Governments weigh value of trust in tougher financial times

Officials need to improve at communicating the value of government services to the public; Illinois should consider taxing retirement income or services; property tax reform has some pitfalls; and local governments may start sprouting budget holes as American Rescue Plan Act dollars run out.

Those were among the takeaways from an event co-hosted by the Civic Federation and the Federal Reserve Bank of Chicago on Wednesday. 

Kil Huh, senior vice president of government performance at The Pew Charitable Trusts, pointed to bond measure passage rates as one gauge of voter trust.

“Public trust is a good measure of where we are directionally heading, but action and results are a more effective measure of the relationships individuals have with institutions,” Huh said. “Small towns are equally as troubled as large municipalities; they just have different kinds of problems, at different scales.”

The moderator of Huh’s fireside chat, Carol Marin, a prominent retired Chicago journalist, raised the point that Illinois, with 8,900 units of local government, leads the nation and outpaces even the runner-up, Texas, which has 6,600.

“Even with as many local government entities as Texas has, they are able to push through spending packages, bond issuances — I think about three out of four bond issuances at the local level have been approved by the voters” in recent years in Texas, he said. (In the May 3 elections, local bond passage rates were even higher, around 86%, according to Texas Bond Review Board data. Illinois does not appear to offer a comparable public database.)

The event, “Taxing Times, Smarter Strategies,” included two panels of tax, policy and budget experts.

One panelist, Kim Murnieks, director of the Ohio Office of Management and Budget, said Ohio learned from the Great Recession and used federal pandemic relief funds to invest in integrated data systems. She’s proud of how the state used its American Rescue Plan Act dollars, including by tagging some general fund monies as one-time dollars when officials noticed the temporary surge of sales tax revenues, she said. 

But other governments didn’t do that.

“I’m actually worried about some of our local governments, especially schools and some of our counties and municipalities, where they used some of their ARPA dollars to fund ongoing expenses — teacher salaries and law enforcement salaries,” she said. “I think we’ll start seeing… some budget holes at the local level, including at the school district level.”

Sophia DiCaro, executive director of the Utah Office of Planning and Budget, said employment opportunities and population growth there are driving housing prices up.

“One of the things we’re seeing right now is… (governors are) addressing affordability, particularly housing affordability,” said Shelby Kerns, executive director of the National Association of State Budget Officers. 

That includes property tax reform, she said. But “there’s not always enough replacement when there’s been property tax reform. We’re seeing schools already feel like things are tight, because their federal dollars have gone away.”

Local governments have built around the revenue streams they have, and shifting additional responsibilities onto them could throw off the delicate balance, said Jared Walczak, vice president of state projects at the Tax Foundation.

“Even if you provide them with an additional local tax, distributionally, all of them will be different,” he said. “Governments have built around these expectations. Some of these proposals — in some cases, like, let’s eliminate the property tax, and replace it with who knows what… path dependency matters a lot, especially for local governments.”

Civic Federation President Joe Ferguson kicked off the event by saying, “Whenever you hear ‘fiscal crisis,’ you should be thinking ‘governance crisis.’ Those two things always go together, especially here.”

Marin seconded that with the observation that “for many Illinoisans… the notion of public trust is an oxymoron.”

She asked Huh, “Is that where the revolution then happens? The public trust revolution, if we can call it that? It’s got to be at the ground level of local governments, versus the federal government?”

Huh remains hopeful about “leadership at the state and local level… they have to deliver for their residents,” he said. “One of the things that I also appreciate from state and local governments is that they tend to learn from each other.” 

States like Ohio, Utah, Oregon, Tennessee, Georgia and North Carolina have built credibility with their taxpayers in recent years, he said.

California excelled during the Great Recession — delivering results for voters after passing a tax increase earmarked for education, then passing a millionaire’s tax on the strength of the public trust it had built — but then floundered during the pandemic, struggling with unemployment aid, he added.

Huh told The Bond Buyer “I don’t know if a revolution is necessary,” but the keys to building trust are that local governments generate results that are important to their taxpayers; that they be very consistent in their approach to problem-solving; and that they communicate effectively the progress they’ve made.

Nowadays, people tend to focus on social media or direct-to-consumer communications, he said, but he also tracks nonverbal signals: how well are local governments delivering on taxpayers’ expectations? 

“That results-based approach is key to building trust over time,” he said. 

Communicating effectively with voters is also not always an easy task when legislation is long and complex. The Bipartisan Infrastructure Law was one instance when leaders could have been clearer about how investments were helping people, he said.

Huh also pointed to a ballot measure in Louisiana that would have repurposed reserves to pay for tax cuts, among a laundry list of other things, such as cutting funds that support education and transportation programs. It got 35% of the vote.

“Part of what might have happened there is there was almost too much in the bill,” he said. But also, “taxpayers are smart,” he said. “They know what they’re getting for their money. And when they see roads that are paved and are functioning well, or they see public transportation that’s working and being invested in, they see healthcare being delivered… they know that their government is working for them.”

Illinois could have a local income tax to fund government services, because some of its neighboring states do, but what would be even better is if the state would pay for more education, said Kim Rueben, senior advisor at the Lincoln Institute of Land Policy.

Rueben also said, “A lot of states basically tax retirement income like other income, and you could do that in Illinois.”

The overall sales tax base that officials are targeting in Illinois is narrowing, said Dr. Paula Worthington, senior policy advisor at the Civic Federation. She advocated broadening the base to include services, which would then allow for the rate to come down.

“Some types of taxes are more efficient than others,” the Tax Foundation’s Walczak said. “You do have more efficiency on well-designed consumption taxes than even well-designed income taxes. You have even greater efficiency on property taxes. … The property tax has the least economic distortions, it has the least adverse effect on growth.”

Whatever tax strategies states adopt, the next few years may be challenging for state and local governments, said NASBO’s Kerns.

“We have elected officials who have only known the boom dollars,” she said. “I’ve been asked to speak to a lot of those local government groups — whether it’s even groups for governors, legislators, local government — and… pre-January, they were all asking the same question: When is our next big bucket of money coming?”