The most important sentence in this syllabus is this:
“2014 is a GREAT time to study state and local finance.”
With Washington DC weighed down by partisanship, fiscal constraints and a dysfunctional bureaucracy, real innovation is taking place at the state and local level. At the same time, globalization and legacy costs are creating serious financial challenges. This class is about how we pay for the public services and physical infrastructure that are the foundation of modern life.
Objectives of the Course
The primary objective of this course is to provide students with an introduction to issues of financial management in state and local government. The course will explore three inter-related areas:
(1) Revenue Management - including the trade-offs associated with establishing a sustainable tax-base;
(2) Infrastructure Finance- by borrowing in the Capital Markets; and,
(3) Pension and Investment Policy - in the context of both cash management and funding pension systems.
The course begins with a survey of the primary revenue sources for state and local governments: (a) property, sales and income taxes; (b) user charges; (c) inter-governmental assistance; and, (d) privatization. We will examine the pros and cons of various revenue sources for financing general government services such as mass transit, sanitation and public schools. We will also explore the financing implications of privatization and economic development. From there we move to debt issuance and an exploration of the municipal bond market. We will survey the bond market and learn how public officials interact with rating agencies, investment bankers and investors. We will learn how bonds are rated and priced. The course concludes with a discussion of investment practices in the public sector in the context of cash management and public pension funds.
Audience
This course is designed for students who anticipate working in state and local government, or for private sector financial institutions, bond rating agencies or other private groups with significant interest in the public sector. Students who have policy interests where state and local governments play a predominant role (e.g., education, transportation, infrastructure and economic development) may also find this course useful.
This is a course in financial policy making at the state and local level. It is NOT a substitute for courses in corporate and project finance or the capital markets. The course is probably not suitable for students: (1) whose work experience, or prior coursework in finance has already given them an exposure to basic issues of financial management and the capital markets; (2) who are primarily interested in corporate finance, quantitative analysis of financial transactions, the capital markets; (3) whose primary interest is outside the United States.
Expectations
Students are expected to read the assigned materials and come to class prepared to participate in an active discussion. In some cases, teams of students may be assigned responsibility for leading class discussion and/or role-playing key actors from the cases.
NOTE: Because a major feature of the course is the discussion of policy issues and financial transactions that are currently affecting state and local governments, students should assume that timely and newsworthy materials may cause revisions in both the reading list and the timing for discussions. These supplemental readings may help students to be more informed about current issues in government finance, which can often be a conversational benefit during job interviews. As a practical matter, that means that students should allocate approximately one hour every week to reading additional materials that will be assigned and posted to the course website early each week for discussion in our Friday afternoon sessions.
In addition, there will a problem to reinforce quantitative skills, a mid-term policy memo and a take-home final exam. Students are welcome to work together on problem sets and to prepare for class. However, specific answers to problem sets and assignments should be submitted independently.
All assignments will be distributed in class and should be returned in person in class on the due date, unless otherwise announced. Late penalties will be assessed. Faxes/email will be accepted only in extraordinary situations. It is reasonable to expect that grades will be determined by the quality of class participation (20%), problem sets (20%), the midterm policy memos (25%) and the final exam (35%). These percentages may be adjusted somewhat depending, in part, on class size.
Prerequisites –Although, there are no formal prerequisites for this course. a microeconomics course similar to API-101/102 would be helpful. Prior coursework in finance is not required. Please note that students will need to have a basic familiarity with Microsoft Excel and simple financial formula functions on Excel in order to complete the problem set.
Office Hours: Friday – Noon to 1pm before class. Other times can be arranged. I am particularly interested in helping students prepare for job interviews. So, if you have an on-campus or off-campus interview, feel free to contact me before-hand to discuss topics/questions that might be helpful to you in an interview.
Session # 1 - January 31st
Introduction to State and Local Revenue Systems
We will overview state and local revenue systems, focus on ways to measure tax liabilities and identify factors that drive revenue decisions in the context of both past practices and economic and technological changes. After that broad overview, we will discuss user fees. User fees have much in common with private sector pricing and are a popular revenue source for state and local governments. We will consider the basic rationale for user fees and examine the advantages and disadvantages associated with their use.
Tannenwald, Robert, “Are State and Local Revenue Systems Becoming Obsolete?”, State Tax Notes, April 8, 2002.
Taylor, Don, “Comparative State/Local Taxes Fiscal Year 2002”, State Tax Notes, October 25, 2004.
CASE: Graduate Student Fees in California Differentials in California Public Higher Education, C16-87-783.
Note that the case is so old that your grandparents may have read it! We still read it because the issues are still relevant and controversial in state finance. We will update some of the controversy in class. So read it with that in mind. Be prepared to come to class with recommendations for the policy makers.
Peterson and Strachota, Chapter 8: User charges & fees, pp. 135-151.
Session # 2 - February 7th
User Fees (Continued) and Sales Taxes
CASE: Financing Public Transportation in Philadelphia: SEPTA
CASE: Ulbrich, Holley Hewitt, “Local Sales Tax in South Carolina,” Practical Exercises in Local Government Finance (Wash, D.C.: Govt Fin Off Assoc.) 1993, pp. 73-75.
Peterson and Strachota, Chapter 7: Nonproperty taxes, pp. 113-133. 4
Dye, Richard F. and Therese J. McGuire, “Growth and Variability of State Individual Income and General Sales Taxes,” National Tax Journal, (March 1991), pp. 55-66.
Mazerov, Michael, “Expanding Sales Taxation of Services: Options and Issues”, State Tax Notes (July 21, 2003)
Hardt, Linholm and Kranz, “A Lawmakers Guide to the Streamlined Sales Tax SSTP.” Journal of State Taxation (2002)
Sales taxes are major sources for state and local government revenues. We will look at the impact a shift to the service economy may have on issues regarding sales taxes and what this may mean for state and local government finance.
Session # 3 - February 14th
Sales Taxes (Continued) and Income Taxes
Fox, William F. and Luna, Le Ann, “State Corporate Tax Revenue Trends: Causes and Possible Solutions”, National Tax Journal, Vol LV, No 3., (September, 2002).
RIPEC, “The Rhode Island Personal Income Tax: A Call for Reform” – Unpublished Draft, January 21, 2005.
We shall continue the discussion of the sales tax and look at the role the personal and corporate revenue taxes play in state and local government finance. A focus of the discussion will consider the relationship between income taxes and state economic competitiveness.
Session # 4 - February 21st
Property Taxes and School Finance
Required:
CASE: Ulbrich, Holley Hewitt, : Homestead Exemption in Allstate,” Practical Exercises in Local Government Finance: Concepts and Practices, (Washington, D.C.: Govt. Finance Officers Association) 1993, pp. 61-63.
Peterson and Strachota, Chapter 6: Property Taxes, pp. 85-111.
Starkey, D., “ Counties in revolt Stung By a Grab of Property Taxes by the State, County Governments are Fighting Back,” California Journal, August 1993, pp. 21-23.
Douglas, Carol, “Proposition 13 – 25 Years Later”, State Tax Notes, Vol. 30, No. 3, October 20, 2003, pp. 222-226.
Bradbury, Katharine, Mayer, Christopher, Case, Karl, “Property Tax Limits, Local Fiscal Behavior and Property Values: Evidence From Massachusetts Under Proposition 2.5”, Journal of Public Economies, 80 (2001), pp. 287-311.
New, Michael J., “Proposition 13 and State Budget Limitations – Past Successes and Future Options”, CATO Institute Briefing Papers No. 83(June 19, 2003).
Recommended:
Bradbury, Katherine L., “Shifting Property Tax Burdens in Massachusetts,” New England Economic Review (Sept.-Oct. 1988), pp. 36-48.
Fisher, Ronald C., State and Local Public Finance 3rd ed., (Chicago, Illinois) 2007, Chapter 12 “Principles of Tax Analysis” , pp. 295-317.
Bradbury, Katharine L., Case, Karl E., and Mayer, Christopher J., School Quality and Massachusetts’ Enrollment Shifts in the Context of Tax Limitations, New England Economic Review, July/August 1998.
The case highlights some of the issues associated with this revenue source. We will also consider the property tax revolt in California and Massachusetts and the impacts today.
Application: School Finance
Required:
Monk, David H., “Raising Revenues for New York’s Public Schools: A Synthesis of Options for Policymakers,” Journal of Education Finance, Vol. 21, Summer 1995, pp. 3-35.
Reschovsky, Andrew, “Fiscal Equalization and School Finance,” NationalTax Journal, Vol. 47, No. 1, March 1994, pp. 185-197.
“No Small Change: Targeting Money Toward Student Performance”, Education Week, Vol, 24, No. 17, January 6, 2005, pp. 7-16, 51-88, and 60-72.
Farney, Dennis, “Insufficient Funds”, Governing, December 2004. 6
Recommended:
Marino, Peter, A Taxpayer Guide to School Finance Reform”, State Tax Notes, July 5, 2004.
The conflicts that appear between the tradition of local provision of elementary and secondary public education and attempts at fiscal equalization provide the focus for this class. The case goes beyond questions of fiscal equalization and considers adequacy which today is driving the debate over school funding.
Session # 5 - February 28th
Other Revenue Sources
A. Privatization:
Required:
CASE: “Privatizing the Albany County Airport,” with “Epilogue,”
KSG Case # C16-91-1024.0
Donohue, John D., The Privatization Decision, (Basic Books) 1989, pp.215-223.
Recommended:
Pack, Janet Rothenberg, “Privatization of Public Sector Services in Theory and Practice,” Journal of Policy Analysis and Management, Vol. 6, no. 4
(1987) 523-540.
A quick look at some issues associated with privatization. The case illustrates a city’s attempt to be innovative and highlights some of the dilemmas facing policy makers.
B. Vice, Virtue and State Finance
Required:
CASE: “The Massachusetts Lottery”, HBS Case# 9-590-009 [Course Packet #4]
Clotfelter, C.T. and P. J. Cook, Selling Hope, (Harvard Univ Press) 1989, pp.59- 63.
Mikesall, J. L., “State Lottery Sales and Economic Activity,” National Tax Journal, March 1994, pp. 165-171.
Scoggins, John F., “The Lotto and Expected Net Revenue,” National Tax Journal,
March 1995, pp.61-70. 7 Hansen, Alica “Lotteries and State Fiscal Policy”,Tax Foundation, October
2004, pp. 46.
Recommended:
Gould, Lois, “Ticket to Trouble,” The New York Times Magazine (April 23,
1995).
With “traditional revenue sources” tightening, the lottery has become the fastest growing source of state revenue. How does the lottery work and is it appropriate for the government to encourage people to gamble?
Session # 6 - March 7
The Inter-Governmental Context,
A. Fiscal Federalism / Devolution
Required:
Petersen and Strachota, Chapter 2: Financing Local Government, pp. 9-27
Quigley, John M. and Daniel L. Rubinfeld, “Federalism and Reductions in the Federal Budget,” National Tax Journal (June 1996), pp.289-302.
Petersen, Paul E., “Who Should Do What?” The Brookings Review, Spring 1995, pp.6-11.
Sutten, Kerry, “Fiscal Devolution: The Impact on State Budgets,” Northeast- Midwest Economic Review, June 1996, pp. 4-8.
*Behn, Robert D. and Keating, Elizabeth K. “Facing the Fiscal Crisis in State Government National Problems; National Responsibilities,” State Tax Notes Sept.
20, 2004 pp.83-847.
A quick look at the division of power and functions between the national, state
and local governments. Why is government involved and what is the appropriate
role for each division? How will the downsizing of the federal government affect state budgets?
B. Economic Development
Required:
CASE: “North Carolina and the Battle for Business,” KSG Case
Recommended:
*Becsi, Zsolt, “Do State and Local Taxes Affect Relative State Growth”
Economic Review, March/April, 1996 pp. 18-36
*Cuno v. Daimler Chrysler, 2004 Fed App. 0293 P (6th Circuit) [ 8 Bartik, Timothy J., “The Effects of State and Local Taxes on Economic Development: A Review of Recent Literature”, Economic Development Quarterly, Vol. 6, No.1, (February 1992), pp. 102-111.
Oakland, W. H. And W. A. Testa, “Does Business Development Raise Taxes,”
Economic Perspectives (March/April 1995), pp. 23-32.
Interstate bidding wars have become increasingly common in the 90’s. This case asks you to give the Governor advice on his industrial recruitment strategy. This case is not in the reading packet. You can reach it from the KSG home page.
Session # 7 - March 14th (midterm due in class)
Techniques and Tools for Financial Analysis
A. Net Present Value Analysis
Required:
“How to Avoid Getting Lost in the Numbers,” HBS Case 682-010
Stokey, Edith and Richard Zeckhause, A Primer for Policy Analysis,
(W.W. Norton & Company, Inc.) 1978, pp. 159-176.
Brealy, R. and S. Myers, Excerpts from Chapters 1-3 Principles of Corporate
Finance, 5th Edition McGraw Hill, Inc. 1996), pp. 13-24 (top) and 34-50.
Assignment: “Valuation and Discounted Cash Flows,” HBS Case 9-291-028,
Questions 1 and 2.
“Selected Investment Alternatives,” HBS Case 9-287-010, Questions 1-4
B. Bond Pricing / Transaction Structure
Required:
Petersen and Strachota, Chapter 15: Debt Markets & Instruments, pp. 293-320.
Public Securities Association, Fundamentals of Municipal Bonds, 4th edition
(Public Securities Assoc.) 1990 pp. 180-186. 5th edition , pp. 141-
We begin to combine the principles of net present value and the conventions of the tax exempt bond market. Why do bond prices and yields fluctuate and how are they related to the taxable fixed income market?