Public Finance, Public Affairs

by Mary Hrovat

Originally predicted to be a quick success at the transition to a market economy because of advantages such as fertile soil, up-to-date heavy industry, and the only warm-water port in the former Soviet Union, Ukraine is lagging behind the other former Soviet republics economically. John Mikesell reports that it is hard to say exactly why this is so, although he can cite contributing factors such as tensions between Ukraine and Russia and the loss of talented people in purges during the Soviet regime. He also mentions problems faced by all the former Soviet republics: "Everything's new--the whole world of doing government finance in a market economy is absolutely foreign to the former Soviet Union countries. They never had visible taxes, for instance, and that's a problem. They never had to worry about financial constraints. They just have no idea about how it works when somebody other than the government owns things."

Mikesell, a professor of public and environmental affairs at Indiana University Bloomington, returned recently from a year in Kiev. Working with the accounting firm KPMG Peat Marwick while on leave from IU, Mikesell served as chief fiscal economist on the Ukraine Ministry of Finance Fiscal Reform Project. The project's goal: to create a macroeconomic budget policy department in the ministry. With that work behind him, Mikesell now shares his knowledge with others working to help Ukraine and other former Soviet republics. For example, he currently serves as a consultant to the World Bank's Public Sector Resource Management Adjustment Credit Mission to the Kyrgyz Republic.

Some members of the Public Finance and Policy Analysis faculty group. Clockwise from right, Kerry Krutilla, Kurt Zorn, Clint Oster, Ming Tai-Seale, Ann Holmes, Thomas Ross, Gerard Wedig, Craig Johnson, and Joyce Man

Public finance is an area in which IU faculty members regularly provide valuable analysis and insight: to Indianapolis and other cities concerned about the pros and cons of subsidizing professional sports; to the state of Indiana, for which one SPEA faculty member served as chairman of the Board of Tax Commissioners and for which others are now analyzing data on important issues of property tax reform; to the region, where SPEA faculty members are helping the Indiana Gaming Commission determine how to grant licenses for riverboat gambling establishments; and to the world, through study of the economic impact of environmental change and through international projects such as Mikesell's work in Ukraine.

Riverboat gambling as a public finance issue? Yes. Indiana's state legislature requires that licenses for riverboat casinos be granted based on the economic development impact on the state, among other factors. Each licensed riverboat is expected to produce between $20 million and $35 million per year in taxes to Indiana. In addition, each riverboat applicant pledges to make additional payments to the communities in which they operate that, in some cases, total over $100 million. Three professors of public and environmental affairs at IUB, Clint Oster, Barry Rubin (also associate dean), and Kurt Zorn (also the director of professional graduate programs), analyzed data that helped the Indiana Gaming Commission determine which companies wishing to set up such establishments should be granted licenses. Oster, Rubin, and Zorn were respon-sible for determining the projected impact of each company's planned activities. Applicants provided data on their projected levels of economic activity: number of employees, wages to be paid, number of customers expected, and amount of gross receipts anticipated. All of these items depended on the size of the boat, the number of gambling stations, and the types of activities on the boat. Oster, Rubin, and Zorn then used input-output analysis, which focuses on multipliers that show the relationship between the amount and type of economic activity and the amount of income generated for the region and the state. Beginning in early 1994, the SPEA team developed the process by which this analysis was done, and then, by late 1994, began applying the process to data supplied by applicants. "The process takes into account secondary and tertiary linkages," Rubin says. He offers the example of a hotel or restaurant on a riverboat that might draw in customers who then go on to spend money in other places, such as at a dry cleaner or a movie theater. The input-output analysis takes the basic activity being generated and translates it, through the use of multipliers, into secondary activity across the area. The group used multipliers from the Bureau of Economic Analysis of the United States Department of Commerce. The hard part was taking the data supplied by companies in various formats and translating it consistently and accurately into usable form. Other factors considered by the Indiana Gaming Commission included tax revenues and the financial health of the applicants, both of which Purdue University faculty members studied. The state police also investigated applicants to determine that they were reputable firms. Rubin says that the completed analyses were presented to the commission objectively, with no ranking or other evaluation attached, and the decision-making was left up to the commission. Although this is an area in which the stakes are high (the annual revenues per riverboat were typically forecast to be between $100 million and $200 million) and the potential for litigation correspondingly high, the group chose their method of analysis wisely, and there have been no challenges to their method. Rubin states that they wanted to use a conservative and tested method, and the type of analysis they did has been used for between ten and fifteen years with good results--analysts used it to determine the economic impact of proposed closings of military bases, for example.

Rubin has also served as an adviser to the Economic Analysis Unit of the Indiana Department of Commerce and has worked with the Bloomington Urban Enterprise Zone Board. His studies of urban enterprise zones and urban economic development have required a great deal of economic impact analysis like that done for the Indiana Gaming Commission. After studying the effect of the enterprise zone in the Evansville area, one of the first in the country, Rubin broadened his work to consideration of other types of influences on a region's economic life and development. With funding from the National Institute for Global Environmental Change Midwestern Regional Center, which is supported by the United States Department of Energy, he has studied the impact of global climate change on the economic activity in an area. His analysis of regions in the Midwest looks at many factors, including the unemployment rate, population size, in-migration and out migration, employment by sector, wages generated, and nonwage income. He predicts how global climate change affects these factors, which in turn affect the tax revenues and public expenditures in a region or city. Rubin works with an econometric technique he describes as a simultaneous equation simulation model that can be applied throughout the United States on different scales.

Just as Hoosiers may choose to gamble on riverboats, Indianapolis and other major U.S. cities gamble on the value of professional sports franchises. Cities spend money to build stadiums and give tax breaks to professional sports teams because they believe having a professional sports team will have a positive impact on the city's economy. In fact, the presence of a sports team has an insignificant impact on the tax revenues and employment rates of the city, and provides an inconsequential return on an investment often amounting to hundreds of millions of dollars, including the costs of building a stadium, the interest charges on bond issues, and the tax losses the city sustains in granting subsidies to the teams. In effect, the tax subsidies and other forms of support benefit the already-wealthy owners and players of professional sports teams in a process Mark Rosentraub characterizes as "welfare for the rich."

Rosentraub, a professor and associate dean in the School of Public and Environmental Affairs at Indiana University­Purdue University Indianapolis and director of the Center for Urban Policy and the Environment at IUPUI, studies the effect of professional sports franchises on their host cities. He describes the basics of sports subsidies and gives case studies of several cities, including Indianapolis, in his book Major League Losers: The Real Cost of Sports and Who's Paying for It. In Indianapolis, he says, the situation is a little better than elsewhere in the nation due to contributions from the Lilly Endowment toward the building of the RCA Dome (then the Hoosier Dome) and also because the dome contains a convention center that generates revenue. The reason teams generate very little economic growth is that most revenue comes from people already living in the area. If local residents did not buy tickets to a Colts game, for example, they would be likely to have spent the money on dinner, a movie, or some other leisure activity in Indianapolis, generating the same economic effects and tax revenue. In other words, the total amount of money spent in the city is not substantially enhanced by professional sports teams. Conventions, on the other hand, bring in people from outside the area who spend money in the city that would not otherwise have been spent.
Rosentraub says that a team's performance has a negligible effect on how much a city benefits from its presence. While there are social and cultural benefits that are difficult to quantify, the economic benefit to a city from boasting its own professional sports team does not justify the expense. Rosentraub plans to continue writing and talking on this topic, educating city administrators and the public.

Revenues and expenditures at any level of government depend on a range of activities and events, from climate to political change to leisure. Public finance faculty members in SPEA continue to contribute knowledge, insight, and analysis at all levels. Mikesell sums up the problem-solving approach to public finance at IU: "We try to stay ahead, and to define what's going on, as opposed to trying to keep up."