Government form and performance: fiscal illusion and administrative ability in U.S. counties.

• Author: Turnbull, Geoffrey K.

1. Introduction

   Counties in the United States typically take one of several forms of government: council-elected executive, council--administrator, or council--commission. The primary differences lie in the separation of powers between executive and legislative functions, and whether the administrative duties are performed by an elected or appointed executive. The question is: Do these differences in government structure matter? And, if so, in what way?

   In the council-elected executive (CE) form, the executive powers are in the hands of the county executive, who is elected directly by voters. The legislative powers rest in the hands of the elected council. In the council--administrator (CA) form, the executive and legislative powers are unified in the elected council. Administrative functions are delegated to the county administrator or manager, who serves as the chief executive officer appointed by and answerable to the elected council. In the council--commission (CC) form of government, the council of commissioners is responsible for budgeting and legislating while individual members serve as agency heads, performing the executive functions of one or more agencies. The commission typically shares administrative duties with the other county officials who are elected to run specific functions such as the county clerk, coroner, sheriff, tax assessor, and treasurer. The CE form exhibits the greatest degree of separation of powers while the CA and CC forms exhibit unified powers. At the same time, these forms also differ with respect to management structure. The CE and CC forms rely on elected administrative officers while the CA form relies on a professional administrator hired by the council. These characteristics are summarized in Table 1.

   This study sheds new light on the relationship between organization form and government performance. We begin with a simple model of local government spending to identify the channels through which government form likely affects spending outcomes. The model assumes an output-maximizing bureaucracy constrained by the elected officials' desire to meet the voters' demand for the publicly provided services. The framework highlights the roles of managerial ability and asymmetric information in the form of voter fiscal illusion in the local public sector, factors leading to observable spending effects.

   While the economics literature has not paid much attention to the separation of powers embodied in local government structure, arguments justifying separation of powers for the federal and state governments in the United States can also be used to explain its role in local government. On the one hand, it is often assumed that the public sector bureaucracy and possibly even elected officials pursue expansionary behavior when they can (Brennan and Buchanan 1980). If the separation of powers successfully introduces checks and balances that increase the responsiveness of both the administration and elected council to voters' demands, then it is more likely to curb expansionary tendencies of the public bureaucracy and lead to lower spending. On the other hand, the separation of powers in local governments typically gives the executive specific agenda control or veto powers in the budgetary process. Agenda control and veto power change the decision-making dynamics in ways that are difficult to predict. In sum, stronger separation of powers can arguably raise or lower spending levels. It remains an empirical question whether spending levels are higher or lower under separation of powers than under a unified executive--legislative structure. Rigorous empirical evidence is scant. Campbell and Turnbull (2003) find that separation of powers leads to greater spending only for Southern counties; they find no spending differences between separation of powers and unified forms of government for other regions of the United States.

   In terms of professional versus elected administration, much of the economics literature concerned with local government form focuses on cities. There is, however, little agreement about how differences in this one dimension of government form affect spending. Booms (1966) argues that unelected professional management is not only more capable but is also freer of politics and the influence of interest groups by virtue of not having to answer directly to the voters, thereby leading to more efficient production and lower spending. (1) Hayes and Chang (1990) and Turnbull and Chang (1998) instead argue that elected administrators must answer directly to voters while professional administrators are hired by and answer to elected members of government. This means that there is an additional layer of a principal--agent relationship in the professional administrator form of government that is missing in the elected executive form. This additional principal--agent relationship might give the administrator wider latitude to pursue personal goals, like increasing the emollients (e.g., staff and perquisites) associated with greater spending or output. Further, the existing empirical evidence on this point is mixed as well. Booms (1966) and Turnbull and Chang (1998) conclude that the difference between professional and elected management matters for cities while Deno and Mehay (1987) find it does not. Focusing on costs for a select set of city services, Grosskopf and Hayes (1993) find no robust differences among different types of city government management, although Hayes and Chang (1990) find some differences for the larger cities in their sample.

   The approach taken here identifies a simple formal link between local spending, managerial ability, and variations in the principal--agent relationships across government forms that may result in different degrees of voter fiscal illusion. The fundamental notion underlying the principal--agent relationship is asymmetric information; the principals (the voters) cannot perfectly monitor their agents (the administration and county career bureaucrats). We allow for the possibility that the additional layer of bureaucracy between the voter-taxpayers and the ultimate provision of the publicly provided service creates greater information asymmetry regarding the tax price--public service nexus. This type of information asymmetry is often viewed as the source of voters' fiscal illusion, which is the notion that a government tends to overstate the marginal benefits of spending and understate the marginal cost to taxpayers to increase its command over resources in the economy. Buchanan (1960, p. 60) traces this fiscal illusion notion to the Italian economist Puviani at the turn of the twentieth century. Modern applications to local governments view voter fiscal illusion as a systematic underestimation of marginal tax prices of publicly provided services, which by itself tends to increase public spending (Wagner 1976; Oates 1979; Turnbull 1998). Thus, the degree to which the additional principal--agent relationship inherent in the CA form of government (in which the administrator is the agent of the council, who are in turn agents of the voters) leads to higher or lower spending, reflects how it affects voter fiscal illusion and production cost.

   There are several advantages from thinking about the effects of government structure within the context of fiscal illusion and production cost effects. The model offers a clear link between the separate branches of the literature dealing with spending effects and cost effects of government form and shows how they can be reinforcing or offsetting. The model is also empirically refutable, in that there are combinations of empirical estimates that lead to rejecting the theoretical framework. Finally, the theoretical framework provides the key relationships among estimable parameters needed to interpret the effects of organization structure on both fiscal illusion and cost efficiency.

   The rest of the paper proceeds as follows. Section 2 presents the theoretical model to demonstrate the predicted effects of managerial ability and voter fiscal illusion on county spending in the United States. Section 3 reports the results of the empirical study, estimates that show how fiscal illusion and spending vary across government characteristics by separation of powers and type of administration. The results clarify previous conclusions about how government form affects local government spending. Decomposing the effects of organization form on spending into its components, we find that separation of powers leads to less taxpayer fiscal illusion and to services offered at greater cost relative to counties with unified decisionmaking structure. We find similar comparisons for counties relying on professional administrative officers relative to those with elected administrators. Section 4 concludes.

2. Fiscal Illusion, Administrative Ability, and Spending

   Our analysis focuses on fiscal illusion and professional managerial proficiency as two channels through which government form affects local government spending. This section offers a simple model that combines the effects of managerial ability and fiscal illusion to provide a framework for interpreting the empirical results.

   The local government spending model presented here assumes that the public sector bureaucracy maximizes public output subject to meeting voters' demands. The output maximization assumption for the public bureaucracy is widely used and is supported by a growing pool of empirical evidence (Blais and Dion 1991; Mitias and Turnbull 2001; Chang and Turnbull 2002). Under the fiscal illusion assumption, voters are not fully informed about the details of the public budget process when ratifying local government decisions or when deciding the politician for whom they will vote. An implicit assumption is that each individual voter finds it too costly to become fully informed even if he or she was to discover that he or she is not fully informed about...