Spend, Tax, and Save: The Impact of Public Enterprises on Local Finances in Georgia

Abstract

Although public owned enterprises have rarely received the attention of the American public, their presence across the nation is heavy and their role in governance fundamental. Public enterprises have existed since the founding of this country and can be found in all levels of government. Over time public enterprises have helped federal, state, and local governments in various ways, including building infrastructure, stimulating economic growth, providing public services, and diversifying governmental revenue sources. The significance of public enterprises in local government financial management and service delivery has greatly increased since the 1970s, mainly due to limitations placed on property taxation. In the 1990s, a decade of heavy administrative reforms inside and outside this nation, public enterprises continued to enlarge their role in government. Governments began seeking alternative ways to finance projects and deliver services without increasing taxes or affecting governmental budgets. At this present time of recurrent fiscal crisis, government must decrease its dependency on traditional revenue sources to finance government operations and services. Public enterprises appear to be an excellent alternative . These business-type activities, which are financed through user charges and fees, represent a great potential revenue source for local governments since they often generate revenues beyond their costs. This dissertation develops seven comprehensive models that can test longitudinally the impact of net enterprise transfers expressed as a percentage of net enterprise income on Georgia’s local finances. The models take into account similar factors previously examined by scholars but they also include a series of other financial, socio-economic, demographic, and governance factors that the author believes are necessary for a deeper understanding of the factors affecting municipal spending, revenue patterns, and general fund balances. The results suggest that local governments in Georgia utilize their enterprise transfers to increase their own-source revenues (additive effect) and constrain their expenditures (siphoning effect). Further, public utilities play an essential role in boosting general fund balances of Georgia municipalities to much higher levels than the 5-15 percent GFOA recommended benchmark. According to this research, net enterprise transfers could help local governments to establish fiscal reserves as part of general fund balances and protect municipal finances from economic fluctuation under periods of revenue shortfall. The research presented in this dissertation represents an expansion of the limited knowledge regarding the impact of enterprise transfers on governmental spending, revenue patterns, and local general fund balances. This research also provides several lessons for public officials as it indicates the positive impact of public enterprises on own-source revenues and general fund balances. At the same time though, net enterprise transfers generate false assumptions about the true cost of government operation and public outputs thus raising fiscal illusion concerns.