Upcoming elections include measures in more than a dozen states to broadly or selectively limit application of property taxes by their local governments. While these preemptive measures up for voter consideration are in response to citizen demands for tax relief and growing public pressure to address household affordability, it is also important to evaluate the proposals with respect to their influence on homeowner behavior following adoption and implementation.

Recent research from Stuart P. DiDonato and Antonios M. Koupias studies the influence of Florida’s expansion of property value assessment limits, which starting in 2008, enabled residents to transfer existing benefits from one residence to another within the state. Their work concludes that the in-state portability of benefits from these assessment limits positively contributed to migration into other counties of the state by approximately 4.8% for households and 3.5% for individuals.

Checking the Results

Findings of this nature require considerable validation, which DiDonato and Koupias performed through a variety of techniques. First, their model intentionally removes California, due to the fact it is the only other state with similar structures in place to facilitate benefit portability, along with the noncontiguous states of Alaska and Hawaii. Next, the authors applied multiple models to test their results.

Utilizing difference-in-difference (DID) estimation with incorporation of event-study falsification tests did not confirm that the establishment of benefit portability in 2008 was responsible for changes of measured migration. However, matrix completion (MC) evaluation of patterns over time between counties for Florida and the 46 remaining states successfully confirmed the effect of the Sunshine State’s voter-adopted property tax policy. Sensitivity analysis involving comparison of other influences further proved the validity of this paper’s findings and established a positive relationship for migration with attraction to natural amenities.

Applying to Evaluating Policy

Drawing from these findings, DiDonato and Koumpias calculated strong mobility elasticity resulting from the effect of benefit portability. The authors also acknowledged that these results do not necessarily benefit the broader population across demographics, with capabilities for evaluating individual incidence limited by the nature of available data. Nevertheless, the research does encourage further investigation, as well as application by state governments seeking to expand likelihood of mobility and growth for their residents.

DiDonato and Koumpias’ article, Effects of property value assessment limit portability on migration outflows, appears in issue 44(4) of Public Budgeting and Finance.

When California’s 11% excise tax on firearms, gun parts, and ammunition took effect in 2024, legislators had already allocated $161 million in projected revenue to a variety of projects. In its first fiscal year, however, the tax collected just $57.2 million.

Colorado’s experience is proving similar. Their new 6.5% firearm tax was projected to raise approximately $36 million, but has only collected ~$17 million in its first fiscal year.

According to research published in Public Budgeting and Finance by Joseph Eisenhauer of the University of Detroit Mercy, the shortfall (as well as an accurate forecast) was predictable.

California and Colorado projections assumed perfect price inelasticity, despite economic theory’s well-understood insight that higher prices reduce demand. Applying published data on firearm consumer price sensitivity, Eisenhauer’s article arrives at forecasts that land almost exactly on California’s actual collections, as well as Colorado’s.

The findings of this research extend well beyond firearms.

“It is questionable whether legislators or voters would have supported these new tax measures if more accurate projections had been issued,” Eisenhauer writes. The same holds for any fiscal policy. When costs, revenues, or benefits are misstated, lawmakers and the public may find themselves constructing debates on numbers that were never realistic to begin with.

Why Assume Consumers Wouldn’t Buy Less?

The original forecasts display strong cases of irony. One long-standing argument for taxing firearms is that higher prices discourage purchases, and thus lead to reduced gun violence. Indeed, Eisenhauer examines that hypothesis in other research, and finds affirmative evidence.

Yet official estimates published by both California and Colorado assumed purchases wouldn’t change at all. Jesse Gabriel, a sponsor of the California excise tax bill, even knew this ahead of time. During a 2023 floor speech in the State Legislature, he stated: “[We estimate] this bill would result in additional excise tax revenue of $159 million in 2024-25… [we note] that this estimate does not account for… any behavioral changes in sales that may result from the enactment of this bill.”

Eisenhauer’s research speculates on three possible explanations for this disconnect.

The least likely, he argues, is that forecasters simply don’t understand the concept. Tax policy passes through many analysts, legislators, and stakeholders. The odds that none of them understood the implications of a tax increase are vanishingly small.

A more plausible explanation is missing data, as no state-level estimates of firearm price elasticities were available when these bills were being debated. However, national estimates have been available for more than two decades; Eisenahauer used them to produce a forecast that was within 1% of perfect accuracy.

His third explanation is political. Advocates in both states were happy to discuss potential revenues (and the benefits of the programs they’d fund), but were hesitant to advocate for reduced gun sales. In fact, during California’s public discussions, Ari Freilich, state policy director for the Giffords Law Center, described the tax as “not looking to punish anyone, or to deter anyone from purchasing weapons.”

The Takeaway

“Regardless of motive,” Eisenhauer writes, “accuracy is important. Advocates of gun rights should rightly be suspicious of tax revenue estimates that fail to incorporate price elasticities. And proponents of gun taxes should be wary of losing credibility by over-promising and under-delivering on tax revenues.”

For states weighing new excise taxes, on firearms or any other good or service, the behavioral channels of such a decision are well understood. Precise data may not be available, but an elasticity of zero is still an assumption, and very likely the least defensible one available.

Eisenhauer’s article, Fiscal Effects of Firearm Taxes in California and Colorado, appears in issue 46(1) of Public Budgeting and Finance.

Publicly financed organizations face a similar challenge: how to maximize public benefit given their available resources. For public schools, this means fulfilling the requirements of balancing a stable year-to-year fiscal condition with the demands of quality education for children. When revenues fall short, those obligations collide.

Research published in Public Budgeting & Finance by Paul Thompson and Muhammad Aatir Khan examines this question via their innovative analytical approach. Examining student achievement before and after Ohio school districts receive state-issued fiscal stress labels, a budget deficit triggered designation obligating districts to enact financial recovery plans, their approach yields a treatment variable from which one can likely identify causality with subsequent, detrimental student outcomes.

“These achievement declines are likely driven primarily by spending cuts necessitated by the fiscal stress labels themselves, instead of other potential factors such as student composition or reduced teaching effort,” Thompson states.

Their analysis indicates that student achievement on math and English Language Arts (ELA) declines by between 0.038 and 0.048 standard deviations after schools receive the fiscal stress label. This means that districts enacting budget cuts exhibit modest drops in student performance, a finding well in line with contemporary education research.

“Recent evidence [from research literature] points unequivocally to the notion that greater educational resources yield better student outcomes,” Thompson writes.

However, the finding comes with an important asterisk, as the authors themselves supply in their article, and as discussed below. Still, this consideration should not distract from the core story of this research: when schools are forced to tighten the belt, student performance is negatively impacted.

Reviewing Prior Research Examining Public Finance vs. Educational Attainment

Thompson and Khan’s research doesn’t exist in a vacuum. Instead, they’re contributing to a broad and fairly consistent body of work examining how public school spending relates to student outcomes, with the consensus view that money matters.

Literature on this subject already examines the situation from many angles: budget impacts created by the Great Recession, adoption of bond and operating tax levies, construction subsidies, class sizes, school closures, year-round school, 4-day school weeks, elimination of teacher incentive programs, removal of universal meal programs, charging student families for textbooks, and more.

Thompson and Khan’s review of these recent studies estimates that for every $1,000 per pupil spending cut, student achievement declines by a factor between 0.045 and 0.2 standard deviations. For these purposes, the “standard deviation” reflects the difference between specific school districts dealing with reductions in expenditures and the overall average across districts in Ohio.

By examining fiscal stress labels specifically, researchers employ a useful analytical technique to reexamine the hypothesis tied to the results of prior research. This method provides a meaningful way to examine the sharp, time-bound, policy-induced shocks with the means available to the objective, quantitative tools available to social scientists.

Why Districts Get Labeled, and How They Respond

Based on 5-year forecasts of annual expenditure and revenue projections, public school districts in Ohio with deficits between 2% and 15% of general fund revenue receive a fiscal oversight label. Districts with these labels are then required to develop fiscal recovery plans, under review by the Ohio Department of Education.

Those predicting deficits of 15% or more are given an emergency label. In these circumstances, districts cede fiscal authority to a state commission that, in pursuit of a balanced budget, may eliminate employees irrespective of employment contracts and collective bargaining agreements. The commission also reviews all revenues/expenditures and gains final approval on tax levies and debt issuances,

During Thompson and Khan’s ten year research window (2008-2018), approximately 14 of Ohio’s 611 school districts were assigned a fiscal distress label. Identified districts responded by cutting average per pupil expenditures by 9.4%, with approximately 59% of the reductions tied to reduced capital expenditures and approximately 41% from lessened operational budgets.

Evaluating Impact on Student Performance

Thompson and Khan are transparent about an important asterisk, as their results are statistically significant under one mathematical technique, but not the other. The two-way fixed effects estimate applied in this research, a method known to be biased when different districts get treated at different times, was significant, while their stacked difference-in-differences approach meant to address that bias, was not.

Nevertheless, their two-way fixed effect did report findings worth exploring with respect to districts responding to the fiscal oversight label.

• Overall student achievement declined by 0.038 and 0.048 standard deviations.

• Fiscal stress labels closed the white-black achievement gap by 0.05 and 0.16 standard deviations, paradoxically, due to increased performance by African American students following distress labels.

• The male-female gap in math remains unchanged, but grows by 0.015 and 0.044 standard deviations in ELA.

• Data indicate no change along socioeconomic lines.

Why Wait?

Thompson and Khan’s research adds context to an already well-tested hypothesis. Do school budgets impact student outcomes? Yes. Yes they do.

However, parallel fiscal stress label research invites a question that optimists may find worth considering.

Such labels trigger an average 9.4% per pupil expenditure reduction (across all categories). At the same time, stress labels also increase the likelihood voters approve a tax increase referendum by 15-23% and increase per pupil local tax revenue (for operating expenditures) by 7.6% to 11.1%.

In other words, if a district can raise revenue once distress becomes official, why wait for a crisis?

Thompson and Khan don’t make that argument themselves. Additional research literature on this subject is increasingly clear that well-directed spending improves student outcomes. Therefore, resources collected by recovery plans can, in principle, be secured before deficits force anyone’s hand.

Thompson and Khan’s article, Impacts of fiscal stress labels on student achievement and achievement gaps, appears in issue 45(2) of Public Budgeting and Finance.

Regularly, Public Budgeting & Finance dedicates issues to research focused on specific topics in the broad field of government and nonprofit financial management. Recent-published special issues and symposia featured articles tied around the themes of “Advancing the Federal Budget Debate” and “Property Tax Administration.”

Currently, our journal is requesting proposals for a special issue on a specific and emerging element in the study of taxation: the environment. Edited by Kenneth R. Richards, Professor with the Paul H. O’Neill School of Public and Environmental Affairs at Indiana University, this future edition is intended to provide “a thorough, scholarly-based understanding of environmental taxation and administration” applicable to furthering government application of principles associated with environmental economics.

Click Here to View the RFP

It’s More Than Collecting Revenue

Utilizing market principles, environmental economics evaluates activity with respect to its impact on natural resources, subsequently developing solutions and policies to achieve sustainable outcomes. While most associate tax policy as a means of generating revenue, its noted ability to influence behaviors is further applicable with respect to achieving environmental goals, such as the reduction of carbon emissions.

Research and evaluation of the development and implementation with respect to environmentally-oriented tax policy needs further growth, and as noted in the RFP, this special issue is another step in building this important base of knowledge:

Scholars are encouraged to submit abstracts for research projects related to this subjects, incorporating one or a combination of formal analytical modeling, empirical analysis, case studies, and legal analysis. Key topics this special issue seeks to address include the following:

• The legal, institutional, and political factors that have influenced environmental and carbon tax design choices (broadly or in a single jurisdiction).

• Carbon tax policy reforms across countries.

• Trade-offs between various energy and environmental tax credits and deductions.

• The environmental implications of changes in energy and environmental taxes (such as gasoline taxes).

• The policy and budgetary implications of environmental tax reforms on pollution emissions and environmental quality, economic efficiency, revenue production, transparency, and income distribution.

• Environmental regulation and taxation: complements or substitutes?

• Optimal design and implementation of environmental regulation and taxation.

Scholars and practitioners should submit their abstracts (2,500 words or less) by email to pbaf@iu.edu no later than October 15, 2026, for consideration in this special issue. Questions can be directed to Kenneth R. Richards (kenricha@iu.edu), or to Public Budgeting & Finance Co-Editors Craig Johnson (crljohns@iu.edu) and Justin Ross (justross@iu.edu).

Perspective authors are encouraged to review the guidelines available at the Public Budgeting & Finance website before submitting abstracts.

Reviewing Prior Journal Work on Environmental Finance

The upcoming special issue on environmental taxation furthers growing research by public finance scholars with respect to revenue, allocation, and impact and management of natural resources. Two recent articles from Public Budgeting & Finance shared important examinations in the areas of equitable utility costs and taxation of renewable energy generation.

In 2024, an article from Kate Albrecht, Deborah A. Carroll, Amanda Kass, Jason Michnick, and Brooke Wetmore assessed the growing claim that local water utility rates were disproportionately higher for minority-majority customer groups. Their research found, when controlled for service infrastructure quality, rates were consistent across racial makeup.

As discussed in a 2025 PBAF News post, this research does not dismiss the importance of evaluating racial equity and further directs attention to other contributing factors, such as the need to ensure access to resources for infrastructure investment and improving local water quality:

In 2022, Eric Brunner and David Schwegman published an article in our Journal examining the impact of wind energy installations on the revenues and expenditures of county-level governments. Reviewing data from 1995 to 2017, the pair found that windfarms generated a positive impact on local jurisdiction revenues, with these proceeds contributing to local capital investments, specifically transportation and hospitals.

Bruner and Schwegman further found that while increased revenues did not result in changes to local property tax rates, investments in wind energy did correlate with increased residential values:

Albrecht and her colleagues’ article, “Fiscal institutions and racial equity: Determining the price of water,” appears in Issue 44 (2) of Public Budgeting & Finance, with a summary and discussion available at PBAF News.

Bruner and Schwegman’s article, “Windfall revenues from windfarms: How do county governments respond to increases in the local tax base induced by wind energy installations?” appears in Issue 42 (3) of Public Budgeting & Finance.

Click Here to View the RFP

Literature on employee satisfaction indicates that happier employees tend to stay longer; a boon for private companies and civil service organizations alike. While agency leaders may not be able to fix budget dysfunctionality, as those issues lie within the control of the President and Congress, it does remain worthwhile to understand how the issue affects employee morale.

Drawing on survey and archival data from 2005 to 2020, researchers Nathan Favero, Carla Flink, and Tingli Qu evaluated in a recent study how budget size and uncertainty are associated with federal employee attitudes. Their work uncovered evidence that larger budgets improve job satisfaction, while not finding evidence that budget delays or lapses have an impact.

The Core Finding

Favero and his team considered over a dozen explanatory variables, including the number of weeks a budget spends in continuing resolution, funding gaps (government shutdowns), and employee demographics. Analyzing approximately 15 years of data, they conclude that the magnitude of resources available matters, but not the uncertainty of funding.

Employee Satisfaction Over Time, 95% Confidence Intervals

For every standard deviation increase in the 3-year average budget change, researchers found a change of about one-fifth of a standard deviation in satisfaction. However, despite 3 years of the data set containing government shutdowns, no obvious decline in satisfaction was discovered for those years.

While the reported fluctuations were relatively small (satisfaction scores ranged between just ~3.65 and ~3.9 on a 5-point scale), their cause is still worth investigating. Answers on a five-point scale can only vary so much, and subtle changes can indicate important shifts in employee sentiment.

Why Doesn’t Uncertainty “Bite”?

Researchers speculate that federal employees are resilient, expect budgetary turbulence, and potentially develop coping mechanisms around the uncertainties of their professional environment.

Flink frames the discussion:

“An on-time budget does not make up for budget cuts, but a late budget could be overlooked if more resources are made available.”

There’s also statistical logic at work.

“Another possibility is that some employees do feel frustrated because of budget delays, but given how persistent the delays have become, the negative effects are already baked in and do not fluctuate much from year to year.”

For public service leaders, the actionable takeaway is that visible and adequate resources do more for morale than smooth and certain approval of appropriations. Anxious administrators can take some comfort knowing their workforce has weathered and overcome these storms in the recent past.

However, the study carries an important caveat raised by University of Michigan Professor Donald Moynihan after his review of the research. “The study focused on a period before recent upheaval (starting in 2025), and in the current climate, federal employee morale is abysmal. They’ve seen significant cuts for no clear reason in ways that seem designed to limit their ability to do their job.”

Moynihan also pointed to a meaningful distinction the study itself gestures toward.

“Some research shows shutdowns hurt employee morale and perceptions of agency effectiveness. This isn’t just budget uncertainty, but experiencing a tangible effect of the inability to pass a budget: employees are sent home, or asked to work without pay.”

Favero and collaborators conclude by suggesting ways researchers may support civil service leaders.

This article, “US Federal Budgets and Federal Employee Job Satisfaction,” is published and currently available to read for free in the online edition of Public Budgeting & Finance.

On September 9th, President Donald Trump put forth an “offer” to extend a $5,000 “dividend” to American citizens. Setting aside the questionable terms and Constitutionality of the proposed stimulus payment (as they are tied to upcoming mid-term election results), the proposal does appear aimed at providing relief to households challenged by ongoing affordability issues.

The estimated cost of this proposal is likely over $1 Trillion, and is likely to be made possible with further deficit spending, so it is important to know if its potential economic impact can also be evaluated. This impact should also be evaluated across income levels and in comparison to the influence created by other forms of Federal spending.

Research published last year in Public Budgeting & Finance from Jaeger Nelson and Matthew Wilson of the Congressional Budget Office offers a model for potentially answering these pertinent questions. Their concepts, the Federal Fiscal Impulse (FFI) and Federal Fiscal Impulse Index (FFII), are intended to measure how changes in fiscal policy at the national level can create changes in economic activity, as measured through Gross Domestic Product (GDP) within the immediately following fiscal quarters.

Depending on the eligibility criteria used to determine who would receive the hypothetical $5,000 per person disbursements, applying the research suggests lower income recipients would generate the most positive, short-term impact on economic growth. FFII findings also show that the impact would not exist for long and would lead to a subsequent decline compared to the path of previous policy, while overall economic growth impact would remain positive on an annual basis (and none of this factors other effects, including those on the growing issue regarding the national debt).

Narrowing Focus of Prior Efforts

Nelson and Wilson’s work builds upon research and models developed over the past two decades to understand the economic impact of changes in government fiscal policy. Building on the work of Federal Reserve researchers Glenn Follette and Byron Lutz understanding the “Fiscal Impetus” of discretionary government spending, David Cashin, and others with respect to fiscal effects, and further development of the Fiscal Impact Measure (FMI) by the Hutchins Center of Brookings, Nelson and Wilson isolate the impact of Federal Policy to provide a path to increased understanding specifically on Washington’s decisions with respect to taxation, agency appropriations, and transfer payments to citizens, localities, and States.

Nelson and Wilson define FFI as “direct short-term effects of changes in federal fiscal policy through its effect on aggregate demand.” The purpose of the FFII, therefore, is to measure the increment of impact on Real GDP growth created by specific changes in fiscal policy. This can be effectively measured on a quarterly basis to identify positive and negative swings with respect to when policies take effect (i.e., timing of stimulus payments) and the duration of their effect compared to what would have taken place under policy conditions prior to the most recent change(s).

Their work involves initial research categorizing total Federal impact into 3 broad categories: Federal government purchases, grants to state and local governments, and taxes and transfers to individuals. Further subcategorization of taxes and transfers enabled their application of weights to control for relationships in the value for each subcategory. These classifications first enable evaluating decomposition of past Real GDP Growth, providing a basis for establishing and measuring the Federal Fiscal Impulse Index.

Stimulus is Impulsive

Nelson and Wilson’s research includes evaluation of Federal policy with respect to actual receipts (revenues) and outlays (expenditures) for Calendar Years 2019 to 2024, and as projected through 2026, as guided through outlooks published by the CBO. Interestingly enough, the CBO’s estimate of average annual GDP from the Fourth Quarter 2024 to Fourth Quarter 2026 (2.1%) is very close to the actual average recorded so far by the Bureau of Economic Analysis (2.2%).

Analysis of Real GDP growth decomposition finds that transfers oriented towards the lower income group (such as TANF) produced noticeable positive impact on GDP growth, with the weakest impact coming from transfers impacting the highest income group. Subsequent historical evaluation found that FFII was more noticeable as a result of the COVID-influenced stimulus policy, especially on a quarterly basis, than policies taken in response to the 2008 global financial crisis. Given how the COVID response focused more transfer payments to lower income individuals, the results appear consistent with the findings from growth decomposition.

Quarterly measurement of FFII also provides a stronger understanding of the volatility stimulus-oriented policies can have with respect to their influence on demand. While the actions are likely to create a positive growth measurement on an annual basis, comparing impact in shorter increments indicates greater fluidity.

What could the “Dividend” Do?

Nelson and Wilson are careful to limit their contributions to FFI and FFII to “short-term analysis of the direct impulse in aggregate demand coming from changes in federal fiscal policy.” Therefore, any simulation of their concepts can only (at best) provide us with a forecast of impact for one to two quarters.

More than likely, the White House and Congressional Leadership will not incorporate FFI or FFII into the movement on potential stimulus actions between now and the end of 2026, as this concept appears to be a political maneuver. Regardless, Nelson and Wilson’s development of methodology to specifically evaluate the impulse effect of Federal fiscal policy with respect to economic impact does provide a starting point for further evaluation of future proposals, especially those seeking to generate immediate results.

Nelson and Wilson’s article, “Understanding the Relationship Between Changes to Federal Fiscal Policy and Near-Term Real GDP Growth,” appears in Issue 45(1) of Public Budgeting & Finance. The authors’ additional work on FFI and FFII is available in a Working Paper published by the Congressional Budget Office.

When the Affordable Care Act (ACA) was adopted in 2010, expanding Medicaid to low-income adults was established as a requirement for States. Two years later, a Supreme Court decision made it optional.

Nevertheless, what remained was an incredibly generous deal in American fiscal federalism: Washington promised to cover the full cost of newly eligible Medicaid enrollees for the first three years, and then 90 percent thereafter.

As of today, ten states are still exercising their option to decline expansion. New research from Laura Montenovo, Kosali Simon, and Coady Wing compares Medicare reimbursements and finds that counties in expansion states gained an average of $361 per resident, per year, in additional federal Medicaid transfers. Their research further finds that non-expansion states would have received $554 per resident more with expansion.

As Montenovo explains in the article:

The Impact of ACA Expansion

The varying timeframes when states adopted Medicaid expansion, and the lack of expansion by others, provide researchers with more than a decade-long natural experiment to examine and draw conclusions .

As Montenovo writes, the resulting body of work indicates that insurance coverage as a result of the ACA increased substantially. This was primarily due to Medicaid expansion. Successive research also found measurable gains in health metrics for low-income populations in states that proceeded with Medicaid expansion.

Unfortunately, the financial implications of Medicaid expansion are less comprehensively explored than health outcomes. This lack of knowledge led to the research of Montenovo and her team examining how federal transfers translate into fiscal resources at the county level.

Understanding Medicaid Reimbursements

Researchers paired transfer estimates with actual IRS data on federal income tax collections at the county level. The relationship is strongly consistently inverse: for every 1% increase in a county’s income tax contributions, ACA-related Medicaid transfers reduce by ~0.86%.

Montenovo’s research establishes a general observation that, the top 20% of counties by federal Medicaid receipts were disproportionately in the bottom 20% of federal tax contributors.

Concretely, researchers estimate the expansion added roughly 7,300 new Medicaid enrollees in the average county, corresponding to ~7% of an average county’s population.

Moreover, the transfer is structurally in line with how progressively-oriented fiscal federalism indicates resources be redistributed.

Potential for Benefit in Non-Participating States

The most common reason provided by non-participating states once Medicaid expansion became option was concern over exposure to increased costs and negative fiscal impact:

“After the 2012 election, on the eve of ACA enactment, twelve of the 13 governors who opposed expansion cited concerns about how the expansion would impact their state budget.”

As stated earlier, Medicaid expansion increases transfer payments to states through its increased reimbursement for newly eligible enrollees. As a result, per-capita transfers would increase, especially if states have higher levels of eligible populations.

Researchers examined state-by-state decisions through 2017. At that time, the 18 states not participating could see increases in reimbursements between $200 and $800 per capita if they went forward with expansion. Based on available statistics, ~7% of the population in non-participating states would qualify for Medicaid, compared to ~5% for those states who chose to expand.

Forecasted Average Treatment Effects of Non-Expansion States

Montenovo’s work references additional research suggesting fiscal concerns expressed by non-participating states have not materialized:

Currently, 10 states continue not to participate in Medicaid expansion: Alabama, Florida, Georgia, Kansas, Mississippi, South Carolina, Tennessee, Texas, Wisconsin, and Wyoming.

Montenovo’s research, Redistributive Effects of Federal Medicaid Outlays Across Counties: Evidence From the ACA, appears in issue 46(2) of Public Budgeting and Finance.

It’s tempting to view a municipality’s creditworthiness as a function of economic factors outside its control. City and town councils cannot legislate their way into stronger tax bases, and their managers do not possess the ability to force Moody’s and other rating agencies to overlook unfunded liabilities as they face the need to finance critical infrastructure maintenance, improvements, and expansions.

Christine Martell rejects the premise that municipalities cannot influence their credit ratings, asserting that local jurisdictions have considerably more ability to act in constructive ways to enhance this key evaluation of their fiscal performance, irrespective of underlying economic conditions.

In the recent study, Is City Agency With Financial Management Levers Critical for Credit Ratings? An Analysis of Information Transparency and Certification, Martell and her collaborators explored what municipal managers can do, within the context of governance practices, to positively impact their credit ratings, presenting themselves as more attractive to bond investors. Her finds offer a highly actionable takeaway:

“No matter the national context and intergovernmental fiscal relations, (municipalities) can have agency in improving their credit ratings by investing in good accounting and auditing systems.”

Study reviews 10 Years of Measurable Results

Martell and collaborators analyzed credit rating reports for 50 cities across 25 countries, over a 10-year period, drawing on assessments from Fitch, Moody’s, and Standard & Poor’s, to explore how much control city governments have over credit ratings. Their study specifically examined the relationship between credit ratings, financial transparency, and certification.

“Our analysis wasn’t focused on the well-known quantifiable factors of credit quality,” Martell writes. “Rather, we quantified the fuzzy, mushy area of financial management in an effort to better understand how these factors relate.”

Economic and fiscal factors matter of course, but municipal managers are limited in their direct influence on them. Instead, the research team zeroed in on frameworks within the control of the surveyed jurisdictions, examining both municipal-level and national-level versions of transparency and certification.

Key Findings

Analysis by Martell and her team show that municipalities benefit most when they credibly certify the financial information they disclose.

“We expected transparency and certification to be equally impactful,” Martell shares, “but (certification is) even more important than transparency. It goes to show the value of producing post-fiscal year analysis.”

Transparency matters, but the research analysis shows it is insufficient on its own.
Publishing budgets and financial reports mean very little if independent verification of their accuracy is unavailable.. Certification closes the loop, and bond markets favorably respond

In addition, certifiable municipal-level information can serve to override national contexts.

Research by Martell and her team did find that municipalities in countries with stronger national financial oversight systems did achieve higher credit ratings, but only when national factors were evaluated in isolation. Once local level practices were incorporated into the analysis, the significance of national factors was largely reduced.

“There were some surprising nuanced findings, and one is how important city-level certification is!”

For municipalities in countries with weak or inconsistent national financial oversight, this study’s findings reinforce the importance of strong local accounting and auditing practices. This is further justification for action at the local level to mitigate the potential of weak national rules to negatively affect credit ratings.

Martell interprets this finding, writing: “financial markets may prioritize the internal, localized information systems at the (municipal) government level over those of the national context, giving (municipalities) a very clear lever and responsibility to attain their highest credit quality.”

Advocating Greater Focus and Investment for Accounting and Auditing

It is not surprising to find municipalities treating certification and auditing as compliance burdens imposed by higher levels of government and advisory boards. Martell’s research suggests that this belief comes with serious costs.

Independent audits, rigorous accounting standards, and timely financial reporting will satisfy legal requirements, and by influencing higher credit ratings, they can materially lower borrowing costs for future issuances and projects.

Supporting research cited by Martell establishes a benchmark on the financial impact of this relationship. Governments with material weaknesses in internal controls face borrowing-cost premiums of 10-18 basis points (bps), and audit delays can increase borrowing costs by 6 bps for every 100 days the assessment is delayed.

Rigorous audits are certainly an administrative or legal necessity, and they also provide a basis for respectable credit management and enable measurable savings.

The Catch: Transparency Can Cut Both Ways

One counterintuitive finding from the study is seen at the national level, with greater transparency being associated with lower credit ratings, not higher ones.

Martell shares a possible explanation:

“Transparency, especially spending transparency, acts as a market disciplining tool, whereas certification seems to broaden market opportunities.”

This should not discourage municipalities to minimize or avoid transparency. Instead, the takeaway is these jurisdictions should ensure disclosure is credibly paired with a certification infrastructure.

Lessons for Municipal Managers & Governing Bodies

The study’s central finding is that financial markets reward municipalities establishing and performing rigorous, independent verification of their financial information.

Martell’s research doesn’t ask local leaders to ignore economic fundamentals, nor does she pretend structural fiscal constraints do not exist or will not impact credit ratings. Changes adopted by rating agencies in 2024 and 2025 did apply higher value to economic conditions.

Nevertheless, municipal managers and their governing bodies should look carefully at what’s within their control, particularly the capacities and knowledge levels of their and take it more seriously than many currently do.

This research is published and available to read in Issue 45(3) of Public Budgeting & Finance.

Despite rolling into higher principal amounts, the agencies responsible for these projects took advantage of the program to lower borrowing rates by an average of 90 basis points. As a result, they are projected to save $80 million in interest payments over the lifetime of the loans.

All the while, USDOT only had to allocate $1 billion in budget authority to do it.

A new study by Muhammet Mustafa Sever, Jonathan Gifford, and Carter Casady examines these COVID-era refinancings. Their research establishes a strong case how TIFIA refinancing quietly outperformed its expectations, showing that the program can potentially be expanded in order to help meet the country’s significant infrastructure needs demand.

“TIFIA’s experience,” Sever writes, “demonstrates how institutional design can strengthen the resilience and sustainability of infrastructure finance, offering lessons that are transferable across sectors and jurisdictions.”

Turning $1 Billion into $12.6 Billion

Unlike most USDOT funding programs, TIFIA does not serve as a grant. Instead, it’s a loan program providing direct financing for approved transportation projects. This difference enables USDOT to limit its obligation to the “subsidy cost” tied to expected loan losses, accounting for default risks and interest rate effects.

This allocated subsidy works out to historically be about 7%. As a result, a $1 billion obligation can authorize $12 billion in loans.

The final ratio of obligation to loan capacity is even higher, once all stakeholders have been accounted for. In their 2018 TIFIA report to Congress, USDOT shared the following:

“$1 of TIFIA program funds will support a TIFIA loan of approximately $14 and result in infrastructure investment of up to $40, when accounting for other state, local, and private sector investments.”

This is an impressive level of leverage for any federal program, and an outcome exemplifying the value of public-private partnerships in infrastructure finance. In addition, the relatively-small federal investment enables borrowers to reduce debt costs, and in some cases, increase their financing capacity.

Where did the Money

Refinancing did not just save money. For many borrowing agencies, TIFIA helped unlock capital to finish initiatives they had already started and support additional work.

“A majority of projects, 12 out of 20, prioritized the completion of infrastructure developments… Moreover, expansion endeavors are evident in 11 out of 20 projects.”

Sound Transit, the regional authority serving the Puget Sound region of Washington state, provides a clear illustration of how capital freed up by lower-cost debt on one set of projects effectively financed another. The authority refinanced approximately $3.3 billion worth of loans across five projects, enjoying an overall interest rate reduction of 82 basis points. The savings from reduced interest costs enabled the funding of a sixth loan to support its Downtown Redmond Link Extension.

The Hampton Roads Regional Priority Projects in Virginia provide another example.

Utilizing TIFIA, an original loan principal of $501 million principal was expanded to $1.66 billion through reissuance, the largest increase of any refinancing in the study’s sample. This enabled the addition of the Hampton Roads Bridge-Tunnel Expansion to their ambitious program..

“By bundling a series of roadway and bridge projects, this project presented a compelling case for using refinancing savings to expand the original scope.”

Across the full sample, the positive impact of TIFIA is consistent: an average 90-basis-point reduction in interest rates, leading to roughly $80 million in aggregate interest savings on the refinanced loans, all achieved through a program designed to require minimal direct federal funding.

Why Has TIFIA Only Lent $37 Billion in 28 Years?

Given TIFIA’s success applying a $1 billion federal commitment to responsibly unlock $12 billion in direct loans, along with considerably more through third-party involvement, there is greater potential for the program than the approximate $37 billion in direct loans secured during its history. This gains additional significance when considering how America’s infrastructure investment gap is measured in trillions of dollars.

Sever’s study points out TIFIA underutilization, as the program still has funding available for additional projects.

“As of the end of FY 2018, DOT reported $1.65 billion dollars in unobligated budget authority for TIFIA. Notably, the trend of underutilization has continued; by the end of FY 2022, unobligated TIFIA budget authority had slightly increased to approximately $1.75 billion, reflecting the program’s ongoing challenges in converting authorized credit assistance into executed loan agreements.”

One of the challenges, as noted in research cited by this paper, is an application process that leans cautious in two directions.

“Outcome evaluations for the Bureau’s credit programs reveal a propensity for risk aversion in its credit allocation decisions… another concern lies in the Bureau’s conservative methodology for calculating the program’s subsidy cost, potentially constraining its lending capacity.”

Combined with an application and approval process borrowers describe as slow and document-heavy, even creditworthy sponsors may simply decide the effort isn’t worthwhile.

Despite historically low interest rates, just 20 out of 70 TIFIA loans active at the start of the pandemic completed refinancing. While the study does not fully explain the reasons for a 28.5% applicant success rate, but this gap between who could have benefited and who actually did is itself a finding.

The Takeaway

TIFIA’s COVID-era refinancing is a success story: a small, well-structured federal credit exposure converted into billions of cheaper, more flexible infrastructure financing that borrowers directed into construction, expansion, and project completion.

At the same time, it’s also a story about a tool that’s being used well below capacity.

“Previous literature suggests that the Bureau’s conservative approach to project selection may have led to underutilized budget resources and reduced program effectiveness,” Sever stated. “While this study did not directly examine this issue, the findings underscore the need for regulatory flexibility in refinancing rules to enhance the allocative effectiveness of the Bureau’s credit assistance programs.”

This research is published and available to read in the online edition of Public Budgeting & Finance.

Researchers Eunjoo Choi and Yonghong Wu examined why some states enter recessions with healthy reserves while others arrive nearly empty-handed. Their study, Impact of Stringent Budget Stabilization Fund Rules on US State Savings: Generalized Synthetic Control Method and Panel Data Analysis, finds that states tend to build stronger reserves when they adopt well-designed, more stringent deposit rules.

Wyoming and Alaska could manage well over six months using only rainy day funds, according to Pew. Indiana, by contrast, could cover barely a month. New Jersey is in even worse shape; its budget stabilization fund is empty.

However, Choi says the findings do not support a simple “stricter is always better” story.

“What surprised us most is that rules don’t work in isolation,” Choi says. “Their effects depend on how they’re combined, and on economic conditions.”

What Makes a Rainy Day Fund Rule Stringent?

Choi and Wu asked a deceptively simple question: Do stricter rules lead to higher savings? To answer it, they first had to define what “strict” means.

The study defines stringency around two ideas: precision and obligation. Do the rules actually require officials to do something? And are they written clearly enough to limit discretion?

For example:

• A rule saying lawmakers may deposit money when they choose is not very stringent.

• A rule requiring that a share of surplus revenue be saved is more stringent.

• A rule that uses an economic volatility formula is more stringent still, because it reduces discretion by tying deposits to objective conditions.

From there, the researchers examined how 14 budget stabilization fund features interacted with saving levels, including deposit requirements, withdrawal rules, repayment provisions, caps, limits, and discretionary authority.

What Matters Most?

If the goal is to build reserves before a downturn, automatic deposit rules may be the most important place to start.

Choi and Wu report several statistically significant findings. Interpreted simply, a 1% increase in each rule feature is associated with the following change in budget stabilization fund levels as a share of general fund expenditures:

“Automatic deposit rules can reduce political discretion and improve consistency,” Choi says. “In particular, governments should ensure mandatory saving mechanisms are paired with sufficiently high caps, so funds can grow over time.”

When states rely on legislative or executive discretion, saving can compete with other priorities. Mandatory rules change the default. Deposits tied to economic conditions also help move money into reserves before it can be used elsewhere.

The Problem With Rules That Are Too Strict

Choi cautions against reading the results as a blanket argument for tightening every rule. Budget stabilization funds are meant to be used during downturns, and some withdrawal or repayment rules can get in the way of that purpose.

“We find the relationship between repayment provisions and BSF levels varies with economic conditions. At low unemployment (around 2%), the relationship is negative, but as unemployment rises (up to about 13%), it becomes positive, meaning that states with more stringent repayment provisions tend to have higher BSF levels during downturns.”

That does not necessarily make stringent repayment provisions desirable. They may keep fund balances high, but if states are not willing or able to use those funds in a crisis, the policy design may be working against the fund’s purpose.

Takeaways for Policymakers

Choi highlights four broad lessons for policymakers.

First, implement automatic deposit mechanisms to minimize legislative discretion.

“Varying results depend on the formula used, legislative adherence, and political interference, underscoring the need for a well-designed formula and the consistent application of systematic rules.”

Second, pair mandatory surplus deposit rules with adequate budget stabilization fund caps.

“If caps are low, the effect of surplus deposits is limited; as caps increase, their positive impact becomes substantially stronger.”

Third, strengthen withdrawal rules while preserving budget flexibility.

“While stringent withdrawal conditions help preserve BSF reserves for genuine emergencies, overly rigid rules can create unintended consequences. It’s not just about having a rainy-day fund, but about designing a set of rules that encourages saving in good times, and allows effective use in bad times.”

Finally, maintain transparency and public oversight.

“Some states may resort to budgetary maneuvers rather than adhering to BSF policies. Transparent reporting and withdrawal calculations, and the intended purposes of each fund, can foster public trust and prevent misuse.”

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The research appeared in issue 45(3) of Public Budgeting & Finance.

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In Bonds on the Ballot, researchers analyzed survey data to uncover voter knowledge bases, preferences, and how they respond to different explanations of bond measures. They found voters don’t necessarily understand the fiscal implications of their vote.

“Only about half of voters can identify how bonds are financed,” says Shanna Pearson-Merkowitz, one of the researchers from the University of Maryland leading the study.

And if that’s the case, how can policymakers effectively and transparently propose bond initiatives? Person-Merkowitz’s research carries an important lesson for city managers, school board officials, and local government leaders: small changes in how bonds are presented significantly influence whether or not they pass.

Why Do Bonds Go to a Public Vote, Anyway?

The logic is straightforward.

Requiring a public vote acts as a safeguard against excessive borrowing. Putting decisions directly in the hands of taxpayers ensures communities only take on long-term obligations where there is clear support, disregarding the rest.

In practice? Reality may not produce the results we’d hope for.

In multiple-choice format, only about half of respondents correctly identified that bonds must be repaid with interest.

Professor Person-Merkowitz expands, drawing on current literature:

“Observational and experimental research suggests voters lack basic knowledge. They’re prone to cost misperception, aren’t influenced by the cost of a bond even when it well exceeds what the government can afford, and it even appears a bond’s placement on the ballot has the largest impact, despite having no impact on fiscal implications.”

But if voters don’t fully understand how to meaningfully evaluate bond measures, should they be tasked with the decision in the first place?

According to Person-Merkowitz, perhaps they shouldn’t:

“The rationale [preventing the legislature from burdening the public with excessive debt] is difficult to justify. It’s not clear whether voting requirements succeed in protecting against legislative short-sightedness… Consideration should be given to eliminating the requirement.”

Nevertheless, it’s difficult to imagine a scenario where we eliminate bond mandates. Under the status quo, how do voters behave? And how might we use this information?

What Influences Voter Behavior?

“Voters do not understand the difference between bonds and taxes. Even a small amount of information about how bonds are financed can significantly reduce voter support,” Person-Merkowitz explains.

The following statement, split between control and experimental survey groups, lowered support for bonds from ~82% to ~67%.

“Generally speaking, are you in favor of or opposed to using bonds, which have to be paid back with interest, to pay for local projects like schools, roads, and other community resources?”

So, providing a very simple explanation of bonds — merely eight words in Person-Merkowitz’s experimental design — drops support by a significant margin, and perhaps enough to change the outcome of a bond election.

Importantly, that decline doesn’t reflect opposition to the projects behind investments.

“What surprised us,” Person-Merkowitz begins, “was when people learned how bonds actually work, they became more supportive of using taxes to fund city projects, rather than less supportive of spending altogether.”

In other words, voters may be rejecting the financing mechanism rather than the projects themselves.

Given that, how might public officials more effectively champion public investments?

Takeaways for Bond Referendums

If small changes in framing can influence outcomes, then communication strategy becomes central.

Person-Merkowitz shares a clear suggestion:

“If you want a bond measure to pass, avoid emphasizing how bonds are paid for and what they will cost. Focus instead on what bonds will do and what the community will gain. Higher teacher retention leading to improved test scores, a new recreation center to bring residents together, fewer potholes, and lower car repair bills. Lead with tangible benefits, not financing mechanisms.”

Conversely, if public officials prefer to raise taxes, sharing how bonds actually work may increase support for alternatives.

However, Person-Merkowitz conclude research by asking whether bond mandates are effective decision-making mechanisms to begin with.

“Kogan (2025) argues the root of the problems with K-12 education is due to local democratic control… There is some evidence school board officials set bond proposals at lower amounts than necessary over concerns of voter disapproval… Other modern means exist to create a check on unwise legislative bond spending… By contrast, the election requirement appears to be an anachronism.”

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Shanna Pearson-Merkowitz’s and colleagues article, Bonds on the Ballot: What Voters (Don’t) Know About Debt Financing and Why It Matters, appeared on EarlyView in February 2026 of Public Budgeting & Finance.

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Many researchers have examined the public health impact of opioid rescheduling.

However, a new Public Budgeting & Finance article, published by researchers Felipe Lozano-Rojas and Mikhail Ivonchyk, examined the fiscal impact on local budgets instead.

When the DEA reclassified hydrocodone from Schedule III to Schedule II, conditions were ripe for a natural experiment: prescription rates fell precipitously, nationwide, and all at once.

After analyzing a dataset of ~1,100 county budgets over 16 years — before and after the change — scholars found that:

• Communities heavily impacted by the epidemic saw budgets grow by as much as 8% per capita.

• Growth was largely driven by increased spending on healthcare services.

• Funding was primarily provided by intergovernmental transfers and increased property taxes.

What lessons might local leaders take? And how might their findings inform how we most effectively combat the opioid epidemic?

A Natural Experiment in Public Policy

Hydrocodone has long been one of the most commonly abused prescription opioids. But the 2014 change discouraged physicians from prescribing the drug, leading to an immediate drop in nationwide prescriptions.

Lozano-Rojas and Ivonchyk used that exogenous shock as a natural experiment. Counties varied widely in their dependence on hydrocodone prescriptions; some places relied heavily, while others prescribed relatively rarely. So, researchers next explored their central question by comparing: what happens to local government fiscal decisions when the supply of legal opioids suddenly drops?

Measuring the Fiscal Impact

To determine government responses, researchers first used variations in the proportion of doctor-prescribed opioids to separate highly affected counties from unimpacted communities.

On average, hydrocodone accounted for ~27% of all opioid prescriptions in highly affected areas (the top quartile of the distribution), and ~10% for the remainder.

But it wasn’t immediately obvious how demand for local services, and thus the cost to provide them, would change. Would abusers recover after rescheduling? Or turn to more dangerous options to maintain their habit?

As Lozano-Rojas writes: “Reducing legal opioids may exacerbate the epidemic if users turn to illicit and more potent drugs. Thus, in turn, could require increased law enforcement and healthcare services.”

Counties sit at the operational center of the opioid response, funding everything from public hospitals and detox centers to emergency response and welfare support; if hydrocodone patients turn to dangerous behaviors after rescheduling, it’s reasonable to assume local service demand would rise.

And in practice, a significant number of users do turn to illicit sources

“Drug rescheduling would increase total deaths over five years as some opioid users escalate to heroin,” health policy researcher Isabelle Rao notes, “while overall deaths would decrease over ten years.”

Researchers next segregated county spending into eight categories, and discovered health and hospital spending accounted for 80% of new expenditures. In other words, reducing hydrocodone supply saves lives in the long term, but has immediate short-term consequences that lead to greater demand for local healthcare services.

The Fiscal Double Bind

Absorbing rising public health costs is only the beginning for impacted communities. A variety of downstream consequences can exacerbate conditions as well.

Washington State University economist Patrick Carlin explains:

“An 8% increase in expenditure is quite large. And, the burden could be compounded if the crisis also depresses local labor markets. Lower labor force participation and wages mean governments face rising costs at precisely the moment their tax base is weakening.”

So, the crisis doesn’t just strain public health resources. It can also depress revenue, forcing policymakers to respond to new problems with fewer resources at their disposal.

A Heartening Silver Lining

Amidst the heartbreak and struggle opioids unleash on communities, Lozano-Rojas’ research carries a positive finding; despite the surge in opioid-related spending, police budgets barely changed.

Researchers found no statistically significant increase in police spending in highly affected communities. Such spending may have even slightly declined several years after rescheduling.

Rather than treating opioid addiction as a criminal justice issue, it appears counties are approaching it as the public health crisis that it is.

Research Implications

“Reducing the supply of legal opioids, a primary cause of the epidemic, is only an initial step,” Lozano-Rojas shares. “As some individuals turn to illicit drugs, local policymakers should be prepared to invest additional resources to prevent adverse outcomes and support recovery.”

Combatting a public health crisis is no easy task.

But which additional interventions may have the most impact?

Carlin shares a variety of possible approaches.

“How effective these strategies are is debated in the literature. It’s likely that a combination will be important to address the pandemic, including investing in both inpatient and outpatient treatment facilities, naloxone (Narcan) availability among emergency responders, and Good Samaritan Laws providing legal protection to people who call for help during an overdose.”

Their findings highlight an uncomfortable reality: restricting opioid supply is a step, but one that generates new costs for communities and local government to contend with.

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Lozano-Rojas’ and Ivonchyk’s paper, Opioid Epidemic and Local Fiscal Choices, appeared in the December 2024 issue of Public Budgeting & Finance.

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But what happens when organizations, praised by donors for their financial prudence, enter the bond market?

According to research by Qingqing Sun, they may face higher interest rates.

Sun’s analysis, published in a recent Public Budgeting & Finance article, examined ~750 nonprofit bond issuances between 2009 and 2016, uncovering something unfortunate.

“Nonprofits that operate with thin financial margins, meaning little surplus, limited cash reserves, and relatively low operating revenue tend to receive weaker ratings in the municipal market.”

But why do bond rating agencies penalize leanness? And how can nonprofits navigate the tension between donor and lender preferences?

Low Bond Ratings Are Unsurprising

“Since nonprofits are encouraged by funders, watchdogs, and public narratives to minimize surpluses and reserves,” Sun begins, “my expectation was rating agencies might interpret their finances differently. Instead, findings suggest they apply a credit-risk lens similar to that used for other borrowers.”

Which makes sense.

A lender’s first and last questions are: ‘Will they be able to pay us back?’

And if you’ve bought a house recently, you may remember how important your debt-to-income ratio was. Similar logic applies to bond issuances; strong revenue, surpluses, and profits are key factors.

“It may seem logical that a credit agency would penalize organizations with low profits and thin cash reserves,” begins NYU Director of Finance, Thad Calabrese, who was not involved in the study. “However, what makes this study noteworthy is that, for the first time, it provides empirical evidence of a ‘trustworthiness tax’ for the nonprofit sector.”

Rating agency behavior may not be surprising. If they treat nonprofits the same as businesses, lean organizations will appear weaker by default.

But what’s the cost of higher nonprofit borrowing rates?

The Cost of Interest

One might imagine debt as something for corporations, not nonprofits. Why would a small neighborhood museum or food bank, operating entirely on donations and community generosity, need a loan?

But “nonprofit” is a tax status, not a business model, and many of the organizations we rely on need access to affordable long-term capital to accomplish their missions.

Calbrese explains: “From hospital beds to charter school classrooms and universities, nonprofit bond ratings directly impact the quality and availability of services. And while for-profits can raise money by selling stock, there’s no efficient equity market for nonprofits.”

Nonprofits are stuck between a rock and a hard place. They need capital to succeed, but simultaneously attracting donors, grants, and bond market lenders is a challenging balance to strike.

All the while, higher interest rates limit the sector’s ability to expand, strain current-day finances, and restrict their ability to positively impact communities.

What, Exactly, Impacts Bond Ratings?

Moody’s publishes six key rating criteria, from which her analysis expanded into 23 explanatory variables.

• Positive Impact: High operating revenue, days cash on hand, profitability, and revenue diversification contribute most positively to good bond ratings. Keeping your board member count relatively small was also moderately impactful.

• Negative Impact: Funding mixes relying too heavily on donations or program revenue, as well as asset mixes weighted heavily toward fixed assets.

• (Surprisingly) Neutral Impact: Debt burden, measured by the ratio of annual debt service to total revenue, had no statistically significant impact, nor did operating margin or percentage of total assets coming from endowments.

How Might Nonprofits Respond?

It’s easier said than done, but Sun shared a handful of approaches that can better position nonprofits in bond markets:

“Rating agencies place greater weight on revenue that’s predictable, renewable, and within managerial control. For example: mission-aligned revenue, such as tuition and university housing services, government contracts for charter schools, and museum memberships.”

Calabrese concurs, adding:

“To secure the best bond ratings, strong profitability, consistent surpluses, cash reserves, and multiple income streams that aren’t overly dependent on volatile donations are regarded as characteristics of financial strength.”

However, most organizations can’t do so without risking other funding sources.

“The ‘nonprofit dilemma’ is that large reserves tell donors ‘we don’t need your check right now,’ while high profit margins might suggest you’re overcharging or under-serving beneficiaries.”

But how can organizations position themselves for bond market and donor-based fundraising?

The right approach, according to Calabrese, is educating stakeholders away from the “lean is better” myth, and toward a mindset that values surpluses rather than punishes them.

Sun concludes similarly, advising:

“The implication isn’t that nonprofits should pursue revenue growth at all costs, but that they should think strategically about revenue mixes and financial buffers. Modest surpluses, diversified income streams, and liquidity reserves can coexist with mission integrity.”

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Sun’s article, Is Financial Leanness Punished by Bond Credit Rating Agencies?, appeared in the March 2025 issue of Public Budgeting & Finance.

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When people picture the budget process, they may picture noisy fights over spending bills and government shutdowns as “resolutions” to disagreements.

But increasingly, President Trump has withheld, cancelled, or slow-walked spending already approved by the legislature — the branch which is constitutionally in charge of the power of the purse.

In his recent Public Budgeting & Finance article, University of Maryland public policy professor Phil Joyce argues these actions are not just technical budget skirmishes, but a direct challenge to the balance of power between Congress and the president.

I spoke with Joyce about how presidents are supposed to decline to spend congressionally approved funding, what Trump is doing instead, and potential implications he sees for the future of our democracy.

Nick Baird (NB): Your recent paper, High Noon for the Separation of Powers?: Trump and the Impoundment Control Act, deals with a lot of legal and historical complexity. For readers who don’t follow closely, could you start with the basics? How are presidents supposed to decline to spend congressionally approved funding, and why are Trump’s recent actions concerning in that context?

Phil Joyce (PJ): The refusal to spend money that’s been appropriated by Congress is referred to as impoundment, and you really have to go back to President Richard Nixon to understand. He had the habit of refusing to spend money that had been approved, picking and choosing which programs he wanted to spend on and which programs he didn’t. And there were a couple problems with that. First, it made Congress mad. Second, it was deemed by the courts to be illegal and unconstitutional.

So in 1974, Congress passed the Congressional Budget and Impoundment Control Act, which reasserted the role of Congress in the budget process, and in their mind, made their role consistent with what the Founders intended.

It set out a specific process and 45-day timeline where the President can request Congress cancel spending that’s already been appropriated, but if Congress doesn’t act, the President is compelled to go ahead and spend that money.

NB: So, in short, it’s a way to restrict a president’s ability to ignore what Congress has already decided? Is that right?

PJ: Yes. Although I would say that the courts already restricted that. It’s not the Impoundment Control Act that actually prevents the President from refusing to spend money that’s been appropriated. It’s the constitution that does that–or at least that is what the courts have decided in the past.

But what the Impoundment Control Act said was, okay, let’s say you’re a president who wants to refuse to spend money. Here’s a process you can use to try to do that.

NB: I see. So my reading of your paper is that, since the Impoundment Control Act has been on the books, it was mostly inconsequential. Between 1974 and 2020, presidents proposed about $100 billion worth of rescissions, and about a quarter of those were accepted by Congress. Pretty negligible in the grand scheme of federal spending.

I know it’s difficult to estimate, since the Trump administration turned off the Office of Management and Budget website that tracked disbursements, but just for comparison, could you estimate how many rescissions the Trump administration has attempted since he returned to office?

PJ: We actually know that because they only proposed rescissions once – about $9 billion for a combination of foreign aid and Public Broadcasting. But the Trump administration isn’t really following the Impoundment Control Act at all. By and large, he’s just refusing to spend money.

The much larger issue is all the spending the Trump administration has unilaterally canceled, which has not gone through the ICA process.

Nobody has a precise estimate, although I will say the Senate Appropriations Committee estimated there was something like $430 billion worth of funds that have been provided for by Congress, and in one way or another, the Trump administration has failed to spend it.

NB: So they essentially blew past over two decades’ worth of similar rescission activity in just under a year, by just choosing not to spend the money?

PJ: Correct. Although I think, arguably, they also exceeded the total amount that previous presidents have illegally withheld by almost the entire $430 billion [since they’re not following the process laid out by the ICA].

It’s part of a larger effort by the Trump administration to exercise executive power. There’s this theory — Unitary Executive Theory — that basically says when the President pledges to “faithfully execute the laws,” then it means, in effect, if he finds a law he thinks would result in spending money inefficiently, it’s within his power to just refuse to spend money, regardless of the fact that money has been provided for by Congress.

NB. Which brings me to my next question. In your paper, you traced a long line of arguments supporting both impoundment and the Unitary Executive Theory. Do you think those are genuine constitutional legal debates? Or just post hoc justifications for the Trump administration to do whatever they want?

PJ: We’ll find out, I suppose.

I’ve been careful not to use words like unconstitutional in describing what they have been doing because what’s “constitutional” is ultimately whatever the Supreme Court decides. The only thing I will say is that the things they’re doing have always been deemed to be unconstitutional in the past, and that the lower courts have stepped in and supported the challenges to many of these impoundments.

However, we don’t really have a definitive decision by the Supreme Court, but so far, they’ve tended to be pretty deferential to Trump’s claim of additional power.

There’s also a couple cases that don’t involve impoundment that I think will give us some signals. One of them is about President Trump’s authority to impose tariffs [Learning Resources vs. Trump], and the other one has to do with whether President Trump is within his authority to fire people who were appointees of independent commissions [Trump vs. Slaughter].

Historically, commissions haven’t been under the direct control of the President. But it’s really hard to say, in the end, how the courts are going to rule on this. What you can say is these actions are inconsistent with past legal rulings.

So to go back to your question about these arguments, whether these are legitimate legal arguments or not, I guess you’d have to say they’re legitimate legal arguments that are inconsistent with all past legal arguments that have tended to win the day in this arena.

NB: Wow. That’s a really tactful way to put it.

PJ: Hah. I try not to be tactful, so I’ll try to work harder on that.

NB: Thanks, hah. Let’s move on a little bit. Help me understand something that doesn’t quite make sense. The Impoundment Control Act means that the President may delay disbursements by 45 days, but if Congress fails to act within that time frame, their inaction means money has to be distributed. If this is how the law is laid out, how is the Trump administration doing what they’re doing to begin with?

PJ: To move back to not being tactful, I would say they’re not following the law. I mean, that’s the argument, right? That they’re illegally withholding funds without going through the process that is laid out in the law.

What happens in cases like that is the Government Accountability Office (GAO) is empowered, as a representative of Congress, to look into matters where the President may be engaging in unilateral impoundments. It’s supposed to then tell Congress, hey, just so you know, here’s a case where you appropriated money, and the President is refusing to spend it, and he hasn’t followed the procedures.

We don’t know exactly how many of those cases are underway, but we do know the head of the Government Accountability Office, the Comptroller General of the United States, gave testimony to the House Appropriations Committee maybe four months ago, indicating they had 39 investigations of violations of the Impoundment Control Act.

I think about 10 of them have been decided, and it’s a mixed bag of violations, no violations, and partial violations.

Interestingly, the GAO is empowered to bring suit against the administration for illegally impounding funds. And even though they have these investigations underway, and some of them have found they’ve illegally withheld funds, they’ve chosen, at least so far, not to pursue actual legal action against them.

NB: That’s what I was going to ask next. When they find that he has broken the law, what happens? What’s the recourse?

PJ: Well, the GAO is choosing not to pursue the recourse. Arguably, there are people who have been harmed by the refusal to spend money, who would also have standing in court to sue. But that’s not the case.

There was a weird court decision, that’s my opinion at least, sometime in the last few months, that said the GAO was the only entity that could actually bring suit.

To me, that’s an odd reading of the law. It feels to me like having standing to sue is normally related to whether you can identify a party who has actually been injured.

Let’s take the Agency for International Development (USAID), which has been essentially totally abolished, unilaterally, by the Trump administration, as an example. There are nonprofits that used to get money from USAID under appropriations that were essentially canceled. Arguably, they should have standing to sue. But whether they choose to do that or not is another question.

NB: That is a weird decision. For what it’s worth, I agree. But let’s move on a bit. In our interview in April, you mentioned you wondered to what extent the other branches of government would stand up to an executive trying to exert extreme levels of authority. It’s December now. Since then, to what extent have you seen them stand up for themselves?

PJ: Well, certainly relative to the power of the purse, not very much.

What’s happened since the last time we did an interview was the longest shutdown in history. But it was really the Republicans in Congress, because they’re in control, who haven’t been standing up to the President. The Democrats are effectively powerless to do anything.

The one place where Democrats did have power, was appropriations, since it can be filibustered in the Senate. The argument they were making was primarily about subsidies under the Affordable Care Act. But everyone I have talked to says that the other thing really behind this was anger, on the part of the Democrats, that the President had been running roughshod over Congress.

There are also some slight indications that there are limitations to what the Republicans in Congress are willing to put up with. In particular, during the shutdown, the president said he thought the Senate should just get rid of the filibuster. And the majority leader, Senator Thune, said well, we’re not going to do that.

And this may be obvious, but one of the reasons is because they may one day not be in the majority, and if you’re not in the majority, then you would like to have some degree of leverage. So in the short run, getting rid of the filibuster will let you do something right now, but in the long run, it may not be a good thing.

I’m really waiting to see what happens with a couple of these cases we talked about earlier, though. I actually think the lower courts have been quite direct in many cases in standing up to some of the more extreme things the administration is doing.

But the Supreme Court, while it hasn’t made a final ruling on many things, actually let a lot of the administration’s actions go forward through the emergency docket. That’s where basically, a lower court says you have to stop doing this, the Supreme Court says you can keep doing it until we make a decision, and since many of these cases haven’t come up at the level of the Supreme Court, the administration can keep going until they do.

NB: What do you think about the case where Trump fired the head of the FCC? They heard oral arguments on that this week. Could you lay out the potential outcomes, and the stakes, of that case?

PJ: Well, we’ve had a professional civil service since the late 1800s, and I really think what’s at stake here is the notion that we have an independent, relatively merit-based, expertise-based civil service that doesn’t ebb and flow with whoever the president happens to be.

There are a whole set of people who are political appointees, some of whom are confirmed by the Senate and some of whom are not, where there is no question about whether the President has the legal authority to fire.

But the question comes down to people who are not political appointees, and this includes civil servants in some cases, and also includes people who are appointed to independent commissions where the appointment staggers across multiple administrations.

So if the President comes in and sees some of these people and doesn’t like the fact that they’re there, the question is, can he go ahead and fire those people? As opposed to waiting for their terms to expire?

With some of these commissions, by law, there are supposed to be members from both parties. So part of the question is, does he have the ability to get rid of members that aren’t from his own party?

The broader issue is an extension of what we talked about earlier — Unitary Executive Theory — which is how much control does the President have over the executive branch? The argument made by the administration is that the President is the chief executive of the country, and therefore, anybody in the executive branch should be subject to the will of the President.

But if you take this to its logical extreme, it would mean we’re returning to the spoils system.

NB: One last question before we go. We’re spending a lot of time talking about what is and isn’t legal. But at least to me, it seems evident that Trump himself doesn’t start with what’s legal, but rather, what do I want? Which legal questions can I pull, however tenuous, and if there are none, how can I slow walk the courts to buy myself time to get what I want?

So, if the administration doesn’t care what is and isn’t legal, why should we?

PJ: Well…I think we should care, because the founders cared.

When they set up the United States under the Constitution, the thing they were most afraid of, if you go back and read the Federalist Papers, was concentrated executive power. And the reason they were worried about that is because they had just fought a revolution against a king.

I don’t have the quote on the tip of my tongue, but Madison wrote that the power of the purse was essentially the most effective way to constrain the excess of executive power. So they gave Congress the power of the purse for a reason. And anything that moves us in the direction of more executive power, is inconsistent, in my mind, with the separation of powers and the checks and balances that were set up under the Constitution.

We can decide, if we want, that they had it wrong in 1789. There are reasons to believe our system is very inefficient, and it would be more efficient if you just gave the President more power. But in my mind, we should do that intentionally. We should do that because we had a conversation and said well, okay, there have been some problems happening in the last ~236 years since the Constitution was ratified, and one of the big problems is the President doesn’t have enough power.

But I don’t think that should happen because a particular president decides to grab power. It should happen because we are consciously deciding.

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Phil’s article, High Noon for the Separation of Powers, appeared in the October 2025 issue of Public Budgeting & Finance.

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One solution being explored? Saving money by switching to 401(k) style defined contribution (DC) plans.

Around the time of the 2007-2009 financial crisis, five states (Alaska, Michigan, Kentucky, Oklahoma, and West Virginia) experimented with such plans.

Beyond the dollars and cents, though, these kinds of reforms lead to concerns over staffing changes, in some ways a softer version of the impacts caused by the recent federal shutdown or the Department of Government Efficiency’s furloughs. In short, changing public pension plans could have unintended consequences on public employee recruitment and retention.

To inform this debate, researchers examined what happened after Alaska shifted from a DB to a DC system for state educators.

The Rare Natural Experiment

University of Texas at Dallas professor Eugenia Gorina and Georgia Tech PhD Candidate Jen Sidorova analyzed over 19,000 Alaskan educators between 2005 and 2017, and found that the switch significantly increased annual turnover rates, with the risk of separation for an average teacher going up by at least 50 percent over the first decade of employment.

Despite increased teacher attrition, Sidorova argues teacher quality didn’t decline:

“Although more teachers left their jobs after the reform, those who replaced them were, on average, just as qualified as those they replaced [in terms of educational attainment]. In other words, the system experienced more turnover, but not a decline in teacher quality.”

However, public administration professor Robert Bifulco thinks the jury is still out:

“Measuring teacher quality is a difficult thing, but a master’s degree almost never predicts anything about student outcomes. It’s about as consistent a finding in the literature as you can have.”

The social sciences are known for difficult-to-test theoretical frameworks. In contrast to laboratories enjoyed by the physical sciences, policy researchers often have to make do with what’s available.

However, whereas some theoretical predictions conflict, there’s a wide consensus on how switching from DB to DC retirement plans should impact teacher retention.

“There are lots of disincentives to changing jobs when you’d be giving up a large amount of pension wealth,” Bifulco explains. “Your wealth changes a lot under DB conditions, but not if you have a DC plan.”

Alaska’s decision, however, provided a rare opportunity — a natural experiment that’s as close to a laboratory setting as economists get. And Gorina and Sidorova were curious to put theory to the test.

“It wasn’t immediately clear to us what we would find in practice,” Sidorova explains. “Economic theory predicts retention would decrease when benefits became more portable, but we know public sector workers aren’t always informed about their benefits, especially pensions. So we expected some mobility, but we were surprised by how clearly the reform affected teacher exits, and how workforce quality stayed consistent.”

Fiscal Sustainability vs Teacher Retention

Alaska’s hand was forced after years of underfunded pension obligations eroded the state’s teacher retirement system. And unlike the old plan, which rewarded staying until retirement, the new one made benefits fully portable.

The result? Slimmer operating budgets for schools, but also higher teacher turnover.

While relieving pressure, it’s not clear whether the reform was enough to resolve the state’s budget woes, nor whether teacher compensation remained competitive enough to retain the state’s best educators.

In a piece covering ongoing contract negotiations between the Anchorage School District and teachers’ union, journalist Tim Rockey writes:

“Finance officials have said the district faces at least a $75 million deficit this year.” He continues, “In an email, Union President Corey Aist shared that we already face a retention problem. And the longer this situation continues, the more educators will leave for more competitive urban districts in the Lower 48 states.”

Lessons for Other States

Alaska’s experience offers an important case study for policymakers. Sidorova and Gorina’s analysis shows modernizing benefits leads to increased turnover while arguing the shift doesn’t necessarily undermine teacher quality.

For those weighing similar reforms, Bifulco’s perspective is worth considering: “There’s no free lunch here,” he says. Shifting from a DB to a DC program may ease fiscal strain, but it also means accepting higher turnover and the possibility of a less qualified and more transient teacher base.

As states eye the balance between sustainability and student outcomes, Alaska’s story illustrates that public policy decisions often come with painful trade-offs.

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Gorina and Sidorova’s research appeared in the Summer 2025 issue of Public Budgeting and Finance.

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Research conducted by American University scholar Tingli Qu found when local governments pool resources — anything from emergency response to education and public safety — they spend less on service delivery while collecting fewer tax dollars along the way.

But there’s also a welcome twist.

“When counties collaborate, taxpayer dollars stretch further,” Qu begins. ”But because of Nebraska’s rules, cooperation also gives extra property tax authority. This means service costs stay down, while governments still have the fiscal tools to respond [by raising additional revenue] in a crisis.”

Nebraska’s system allows local governments to raise property taxes to fund shared projects. That means counties can save money during good years by spending smarter, while also staying ready for unexpected emergencies.

The Science of Sharing Services

Oftentimes, scholars simply count the number of agreements and draw conclusions from there. But Qu went further, asking a deeper question: “Does where you sit in the collaboration network matter?”

To find out, she analyzed five years of data (2012 - 2017) from every county in Nebraska, mapping who was working with whom, how centrally a county fell within an ILA, and measuring “density” by tallying the number of counties participating in the same agreement.

Her analysis was robust, but in plain terms, it turns out the answer is “yes.”

• When counties enter service agreements with one another, they save money.

• When multiple counties enter the same service agreement, the network gets denser, and they save even more money.

• If counties enter disparate agreements, with a “central” entity playing intermediary between disconnected parties, the central player benefits the most.

Where Do the Cost Savings Come From?

If you’ve studied economics, this will sound familiar — centralizing service delivery leads to cost savings through economies of scale and reduced transaction costs.

Public policy professor Gang Chen, a public finance scholar not involved in the study, likens the logic to a small town sharing with neighbors.

“Rather than maintaining a fleet of vehicles, local governments can pool emergency response resources. The shared approach not only enhances disaster preparedness but also reduces the fiscal burden of maintaining redundant equipment and personnel.”

The analogy goes beyond just emergency response. Governments can consolidate pension or health insurance plans, school districts, police forces, waste management, and any number of other services.

The Nebraska Twist

The state’s fiscal framework adds an intriguing wrinkle. Since 1999, they’ve capped local property tax rates, but it also allows a small additional property tax levy for counties if the funds support ILAs.

That incentive is a second explanation Qu presents for her findings:

“This result differed from my expectations, but county governments, especially those with limited fiscal resources, actively seek to join ILAs because they can get access to additional property taxes.”

The Bottom Line: How Much Money Can We Save, Exactly?

Correlation isn’t causation, and Nebraska’s experience may not extend everywhere. But if we can, in fact, extrapolate from Qu’s data, there are significant savings on the table for both taxpayers and local governments.

Across Nebraska, counties in the middle 95% of her sample varied by +/- 6.8% in per capita revenue, and +/- 7% per capita spending, depending on how centrally positioned they were within an ILA. Similarly, those same counties varied by +/-3.5% per capita revenues and +/- 4.5% per capita spending, depending on their network’s density.

Taken together, that translates roughly to a maximum 10-20% spread between the highest and lowest bounds of her data, suggesting a county’s fiscal health depends not only on how much they spend, but also on how well they cooperate with their neighbors.

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Qu’s research appeared in the November 2024 issue of Public Budgeting and Finance.

Our stories may be republished online or in print under Creative Commons license CC BY-NC-ND 4.0. We ask that you edit only for style or to shorten, provide proper attribution and link to our website. AP and Getty images may not be republished.

“Our budget has become more about preservation than medium or long-term planning,” explains Nicholas Whitener, who co-authored the study with professor James Savage.

Their analysis compares fiscal years 2018 and 2025, periods when Republicans had unified control of government, to study how the budget process functions when a single party controls the outcome.

Despite different economic landscapes at the time, they found a similar pattern; rather than proactively reacting to inflation, rising interest costs, or shifts in economic growth, lawmakers prioritized maintaining existing commitments without confronting politically difficult tradeoffs.

In short? We’re affirming the past, while declining to plan for the future.

Performing Discipline (Without Imposing It)

At a glance, Washington looks busy.

The White House announces priorities. The House and Senate pass budget resolutions. And all the while, pay-as-you-go requirements, deficit limits, and spending caps are still on the books.

But in practice, the study’s authors argue the rules meant to constrain spending have become rituals giving the appearance of discipline, while doing little to enforce it.

“We expected polarization,” Whitener says. “But we didn’t expect that we’re just going to keep adjusting rules that were supposed to bind the budget. They’re getting disregarded based on political will.”

The procedural mechanics of budgeting are still running, but the purpose has been lost over time. Instead of adapting to new realities, Congress creates exceptions to rules in order to hold onto old priorities — tax cuts, defense, and entitlements — while avoiding politically painful choices.

Savage, who has studied budgeting since the 1980s, says the change reflects a deeper shift in how both parties govern.

“You have a presidency and a Congress that want to maintain without going through a lot of strife and struggle, like we’re doing with the shutdown right now,” Savage says. “They’d like to preserve [the budget], and the process allows for that to happen.”

What’s the Limit?

America has never been completely debt-free.

Moreover, no country on Earth is, either. It’s perfectly normal for countries to carry some debt while running deficits in some years, and surpluses in others. Still. Even under that generous framing, at some point, too much is too much.

But where is the limit?

Economic literature analyzes that question through several theoretical frameworks.

“Micro theory says to balance the budget and keep the government out of it,” Savage explains. “Then there’s Keynesianism and supply-side economics, both of which tolerate high deficits for different reasons. We also have modern monetary theory, which tolerates huge national debts, but even then, there’s a threshold. And so the question is, what’s the tipping point?”

Unfortunately, theory can’t point to any single critical point. Ray Dalio’s Principles for Navigating Big Debt Crises includes a compendium of the worst debt disasters of the last 100 years, indicating that losing a major war predicates many debt crises and hyperinflationary events, but that analysis is outside the scope of pure macro theory.

However, Whitener and Savage argue that America’s problem is about more than numbers; it’s about institutions. The budget process still performs the motions of discipline, yet no longer enforces it.

And if the system itself is unresponsive, the question becomes how to fix it.

Options for Reform

One issue is how easily a single party can take control of reconciliation; all it takes is a simple majority in the Senate — 51 votes — to pass a budget. The low vote threshold discourages compromise between parties, and is ripe for abuse by whoever is in power.

Whitener has a favored remedy: “Constitutional reforms would likely be more effective, since politicians would need a super majority to change the rules.”

It’s hard to imagine that passing these days, but there’s at least a precedent; the many EU countries have constitutionally enforced automatic correction mechanisms.

And in lieu of such a sweeping change? Whitener jokes, “If you really want to balance the budget, make congressmen ineligible for reelection if the deficit exceeds a certain threshold. They’d be forced to prioritize fiscal responsibility.”

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Whitener and Savege’s research appeared in Public Budgeting and Finance.

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However, recent research has started to turn to the European Union, where the countries have a variety of different rules designed to curtail government debt. The findings could provide potential guidance for the US as it faces a growing deficit. The authors of the study, Sungho Park and Sewon Kim (scholars at University of Alabama and Indiana University, respectively), found that expenditure rules were the most effective strategy, while balanced budget rules had minimal impact. Furthermore, fiscal rules are most effective at controlling debt when they’re more stringent, based on a stronger statutory basis, and are monitored by an independent body.

Understanding America’s Debt

Most predictions of US federal debt suggest it will continue to grow. This will likely mean a rising portion of future revenue is funneled into interest payments, reducing the government's ability to respond to future economic shocks or address social issues. The role of the US dollar as a world reserve currency and the power of economic growth have prevented the country’s debt sparking an economic crisis. Yet there’s no guarantee this can continue forever.

“The debt is projected to continue growing steadily due to structural factors such as an aging population, rising mandatory spending on programs like Medicare and Social Security, persistent defense expenditures, and ballooning interest payments” says Kim.

However, she is also keen to point out that there’s no universally agreed “magic number” for how much debt a country can take on, and the US hasn’t necessarily crossed a red line.

Besides, there is a tradeoff between maintaining a balanced budget and achieving desirable social outcomes. Jürgen von Hagen, Director of the Center for European Integration Studies and Professor of Economics at the University of Bonn, points out: “It is important to protect public investment from being slaughtered on the altar of expenditure rules. Germany is a prime example: 40 years of allegedly fiscal discipline under conservative governments have resulted in a state of near collapse of public infrastructure and education.”

Policymakers cannot consider debt in a vacuum, although understanding how to tackle it is a necessary starting point.

Turning to Europe for Answers

Given the complexity of decisions related to debt management, taking an evidence-based approach is crucial. While there is limited data on the impact of various fiscal rules within the US, EU countries are the ideal environment to study.

The region has focused on the sustainability of public finances since the early 1990s, and European countries have experimented with various strategies. Plus, since the EU is made up of multiple countries that have each taken distinct approaches, which allows for comparisons.

Kim says: “Some countries have constitutional rules with automatic correction mechanisms; others rely on political commitments or advisory bodies. Such variation offers powerful insights into the institutional ingredients that help fiscal rules succeed—and provides a basis for thinking about how similar mechanisms might be adapted to the U.S. context.”

While the EU and the US are different in many ways, they share enough similarities for the results from Europe to be broadly applicable. “EU member states share many institutional and economic similarities with the U.S.” says Kim. “They operate under structured, democratic decision-making systems with competitive party politics, much like the American federal system. From a fiscal perspective, both the EU and U.S. governments shoulder primary responsibility for large-scale social spending programs, and in turn, carry the weight of rising public debt.”

The Power of Expenditure Rules

Studying EU countries between 2000 and 2021, the research looked at four types of fiscal rules:

1. Balanced budget rules (constraining the size of the deficit)

2. Debt rules (placing explicit limits on public debt)

3. Expenditure rules (limiting spending)

4. Revenue rules (putting a cap on revenues)

The key finding is that a single unit increase in the stringency index of expenditure rules led to a 0.9% decrease in the debt ratio, with greater stringency leading to even more impressive debt reductions.

This suggests that adopting and implementing expenditure rules may be the most effective approach the government can take. However, successful implementation would likely involve more than just setting a number to reduce spending.

Complementary mechanisms like independent monitoring authorities and real-time monitoring were also found to reduce central government debt (by 4.4% and 7.8% respectively). Jürgen von Hagen points out: “Monitoring is of key importance for the effectiveness of fiscal rules. Simple numerical rules invite accounting gimmicks to get around them. It takes human judgment to discover such efforts at evasion. This, in turn, requires sufficient political clout of the monitoring body in the public debate about fiscal policy. EU law now requires all member states to have fiscal policy watchdogs. The German one is a joke - noone even knows about its existence. The Portuguese one - of which I was vice chair and the chairwoman was a very well-known public figure - was quite effective in the years when she was there.”

Meanwhile, the research found no significance for fiscal rules. The authors speculate that this is due to their complexity, or the lack of clarity surrounding them. Achieving a balanced budget is a more ambiguous target than simply reducing spending, and governments may face political or economic pressure to bypass the rules.

The Viability of Effective Execution

While it’s a useful first step to know which kinds of interventions are the most effective, the political feasibility must also be considered.

Kim holds out some hope that the US will tackle its debt issues in the future. “There is a growing and evolving concern about mounting federal debt both inside and outside government. In addition to our study, many others have raised similar concerns and proposed a variety of potential paths forward. Organizations such as think tanks and nonprofits have continued to focus on this issue and have developed several innovative solutions. With such meaningful ideas in circulation, it is reasonable to believe that progress will be made—and that the debt challenge can be addressed over time.”

Another important question is how the government can balance the need to address debt with securing socially desirable outcomes, which requires more than just choosing a number.

The research appeared in issue 45(1) of Public Budgeting and Finance.

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Our stories may be republished online or in print under Creative Commons license CC BY-NC-ND 4.0. We ask that you edit only for style or to shorten, provide proper attribution and link to our website. AP and Getty images may not be republished.

The findings highlight the urgency of addressing the long-term consequences of unchecked spending and raise crucial questions about policymaking horizons.

US federal debt has grown consistently since the abandonment of the Budget Enforcement Act of 1990 in 2002, which put constraints on deficit-increasing measures. The issue is only likely to increase over time, as the high interest rate environment and slower-growing, tax-paying, working-age population make it more difficult to pay down debt.

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Yet since commonly accepted debt estimates understate the true scope of the problem, researchers Jagadeesh Gokhale and Kent Smetters set out to find a more precise number.

Jagadeesh Gokhale, Director of Special Projects at the Penn Wharton Budget Model and an expert in U.S. fiscal policy, explains of his research: “This study brings together expertise accumulated over two decades on data sources, analytical methods, and budget policy frameworks. The motivating factor is to discover and summarize the implications of current budget allocations — that are specified in hundreds of billions of dollars across many federal programs — for the pocketbooks of people across socio-economic classes, those who are alive today, and future generations.”

The $162.7 trillion figure represents 6.6% of the present discounted value of GDP, and would change the economic landscape for future generations, with higher taxes and fewer state benefits.

Researcher Sita Nataraj Slavov, a professor of public policy at George Mason University (who was not involved in the study), said of the findings: “Economists have been warning for a long time that the federal government’s finances are on an unsustainable path. The government has made spending commitments that far exceed revenue, and the usual metrics — such as the current debt or short-term deficit projections — don’t capture this.”

Understanding Fiscal and Generational Imbalance

Policymakers primarily focus on explicit debt (the debt burden held in the present moment). This fails to consider how future debt will be repaid, which is a salient question as the deficit becomes excessive.

Adding implicit obligations offers a fuller measure of federal indebtedness, and therefore a more holistic view of the government’s financial situation. In their study, the researchers called this fiscal imbalance (FI).

As Sita explains: “The current debt only reflects what the government has already borrowed and is contractually obligated to repay. However, the government has made future spending promises that far exceed future revenue. That’s not reflected in the current debt, but it matters because some change will need to be made to bring that into balance.”

The paper also calculated generational imbalance (GI), which measures the imbalance between the federal taxes paid and the transfers received from social insurance programs by current and future generations.

It found that past and current generations are set to receive $62.7 trillion more than they will pay to fund Old-Age, Survivors, and Disability Insurance (OASDHI) programs. Meanwhile, maintaining the current OASDHI policy for those alive today throughout their lifetime will effectively levy significant taxes on future generations.

It’s an approach that most would agree is unsustainable and inherently unfair due to the burden placed on future generations, calling for the need to rethink fiscal policy.

Solutions For The Debt Problem

The new findings outline the current problems of the US government and its increasing debt, coloring fiscal issues in a new light.

Yet the solutions required speak to general principles of fiscal responsibility. Essentially, restoring fiscal balance requires some combination of tax increases and reductions in transfers or federal purchases.

The paper identified three main options:

1. Proportionate increases in all government receipts and reductions in all government expenditures. This would boost lifetime net tax profiles but reduced protections for those alive today and future generations.

2. Increases only in federal taxes. This would disproportionately affect those who pay higher net taxes.

3. Reductions only to all federal expenditures. This would disproportionately affect those who receive the largest net transfers.

There is a trade-off between harming those who most need a social security net and penalizing those who are most productive.

Jagadeesh explains: “The principles to follow are to achieve reasonable equity across current and future generations, provide a reasonable social safety net, and promote economic growth by maintaining low net tax burdens on households. A first step would involve distributing the adjustment burden for reducing the existing fiscal imbalance across as many individuals and generations as possible.”

A major reason that the government hasn’t placed enough emphasis on fiscal responsibility so far may be down to its short-term bias.

The Congressional Budget Office publishes budget projections for the next ten years, along with Social Security and Medicare actuaries. Since the reality of fiscal consequences go beyond this decade-long period, the current system results in a low chance of Congress adopting fiscal adjustments to address the entirety of its implicit federal obligations.

There’s also the fact that the hard fiscal changes needed tend to be inherently unpopular among voters.

Sita says: “Politically, it’s a difficult issue because restoring fiscal sustainability will require either cutting large, popular programs like Medicare and Social Security or raising taxes on the broader public, not just those at the top. These are hard choices, but something needs to be done.”

Sketching A Change In Thinking

While the figures identified in the research might suggest a bleak financial future for our children and grandchildren, Jagadeesh holds some hope that a better understanding of the current situation could change attitudes.

He says: “Federal tax and spending policies that emerge from the preferences of today’s voters and policymakers devote insufficient attention to their effects on future generations, presumably because the relevant information is not easily available. The hope is that revealing those effects may temper political incentives to adopt policies that could cause a vicious downward economic spiral.”

While the problem is rooted in economics, the path to a more sustainable future may well depend on a fundamental shift in public and political mindsets rather than solely on changing fiscal policies.

The research appeared in issue 45(1) of Public Budgeting and Finance.

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Our stories may be republished online or in print under Creative Commons license CC BY-NC-ND 4.0. We ask that you edit only for style or to shorten, provide proper attribution and link to our website. AP and Getty images may not be republished.

It’s been hard to keep track of everything the Trump administration has been up to recently, from tariffs to executive orders. While the possibility of tax law changes hasn’t been the focus of the media frenzy, it’s another policy that would have major implications. With his congressional majority in place, most observers believe President Trump will seek to renew key provisions set to expire from the Tax Cuts and Jobs Act of 2017 (the signature policy achievement from his first term).

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However, the budgetary impact of renewing these policies will face headwinds from the substantial government deficit and rising interest rates. I caught up with Martin J. Luby and Michael Granof at the University of Texas at Austin to discuss the important role of tax expenditures in the federal budget and how they are in need of reform. Luby and Granof, along with Matthew Zachary, recently collaborated on “An Essential Component of Any Policy Toolkit to Address Federal Budget Deficits: Tax Expenditure Reform.” Granof is Professor at the McCombs School of Business, and Luby is Associate Professor at the Lyndon B. Johnson School of Public Affairs.

Note: This transcript has been lightly edited for clarity.

Sarah Bromley (SB): I’m sure many people are familiar with the TCJA and looking forward to hearing your thoughts on everything that is happening in the government right now. But to avoid any confusion, maybe you could start by giving a quick breakdown of what exactly tax expenditures are, and why they’re so relevant for today’s political environment?

Martin Luby (ML): Federal tax expenditures are losses in federal tax revenue associated with provisions in the tax code that allow for a special exclusion, exemption, or deduction from gross income, a tax credit, preferential rate of tax, or tax deferral. These provisions reduce the amount of taxes owed by taxpayers, resulting in an overall reduction in federal tax revenues. Many people have identified curtailing tax expenditures as a source of new funds to increase federal spending, shrink the deficit, or reduce other taxes.

Michael Granof (MG): It’s also worth noting that tax expenditures for 2025 are estimated by the U.S. Treasury to total $1.569 trillion (although, owing to taxpayer behavioral changes, if various tax expenditures were to be eliminated, the impact on the deficit would almost certainly be less).

SB: Given the size of tax expenditures, I can see why they might have attracted some scrutiny. But is there any particular reason that tax expenditures are a popular target for reform?

ML: Tax expenditures are often criticized as lacking transparency and proper oversight. They exist in the tax code, which is rarely changed, rather than being budgeted via the appropriations process (which theoretically needs to be reviewed every year). And they lack proper oversight since tax expenditure programs are usually overseen by the IRS rather than federal agencies that have functional experience in the area of tax expenditure. The lack of oversight leads to tax expenditures remaining in the tax code long after they have achieved their stated purpose. Tax expenditures have also been criticized on equity grounds as mainly benefiting higher-income taxpayers.

MG: Tax expenditures are, in economic substance, subsidies. Some of these, especially the larger ones such as employer contributions for medical insurance, can better be provided in the form of tax expenditures rather than direct appropriations. Hence, we most certainly don’t advocate for the elimination of all tax expenditures.

SB: You mentioned something interesting there about tax expenditures being criticized on equity grounds. Why is that the case?

ML: Since many of the largest tax expenditures are in the form of deductions, which reduce a taxpayer's taxable income, higher-income taxpayers who face higher marginal tax rates gain more from the deduction than taxpayers with lower marginal tax rates. Thus, a tax system that includes deductions without or with limited tax deduction caps makes the overall federal income tax system less progressive (i.e., less equitable), as measured by the effective tax rate of various taxpayers.

SB: So it seems like tax expenditures have a place, but they can often be wasteful. Can you give some examples of tax expenditures that didn’t serve their intended purpose, yet persisted?

ML: Tax subsidies for oil and gas exploration and drilling — even as oil and gas shortages have turned into surpluses. In this case, the tax expenditure may have initially served its purpose, but the tax break has persisted longer than necessary to achieve the policy goal. We discuss this in more detail in our paper.

SB: Now we’ve covered some of the basics, I’m wondering where exactly the Tax Cuts and Jobs Act (TCJA) of 2017 comes into this. What impact did the Act have on tax expenditures and the budget as a whole?

ML: The TCJA simplified the tax code in certain ways — for instance, an expansion of the standard deduction reduced the number of taxpayers who itemized their deductions. It eliminated and reduced certain tax expenditures and introduced some new ones, and it slightly changed the number of tax expenditure categories. As a result of TCJA 2017, the amount lost in federal tax revenue (i.e., the size of tax expenditure budget) declined modestly after the passage of the law.

SB: Got it. And if Trump were to renew the TCJA, what impact would you expect it to have on tax expenditures, the federal budget, and the deficit?

ML: Republicans in Congress are scouring the federal budget to find ways to pay for the extension of TCJA 2017. This includes eliminating or reducing special preferences in the tax code as a way to raise revenues. At the same time, the Trump administration has signaled interest in expanding certain tax preferences, like increasing the deduction for state and local taxes (SALT) and instituting new tax preferences, such as no taxes on tip income.

There would be some difficulty eliminating or reducing existing special tax breaks, while it would be politically popular to expand existing measures like SALT and institute new provisions (such as no tax on tips). Given this, one could see momentum towards greater tax expenditures and larger budget deficits once the dust clears. However, Republican deficit-hawks in the House have influence given the thin margins among the Republican majority, which may both rein in attempts at expanding tax expenditures and force efforts to curtail existing tax breaks.

SB: So not all Republicans agree on how to approach tax expenditures. You mentioned in your paper that TEs are a bipartisan issue, and that reforming them would suit the interests of both parties. How feasible do you think it is to achieve bipartisan support for tax expenditure reform currently?

ML: Curtailing tax expenditures can be viewed as both cutting spending — since tax expenditure is simply a form of spending — and increasing taxes, since reducing or eliminating tax expenditures results in a greater tax bill to the taxpayer. This could form the basis for bipartisan support for deficit reduction since both Republicans and Democrats can credibly claim they’re using their preferred means. Republicans would be cutting spending to address the federal budget deficits, while Democrats would be reducing tax breaks for special classes of taxpayers and upper-income households to achieve the same goal.

SB: That makes sense, though I imagine it’s easier said than done. Do you anticipate that it would be difficult to gain political support to eliminate or scale back some of the most popular tax expenditures?

ML: It would be very difficult to scale back many of the largest tax expenditures, such as the mortgage interest deduction, charitable contributions, and child tax credit. Moreover, as we note in the paper, some of this type of spending may be best done via a tax expenditure rather than through direct federal appropriations, like supporting charitable organizations through tax deductions for charitable donations.

SB: I’m definitely getting the picture that this is an issue to be approached delicately. We’ve touched on your recommendations for reforming tax expenditures already, and I know it’s something you discuss in more detail in your paper, but maybe you could summarize your core ideas?

ML: We are simply suggesting to reduce or eliminate the least efficacious ones, as well as creating a formal process that regularly evaluates tax expenditures to ensure they are meeting their goals. Such a regular evaluative process would aim to reduce tax expenditures over time.

MG: At the very least, whenever a tax expenditure is incorporated into the tax code, it should be accompanied by a sunset provision to ensure that it will have to be reviewed and explicitly voted upon again after a specified number of years.

SB: Hopefully the Administration is reading this! You also say in your paper that you believe the federal government should provide subsidies through direct grants rather than special tax provisions. Can you explain why this would be a better approach for the federal budget?

ML: There are three reasons. Firstly, direct grants typically require reappropriation every year, whereas once a tax expenditure is incorporated into the tax code, it remains in the code until explicitly removed — which is often never. Direct grants can also be more readily targeted to specific industries or narrow classes of taxes that satisfy the goals of the subsidy, and they’re typically administered by the federal agency most closely associated with the nature of the grant. Meanwhile, tax expenditures fall under the purview of the IRS, which is less qualified to ensure that those who take advantage of the special tax provisions are truly qualified to do so.

SB: Before we close things off, there’s just one more thing I’m curious about. It’s been a few months since you last revised your paper — is there anything you would want to add-on if you wrote it today, based on recent events with the Trump administration?

MG: One thing to note is that since the presidential election, Congress has begun to scour the tax code and tax expenditures to find "pay fors" for the extension of the TCJA, as well as other policy priorities of the Trump administration. Unfortunately, they are looking to curtail tax expenditures not to address the federal deficit (which was the thrust of our paper), but rather to only partially offset the cost of extending tax cuts. This will have the effect of exacerbating the negative long-term federal budget outlook.

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