Revenue Generation and Expenditure Implications of Municipal Non-Utility Enterprises

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ABSTRACT. Although municipal enterprise funds provide several advantages to cities in the provision of goods and services, little is known about how these municipally operated businesses affect other aspects of the fiscal management practices of the cities which use them. This is particularly true of non-utility enterprises. This study uses the concept of net revenue transfers to examine how five commonly used non-utility enterprises impact the tax, expenditure, and revenue generation practices of cities. The results provide a new perspective and counter some commonly held views about non-utility enterprises.

INTRODUCTION Our cities continue to wrestle with the problem of providing a package of municipal goods and services that is acceptable to their residents while operating under increased constraints regarding taxes and spending. Although seemingly unwilling to pay higher taxes, or permit increased municipal spending, citizens still wish to maintain, or even increase, their standard of living when it comes to the goods and services they expect their city governments to provide.

Cities have been variously characterized as promoters of economic growth, providers of amenities for their residents, providers of minimum levels of services, or arbiters of conflicting interests (Williams, 1961). Since 1945, however, cities have increasingly focused on the provision of services, while the services themselves became more and more costly. Several factors account for this steady increase in expenditures: first, the larger package of services demanded by citizens; second, new and more expensive technology; and finally, steadily increasing labor costs.

As the costs of municipal services grew, the ability of cities to raise revenue was being more and more severely constrained. In the mid-1970s federal revenues to cities began to decline, a trend that accelerated during the Reagan and Bush administrations. At the same time, taxpayers were expressing their feelings at the polls by passing tax and expenditure limitations such as California's Proposition 13 and Massachusetts' Proposition 2 1/2. The situation is not much changed today.

Consequently, cities tried to reduce costs through contracting out and alternative means of service delivery which would largely remove city government from the business of direct service provision. In many instances the use of alternative delivery methods has been successful. However, cities continue to provide a wide range of public services because it is either politically or economically advantageous to do so or because, in many cases, there is no private sector provider willing to provide the needed service.

Municipal enterprises are one of the delivery methods traditionally employed by cities to provide a wide variety of public services. Although often associated with the delivery of utility services, municipal enterprises also provide a broad spectrum of transportation, recreation, community development, and social services to city residents.

LITERATURE REVIEW Municipal enterprises have a number of advantages for cities. The first is that those who use the goods and services pay for them. This includes many individuals and groups who, for various reasons, are exempt from property, sales, or other local taxes. Second, capital financing and operating costs come from enterprise revenues rather than municipal tax revenues, relieving taxpayers of risk and responsibility. A third advantage of municipal enterprises is that revenues and consumption provide market-like demand indicators for levels of production. Finally, while some types of municipal enterprises require subsidization, many produce revenue in excess of expenses, or surpluses, for the cities which operate them.(Advisory Commission on Intergovernmental Relations, 1987; Gitajn, 1984)

The revenue raised by municipal enterprises is a considerable amount in an era of fiscal constraint. Gitajn (1984) reports that enterprise revenue constituted 32 of all municipal own-source revenue. …