Year of Publication
Martin School of Public Policy and Administration
Dr. Dwight Denison
This paper seeks to determine the effects of state budget changes on local government expenditures; particularly, how changes in state funding provided to local governments affects local government expenditures. The hypothesis tested is that state funding is a significant factor on local government expenditure. To evaluate this, two levels of analysis were conducted. The first was a paneled fixed effects regression analysis of data for all fifty states from the years 2000 to 2013, in which changes to local expenditure were measured by the effects of multiple fiscal and socioeconomic variables. The second level of analysis evaluated the same effects during the same time period using the same method, but for county level expenditures for the state of New York.
The results from the analysis showed that, at both the national level for all states and the New York state level for all counties, state aid or transfers to local governments was a statistically significant factor on local expenditures. The data for all fifty states showed that for every $100 increase in per capita state intergovernmental revenue, per capita local expenditures increased by $116, or that a 6.8% change in state IG revenue results in a 2.3% change in local expenditure. For the county level data for New York, the analysis showed that for every $100 increase in per capita state aid, per capita local expenditures increased by approximately $45, or that a 40% change in state aid results in a 2.5% change in local expenditures.
These results would support our hypothesis that state funding, either through direct aid or other intergovernmental revenue transfer mechanisms, is a significant factor on local government spending on projects and services; as such, it can be assumed that when state governments reduce their budgets, local governments see their ability to fund projects and services reduced without resorting to another funding mechanism.
Perrin, John, "An Analysis of the Effect of State Aid Transfers on Local Government Expenditures" (2017). MPA/MPP/MPFM Capstone Projects. 281.