The Choice for Scrutiny in Local Revenue Decisions:

A Case for California Counties 2001~2010

Sanghee Park, Seoul National University (selotus@gmail.com; 82-10-8698-0417; 1-213-505-4769)

Abstract
This study examines what drives local governments to choose to rely more on alternative sources
to increase revenue in the context of California counties between 2001 and 2010. By focusing on
nontax revenues such as fees and charges, fines and forfeits, this paper seeks to understand the
strategic behavior of local governments under financial stress and political constraints. Fixed
effects estimation on the two types of dependent variablesthe ratio and the dollar amount
shows the importance of the economy variable in the county revenue decisions. The ratio and the
amount of fees and charges, fines and forfeitures increases when the county unemployment rate
rises. The ratio of nontax revenues also differs across local demands and characteristics such as
county median income and willingness to pay taxes. The intergovernmental aids and the
percentage of Democratic votes in the gubernatorial elections have significant effects on the share
of nontax revenues, yet signs differ between the ratio and the amount models.

Introduction
Public sector economics have focused on how to spend money, but the question of how to earn it
becomes much more important in times of economic stress (Stiglitz 2000). Under chronic financial
stress, decreasing state budgets have left local governments few options in revenue decisions
cutting spending, raising taxes, and finding new sources of revenue (Wu 2009). Reducing the
existing level of expenditure could be a direct response from the localities in the face of shrinkage,
but it is certainly neither particularly viable nor politically popular. Cities and counties are more
inclined to cut spending rather than raise taxes because it causes less resistance from residents
(MacManus 1993). Meanwhile, raising local property tax rates has been more realistic and easier
because such taxes are already a main source of local revenue. However, local revenue decisions are
always constrained by state controls as well as competition among other local governments
(Pagano and Johnston 2000). Moreover, such measures have become more difficult to pass since
the tax and expenditure limitations (TEL) in 1970s, such as California's Proposition 13 in 1978.
For these reasons, neither reducing spending nor raising taxes has been a popular option
(Neimand and Krimm 2009: 22). Now local governments are desperate to exploit new sources of
revenue in order to survive in local competition for economic efficiency and better services. There
has been a marked change in the source of government revenues (Stiglitz 2000: 44). It is time for
local governments to think about how to raise revenue without much adverse effect on the
economy. However, scholarly attention to revenue politics has been relatively thin for several
reasons (Royed and Borelli 1999; Blom-Hansen et al. 2006: 446).
Under fiscal federalism, there is a division of economic responsibilities between the federal,
state, and local governments (Stiglitz 2000: 728). Local governments have more responsibility for
allocating resources in programs, while state governments are required to take responsibility in
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distribution and stabilization (Musgrave 1959: 179-83). Cities and counties may react to fiscal
stress differently, given the different resource bases, functional responsibilities, authorities, and
local needs (MacManus 1993; Neiman and Krimm 2007). Accordingly, revenue decisions also vary
significantly among cities and counties (Pagano and Johnston 2000).
County governments operate not only as administrative arms of the state government but
also as direct providers of local services (Ostrom and Ostrom 1988; Berman 1993; Berman and
Salant 1996; Benton 2002a, b; Chapman 2003; Choi et al. 2010). The role of county governments
has been significantly expanded in recent years (Benton 2002a; Streib et al. 2007), which allows
them a wide range of choices in services or programs as well as in revenue decisions (Morgan and
Kickham 1999; Sokolow and Detwiler 2001; Streib et al. 2007). Demands for more services and
devolution to local governments, coupled with the worsening economy, may accelerate this trend.
Counties are more likely to rely on revenue source-related strategies than cities and school districts
(MacManus 1993: 204); however, the studies on county responses have been limited (e.g.,
MacManus 1993).
This study examines what drives local governments to choose to rely more on alternative
sources to increase revenue. By focusing on nontax revenues such as fees and charges, fines and
forfeits, this paper seeks to understand the strategic behavior of local governments under financial
stress and political constraints. Specifically, we investigate the factors determining dependence on
nontax revenues in the context of California counties between 2001 and 2010. We also consider the
difference between the economic incentives levying user fees and charges and hard measures such
as fines and forfeitures.
We claim that counties facing under economic hardship will be more dependent on nontax
revenues associated with incentive tools, such as fees and charges, fine and forfeitures, in delivering
local services under state oversight. Among the various tools of government, decision-makers in
3

local governments, such as county supervisors, may choose to specify monetary charges for certain
activities and/or crack down on fraud as a way of securing the budget, increasing services without
more taxation, and achieving equity and equality. Although the portion of fines and forfeits is small
in local revenue shares, it is an important question as the decision will affect individual and
organizational behavior in the long run.
Local choices for economy and scrutiny will likely vary according to several factors. This
study explores the impact of the economic, political, institutional, financial, and local factors closely
related to local revenue decisions. The hypotheses are tested across 58 counties in California over
10 years between 2001 and 2010. Data will be drawn from various sources such as the Counties
Annual Report, the Bureau of Labor Statistics, RAND California, the California Elections Data
Archive (CEDA), and the Public Policy Institute of California (PPIC). The dependent variable will be
measured by the ratio of the amount of fees and charges, fine and forfeitures to the total revenues.
The model will include variables that explain economic conditions, such as unemployment
rate and county residents expectations for 12 months; political factors as ideological preference,
political support for the governor and Democratic vote shares in gubernatorial elections in every
four years; institutional variables such as county home rule and Proposition 1A; financial factors
such as intergovernmental revenues from federal and state government and property tax ratio out
of total own-source revenue; and local demand factors such as county wealth measured by median
income, willingness to pay taxes, and interest in political issues on the part of county residents.

County Revenue Decisions in Times of Fiscal Crisis

County revenue structure has changed significantly due to the increasing role of counties as
service delivery agents and to institutional changes such as the TELs and Proposition 13. The tax
and expenditure limitations (TELs) and Proposition 13 decrease dependence on local property
taxes while prompting local governments to seek out alternative sources of revenue (Carroll and
Johnson 2010). Nowadays, local governments are desperately seeking revenue (Altshuler et al.
2010: 331), but they are in the difficult situation that state governments under budget pressures
are more likely to transfer program responsibilities without funding. As local governments are now
resistant to unfunded state mandates (Berman and Salant 1996), local revenue decisions are
becoming the fiercest policy battleground of state-local relations. (Krane et al. 2004: 515).
Property taxes are the main source of local revenue. However, raising property tax rates is
not always possible because of institutional constraints such as tax and expenditure limitations
(TELs). Since 1970s, local autonomy in property taxation has been seriously limited (Solokow
2000; Krane et al. 2004). In California, for example, Proposition 13 in 1978, seeking to protect
homeowners, forbade local officials from setting their own property tax rates. Moreover, elected
officials in the interlocal competitions for residents, employment, and businesses (Tiebout 1956;
Peterson 1981) may be reluctant to raise property tax rates as the unpopular measure creates
political risks (Krane et al. 2004). Politicians are sensitive to public opinions on local expenditures
and revenue (Soroka and Wlezien 2005).
Due to the institutional constraints and the diminishing importance of property taxes as a
local revenue source, local governments seek alternative sources such as nontax revenues from fees,
licenses, charges, fines, forfeiture, and miscellaneous revenues (Krane 2004: 523-24; Carroll and
Stater 2009). In times of fiscal crisis, state governments prioritize federal programs and services
(Sosin et al. 2010), which allows local officials in cities and counties a considerable amount of fiscal

discretion (Krane et al. 2004). In particular, the State of California permits wide autonomy to local
governments in the structural, programmatic, and fiscal areas (Sokolow and Detwiler 2001: 59).
California is an appealing context for examining local choices on revenue sources. In
addition to the significant diversity among California counties, local service demands and
population keep growing. California counties have a wide variety of responsibilities in local demand
as well as state mandates. During the economic downturn since the early 2000s, California counties
have experienced both an increase in state mandates and local demands and a decrease in taxable
transactions and intergovernmental aids. They spend relatively large amounts of money compared
to counties in other states, yet they are much influenced by the states fiscal decisions (Neimand
and Krimm 2009).
The state has long suffered from continuing fiscal constraints. Californias unemployment
rate has been always higher than the national average, even when the state economy was strong
(PPIC 2009). Since the early 2000s, California has suffered from a bubble-burst caused by the stock
market decline (Musso et al. 2006). Since Proposition 13, the state-local fiscal conflicts in California
have intensified, and state-local antipathies become more severe in times of economic strain
(Neiman and Krimm (2009). Even Proposition 1A in 2004 failed to resolve a number of problematic
aspects of the fiscal system (Barbour 2007).
Despite some distinctive features, however, Californias revenue and spending patterns are
not that different from those of other states, which allow us to find implications for local
governments in other states (Cain and Mackenzie 2008). As in other states, California's reliance on
nontax sources such as fees, charges, fines, forfeitures, and other miscellaneous revenues has been
growing significantly (Shadbegian 1999; Cain and Mackenzie 2008). There is reason to expect a
similar pattern to hold in other states.
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Although local revenues are mostly from taxes such as property taxes, sales taxes, and
income taxes, the importance of nontax revenues has become more evident in recent years.
Significant amounts of revenues are from nontax sources such as fees, charges, fines, and forfeitures.
The growing reliance on other sources of revenue leads to revenue diversification, which has been
regarded as a desirable direction for local finance. Since Proposition 13, local governments have
tried to diversify their revenue structures in order to decrease reliance on property taxes and
increase flexibility and stability during economic downturns. Quite a number of studies in local
finance have investigated the effect of revenue diversification, although it is not always clear and
depends on the types of services provided by local governments (Carroll and Johnson 2010;
Mikesell 2007). Some argue that revenue diversification leads to stability in revenue structure
(Carroll and Stater 2009; Carroll 2009; Jordan and Wagner 2008), while others in economics focus
on higher tax burdens for fiscal illusions (Wagner 1976; Hendrick 2002: 53). Hendrick (2002)
shows that revenue diversification lowers tax efforts when controlling for other factors. However,
revenue diversification itself is not the objective that local governments are pursuing; rather, it is
an outcome of the local governments efforts to find alternative sources of revenue. Although the
increasing reliance on other sources coincides with decreasing property tax shares, it is more direct
to see local efforts toward alternative sources in the share of the revenue from fees, charges, fines,
and forfeitures.

Hypotheses
This study focuses on the local decisions for increasing reliance on fees and charges, and fines and
forfeitures as a new source of revenue. This study attempts to identify whether economic hardship
prompts strategic behavior to rely more on pay-use systems and more scrutiny in local services.
7

Specifically, counties under economic stress are more likely to raise revenues from (1) fees and
charges to earn money without severe resistance; and (2) fines and forfeitures to save money by
improving oversight on waste and fraud (Cain and Mackenzie 2008).
The two broad categories of solving public sector problems are market-based solutions and
direct regulation (Stiglitz 2000: 223). Economists tend to believe that market-like mechanisms
ensure more efficient behavior (Stiglitz 2000: 233). The research that specifically addresses the use
of user charges presents a set of findings that relate to economic efficiency (Downing 1992; Sun and
Jung 2012). Although the reliance on nontax revenue may be driven by the economic incentive of
local governments, we assume that the reliance on fees and charges is based on a different logic
from that of fines and forfeitures.
The potential of user charges as a new source of revenue has been discussed in several
studies. Fees and charges can be useful when it is possible to exclude those who benefit from the
good or service from the non-users. Under the benefit principle those who benefit bear the costs,
fees and charges are a relatively easy and equitable way of raising revenues (Stiglitz 2000: 140).
User charges also have revenue potential with economy-enhancing effects on local expenditures,
especially in decentralized institutional arrangements (Bierhanzl and Downing; Oates 1994: 131;
Jung and Bae 2011; Sun and Jung 2012). Several factors affect reliance on user charges in county
governments such as TELs (Shadbegian 1999; Mullins and Joyce 1996), intergovernmental revenue,
functional changes, changes of expenditure mix (Tannenwald 1990), and county government
structure (Benton 2003). However, user charges are limited to the specific services and also comes
with equity issues (Pearson 1981; Sun and Jung 2012). They engage inefficiencies or distortions like
under-consumption of the relevant good or service, especially when government charges more
money than the good or service costs (Stiglitz 2000:130).

On the other hand, fines and forfeitures have received little attention, mainly due to their
negligible share of local revenues. Yet the amount, not the ratio, of the money has been increasing
continuously and rapidly. Fines and forfeitures fall into the category of regulation and punitive
monetary sanction, which is the essence of government activities. The primary purpose of levying
fines and forfeitures is to reduce social costs associated with negative behaviors, but it also is
associated with economic benefits related the control (for more information, Becker 1968).
Although fines and forfeitures are nontax revenues category, they are equivalent to corrective taxes,
sometimes called Pigouvian taxes (Stiglitz 2000: 277). The choice for more scrutiny may be related
to economic incentives rather than sanction or coercion itself.
The revenue potential of these alternative sources comes from the possibility of inter-fund
transfer. In particular, user fees are to be used for the specific functions in principle, but they can be
transferred to the general fund with the approval of city councils. Although it involves some
transaction costs, the money from user fees offer a great revenue opportunity for local
governments.
We set forth an array of hypotheses that the ratio and the amount of fees and charges, fines
and forfeitures is affected by the economic, political, institutional, financial factors as well as local
demand and characteristics. We are interested in determining the relative impact of the
independent variables in the equation, rather than using the model for predictive purposes.

Economic factors: Unemployment rate, county residents expectation of economy in 12

months
The economy is an essential part of local finance. In times of economic hardship, we expect
more entrepreneurial reactions from county governments that increase or at least maintain own9

source revenue in order to offset the decrease in the state budget. Under such conditions, counties
are more likely to adopt entrepreneurial revenue-raising strategies in accordance with the ones
employed in the private sector. More specifically, they tend to more actively exploit nontax revenue
bases as a new source of county revenue that fits individuals economic incentives. This seems to be
so mainly because local officials will try to find ways to cover the losses in property tax shares or
intergovernmental aids with compensating strategies such as bonds, delaying and canceling
payments, encouraging more businesses, and finding new sources of revenue (Cain and Mackenzie
2008; MacManus 1993).
Although we are ready to accept the importance of the economy, it is not clear what aspects
of economy affect local finance in what directions. Based on the theoretical grounds, elected local
officials with a political incentive to satisfy taxpayers will attempt to create more scrutiny as they
expect it to be jibe with public concerns on waste and fraud. Although not without resistance, there
is strong public opinion favoring user charges, especially under fiscal stress (Downing 1992: 525).
Thus, county residents expectations on the economy are also likely to affect the political incentives
to increase reliance on nontax revenues.
Hypothesis 1: The ratio and the amount of nontax revenues will increase when the economy
worsens.

Political factors: Democratic votes in the gubernatorial elections, county residents

support for the governor
According to Stein (1999: 27), politics at the subnational level are not associated with
meaningful changes in municipal public policies. The fiscal federalism theories expect institutional
factors to have a more decisive influence than public preference. Furthermore, politicians,
regardless of party ideology, may not take a positive attitude in revenue policy as it is unpopular
10

with voters. This taxation by inertia argument and the political costs of taxation are evident in
political science research (Rose 1985). Because local governments are constrained by state
regulation, political preference of local residents may not be a decisive factor and there may be no
room for local governments to implement their revenue policies in accordance with ideological
preference.
Along with institutional changes, nevertheless, various features affect the budgetary process,
both expenditure and revenue, such as the interactions of past policies, the changing roles of
participants, the influence of theories of public management, political and economic ideologies, and
pragmatic reactions to the societal environment. (Caiden 2010: 204). Therefore, politics and
political bargaining among parties with different ideologies could be one of the significant factors in
local revenue decisions (Carroll and Stater 2009; Blom-Hansen et al. 2006). Revenue policy can be
categorized in a redistributive policy area, which is well suited for ideological positioning (BlomHansen et al. 2006: 445-446; Boyne 1996: 132-135).
This study expects that the political ideological preference of county residents will affect
revenue politics. Supporters of leftist or liberal governments are believed to be more receptive to
revenue-raising strategies through taxation, while advocates for conservative governments are
reluctant to raise tax rates and favorable to tight fiscal policy. Accordingly, we expect that liberal
counties are more willing to increase taxes and less likely to exploit alternative sources of revenue
to make up for the lack. At the same time, counties with more supporters for Democratic governors
are more likely to take a proactive attitude in raising revenue from alternative sources. Counties
with higher support for the governor may be unwilling to raise taxes that negatively affect their
popularity; however, the political costs involved in raising taxes will be lower when county
residents are more liberal and supportive of the current governor. In Hypotheses 2 and 3, we

11

expect a positive relationship between reliance on nontax revenue, liberal/Democratic ideological

preference and political support for the governor.
Hypothesis 2: The ratio and the amount of nontax revenues will increase when counties have
liberal/democratic ideological preference.
Hypothesis 3: The ratio and the amount of nontax revenues will increase when counties are
more supportive of the current governor.

Institutional factors: Home-rule status, Proposition 1A in 2004

Although we cannot include important institutional changes such as the TELs or Proposition
13 in 1978, other institutional variables such as home-rule status and Proposition 1A in 2004 will
be included in the model.
City and county governments with charters have more autonomy in structural, functional,
and fiscal areas (Benton 2002b: 473). Although the effect seems more limited in counties (Benton
2002b; Sokolow and Detwiler 2001), it is reasonable to assume that chartered counties are more
responsive to the needs of county residents (Benton 2002b; Chapman 2003; Choi et al. 2010). In
particular, Benton (2003b) suggested that counties with home-rule tend to value administrative
efficiency highly, so that they are more willing to rely on fees and charges that adhere to the
benefit-based principle. Nelson and Svara (2012) also noticed the importance of government forms
in adopting innovative practices in municipal governments.
The passage of Proposition 1A in November 2004 was a result of local governments'
struggle for fiscal autonomy (Barbour 2007). There have been several attempts to modify the statelocal relationship and to limit the states fiscal interference (Misczynski and Mejia 2011; Danielson
and Mejia 2011). Proposition 1A was intended to protect local government budgets from being
12

transferred to the state government. With a two-thirds vote of both the state senate and state
assembly, local property taxes can be shifted to the state, but the state cannot change local sales tax
rates and or their allocation (Neiman and Krimm 2009).
Hypothesis 4: The ratio and the amount of nontax revenues will be positively associated with
institutional changes granting fiscal autonomy to local governments.

Financial variables: Intergovernmental revenue, dependence on property taxes

The largest share of county revenue comes from intergovernmental aid. Intergovernmental
aid to local governments is an important tool used by the federal and state governments to direct
and coordinate public policy across the nation (Clark and Whitford 2011). With a flypaper effect,
intergovernmental revenue creates positive effects on spending. Intergovernmental revenue also
helps to improve the efficiency, equity, and stability of the subnational government sector (Fisher
2007). A number of previous efforts have been made to identify the effect of shrinking
intergovernmental aid to local economies. For example, Wu (2009) argues in a study on municipal
property taxes that municipal governments respond to decrease in intergovernmental aid by
increasing property tax rates. In addition to raising revenues from property taxes, we expect
counties will try to increase revenues from nontax sources.
The local property tax is the most important single own-source tax under the discretion of
local governments. The property tax ratio out of total own-source revenue is often used to measure
dependence on property tax base (Neiman and Krimm 2009), tax visibility (Carroll 2009), and
revenue diversification (Pagano and Johnston 2000). According to Pagano and Johnston (2000:
163), revenue diversification as measured by the property tax ratio is negatively associated with
the property tax rates because sales and income taxes respond relatively quickly to local demands.
13

Since the reliance on local property taxes varies substantially (Wu 2009: 79), we include the
property tax ratio in our model to explain how much counties depend on property taxes in their
revenue structures. We expect that counties that are more dependent on revenues from property
taxes are less likely to exploit alternative revenue sources.
Hypothesis 5: A decrease in intergovernmental revenue will increase the ratio and the amount
of nontax revenues.
Hypothesis 6: A reliance on property tax will negatively affect the use of alternative sources of
revenues.

Local demands and characteristics: County median income, willingness to pay taxes,
interests in political issues
We include county median income as it is associated with the economic incentives of county
residents in revenue decisions. Studies show that localities with higher income are more inclined to
pass revenue-enhancement measures (Rueben and Cerdan 2003; Cain and Mackenzie 2008).
However, Netzer (1992) found that higher personal income is negatively associated with user
charges reliance.
We also include a variable explaining county residents' willingness to pay taxes. We know
from other studies that politicians and other policy makers respond to public opinion in their
decisions as the public adjusts its preferences for policy (e.g., Soroka and Wlezien 2005). Elected
officials or politicians are assumed to be sensitive to local demand from the voters, taxpayers, and
residents because those constituents are the source of political support. When voters are more
willing to pay taxes for more services, the politicians' decision to raise taxes becomes easier. Since
14

California requires direct voter approval of taxing and spending activities (Cain and Mackenzie
2008), we expect that constituents' willingness to pay taxes will affect reliance on nontax revenues.
In line with this reasoning, higher percentages of residents with strong political interests
are considered more likely to affect local revenue decisions. When voters are more interested and
actively participating in the political decision-making process, the gap between public perceptions
and the true cost of public goods will be minimized (Feld and Schaltegger 2005). This is directly
related to the fiscal illusion pushing local governments to spend more than the optimal level of
spending. Therefore, we expect that greater resident interest in political issues will increase
reliance on nontax revenue sources.

The Data
We include one-year lagged variables in the model to capture the potential influence of the previous
year on the local revenue decisions of the current year. All the finance data is inflation-adjusted for
the year 2010. More details on the data, measurement, and sources for the variables can be found in
Table 1.

[Table 1 about here]

The dependent variables are measured in two ways: 1) the ratio of user fees, charges, fines,
and forfeitures out of total own-source revenue; 2) the absolute dollar amount of user fees, charges,
fines, and forfeitures. Although the ratio variable is frequently used in the public finance literature
15

(Mikesell 1993; Jung and Bae 2011), it may not reflect the dynamic priority changes involved in
revenue decisions in the level of fees and charges, fines and forfeitures. Also the percentage is
sensitive to the changes of other resource categories and can be changed without a significant
increase or decrease in the amount of the concerned nontax revenues. Therefore, we use both the
relative share of fees, charges, fines, and forfeitures out of total own-source revenue and the dollar
amount of these revenue sources as our dependent variables. The share of fees and charges can be
increased by raising rates for existing fees and charges and by imposing new fees and charges. We
do not differentiate between the two cases. Three models with each dependent variable were
developed to explore further local revenue decisions: the integrated model, the scrutiny model, and
the economy model. The scrutiny model focuses on the ratio/amount of fines and forfeitures and
the economy model engages in the ratio/amount of fees and charges.
We attempt to identify the effect of the economy on county revenue decisions by using two
different measures for economy: the previous years unemployment rate and the residents
expectations for the economy in 12 months. The unemployment rate (%) in county level is
provided by the Bureau of Labor Statistics. The residents expectation for the economy are
measured by the percentage of people who answers negatively to the PPIC survey question Do you
think that during the next 12 months we will have good times financially or bad times?
Although the strength of ideological preference can be measured in various ways, the
political and ideological preference of county residents in this paper is measured by voter approval
for the Democratic governor or gubernatorial candidate in general elections in the California State
Archives (www.sos.ca.gov). It is measured by the share of Democratic votes in the gubernatorial
elections in every four years 1998, 2002, 2006, and 2010. The support for the current governor is
from the PPIC survey data every year with a question that Overall, do you approve or disapprove
of the way that ______ is handling his job as Governor of California? while the question is a little
16

modified in the year 2010 to In general, are you satisfied or dissatisfied with the governor's budget
plan?
The institutional factor of the introduction of Proposition 1A in 2004 is included in the
model as a dummy variable, while the time-invariant county home-rule variable is dropped in the
model.
Intergovernmental revenue in this paper is calculated by the sum of total federal and state
aid, and dependence on property taxes is measured by the ratio of the property tax out of total
own-source revenue of a county. Total own-source revenue includes all tax revenues, such as
property tax, income taxes, sales taxes; and nontax revenues, such as fees, charges, fines, and
forfeitures, miscellaneous revenue, utility revenue, and transfers. This figure excludes
intergovernmental revenue from federal, state, and other local governments (Mikesell 1993).
County median income data is provided by the US Census Bureau. The data on willingness
to pay taxes is from the PPIC survey. We use the percentage of the positive answer to the question
In general, which of the following statements do you agree with moreI'd rather pay higher taxes
and have a state government that provides more services, or I'd rather pay lower taxes and have a
state government that provides fewer services? except for the year 2010, when the question was:
What if the state said it needed more money just to maintain current funding for _______? Would
you be willing to pay higher taxes for _______? We averaged the answer to the health and human
services and higher education services in the year 2010.
To measure the level of interests in political issues among county residents, we also use
subjective data from the PPIC survey question Generally speaking, how much interest would you
say you have in politicsa great deal, a fair amount, only a little, or none? We use the percentage
of respondents who selected the first two categories, a great deal and a fair amount, to represent
17

the percentage of the population with political interests. All the subjective data from the PPIC
survey is yearly data as of January at the county level. For the causal inference based on the
temporal precedence condition, all the independent variables except the variables from the PPIC
survey data were lagged one year.

Results and Discussion

Descriptive statistics and pair-wise correlations are presented in Tables 2 and 3. The trend
of dependent variables in counties with a representative shape permits the reader to gain a sense of
the overall data structure. As we could see the trend changes in Figure 1, there is no discernible
pattern in the ratio of the nontax revenue sources across time, while the amount of the sources
shows more increasing patterns.

[Figure 1 and 2]

Table 4 and 5 provides the fixed effects estimation on the two dependent variablesthe
ratio and the dollar amount of each revenue category. Fixed effects models are used to test the
additive model explaining the relative impact of the independent variables in the equation. The
fixed effects approach is preferable for this work, based not only on the Hausman test but also on
the theoretical considerations. To test the robustness of the results, the model was run with various
other specifications. The final solution was robust and stable. Adding or removing additional
variables had little effect on the overall fit of the model or the relative predictive power of the
independent variables.

[Table 4 and 5]
18

First of all, we see the significant positive impact of the unemployment rate, which is in
accordance with our expectations. This implies that the share of fees and charges, fines and
forfeitures is increasing when county unemployment rates rise. However, the county residents
expectations for the economy in 12 months failed to reach the significance level, except for the
scrutiny model explaining the amount of fines and forfeitures.
The ratio models in Table 4 show that the Democratic vote shares in gubernatorial elections
are positively associated with reliance on the alternative revenues sources, indicating that counties
liberal/democratic ideological preference is increasing the ratio of nontax revenues to total ownsource revenue as we predicted in Hypothesis 2. Notice, however, that the coefficient for this term
turns negative in the amount models. This means that the alternative explanation is also supported
by the analysis. Liberal counties may be willing to increase tax revenues with less political cost,
which results in decreasing amount of fees, charges, fines, and forfeitures, while conservative
counties may be less likely to increase taxes and more willing to rely on the hard measures that are
associated with economic incentives. With the current analysis, this study could not ascertain the
differential effect of political/ideological preference on the ratio and the amount of nontax revenues.
However, the ratio and the amount will not always necessarily correlate; the ratio could increase
while the amount shrinks, and vice versa. Meanwhile, the political support for the governor (or his
Democratic challenger in the most recent gubernatorial election) does not appear to be associated
with significantly higher ratio and amount of nontax revenues.
Among local demands and characteristics, residents' willingness to pay taxes of county is
negatively associated with the ratio of fines and forfeitures, suggesting that counties with more
residents who are unwilling to pay taxes are more likely to increase the ratio of fines and
forfeitures as a way of generating revenues. The ratio models also show that county wealth
measured by median income is a negatively associated with the ratio of the nontax categories. We
19

expect its coefficient to be positive, such that more affluent counties will consider providing
services based on a benefit principle. However, it seems that punitive tools such as fines and
forfeitures are not frequently used in counties with less income.
Intergovernmental revenues from the federal and state governments were significant but
positive in the ratio model, which also conflicts with the results from the amount models. This
result calls into question the validity of conclusions from the existing studies on the effect of
intergovernmental aid on revenue decisions. For whatever reasons, the institutional change
brought about by the introduction of Proposition 1A drove significant negative changes in the ratio
models, while the sign turned positive in the amount model of fines and forfeitures. This is contrary
to our expectations. One concern with this result is whether the dummy variable can be used
reliably to make inferences about the effect of institutional changes expanding fiscal autonomy. Our
findings, of course, are only tentative and subject to modification by future research.
The amount models in Table 5 show that the dollar amount of fines and forfeitures is
positively related to the economic factors, indicating that counties are willing to increase revenues
from fines and forfeitures when the county unemployment rate goes up and expectations for the
economy over the next 12 months worsen. It appears that the choice for scrutiny is triggered by the
worsening economy, except for the amount models providing no evidence for the effect of economy
variables on reliance on user charges and fees.
Although not consistent with the ratio models, the percentage of Democratic votes in
gubernatorial elections is indeed fairly closely related to the amount of nontax revenues, but this
relationship disappears in the scrutiny models with fines and forfeitures. The negative sign of the
variable indicates that counties with more supporters of Democratic governors and candidates are
less likely to increase revenues from alternative sources, especially from user charges and fees. In
all the amount models, the statistical results reveal that the factors of local demand and local
characteristics had no discernible effect on the amount of nontax revenues.
20

Interestingly, we found strong support for Hypothesis 5, suggesting the impact of shrinking
intergovernmental aid on reliance on alternative revenue sources. In the integrative models, the
amount of fees, charges, fines, and forfeitures increases when counties suffer from decreasing
intergovernmental aid. It is evident that the results are in line with previous research using the
same or similar covariates. Yet the variable representing the property tax ratio is not significantly
related to the ratio/amount of nontax revenues once the other variables are controlled.
Although the models presented in Tables 4 and 5 show some differences, the most
interesting and significant finding in this study concerns the importance of the economy variable.
Not only does the economy variable have an independent impact on the ratio and amount of the
nontax revenues; it also accounts for considerably more of the variance than do political or fiscal
factors.

Conclusion
This paper examines county revenue decisions, focusing on the county responses to fiscal stress
and political constraints. It is an effort to answer the question of whether counties show strategic
behaviors relying more on the economic benefit principle or on scrutiny as a way of increasing
county revenue. We have estimated the scrutiny and economy model separately under the
assumption that the two categories of nontax revenues fines/forfeitures and user charges/fees

have different logics and effects on the local revenue structures. However, narrow difference was
found in the models with different revenue categories.
The result of the fixed effects models with two different types of dependent variables
confirms much of what we expected. County revenue decisions vary significantly according to
economic situation, political environment, fiscal conditions, and local demands and characteristics.
The three factors that stood out most consistently were the county unemployment rate, Democratic
21

vote shares in gubernatorial elections, and intergovernmental revenues. We found a constant

positive association between the unemployment rate and alternative revenue sources in both the
ratio and the amount model.
Unfortunately, we cannot reliably predict the direction of the effect of political/ideological
preference and intergovernmental aid on the share of nontax revenues, although the variables
achieve statistical significance in all models. Except for the economy variable, the two factors show
different signs in the ratio and the amount models. Much remains unexplained here. What does
seem clear is that political/ideological preference and intergovernmental aid affects county
revenue decisions even after one controls for other factors. The findings provide clues to the
important role of professional managers such as county supervisors in determining the financial
stability of local revenue structures. Given this interesting finding, further research is necessary to
determine the degree of influence local managers and decision-makers exert on the revenue
structure. The results also shed light on how important control variables such as willingness to pay
taxes and county median income influence the ratio of alternative revenue sources.
Although we expect the findings of this study will have some implications for local
governments, appropriate caution should be exercised in generalizing the results. California is
somewhat distinctive in its revenue structure in that there is little discretion in determining
property taxes because of Proposition 13. As we have used the total amount of nontax revenues, we
could not tell the difference between the increase caused by rising rates and that caused by the
exploitation of new sources. Another caveat of the analysis is that it does not directly tackle the
issue of inter-fund transfer. The institutional factors in the transaction costs involved in inter-fund
transfers may affect the revenue potential of the nontax sources of local governments.

22

Table 1 Data, Measures, and Sources

Variables
Dependent variable

Data and measures

The ratio of fees and charges, fines and
forfeitures out of total-own source revenues
(%)
Total amount of fees and charges, fines and
forfeitures ($)(2000-2010)

Source
RAND California County
Finance Statistics and
Counties Annual Report
http://www.ca.rand.org;
http://www.sco.ca.gov

Economic hardship variables

Unemployment rate
County unemployment rate (%) (2001-2010)
(L)

Bureau of Labor Statistics

http://www.bls.gov

County residents
expectation on
economy in 12 months

% of people who answers negatively to the

question that Do you think that during the
next 12 months we will have good times
financially or bad times?

Public Policy Institute of

California (PPIC)
http://www.ppic.org

% of people who voted for the Democratic

candidate in the gubernatorial elections in
1998, 2002, 2006, 2010.

California Elections Data

Archive
(CEDA)http://www.csus.
edu/calst/index.html
California State Archives
http://www.sos.ca.gov
Public Policy Institute of
California (PPIC)
http://www.ppic.org

Political variables
Democratic votes in
gubernatorial
elections (L)

Support for the

Governor

% of people who answers positively to the

question that Overall, do you approve or
disapprove of the way that ______ is handling
his job as Governor of California? except for
the year 2010: In general, are you satisfied
or dissatisfied with the governor's budget
plan?
Institutional changes variables
County Home-rule
Charter status (0, 1)
Proposition 1A

Proposition 1A (0, 1)
before=0, after 2004=1

Financial variables
Intergovernmental
Intergovernmental revenues from Federal
aids (L)
and State government

Property tax ratio (L)

% of property tax out of total own-source

revenue

California State
Association of Counties
http://www.counties.org
California State
Association of Counties
http://www.counties.org
RAND California County
Finance Statistics and
Counties Annual Report
http://www.ca.rand.org;
http://www.sco.ca.gov
RAND California County
Finance Statistics and
Counties Annual Report
http://www.ca.rand.org;
http://www.sco.ca.gov
23

Changes in local demands and characteristics

County income (L)
Median income ($)
(2001-2010)
Willingness to pay
taxes

Interests in political
issues

% of people who answers positively to the

question that In general, which of the
following statements do you agree with more
- I'd rather pay higher taxes and have a state
government that provides more services, or
I'd rather pay lower taxes and have a state
government that provides fewer services?
except for the year 2010 (average of two
questions for health and human services and
higher education): What if the state said it
needed more money just to maintain current
funding for______? Would you be willing to pay
higher taxes for _______?
% of people who answers to the positive
categories (a great deal and a fair amount) to
the question that Generally speaking, how
much interest would you say you have in
politics - a great deal, a fair amount, only a
little, or none?

United States Census

Bureauhttp://www.cens
us.gov/did/www/saipe/c
ounty.html
Public Policy Institute of
California (PPIC)
http://www.ppic.org

Public Policy Institute of

California (PPIC)
http://www.ppic.org

24

Figure 1 Changes of the proportion of fines and forfeitures, fees and charges to the total ownsource revenues with a representative shape by year

Alameda

Humboldt

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

40
30
20

20

20

25

25

30

30

35

50

35

Imperial

2000

2001 2002

2003

2004

2006

2007

2008 2009

2010

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2006

2007

2008

2009

2010

Monterey

20

25

10

25

30

15

30

35

20

35

25

Modoc

40

Los Angeles

2005

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2000

2002

2003

2004

2005

2006

2007

2008

2009

2010

2000

San Diego

2001

2002

2003

2004

2005

San Joaquin

25
20

20

15

25

20

30

30

35

35

25

40

Sacramento

2001

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Solano

Stanislaus

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Ventura

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

25

20

25

30

25

30

35

30

35

40

35

45

40

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

25

Figure 2 Changes of the amount of revenues from fines and forfeitures, fees and charges with a

2005

2006

2007

2008 2009

2010

2001 2002

2003

2004

2005

2006

1500000
1000000

2005

2001 2002

2003

2004

2005

2006

2007

2008 2009

2010

2010

2000

2005

2010

San Joaquin

2010

2010

2000

2005

2010

180000000

Ventura

160000000
140000000

80000000

2005

2000

Monterey

2005

Stanislaus

70000000

2000

2010

90000000

350000000

2000

90000000

Solano

2010

100000000

2005

2008 2009

95000000

450000000

San Diego

400000000

250000000
200000000
150000000
100000000
60000000 70000000 80000000 90000000

2000

500000000

300000000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

2000

2007

Modoc
2000000

Los Angeles

Sacramento

35000000
30000000
25000000

2000

20000000

2004

70000000 75000000 80000000 85000000 90000000

2003

Imperial

100000000

2001 2002

Humboldt

200000000

2000

14000000 16000000 18000000 20000000 22000000

Alameda

1800000000 2000000000 2200000000 2400000000

240000000 260000000 280000000 300000000 320000000

representative shape by year

2000

2005

2010

2000

2005

2010

26

Table 2 Summary statistics

Variable
The ratio of fees, charges, fines and
forfeitures (ffr)
The ratio of fines and forfeitures
(Rfine)
The ratio of user fees and charges
(Rcharge)
The amount of fees, charges, fines,
forfeitures (ff)
The amount of fines and forfeitures
(fine)
The ratio of user fees and charges
(charge)
County unemployment rate (L)
(Unemp)
Economy expectation on 12 month
(12mon)
Support of the governor
(Sgov)
Interests in political issues
(polint)
Democratic vote shares in the
gubernatorial elections (L) (demv_g)
Willingness to pay taxes of residents
(wpt)
County median income (L)
(income)
Intergovernmental revenues (L)
(Igr)
Property tax rates out of total ownsource revenue (L) (Ptr)
Introduction of Proposition 1A (L)
(Prop)

Obs.
626

Mean
25.02394

Std. Dev.
8.440669

Min.
6.336404

Max.
53.5041

626

4.534661

2.428179

.6639721

17.28196

626

20.48928

7.548672

4.875734

47.96727

627

1.17e+08

2.81e+08

457604

2.32e+09

627

1.84e+07

4.82e+07

60090

3.68e+08

627

9.84e+07

2.35e+08

352117

1.97e+09

570

7.742632

3.152111

2.8

26.2

390

51.1359

19.36228

9.54

96.32

443

51.65025

16.85449

4.96

90.74

418

68.42514

13.3538

16.57

100

570

39.30912

11.60992

17.2

73.5

400

46.9005

15.63873

8.74

95.1

570

65006.03

16768.46

37350

129235

570

4.90e+08

1.17e+09

3638541

9.31e+09

569

33.60449

9.655762

8.207121

60.08281

570

.5

.5004392

27

Table 3 Pair-wise correlations

(1)
(2)
(3)
ffr
Rcharg Rfine
(%)
e (%)
(%)
(1)
1.000
(2)
.9600* 1.000
(3)
.4918* .2282* 1.000
(4)
.2150* .2372* .0098
(5)
.1853* .1793* .0869
(6)
.2199* .2479* -.0061
(7)
-.0103
-.0515
.1211
(8)
.0683
-.0551
-.0726
(9)
-.0136
-.0266
.0399
(10) -.0900
-.0770
-.0834
(11) .3634* .4050* .0087
(12) -.1511
-.1179
-.1826*
(13) 0.0383 0.1097 -.2028*
(14) .1931* .2132* .0108
(15) -.2505* -.2473* -.1028
Prop -.3705* -.3285* -.2654*
(L)

(4)
ff
($)

(5)
fine
($)

(6)
charge
($)

(7)
Unemp
(L)

1.000
.9791*
.9991*
-.1584*
.0096
-.0317
-.0135
.2349*
.0313
.1982*
.9811*
.0210
.0191

1.000
.9697*
-.1453
.0098
-.0278
-.0218
.1930*
.0077
.1830*
.9624*
.0163
.0164

1.000
-.1603*
.0096
-.0324
-.0117
.2422*
.0360
.2002*
.9799*
.0219
.0196

1.000
.1057
-.0388
-.2314*
-.3292*
.0960
-.4634*
-.1343
-.0396
.1645*

(8)
12mon.

(9)
Sgov

(10)
Polint

1.000
-.3339*
.0850
-.1834*
.0338
-.0334
0.0031
.1769
.2479*

1.000
-.0502
-.0802
-.0683
-.0037
-.0354
-.0059
.0297

1.000
-.0120
.0043
.2615*
-.0366
.0674
.0956

(11)
Demv
(L)

1.000
.0826
.4196*
.2433*
-.0098
-.4670*

(12)
wtp

1.000
-.0183
.0313
.0959
.3021*

(13)
incom
(L)

(14)
igr
(L)

(15)
ptr
(L)

1.000
.1607*
.1952*
.0520

1.000
.0191
-.0124

1.000
.3129*

Note: Coefficients with asterisks are statistically significant at Bonferroni-adjusted .05 levels.

28

Table 4 Fixed effects estimation on the ratio models

Variables
Model (ratio): User
Scrutiny model
Economy model
charges and fees,
(ratio): Fine and
(ratio): User charges
Fine and forfeitures
forfeitures
and fees
Unemployment rates (L)
.4313601***
.1143694***
.3169907***
(.0998359)
(.0368489)
(.0834766)
Economy expectation for 12
.0133799
.001502
.0118779
months
(.013562)
(.0040347)
(.011797)
Support for Governor
-.0280916
-.005525
-.0225666
(.021621)
(.0064785)
(.0175395)
Interest in political issues
-.0000754
-.0067932
.0067178
(.0207907)
(.0083897)
(.0164465)
% of democratic votes in
.2872048***
.0553569**
.2318479***
gubernatorial elections (L)
(.0647807)
(.0243769)
(.0473415)
Willingness to pay taxes for
-.0413371
-.0134884**
-.0278487*
more services
(.020954)
(.0066911)
(.0165119)
County median income (L)
-.0001972***
-.0000745***
-.0001227**
(.0000725)
(.0000278)
( .000058)
Intergovernmental revenues
2.08e-09**
5.71e-10*
1.51e-09*
(Federal+State) (L)
(8.72e-10)
(3.15e-10)
(8.30e-10)
Property tax ratio (L)
-.002154
.0116671
-.0138211
(.0897359)
(.0236594)
(.0737089)
Proposition 1A (L)
-4.022433***
-.7046198***
-3.317813***
(.7378299)
(.2006292)
(.667243)
Constant
28.21044***
7.148855***
21.06158***
(7.319041)
(2.124864)
(6.042604)
6.4217152
1.8875532
5.585995
sigma_u
4.4835016
1.2750092
3.7954404
sigma_e
Rho (fraction of variance
.67229023
.68668271
.68415312
due to u_i)
323
323
323
Number of obs
44
44
44
Number of groups
0.4553
0.2863
0.4336
R-sq: within
0.0594
0.0504
0.0655
between
overall
0.1967
0.0974
0.1939
-0.4118
-0.5815
-0.2663
Corr(u_i, Xb)
31.56
.
27.89
F(10,43)
0.0000
.
0.0000
Prob > F
Note 1: *** p<0.01, ** p<0.05, * p<0.1, Standard errors noted in parentheses are adjusted for 44 clusters in id
(county).
Note 2: (L) refers to variables that lagged one year.

29

Table 5 Fixed effects estimations on the amount models

Variables
Model (amount):
Scrutiny model
User charges and
(amount): Fine and
fees, Fine and
forfeitures
forfeitures
Unemployment rates (L)
706427.4*
512606.1*
(407031.1)
(267867)
Economy expectation for 12
76370.38
38542.76**
months
(57804.99)
(18228.06)
Support for Governor
76345.1
8189.733
(67564.76)
(17669.07)
Interest in political issues
45758.48
-20379.5
(70300.62)
(20839.75)
% of democratic votes in
-799108.5***
-72502.29
gubernatorial elections (L)
(270090.7)
(88196.59)
Willingness to pay taxes for
37155.26
-32612.48
more services
(52570.78)
(23665.28)
County median income (L)
80.91982
-167.5232
(386.5001)
(103.5216)
Intergovernmental revenues
-.1433594***
-.0123211*
(Federal+State) (L)
(.0251847)
(.0063899)
Property tax ratio (L)
-588246.6
-135410.9
(399204.1)
(125317.1)
Proposition 1A (L)
-1368964
1332761
(4713387)
(1243158)
Constant
3.24e+08***
5.33e+07***
(4.04e+07)
(9895327)
5.120e+08
71365583
sigma_u
24416387
7449012.9
sigma_e
Rho (fraction of variance
.9977307
.9892226
due to u_i)
323
323
Number of obs
44
44
Number of groups
0.3330
0.0906
R-sq: within
0.9760
0.8841
between
overall
0.9569
0.8597
-0.9922
-0.9603
Corr(u_i, Xb)
26.47
4.30
F(10,43)
0.0000
0.0003
Prob > F

Economy model
(amount): User
charges and fees
193821.3
(301375.4)
37827.62
(50240.37)
68155.36
(58122.94)
66137.98
(65089.16)
-726606.2***
(255829.4)
69767.74
(53376.95)
248.443
(448.2067)
-.1310384***
(.0194339)
-452835.7
(313801.2)
-2701725
(4200381)
2.70e+08***
(4.02e+07)
4.416e+08
21351976
.99766726
323
44
0.3432
0.9745
0.9546
-0.9923
34.51
0.0000

Note 1: *** p<0.01, ** p<0.05, * p<0.1, Standard errors noted in parentheses are adjusted for 44 clusters in id
(county).
Note 2: (L) refers to variables that lagged one year.

30

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