Tuesday, March 8, 2011

Minnesotan Municipal Enterprises

In 2004 the Minnesota State Auditor came out with a special report on municipal enterprises in the state of Minnesota. The article broke down the types of public-service enterprises and described each type’s general fiscal situations. I thought it would be interesting if I applied PA 5113’s tax evaluation criteria to two different types of municipal enterprises: community development enterprises and municipal golf courses.

Community Development Enterprises

There are two main kinds of community development enterprises: economic development authorities (EDAs) and housing development authorities (HDAs). In 2004 there were 119 of these in the state of Minnesota. Community development enterprises generally provide loans to eligible homebuyers, housing developers and businesses. The loans have interest rates below market value. The “user charges” in these cases are the monthly loan repayments that loan recipients pay back to the community development enterprises.

Efficiency: Many of the loans made are for projects that are deemed unattractive or unprofitable to the private market, creating “market failures” for constructing buildings such as low-income housing. Since private companies produce fewer buildings than is socially optimal, community development enterprises help rectify the difference between private production and the socially desired amount of consumption by subsidizing construction of under-produced buildings. At the same time, these loans may be negatively changing loan recipients’ behavior if they are providing loans that the recipients would have otherwise received from private financial sources. In such cases the subsidized loans would be distorting loan recipient behavior. In sum these loans increase efficiency if it encourages production of buildings that are under-supplied by the private market, but can crowd out private sources and distort behavior if the loans would have been originated by the private sector.

Equity: While the purpose of these enterprises is to increase societal equity, there are vertical equity issues amongst loan recipients. Users who receive loans have differing abilities to pay them back, depending on the project. Because the loan interest rates and repayment rates are usually set at similar levels for all loan recipients, this creates vertical inequities amongst users because their ability to pay does not change the loan repayment stipulations or the interest rates charged.

Adequacy: The financing is mostly self-perpetuating from the loan repayments made by users, making the funding relatively stable. While these fees make up the bulk of community development enterprises, the fees are usually supplemented by grants and governmental aid. A certain number of users also default on their loans, decreasing the adequacy of the user charges as a source of income. This is an issue, especially since the tax base is narrow and relies primarily on a few loan recipients.

Feasibility: Politically, these types of organizations are very feasible. They usually only require one-time seed money that perpetuates the program through loan repayments. Other non-municipal political players such as the HUD and foundations provide money and political support to community development enterprises. Since loan recipients are the only users who are paying for the loan it has a narrow enough tax base that the regular taxpayer does not care about the monthly repayment user fees loan recipients must pay. This creates low visibility. In terms of administration it is relatively easy to collect the loan payments once a system is set up; however, the whole process requires a lot of paperwork and can be time-consuming to administer.

Municipal Golf Courses

In 2002 there were 46 municipal golf courses in the state of Minnesota. The state auditor’s report categorized these types of municipal enterprises as “quality of life enterprises” that usually provide a desired service that has little or no private sector competition. People who utilize the golf course pay the user fees.

Efficiency: Municipal golf courses can be relatively efficient as long as they do not detract from people utilizing private golf courses. Assuming they are located in areas with little or no private sector competition, they are not “crowding out” the private availability of golf courses. Even if there are golf courses nearby, they may cater to a different population that is not willing to pay high membership fees to a country club. As long as the users would not have visited private sector golf courses, they do not detract from economic efficiency.

Equity: There are two issues regarding municipal golf course user fee equity that should be mentioned. One is that there are vertical inequities in the user fees. User fees are the same regardless of a person’s ability to pay, forcing users with lower incomes to pay the same amount as wealthy users. This makes the user fees regressive. At the same time the user fees are equitable based on received benefits. One price provides the same product, allowing for uniformity in user benefits regardless of income.

Adequacy: The user fees derived from people who utilize municipal golf courses is inadequate to pay for its services. The state auditor report states that recreation enterprises are unprofitable, and usually have to be subsidized with other funds. The report also specifically mentions golf courses as requiring high levels of additional funding to run. Only a certain number of people can utilize the golf course at any given time due to capacity issues. Revenue is also inhibited because golf courses are usually open only part of the year. Both these factors make the revenue raising capacity low but relatively predictable. Because the user fees do not pay for the cost of the program, the level of funding adequacy is low.

Feasibility: Recreation facilities like municipal golf courses are politically popular in areas without other options, and the user fees are seen as necessary to provide the service. While the user fees are visible to those who pay for using the golf course, the true costs of the program are relatively invisible to other taxpayers who may be paying for it through local government subsidies to the golf course. In terms of administration, the golf courses are relatively easy to set up and collect user fees.

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