Democracy, Debt, and Governance: A Triple Threat to the American Dream

Abstract

Purpose. To examine the governance environment in California cities as it relates to the impact of long-term debt use on future generations and to determine whether those charged with governance consider it.

Theoretical Framework. This study was based on critical theory, social theory, grounded theory, principal-agent theory, and social contract theory.

Methodology. This study employed an explanatory sequential mixed methods design using qualitative interviewing to collect primary data and California State Controller datasets to collect secondary data. The subjects interviewed were a former finance director, current city council member, bond attorney, bond underwriter, and a registered municipal financial advisor.

Findings. Debt service as a percentage of total revenues and expenditures grew by 1.06% and 0.70%, respectively. These changes were lower than expected. Revenues grew by $29.795 billion. Expenditures grew by $35.658 billion. Despite expenditures exceeding revenues in 7 of 10 years, and in total, the evidence suggests that macroeconomic factors and legislative changes were primarily responsible as opposed to governance decisions. California cities issued a total of $77.523 billion in long-term debt. This, coupled with the deficit spending, resulted in unanimous concern. Debt service as a percentage of expenditures increased. However, there appears to be enough economic and legal framework in place to keep cities from overleveraging themselves. Revenue and expenditure trends did not grow or contract proportionally but did behave appropriately according to theory. These findings did not yield a conclusion as to affordability when considering whether to issue new debt. These findings necessitate more detailed, long-term planning and that city council members need to be educated on and invested in the process of long-term debt use.

Conclusions and Recommendations. Those charged with governance do consider the impact of long-term debt use on future generations. There are adequate, external safeguards to keep cities from issuing too much debt and sufficient internal controls to ensure revenue and expenditure trends behave according to theory. Recommended research includes an examination of the efficacy of longer term financial planning with controls for budget rules and the political environment. Additional variables could include the impact of exogenous regulatory factors and the impact on reserves.