MBAX 6431 Week 2 General Fund Revenue Analysis Example

Who Sets Each Rate and How Each Source Moves With the Economy: A Revenue Analysis of the Ashford Falls General Fund, Five Sources Sorted by Control

Student Name

Walden University

MBAX 6431: Finance & Budgeting for the Public Sector

Instructor Name

Month Day, Year

Who Sets Each Rate and How Each Source Moves With the Economy: A Revenue Analysis of the Ashford Falls General Fund, Five Sources Sorted by Control

Purpose

This analysis sorts the general fund revenue of Ashford Falls, a composite mid-sized city used throughout this course, by two questions: who sets each source, and how does each respond when the local economy grows or shrinks? All figures are illustrative round numbers, not taken from any real city's budget. The general fund is the city's main operating fund, which pays for police, fire, parks, public works and general government; enterprise funds such as water and sewer are excluded because their charges must stay with the services they pay for (Mikesell, 2018).

The Five Sources

Table 1

Ashford Falls General Fund Revenue, Illustrative

All amounts are illustrative and do not describe a real city.

Ordered by Control

The sources are discussed in order of how directly the council controls them, which is more useful for budgeting than ordering by size.

The property tax is the source the council most directly sets. Each year it adopts a levy, the total amount to be raised, and the rate follows from the levy divided by taxable value. But the state caps how fast the levy may grow, in this illustrative case at the lesser of 3 percent or inflation plus new construction, unless voters approve more in a referendum. Control is real but bounded.

Charges and fees, for recreation programs, permits and inspections, are set by ordinance. The council has wide discretion over them, though fees for regulatory services are generally expected to recover no more than the cost of providing the service, which limits their use as a general revenue source.

Franchise fees, paid by utilities and cable providers for use of public rights of way, are set in long-term agreements and by state law. The council negotiates them only when agreements are renewed.

The local sales tax share is set almost entirely outside city hall. The legislature fixes the rate and the formula for distributing collections, and the city receives what its residents and visitors spend.

Intergovernmental aid is the least controlled. Its amount is set by the state's formula and by federal grant awards, and its permitted uses come attached. Money that arrives with conditions is not interchangeable with money the council raises itself, a point the course will return to.

Elasticity as a Direction

Elasticity describes how much a revenue source changes when income or economic activity changes. The analysis does not estimate coefficients for Ashford Falls, but the direction for each source is well established. The sales tax is the most responsive, rising in good years and falling in recessions, because it follows consumer spending, which tracks income closely (Bruce et al., 2006). The property tax is the least responsive in the short run: assessed values change slowly, and the council sets a levy amount rather than letting revenue float with values. Charges and fees follow use, which may rise or fall with conditions; recreation fees fall in a recession while some permit fees fall with construction. Intergovernmental aid depends on the state's own revenue, which is often elastic, so aid tends to be cut with a lag after a downturn.

How the Mix Has Shifted

The shares in the table are not fixed. In the illustrative history the course uses, the property tax made up about 44 percent of general fund revenue a decade ago, and the sales tax share and charges have grown faster since, partly because the levy cap held the property tax back while spending grew. That shift has made the city's revenue more responsive to the economy than it was, without any single decision to make it so. A budget office that tracks only totals can miss this kind of drift, which is why the analysis sorts sources by behavior as well as by size. The council should also note that every point of share moved from the property tax to the sales tax moves a point of revenue from a source it controls to one it does not.

What the Mix Means

Two features of the mix matter for later analysis. First, the source the council controls most, the property tax, is also capped, so the city's main lever cannot grow faster than the cap without a referendum. Second, about 38 percent of revenue, the sales tax share and intergovernmental aid, is both outside the council's control and sensitive to the economy. In a recession those sources would fall at the same time, while the property tax held steady. Rubin (2020) notes that cities with more elastic revenue gain faster in expansions but face sharper shortfalls in downturns. Ashford Falls has a moderate exposure, and the forecast later in the course will test it.

References

Bruce, D., Fox, W. F., & Tuttle, M. H. (2006). Tax base elasticities: A multi-state analysis of long-run and short-run dynamics. Southern Economic Journal, 73(2), 315-341. https://doi.org/10.1002/j.2325-8012.2006.tb00774.x

Mikesell, J. L. (2018). Fiscal administration: Analysis and applications for the public sector (10th ed.). Cengage Learning.

Rubin, I. S. (2020). The politics of public budgeting: Getting and spending, borrowing and balancing (9th ed.). CQ Press.