure that anyone who benefits from these tax advantages pays at least a minimum amount of tax. (For more details of AMT calculation, see here.)

When the AMT first became effective, it was intended to target [only!] 155 high-income households that had been eligible for so many tax benefits that they owed little or no income tax under the tax code of the time. However, as it was not indexed to inflation and recent tax cuts, an increasing number of upper-middle-income taxpayers have been finding themselves subject to this tax. According to a brief issued by the Congressional Budget Office (CBO) (No. 4, April 15, 2004), "In 2010, if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax. Rather than affecting only high-income taxpayers who would otherwise pay no tax, the AMT has extended its reach to many upper-middle-income households." (Curious abou how you may avoid the AMT? Click here.)

In recent years, pressure to reduce or eliminate the tax is growing as an increasing number of taxpayers incur the AMT. Yet no formal approach has been taken to repeal the tax code. For years, Congress has passed one-year patches aimed at minimizing the impact of the tax. The future of AMT remains unclear, as policy analysts are divided over the best way to address the criticisms.

Minnesota state aid programs for local transportation

2008-02-22T09:29:00.004-06:00

Funding for local governments' transportation investment comes not only from own-source revenues such as the property tax but also from intergovernmental grants such as federal and state aid.

In Minnesota, most grants for local transportation are administered by State Aid for Local Transportation (SALT) in Minnesota Department of Transportation (MN/DOT). SALT is in charge of the County State Aid Highway (CSAH) and Municipal State Aid Street (MSAS) portions of the Highway User Tax Distribution Fund (HUTDF), along with federal aid highway dollars. In addition to funding support, staff from SALT provides technical assistance in highway and bridge design, construction and maintenance.

For more about State Aid programs, see State Aid Manual 2007.

New transportation reports released from SAFETEA-LU commissions

2008-02-20T14:48:00.005-06:00

The current federal legislation for transportation programs is call SAFETEA-LU ( Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users), which authorizes the Federal surface transportation programs for highways, highway safety, and transit for the 5-year period 2005-2009. In recent weeks, two commissions created by the SAFETEA-LU each released a new report on future development of public transportation systems.

On January, the National Surface Transportation Policy and Revenue Study Commission issued its report, "Transportation for Tomorrow," that recommends a radical restructuring of surface transportation programs and incremental increases in the federal tax. The commission concludes that the United States needs to invest at least $225 billion annually from all sources (federal, state, and local) for the next 50 years to repair the existing transportation system and create a more advanced system. Today, only 40% of the recommended amount is invested each year. This significant increase in funding is needed to sustain strong economic growth and keep the United States competitive.

Accordingly, the commission recommends that the federal fuel tax be increased five to eight cents per year over the next five years, after which it should be indexed to inflation. States are encouraged to enact even larger increase. Additional recommendations include new federal ticket taxes to help pay for transit and passenger rail, a federal freight fee to help finance freight-related improvements, new flexibility regarding tolling and congestion pricing, and public-private partnerships.

Another commission is the National Surface Transportation Infrastructure Financing Commission, which is charged with analyzing future highway and transit needs and the finances of the Highway Trust Fund and making recommendations regarding alternative approaches to financing transportation infrastructure. The Finance Commission recently released its interim report titled The Path Forward: Funding and Financing our Surface Transportation System. This report outlines the current issues facing transportation funding and how the commission will analyze funding options and finally make recommendations. Highlights of the preliminary observations:

Demand for transportation is out pacing investment;
Maintenance costs are increasing and reducing the funds available for system expansion;
The fuel tax is not sufficient at current rates;
Direct user fees should be explored;
Along with increased investment, more intelligent investment and better operation of the system is needed.

Minnesota: State general property tax

2008-02-19T17:51:00.004-06:00

The state general property tax in Minnesota was enacted in 2001 as part of a broader package of property tax reforms that included class rate reductions, the state takeover of transit levies, and replacement of the state-determined school district general education property tax with direct state-aid payments. Prior to 2002, the last levy of a Minnesota statewide property tax was in 1967.

According to "Minnesota Tax Handbook, 2006" (p. 42), the state general property tax has the following features:

Tax Base: Net tax capacity of commercial-industrial, public utility, railroad, mineral, and seasonal recreational property. Net tax capacity is the estimated market value multiplied by the net class rate. For seasonal recreational property, the class rate for the first $76,000 of market value is 0.4% rather than 1%.
Rate: Tax rate is determined annually to equal the mandated levy. The levy was $592 million for 2002 and for subsequent years is increased by the rate of increase in the implicit price deflator for state and local government consumption expenditures and gross investment. Of the total amount, 95% is levied on commercial- industrial property and 5% on seasonal residential recreational property.
Exemptions: Electric generating public utility machine

Homeowners refund in Minnesota

2008-02-19T17:23:00.004-06:00

Minnesota has two property tax refund programs for homeowners: the regular property tax refund and the special property refund.

The regular property tax refund is for people who own and reside in their home ("homesteaded") and meet certain income criteria. In 2008 (the 2007 filing), the limit is $93,480 for households without dependents, and it increases with family size, up to $113,880 for households with five or more dependents. [The coverage seems surprisingly wide for me.]

The special property tax refund is for people who has remain "homesteaded" for the past two years and seen a large increase in their property tax bills, for instance, if your property tax payable in 2008 have increased by more than 12 percent and is at least $100 over your 2007 property tax. (The increase must not be attributable to new improvements.) There is no limit on household income in this program.

Renter’s Property Tax Refund Program

2008-02-19T17:06:00.002-06:00

In the class we talked about the property tax incidence for apartments -- depending on the relative mobility between renting behavior and housing capital, renters and house owners each share a portion of property tax burden.

In Minnesota, the renter’s property tax refund program (sometimes called the “renters’ credit”) is a state-paid refund that provides tax relief to renters whose rent and “implicit property taxes” are high relative to their incomes. “Rent constituting property taxes” is assumed to equal 19 percent of rent paid. If that rent constituting property tax exceeds a threshold percentage of income, the refund equals a percentage of the tax over the threshold, up to a maximum amount.

Minnesota's fiscal disparities programs

2008-02-19T16:23:00.006-06:00

The Twin Cities area fiscal disparities program as initiated in 1971 as a program of commercial-industrial tax-base sharing within the Twin Cities metropolitan area. The map above shows the various development areas within the seven-county region as they existed in the early 1970s. In 1995, a parallel program was established on the Iron Range of northeastern Minnesota.

The Twin Cities area fiscal disparities program shares 40 percent of the growth in the commercial-industrial (C/I) "property tax capacity" (adjusted tax base) of Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, and Washington counties. The fund must be spent on activities that benefit the metro area as a whole. Approved uses include infrastructure improvements such as airports, highways, streets, and roads, cultural and recreational uses. Municipalities must file a report with the Department of Revenue showing that expenditures for approved uses equal or exceed the fiscal disparities distribution of the municipality. If a municipality fails to comply with the reporting or expenditure requirements, the following year's fiscal disparities distribution to the municipality would be withheld.

The program not only reduces fiscal disparities among municipalities within the region, but it also encourages infrastructure investments by "internalizing" the positive externalities associated with these improvements.

A proposal of property tax-increase blocker

2008-02-19T10:19:00.004-06:00

[Thank you Jeff for suggesting this case.]

In 2005, Minnesota Governor proposed a property tax-increase blocker through "taxpayer satisfaction surveys," according to Star Tribune (Smith, 03/10/2005). Also known as the "turbo-charged, truth-in-taxation" proposal, the bill would allow property owners to challenge the property tax levy decisions of the City Council through a reverse referendum process.

This is how it is supposed to work. Together with their annual property tax statements, property owners will be provided a survey, which would include a question, “Are you satisfied with the proposed property tax levy?” and will provide a space where the taxpayer can answer “yes” or “no”. If at least 20 percent of the surveys are returned with a “no” response, the city would have to hold a referendum on the levy increase. The hearing would be held in January. If the voters do not support the proposed levy, the final levy would be reduced to the previous year’s levy.

Ironically, the Governor initiated this idea while he was significantly reducing local government aid (LGA), which by nature adds pressure for local governments to increase property tax levy so as to keep up with their services. Not surprisingly, "local government officials fought this legislation tooth and nail ," and the bill went nowhere.

Perception of nonprofit efficiency

2008-02-16T11:35:00.007-06:00

A study released recently from Ellison Research (Phoenix, Arizona) show that most Americans believe non-profit organizations are not financially efficient enough in their work. Sixty-two percent believe the typical non-profit spends more than what is reasonable on overhead expenses such as fundraising and administration. Regarding a particular nonprofit that one knows or relates to, however, the perception tends to be better.

This interesting pattern echoes what I have heard about local government perceptions -- when asked about local governments in general, many people consider them over-sized, inefficient, and poorly managed. Yet the same people tends to have somewhat better perceptions if the questions are about a particular local government that they deal with.

Are we just more distrustful of things that we less know? Or should we blame or appraise the media that are fond of bad news?

Minnesota: 20 years behind in transportation investment

2008-02-13T21:39:00.009-06:00

Growth & Justice, a "progressive" economic think tank in Minnesota, claims that Minnesota is 20 years behind in transportation investment. According to their research, if the state had kept up with its highway funding in 1986, "adjusting for inflation and dramatic growth in highway usage, it would have invested $13.89 billion more over the last 20 years."

The complete report is titled “Twenty Years Behind: Highway Spending & Revenues by Minnesota’s State Government, 1986-2006.” According to the report, the trend line for overall highway spending in Minnesota lags behind that for overall spending by all states combined.

Over the years, Federal highway funds to Minnesota declined significantly, adjusted for inflation and miles traveled. The trend is driven in part by a problematic formula of federal gas tax distribution, which was recently fixed by Congress, and in part by the fact that federal gas tax revenue has failed to keep up with inflation for the rate has not been increase for many years.

Regarding own-source revenue, Minnesota's Motor Fuel Tax, a major source of the state Highway Fund, dropped by more than a third from 2006 to 1986.

Ambitious Transportation bill proposed by legislative session.

2008-02-13T09:12:00.006-06:00

The legislative session in Minnesota opened on Feb. 12 and on its very first day proposed an ambitious transportation finance bill with an $8.4 billion package that includes up to a seven-and-half cent gas tax increase, tab fee increase on new cars and a possible half-cent metro sales tax.

The bill is likely to be vetoed by Gov. Tim Pawlenty, as was the fate of a similar bill last year. However, sponsors hope public pressure after last year's fatal Interstate 35W bridge collapse will help them win over the heated debate or at least gain partial success with some compromise.

Like many other states, Minnesota has a biennial budget. The legislature convenes in regular "long-year" session each odd numbered year from January to mid-May to discuss budget proposal submitted by the Governor. In even numbered year the legislature re-convenes for a "short-year" session, as "one of budget review; action on the results of interim studies; consideration of emergency measures and the result of the evaluation of the needs of the state." This current session will end in April, when we will know the result of this transportation finance bill.

Federal budget deficit (1961-2007)

2008-02-12T11:44:00.002-06:00

See the figure for federal budget deficit from 1961 to 2007. (http://www.uuforum.org/Images/deficit.gif)

Bush describes a "good, solid" budget

2008-02-11T16:09:00.000-06:00

On 02/04, President Bush just submitted his proposed budget, one that he described as a "good, solid budget" and one he claims that puts the federal government on the path to balancing its budget in the very near future -- by 2012.

Chicago Daily Observer (Martire, 02/11), however, finds that "the only verifiable good thing about it [the proposal] is the president's description." Likewise, Investment News (02/11) sees the budget proposal "just plain dishonest."

The proposal will increase the "acknowledged" federal deficit from $162 billion in FY2007 to $410 billion in FY2008. Then the proposal suggests that it may drop marginally in FY2009 to $407 billion -- that is what the president claims "on the path of balancing its budget."

Note that the talk is about the "acknowledged" deficit, which is the number after the surplus in Social Security has been borrowed by the administration. While the "acknowledged" deficit is $401 billion, the actual budget deficit is a whopping $602 billion, after spending $192 billion Social Security surplus on current operations (CDO).

Even worse is the fact that both the $410 billion "acknowledged" deficit in FY2008 and the $407 billion in FY2009 may have been severely underestimated. On the revenue side:

The revenue growth for the coming two years has been "certainly overstated" with the current economic slowdown being simply ignored;
The proposal assumes no change in the Alternative Minimum Tax (AMT), which is "most likely" to be fixed by a Democratic Congress and the cost may be another "$20--$100 billion annually in lost revenue" (CDO).

On the spending side there are even more unrealistic assumptions:

The budget proposes only about $70 billion for the war in Iraq and Afghanistan, while the true costs are likely to be "more than double that figure" (IN);
The budget projects cuts in Medicare spending of $12.2 billion in FY2009, which may be unlikely to pass Congress.

How high could it be?

2008-02-07T19:20:00.000-06:00

Currently the top marginal rate of federal income tax is 35%, which means that Bill Gates pay 35 cents for the last dollar that he earns every year. Does it sound high or low? That is your personal call.

Let's just put it in historical perspective (See the graph to the right). It is shocking to know that there were 14 years that we have the top marginal rate over 90%. The record high was 94% during 1944-1945, at the end of WWII. Yet the high rate was not due to the war itself. It was a little peak among a half-decade long period of 70% or above, from 1930s to 1980s.

Top US Marginal Income Tax Rates (1913-2003)

Revenue instability of sales tax

2008-02-05T10:25:00.000-06:00

Many localities have increase their reliance on sales taxes, which are considered by many as more politically acceptable than the traditional mainstay of property tax. A drawback of sales taxes, however, is that the revenues are subject to more fluctuations than that of property tax when the economy goes up and down.

Kansas's Lawrence Journal World (2/4, Lawhorn) reported that "flat" 2007 sales tax receipts mean that "more city budget cuts may be on the way" for 2008. The 2007 figures were "about $1 million less than commissioners had budgeted." The 2008 budget would require "sales tax collections...to increase by 3.1 percent over their 2007 levels," and the typical annual growth rate only "averaged 2.3 percent." Last year, the city faced a similar problem and "commissioners imposed across-the-board decreases" for some types of social service and "outside" groups as well as making internal budget cuts. City Manager David Corliss told commissioners that overall economic conditions were depressing tax receipts (Courtesy: ICMA newsletter).

Q&A: Budget assignment for PA5003

2008-02-05T08:55:00.000-06:00

Q: I am attaching the link of the Hennepin County budget for 2006-2007 and wanted to know if this is correct.

A: The link is great but you may click around the some website to get more information.

Here is the complete budget of FY2007: I would encourage you to quickly read through the document and get a sense of how the information is organized. The rest of this course is focused on "Financial Reports" which are compiled after a fiscal year ends; the purpose of this assignment is for students to read the "Budget" which is proposed before a fiscal year starts.
The link that you provided sets an example about how you may organize information about major revenue sources or expenditure types. Note that you are expected to calculate the percentages (with formula and absolute referencing) by yourself in the Excel table even if you know the percentages already.

Maine cannot maintain infrastructure without federal funds

2008-02-04T10:06:00.000-06:00

Maine "is losing ground in the struggle to maintain and improve its roads and aging bridges," as its planned funding of $3.2 billion for the next 10 years is "about $2 billion short" of what it needs for "critical highway and bridge improvements," the Central Maine Morning Sentinel (2/3, Cooper) reported.

According to "Connecting Maine: Planning our Transportation Future" published by the state's transportation department, "a big part of the problem is the federal government." The U.S. Highway Fund gets the bulk of its revenue from federal gas tax, which hasn't been raised in over 14 years and the result is underfunded federal obligations. In MDOT's fiscal year 2008-2009 biennial capital work plan, the federal funding accounts for just 62.5 percent of the total capital expenditure, compared to 71.2 percent in fiscal year 1998-99.

To cope with the shortfall, options for the state "range from cost savings efforts on the part of the department, increased motor fuel taxes and long-term borrowing to new alternative financing sources, increased use of tolling, mileage-based fees, increase in use of public-private partnerships and broadening the base from which transportation revenues are derived."

Financing Transit System Through Value Capture

2008-02-01T21:12:00.000-06:00

Value capture refers to an innovative way of infrastructure financing: A new or improved infrastructure tends to raise property values in adjacent areas, and thus generate a windfall for private landowners; through a variety of ways the increased value may be all or in part "captured" to pay for the investment of the infrastructure.

In recent years, value capture is often proposed as an alternative to traditional approaches of transportation finance, such as general revenue, gasoline tax, or tolls. A transit system, for instance, may be (in part) funded through several ways of value capture:

Joint (or linked) development of transit system and adjacent parcels through public-private partnership, so that the cost of transit system can be offset by the benefits gained from adjacent development;
Rezoning and reselling: public agencies may buy privately held land near transit hubs that is zoned for low-density use on the open market, increase the designated use density, and then sell the land back to private developers on the open market;
Impact fees (or development fees), which are applied on the construction of new buildings (or new improvements) in areas adjacent to the transit system. They can be one time levies but are also possible to be designed to be paid over a long period of time;
Special assessment district: a defined area in which the market value of real estate is enhanced due to the construction of transit system. An additional tax is apportioned in the district to recover the the cost of the transit system;
Tax increment financing: a tool to use future gains in taxes to finance the current improvements that will create those gains. A transit system will not only raise the value of surrounding properties, but also bring in new investment. The increased site value and investment creates more taxable property, which increases tax revenues. The increased tax revenues are the "tax increment," which is used in TIF to finance debt issued to pay for the project.
Split-rate property tax, an idea to have separate property tax rates for land and improvement (buildings). A transit system tends to increase the value of land rather than that of buildings. Thus taxing a higher rate on land is able to reclaim part of the the benefits that it received because of the transit system. The land value tax is considered efficient because land is immobile and with inelastic demand. And it has additional benefits in encouraging compact development and smart growth.

To examine the possibility of using value capture to fund transit system in Minnesota, we may evaluate the above options of value capture along with other alternatives of transit finance again a set of tax criteria:

Efficiency: How does it relate margin cost with margin benefit of the project? Is it business friendly? Does it promote or hinder economic development? How would it distort people's behavior?
Equity: Who pays for it? How is the payment related to the benefit received or people's ability-to-pay? Is it regressive or progressive? Is the distributional effect desirable or acceptable?
Revenue sustainability: Is the (tax) base broad or narrow? How high should the (tax) rate be? How stable is the revenue? Can it catch up with the growth of personal income? Is it pro-cyclical or counter-cyclical?
Feasibility: Is the tax (fee) visible to the public? To what extent the revenue can be "exported" to nonresidents? How difficult is it for the government to administer the tax (fee)? How complicated is it for the public to comply with it?

In general, a properly designed system of value capture may meet well with most of these principles: it can be both efficient and fair as the cost correlates well with benefits received; it may generate sustainable level of fund to supplement construction, to support operation, or to pay back debt; it may be more politically acceptable than to raise other taxes; many examples of it has been proved to be administrable.

Orange county file lawsuit to void pension agreement

2008-01-31T10:13:00.000-06:00

The Los Angeles Times (1/30, Berthelsen) reported that California's Orange County supervisors "voted unanimously Tuesday to file a lawsuit seeking to repeal part of their pension agreement with sheriff's deputies, saying the county cannot afford the expense." Should the county prevail, it would save "$187 million in the coming decades" but also face the "wrath of one of the county's most politically powerful unions."

The lawsuit was driven largely by Chairman John Moorlach, previously the county's treasurer, who "has long advocated reforming the generous deals of county's pension agreements with its public employee unions" -- much like those struck elsewhere in the state in recent years --
that have "created an estimated $2.3-billion pension fund shortfall over the next 30 years."

A good example of a "defined benefit" pension program, the provisions allowed public Sheriff deputies to retire at age 50 with annual pension payments totaling 3% of their highest year's pay, multiplied by their years of service -- an increase from 2% under the previous deal -- and granted the benefit retroactively. Deputies, "on average," retire with an annual pension of $70,000 [received until they pass away].

Budget deficit in Atlanta

2008-01-31T09:59:00.000-06:00

The Atlanta Journal-Constitution (1/30, Stirgus) reported that Atlanta "faces an estimated $70-million budget deficit." To close the gap, the city would freeze hiring for "non-essential positions," cut spending by 50 percent for such things as travel, and ask "city administrators to look for other cost savings." In addition, the mayor Franklin indicated that "she wants to amend the city charter to create a new reserve fund."

The budget shortfall was due to "the unsteady national economy" as well as "some errors in the budget for the current fiscal year." City financial officials have tended to "under budgeting" fuel and utility costs, which have risen across the country. For the first three months of Atlanta's current budget year, revenue was down 27 percent while spending was up 9 percent compared with the same time period a year earlier.

States get "creative" to raise revenue

2008-01-29T09:31:00.000-06:00

The AP (1/29, Gormley) reports that states are resorting to "innovative -- and sometimes odd -- ways" of generating funds "in these increasingly gloomy economic times."

Because of the looming recession, many states suddenly found themselves facing budget deficits again. In response, they could "[l]ease a toll highway, like Indiana and Virginia did, or cash in on future lottery profits as a half-dozen states are considering." Also worth considering: "slap a tax on pornography as six states already have," "tax strips joints like they do in Texas," or collect amusement tax or "jock tax" for live performances and professional athletic events.

These seemly-amusing revenue-generating ideas are popular for politicians, who love to use such methods because "they don't have to raise income [or sales] taxes." However, "critics say that's also the danger, if long-term problems never get fixed and essentials such as health care and education go wanting."

PA5003 Syllabus

2008-01-28T17:06:00.000-06:00

Click here to download syllabus for PA5003: Introduction to Financial Analysis and Management (in PDF).

* Students in the class are encouraged to get the DOC version through WebVista, which includes all functioning hyperlinks.

Federal Reserve makes emergency rate cut

2008-01-25T21:14:00.001-06:00

The Federal Reserve, informally the Fed, responding to fears about a possible United States recession, makes a surprising move to cut its overnight discount rate between banks to 3.5 percent, from 4.25 percent, International Herald Tribune (01/22, Grynbaum and Holusha) reported. This is a good example of "monetary policy" as a tool for the government to manage the economy.

As the central banking system of the United States, the Fed is composed of (1) the presidentially-appointed Board of Governors of the Federal Reserve System; (2) the Federal Open Market Committee; (3) 12 regional Federal Reserve Banks located in major cities throughout the nation; (4) numerous private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks; and (5) various advisory councils. Currently, Ben Bernanke serves as the Chairman of the Board of Governors of the Federal Reserve System.

The Federal Reserve is in charge of monetary policy, which influences the availability of cash and credit in the market to stabilize the growth of national economy. To achieve it goals, the Fed relies on three main tools:

open market operations - purchases and sales of U.S. Treasury and federal agency securities to control the amount of cash circulation;
discount rate - the interest rate charged to commercial banks when they borrow money from regional Federal Reserve Banks;
reserve requirements - the amount of funds that a bank must hold in reserve against specified deposit liabilities

The discount rate is not market interest rates which vary for different banks and to different borrowers. However, functioning like "the bank of banks," the Fed sets a discount rate that directly affects market interest rates. Therefore, it is often called as the "benchmark rate." The 0.75 emergency rate cut was unusual both in its scale and its timing: In recent years, the Fed's rate changes were almost always in increments of one-quarter or one-half point. It was the biggest single cut since October 1984.

Note that monetary policy should be contrasted with fiscal policy, which refers to government borrowing, spending and taxation -- According to Keynesian economic theories, running a fiscal deficit and increasing government debt can stimulate economic activity, while running a fiscal surplus with lower level of spending can prevent economic overheating. Nevertheless, fiscal policy has been less effective in recent years, in part because the federal government is almost always running deficits.

Peer-review publications

2008-01-25T11:38:00.004-06:00

"Local Option Sales Taxes and Fiscal Disparities among Localities: Evidence from Georgia,” Zhirong Zhao and Yilin Hou, Public Budgeting and Finance, 2008(28), 39-57.
“Is Management Performance a Factor in Municipal Bond Credit Ratings? The case of Texas School Districts,” Dwight Denison, Wenli Yan, and Zhirong Zhao, Public Budgeting and Finance, 2007(27), 86-98. (A different version of working paper from the same project.)
“Motivations, Obstacles, and Resources: The Adoption of the General Purpose Local Option Sales Tax in Georgia Counties,” Zhirong Zhao, Public Finance Review, 2005 (33), 721-746.
“Morality Policy and Unintended Consequences: China’s ‘One Child’ Policy,” Jerome S. Legge and Zhirong Zhao, Chinese Public Administration Review, 2004 (3), 30-45.

Other publications in English

2008-01-25T11:38:00.001-06:00

Book Chapter, “Expenditures and Revenues of US Governments,” in Handbook of Governmental Accounting, Zhirong Zhao, edited by Frederic Bogui, New York, NY: Marcel Dekker Inc. (In press)

Publications in other languages

2008-01-25T11:32:00.006-06:00

Multiple book chapters, in National Register of Historical Cities in China (in Chinese), edited by Chinese National Ministry of Construction & Chinese National Bureau of Heritage, Zhirong Zhao, Chinese Youth Publishing House, Dec. 2002
Multiple book chapters, in Historic Cities in China (in Japanese), Zhirong Zhao, edited by Zixuan Zhu et al, Kajima Institute Publishing Co., July 2001
“The Value Conceptualization of Historic Preservation – Toward Sustainable Resource, Environment, and Benefits,” Zhirong Zhao, Urban Planning Forum (in Chinese), 1999 (1)(citations)
“Preservation and Renewal of Historic Districts (PDF),” Zhirong Zhao, New Architecture (in Chinese), June 1998 （citations)
“The Marginal-information View of Historic District Preservation,” Zhirong Zhao, selected into Proceedings of International Seminar on Conservation and Development of Historic Cities in Northeastern Asia (in Chinese), 1998
"Historical District Preservation -- Conceptualization and Policy Recommendations," Zhirong Zhao, Master Thesis, Tongjing University, 1997. (citations)