Fiscal Futures: Toward a System of Public Finance for the 21st Century.

• Author: Barnes, William R.

As modern governments struggle with outmoded public-finance systems, the overriding challenge becomes developing a new system that meets the current and future needs of local government. The task begins with the difficult question of "where to start." This article outlines three phases in the process of answering that question.

Public finance in the 21st century faces unprecedented challenges. Most of these challenges stem from a system of public finance that is based largely in the previous century. The overriding challenge is therefore to develop a new system of public finance that meets the current and future needs of local government. This is a task of Herculean scale, and as is often the case with such tasks, it begins with the difficult question of "where to start." This article outlines three phases in the process of answering that question--identifying trends and challenges affecting public finance, defining principles to guide a new system, and raising key questions and issues for the future. The topics discussed are derived from an ongoing, multi-year research effort underway at the National League of Cities (NLC) and are intended to serve as a framework for public discussion.

Background

Since 1997, the National League of Cities has been engaged in a high-level research effort aimed at exploring economic, demographic, and legislative factors affecting America's cities. The primary research vehicle for this effort is a panel of cities called the Municipalities in Transition Panel. The panel is comprised of a representative sample of cities (see Exhibit 1) from across the country. The panel seeks to develop a more detailed and focused understanding of city issues and trends identified in NLC's annual surveys.

Last year, the mission of the panel became focused on issues of public finance. Specifically, the panel began to examine how the economic, demographic, and regulatory landscape of cities and regions is affecting the future of public-finance systems, and to develop a set of recommendations for the future. The panel's findings, presented here, were approved by the NLC Board of Directors in July 2000 and call for a multi-year set of activities called The Future of Public Finance Initiative. The initiative has two goals:

1) Help municipal public officials understand the challenges to municipal public finance, recognize their urgency and importance, and take constructive steps locally.

2) Foster and shape a public policy debate aimed at developing the public finance arrangements needed to support evolving municipal roles in the new century.

While this research is derived from analyses of municipal circumstances--circumstances that may not fit the experiences of all local governments--much of what is presented here is relevant to public finance in general, and is offered as food for thought and debate.

Major Findings

Beyond its inherent importance, the struggle over sales tax on electronic commerce is also a wake-up call for public officials to pay attention to a much broader set of problems. Remote sales are only one of many important challenges to the continued viability of public finance. The evolving nature of the economy from one based on manufacturing and property-based wealth to one based on services and knowledge-based wealth creates unprecedented challenges for public-finance structures. Significant changes in a wide range of factors are creating opportunities and threats for the fiscal arrangements required to support evolving public roles.

Changing local government roles have important implications for the future of public finance systems. Devolution of federal and state responsibilities to local governments places a heavier burden on local finances. City residents also are demanding more and improved services from their local governments at the same time that local governments are feeling the pinch of state and citizen-imposed limits on taxes. In addition, local governments are engaged in a constant struggle between the need to compete and the need to collaborate with their neighboring jurisdictions--spurring decisions that ultimately affect each city's bottom line.

Meeting the dual objectives of informing public officials about these challenges and engendering a public debate cannot be achieved within the confines of existing financial structures of individual local governments. Problems and the solutions for local governments need to be approached in the contexts of the entirety of intergovernmental fiscal arrangements. This means looking horizontally at the local level--other local municipalities, schools, counties, and special districts -- as well as vertically to the state and federal governments.

It is also important to avoid being trapped by current assumptions. No conventional ideas should go unchallenged and no heresies should go unexplored. Given the many ways the world has changed and is likely to continue to change, new ways of thinking about federalism and state/local "sovereignty" are needed.

Studies of municipal fiscal...