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Progressivity and the Rainy Day Cushion

General obligation and revenue bonds┬áhave disparate effects on their jurisdictions and territories. Where a municipality’s debt burden arises primarily from the issuance of general obligation bonds, its taxpayers are the source of funds, and as tax administration is more or less progressive across the federal, state, and local levels, this burden is shared on a more or less ability to pay basis: Higher incomes are charged with higher effective tax rates, and higher property value ownerships are charged with higher total real estate taxes payable. Where a municipality’s debt burden arises primarily from the issuance of revenue bonds, its users of the funded public service (for example, a public sewage system) bear the burden, which, like a sales tax, is not generally progressive. That is, residents must pay the same price for water from Detroit notwithstanding the resident’s income or assets, leading to serious issues of affordability.

The effects of macroeconomic policies of public finance are debated and subject to rigorous academic inquiry. Whether there has indeed been progress of late and how the state of progress is trending are important public policy issues. As public services become more privatized and less socialized, they begin to resemble the private / commercial sector more closely. Creating and accumulating surplus value is essential in for-profit endeavors that aim to maximize this ‘shareholder value.’ Maximization of net assets / surplus value in the independent sector, where donors and funders’ commitments and support are variable, is less tolerable and desirable as donors and funders do not ordinarily expect their financial contributions to be saved perennially but used to further the supported organization’s mission and purpose in the immediate and near terms.

Creating and accumulating surplus value in the public sector (positive changes in net position) are also necessary (for example, to avoid periodic deferrals of required maintenance to public infrastructure, to replace aging infrastructure, etc.) Public sector leadership seeks assistance from private sector means and methods, including the accrual basis of accounting and financial reporting as a tool both to govern and manage and to inform the public. However, tension between making surplus value and providing essential public services for everyone independent of income and asset levels remains. Consider the affordability of health care and insurance.

Where public services are provided at less than full cost to users and taxpayers, subsidies are required. Also, where funding is less than full cost, borrowing often follows as the value of the rainy day cushion is allocated to support the public service. Entanglement with the lender offers its own set of issues.