Strategic Path to Fiscal Sustainability: Revenue Diversification and the Use of Debt By U.S. Municipal Governments Page: 2

                                
Maleckaite, Vaida. Strategic Path to Fiscal Sustainability: Revenue Diversification and
the Use of Debt by U.S. Municipal Governments. Doctor of Philosophy (Public Administration),
August 2012, 177 pp., 14 tables, 12 figures, references, 150 titles.
This work explores the relationship between municipal government debt and revenue
diversification using a prism of institutional and fiscal interactions, concentrating on revenue
fungibility effects over time and on the role of state-imposed constraints.
A diversified revenue structure tends to stabilize revenue levels by balancing income-
elastic and inelastic revenue sources. The impact of such diversity has been the subject of much
research on expenditure and service levels among state and local governments. Considerably less
research has been conducted on its potential relationship with debt, although capital financing is
a necessary and often-utilized mechanism for funding capital and operational spending for local
governments.
Since it is well known that debt payments are fixed in the short run, they require
sufficient revenue adequacy through economic highs and lows. It is thus argued that local
governments with more diversified revenue structures are better able to utilize debt financing
since revenue diversity mitigates the risk of borrowing by providing for greater fiscal
predictability in the long run. This hypothesis is tested on two samples - a large sample of cities
in Massachusetts from 2000 through 2009, as well as a cross-state sample, encompassing the
cities from the majority of U.S. states.
The findings of both studies provide preliminary evidence on the influence of revenue
diversification on the levels of municipal indebtedness. While the Massachusetts study reveals
that revenue diversification is, indeed, a statistically significant determinant of debt per capita,
which also has an indirect effect on property tax burdens, the cross-state study suggests that