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SPAA Assistant Professor Pengju Zhang Explains Fiscal Challenges at the State and Local Level

Assistant Professor Pengju Zhang

State and local governments are constantly confronted with fiscal challenges, including debt management, government spending, and taxation. Rutgers School of Public Affairs and Administration (SPAA) Assistant Professor Pengju Zhang has extensively researched the causes and consequences of these challenges and the ways in which governments respond to economic pressures. We sat down with Zhang for insight into why he loves his field, how state and local governments address fiscal health concerns, and how those actions and strategies affect public welfare. 

Why did you join SPAA?

SPAA exemplifies the multidisciplinary nature of public administration and affairs studies. Many of our scholars have strong backgrounds in political science, sociology, law, psychology, and economics, and the intellectual diversity makes SPAA a great place to do research and exchange new ideas. In addition to the intellectual diversity, I’m also very excited by the cultural diversity of our faculty and students.

How did you become interested in state and local public finance? What are some of your other areas of expertise?

Obviously, our quality of life is substantively affected by education services, water services, sewerage services, fire protection services, and public safety services, and those important daily services are primarily provided by state and local governments. A crucial part of understanding and evaluating those services is understanding how governments get money for them and how they spend money on them.

To me, the typical public revenue and public expenditure questions at the state and local level are fascinating. If governance is a movie, then public finance is the director, and public policies are actors and actresses. When watching a movie, we don’t necessarily see the director, but the influence of the director is everywhere. Similarly, we don’t directly observe the flow of financial resources in governance or public affairs, but public welfare would suffer without appropriate arrangements of financial resources.

Besides state and local public finance, my interests and expertise extend to education policy, local public management, development policy, and quantitative analysis.

What are some of your current research projects?

An important research area in state and local public finance is the study of intergovernmental fiscal institutions between state government and local governments. Local governments have never been passive creatures when facing state-imposed fiscal institutions such as tax and expenditure limitations (TELs), which are fiscal rules that a state adopts to constrain the size and growth of local revenue and expenditures in modern tax revolt. Most states in the country adopted some type of TELs, including New Jersey.

I recently published two articles that demonstrate that TELs, though they sound benevolent in some way, can actually generate unintended consequences. The first article, “Impact of Tax and Expenditure Limits on Local Government Use of Tax-supported Debt,” discusses how TELs discourage local governments from using general obligation debt, which is commonly perceived to be cheaper than other types of debt. The second article, “The unintended impact of tax and expenditure limitations on the use of special districts: the politics of circumvention,” investigates whether TELs could partially explain the rapid growth of special districts since the 1970s. Furthermore, I have a working paper related to TELs, which is a joint study that explores whether local governments in New England areas turn to user fees and miscellaneous revenues after their taxation power is constrained.

I’m also surveying all village mayors/treasurers in New York State with the purpose of identifying the causes and consequences of fiscal challenges at the village level. The survey will also document village officials’ attitudes toward village dissolution, which has been encouraged and increasingly adopted to address efficiency issues in the state of New York. In addition, I’m working with my colleague Wen Wang [Associate Professor at SPAA] and other scholars to study the association between local autonomy and local government response to public service needs in developing countries.

What do you consider to be the top three issues for public administrators right now? How can they address these issues?

Based on my own expertise and experience, I think the following issues will challenge current public administrators.

First, fiscal pressure and fiscal sustainability – ­­unpredictable economic cycles, ebb and flow of global market forces, and unstable intergovernmental aid have imposed serious challenges to local public administrators. Of course, these challenges are generic ones because local governments in many other countries suffer from this, too. However, the fiscal constraints have really hit many local governments in the U.S.

The second challenge is collaboration. The new generation of public administrators has to learn how to collaborate with nonprofit organizations and other entities, as it is becoming more and more difficult for a government to handle all public service demand alone nowadays. In general, collaboration is needed at the stages of both the decision-making process and policy implementation.

The third challenge comes from the development of information and technology. It will be increasingly common that public administrators find their working skills are outdated unless they are open-minded; learn new skills such as skills to establish collaboration networks, digital communication skills, and public speaking; and keep training themselves.

New Jersey just elected its next governor, Democratic candidate Phil Murphy, following an election in which state taxes and the budget were critical issues for New Jersey citizens. What advice would you give Murphy in terms of tackling these issues? 

New Jersey is confronted with enormous fiscal pressures. For example, with low confidence in the state’s budget improvements and reforms, Standard & Poor’s Global Ratings repeatedly downgraded the state rating to an A- with a negative outlook, making New Jersey the second lowest-rated state after Illinois.

Although there are many reasons for the current fiscal distress, I think a primary reason is that New Jersey has a very low public employee pension funding ratio. According to a Bloomberg analysis at the end of last year, New Jersey became the state with the worst-funded public pension system in the United States in 2015, followed by Kentucky and Illinois. I suggest Governor Murphy adopt a practical and strategic plan for addressing public pension issues. I don’t think it is easy to make a structural change and address this issue in a short time period, but he cannot wait until it is too late.