The following is an Executive Summary of a Spring 2016 Masters Thesis from the The Ohio State University John Glenn College of Public Affairs entitled “After the Storm: Investigating Ohio’s Recovery from the Great Recession and its Impact on Local Capital Investment”.
You may read the report in its entirety here.
The Great Recession of 2008 and 2009 hit both state and local governments in Ohio hard in terms of decreased revenue from income, sales, and property taxes. Facing its own budget crisis, the state government significantly cut the state’s primary revenue sharing program, the Local Government Fund. These cuts amounted to a 50 percent reduction from 2001 to 2013, adding to existing strain on local government budgets. This project seeks to further understand impacts of the Local Government Fund cuts on local government through analysis of quantitative budget data from 2007-2013.
Revenue-sharing programs from state to local government fall under the study of fiscal federalism, the vertical structure of government financing. Over the past decade, researchers of fiscal federalism have seen movement towards decentralization, with revenue-sharing cut in order to increase the reliance of local governments on funding collected from within their own jurisdictions. When local governments are faced with cuts to revenue sharing, they are forced to make hard decisions about raising local taxes versus cutting spending, known as cutback management.
In Ohio, local governments have grappled with these cuts to revenue sharing in multiple ways. A survey conducted in 2013 began to shed some light on the responses of local government leaders to the policy changes. On the revenue side, local governments have raised charges for service and other fees in addition to raising property and income taxes where possible. The most frequent expenditure changes were cuts to capital spending. Conversations with local government leaders across the state solidified and clarified the impact of these cuts on capital investment.
The two primary research questions under investigation are 1) How did local government revenues change as a result of cuts to the Local Government Fund? and 2) How did these changes to revenue impact local governments’ ability to invest in capital projects? Analysis has been conducted on budget data from 250 cities measuring total revenues and expenditures, key revenue sources, and capital outlays from 2007-2013. These data were collected from the Ohio Auditor of State and Department of Taxation. Key demographic variables from the United State Census Bureau are also included to capture differences between municipalities.
Descriptive analysis was used to answer the first research question. Overall, cities have seen decreasing property tax revenues and increasing income tax revenues since the recovery began in 2009. These increased income tax revenues have been due in part to increasing municipal income tax rates, with a statewide average rate increase of 0.48 percentage points. Capital outlays have declined since the Great Recession and through changes to the Local Government Fund, with a 22 percent decrease in the statewide average from 2007 to 2013.
Regression analysis was used to examine whether certain years or changes to revenue sources had a significant impact on capital outlays. It was expected that capital outlays would have a positive relationship to Local Government Fund revenues and a negative relationship in the years after the cuts took place. The model found that capital outlays were indeed significantly lower in the years after the Local Government Fund was reduced. These results offer tentative confirmation that cuts to the Local Government Fund have led to declining capital investment in cities across Ohio. Ohio’s local government leaders may use this information as well as their own experiences to begin lobbying state legislators for a dedicated capital improvement fund for local governments. Due to limitations to the data and to the model, further research should be pursued to confirm and expand upon these findings.