Enterprising Government: The Political and Financial Effects of Fee-Supported Municipal Services

ABSTRACTA market-like service delivery mechanism which shifts tax-supported general fund services to fee-supported enterprise fund services has become a popular strategic tool for cities to achieve more responsive and efficient finance systems. Although the major advantage of fee-supported services is the ability to earn rather than spend, not all local governments utilize them. By employing the two stage Heckman model, this research explores Florida municipalities' strategic behaviors of introducing and increasing fee-supported services. We found that cities that have limited property tax revenue to provide general fund supported services are more likely to introduce and increase fee-supported services. Another important discovery is that the strong mayor form of government tends to favor the fee-supported services more than council-manager cities.Key words: Fee-supported services, enterprise funds, property tax, form of government, Heckman selection modelSince the tax revolt of the 1970's, all levels of governments - federal, state, and local - have been pursuing various ways to overcome limited revenue sources. Cities often face more severe financial difficulties and lack of funding sources compared to other levels of government because they have fewer ways of generating revenue resources. Municipalities, whose general funds are mainly covered by property taxes, have a hard time balancing their budget since property tax has been capped and the creation of new taxes has been severely constrained in many states. Since typical city services are public safety and basic maintenance services - such as water, gas, electricity, sewage, and garbage collection - the funding decisions for those services immediately affect city residents and may turn into politically sensitive issues for the elected officials and the local voters.In order to overcome these financial and political obstacles, municipalities often use the fee-supported service model for many of their public services outside of the tax- supported general fund services, because fee-supported services charge customers, not the community as a whole, and possibly generate profits. In other words, fee-supported services are voluntarily purchased public goods and the prices of these services are supposed to reflect the true cost of production including capital investment (Bierhanzl & Downing, 1998, 2004; Government Finance Officers Association, 2001; Mikesell, 2007). Since a user charge is a market-like financing which shifts general fund activities to fee-supported enterprise fund activities, the usage of user fee-supported goods and services has become a popular strategic effort for cities to achieve more responsive and efficient finance systems (Bailey 1994; Netzer 1992; Stumm and Kahn 1996; Stumm 2000; Wagner 1976; Zorn 1991).This research argues that municipalities have shifted more towards reliance on user charges than general tax financing to generate their revenue and contextual factors, such as political institution, fiscal, economic, and demographic factors have influenced this shift. According to the U.S. Census, user charges made up 9% of total local revenue and property taxes generated 37% of the total in 1970. However, in 2006, 14% of total local revenue came from user charges and 24% from property taxes (U.S. Census). Previous studies also show that the increased reliance by local governments on user charge financing is due to its more efficient way of providing local services than tax revenue (Baily 1994; Sun & Jung 2012; Wagner 1976). However, despite the efficiency gains from the greater degree of reliance on user charge financing, cities' motivations for using fee- supported goods vary according to financial, managerial, social and political attributes affecting their decision making and some cities are actively involved in the provision of fee based enterprise services, but some cities are not.In this study, we explore municipalities' strategic behaviors of introducing and increasing fee-supported enterprise services to respond to financial necessities and political pressures. …