Fiscal Dependency and Institutional Sustainability

This report examines fiscal dependency as a structural condition affecting governments, public institutions, and publicly supported service systems. It evaluates how reliance on externally controlled, concentrated, restricted, temporary, or economically sensitive revenue sources can affect institutional stability, policy flexibility, operational continuity, and long-term fiscal sustainability.

The analysis is designed as a broad institutional synthesis rather than a financial audit of a single government or program. Its purpose is to establish a common framework for identifying, measuring, and managing fiscal dependency across different public-sector settings.

Policy Domains Covered

The report considers both operating and capital dependency. However, it gives particular attention to operating dependency because the use of uncertain or temporary resources for permanent staffing, essential services, and recurring obligations generally presents greater continuity risks than reliance on external funding for a discrete capital project.

Jurisdictional Scope

The primary jurisdictional focus is the United States, with emphasis on the relationships among federal, state, and local governments. The report also considers special-purpose public bodies and institutions whose finances are closely connected to governmental appropriations, transfers, or statutory revenue arrangements.

Relevant institutions may include:

• state agencies;
• counties, municipalities, townships, and other local governments;
• public school systems;
• public colleges and universities;
• transit and infrastructure authorities;
• public health and hospital systems;
• housing and development authorities;
• pension and benefit systems;
• quasi-public entities; and
• nonprofit organizations performing publicly financed services.

The report is not limited to a single state. State and local examples may be used to illustrate recurring structural issues, but they should not be interpreted as comprehensive evaluations of the jurisdictions discussed.

International fiscal-management literature may be used where it offers transferable analytical methods, particularly regarding fiscal risk, intergovernmental relations, stress testing, and subnational government oversight. International examples are used for conceptual comparison and are not treated as direct substitutes for U.S. constitutional, statutory, or budgetary structures.

Time Period Covered

The report primarily examines modern public-finance conditions from the period following the 2007–2009 financial crisis through the most recent evidence available at the time of publication.

Historical evidence predating this period may be included where necessary to explain the origins of current funding arrangements, constitutional structures, longstanding revenue limitations, or recurring patterns of fiscal dependency.

The report does not attempt to provide a complete historical account of American intergovernmental finance.

Evidence Base

The analysis draws from a combination of quantitative, legal, institutional, and policy evidence, including:

• federal, state, and local budget documents;
• audited financial statements and annual comprehensive financial reports;
• grant and intergovernmental transfer data;
• public revenue and expenditure datasets;
• legislative and administrative reports;
• government accountability and inspector general findings;
• credit-rating and fiscal-condition indicators;
• academic literature on public finance and fiscal federalism;
• established government-finance professional guidance;
• policy research from nonpartisan institutions;
• statutes, regulations, funding formulas, and appropriations language;
• program evaluations and performance reports; and
• documented cases of funding expiration, revenue loss, service disruption, or fiscal restructuring.

The report places particular weight on primary government records, transparent methodologies, and evidence that can be independently verified. Secondary research is used to provide context, compare analytical approaches, and identify broader patterns.

Where evidence is incomplete or inconsistent across jurisdictions, the report distinguishes between documented findings, reasonable analytical inferences, and proposed PRI measures.

Units of Analysis

Fiscal dependency may be evaluated at several institutional levels:

1. Government-wide dependency, including the overall share of a government’s budget supported by outside or concentrated sources.
2. Fund-level dependency, including reliance within general funds, special revenue funds, capital funds, enterprise funds, and other legally distinct accounts.
3. Agency-level dependency, where a department or public body may be substantially more exposed than the government as a whole.
4. Program-level dependency, especially where a specific service relies on a temporary grant, reimbursement system, or restricted appropriation.
5. Revenue-source dependency, measuring exposure to a particular tax, transfer, industry, employer, taxpayer, or grantor.
6. Service-level dependency, assessing whether an essential public function could continue if a major funding stream were reduced or terminated.

This layered approach is necessary because fiscal strength at one level may conceal significant vulnerability at another. A government may have a diversified overall revenue structure while a critical program remains almost entirely dependent on a single grant or transfer.

Forms of Dependency Included

The report examines the following principal forms of fiscal dependency:

• Vertical dependency: reliance on a higher level of government for funding.
• Horizontal dependency: reliance on shared-service partners, regional entities, or neighboring jurisdictions.
• Concentrated revenue dependency: reliance on a small number of major revenue sources.
• Restricted-funding dependency: reliance on resources that cannot be redirected to meet changing needs.
• Temporary-funding dependency: use of short-term resources to sustain continuing obligations.
• Mandate dependency: responsibility for services without corresponding funding authority.
• Economic-sector dependency: exposure to the performance of a dominant local or regional industry.
• Institutional dependency: reliance on annual appropriations, donor support, reimbursement systems, or contracts controlled by outside entities.
• Debt-related dependency: recurring reliance on borrowing or refinancing to sustain operations or defer structural adjustment.

Debt is considered where it functions as a substitute for sustainable revenue or contributes to institutional dependence. The report is not intended as a comprehensive study of public debt management.

Outcomes Examined

The report evaluates fiscal dependency in relation to:

• budget volatility;
• structural imbalance;
• service continuity;
• staffing stability;
• institutional autonomy;
• administrative capacity;
• reserve depletion;
• deferred maintenance;
• tax and fee pressure;
• emergency borrowing;
• long-term planning;
• public accountability;
• geographic and institutional inequality; and
• the ability to absorb fiscal shocks.

The report does not assume that dependency automatically produces negative outcomes. The analysis considers whether the funding arrangement is predictable, proportionate, transparent, replaceable, and aligned with the duration of the underlying obligation.

Explicit Exclusions

This report does not provide:

A Comprehensive Audit of Individual Jurisdictions

The report does not certify the fiscal condition, solvency, legal compliance, or financial-management quality of any specific government or institution. Examples are illustrative unless expressly identified as formal case studies.

A Universal Fiscal Dependency Threshold

The report does not establish a single percentage above which all governments or institutions should be considered excessively dependent. Appropriate exposure levels vary according to institutional purpose, revenue authority, service obligations, reserve capacity, legal structure, and the stability of the funding source.

An Argument for Complete Fiscal Self-Sufficiency

The report does not recommend eliminating grants, transfers, shared revenues, federal support, or intergovernmental financing. Such arrangements are often necessary to promote equity, national standards, regional coordination, and access to essential services.

The report evaluates the quality and sustainability of dependency, not merely its existence.

A General Tax Policy Study

Although tax structure and revenue concentration are relevant, the report does not comprehensively evaluate the fairness, efficiency, or economic effects of every tax instrument. It does not prescribe a universal preferred balance among income, sales, property, excise, corporate, or user-fee revenues.

A Complete Study of Public Debt

Debt, refinancing, and borrowing are considered only where they relate directly to fiscal dependency, structural imbalance, or replacement capacity. Bond issuance, debt affordability, municipal bankruptcy, and capital-market regulation are not independently examined in full.

A Pension or Entitlement Solvency Report

Pensions, healthcare liabilities, and benefit programs may be considered as expenditure pressures, but the report does not provide actuarial valuations or comprehensive solvency projections for individual systems.

A Macroeconomic Forecast

The report may use economic forecasts and adverse scenarios to evaluate vulnerability, but it does not attempt to predict a specific recession, revenue collapse, interest-rate path, or federal funding decision.

A Legal Opinion

The report discusses statutory, constitutional, and administrative structures where relevant, but it does not provide legal advice or determine the enforceability of specific funding arrangements. Jurisdiction-specific conclusions require review by qualified legal counsel.

A Performance Evaluation of Every Grant-Funded Program

A program may be effective and still create fiscal dependency. Conversely, a financially independent program may perform poorly. This report focuses on funding structure and institutional risk, not on conducting full outcome evaluations of every program discussed.

An Assessment of Private Household Dependency

The study addresses public-sector and publicly supported institutional dependency. It does not primarily examine household reliance on public benefits, personal debt, charitable support, or private financial assistance, except where these factors affect government expenditure obligations or program demand.

A Partisan Evaluation of Government Spending

The report does not evaluate fiscal dependency according to whether a program is associated with a particular political party, ideology, administration, or policy agenda. The same analytical standards are intended to apply across policy areas and jurisdictions.

Analytical Boundaries

The report focuses on structural exposure rather than isolated funding fluctuations. A temporary decline in revenue does not necessarily establish dependency, and receipt of outside funding does not alone indicate institutional weakness.

A material fiscal dependency generally exists where one or more of the following conditions are present:

• the institution cannot maintain a core responsibility without continued outside support;
• a major revenue loss cannot be replaced within a reasonable period;
• permanent expenditures are supported by temporary resources;
• funding restrictions prevent resources from being used where operational needs are greatest;
• service obligations exceed available revenue authority;
• a small number of sources account for a disproportionate share of available resources;
• reserves are inadequate to absorb a plausible disruption; or
• the institution lacks a transition plan for foreseeable funding changes.

The analysis also distinguishes between capacity dependency and continuity dependency. Capacity dependency exists when outside resources permit an institution to provide a higher level of service than it could support independently. Continuity dependency exists when the loss of outside resources would threaten basic operations or essential services. The latter generally presents a more serious institutional risk.

Intended Use of the Research

This report is intended to provide:

• a conceptual definition of fiscal dependency;
• a standardized vocabulary for policymakers and institutions;
• a framework for fiscal dependency measurement;
• a basis for disclosure and reporting requirements;
• guidance for fiscal stress testing;
• a method for distinguishing manageable interdependence from institutional vulnerability; and
• policy options for improving resilience without unnecessarily dismantling beneficial funding relationships.

The findings should be used as a foundation for jurisdiction-specific analysis, legislative review, administrative planning, and future PRI research. They should not substitute for detailed local financial data, legal analysis, actuarial review, or institution-specific risk assessment.

This report is organized around the following central research questions:

Primary Research Question

Under what conditions does fiscal interdependence become fiscal dependency, and how does that dependency affect the stability, autonomy, accountability, and long-term sustainability of governments and publicly supported institutions?

Supporting Research Questions

1. How should fiscal dependency be defined and distinguished from ordinary intergovernmental cooperation or beneficial shared financing?
2. Which forms of fiscal dependency create the greatest institutional risk, including external funding reliance, revenue concentration, restricted funding, temporary funding, mandate exposure, and debt-supported operations?
3. To what extent do conventional budget measures conceal fiscal dependency when annual revenues and expenditures appear balanced?
4. How does reliance on temporary or nonrecurring revenue affect the sustainability of permanent staffing, recurring programs, and essential public services?
5. How vulnerable are governments and public institutions to the reduction, expiration, restriction, or political reallocation of major external funding sources?
6. How does revenue concentration affect budget volatility, service continuity, and the ability to absorb economic or policy shocks?
7. To what extent do restricted grants and special-purpose funds limit an institution’s ability to redirect resources in response to changing operational needs?
8. How do unfunded or underfunded mandates affect structural balance, administrative capacity, and accountability across levels of government?
9. What characteristics make an intergovernmental funding arrangement stable and sustainable, including predictability, duration, flexibility, transparency, and transition protections?
10. How much fiscal exposure can an institution absorb before funding disruption produces material consequences such as service reductions, layoffs, tax increases, reserve depletion, borrowing, or deferred obligations?
11. What role do reserves, revenue diversification, replacement capacity, and contingency planning play in reducing fiscal dependency risk?
12. How should governments distinguish between operating dependency and capital dependency when evaluating institutional vulnerability?
13. How does fiscal dependency differ across governments, agencies, funds, programs, and service areas within the same jurisdiction?
14. How do layered funding and administrative responsibilities affect the public’s ability to identify which institution is accountable for fiscal decisions and service outcomes?
15. Which fiscal dependency indicators can be measured consistently across jurisdictions using publicly available budget, financial, grant, and intergovernmental revenue data?
16. What stress-testing methods are most useful for estimating the operational consequences of losing a major revenue source or experiencing multiple fiscal shocks simultaneously?
17. Can standardized fiscal dependency disclosure improve legislative oversight, budget planning, institutional accountability, and public understanding?
18. Which policy interventions can reduce harmful dependency without eliminating beneficial intergovernmental transfers, shared services, or equalization mechanisms?
19. When is revenue diversification a practical response to fiscal dependency, and when are stronger reserves, revised funding formulas, mandate reform, or expenditure restructuring more appropriate?
20. What principles should guide the transition from unmanaged dependency toward managed fiscal interdependence?

Testable Propositions

The report evaluates the following propositions against the available evidence:

These questions and propositions provide the analytical structure for the report’s evidence review, comparative analysis, case examples, findings, and policy recommendations.

Fiscal dependency in the United States developed gradually through the expansion of cooperative federalism. Although state and local governments historically financed most domestic services through locally controlled taxes, differences in tax capacity created substantial variation in the ability of communities to support education, infrastructure, public safety, health, and social services.

The federal role expanded significantly during the Great Depression. New Deal programs and the Social Security Act of 1935 established enduring patterns of federal financing combined with state and local administration. This structure increased governmental capacity but also tied subnational institutions more closely to federal appropriations, eligibility rules, matching requirements, and administrative conditions.

After World War II, federal grants became increasingly important in transportation, housing, education, healthcare, environmental protection, and social services. Categorical grants directed funding toward defined purposes, but their restrictions sometimes limited the ability of recipients to respond to other operational needs. General revenue sharing, introduced in 1972, briefly provided more flexible federal support before being discontinued in the 1980s.

During the 1980s and 1990s, block grants and devolution shifted greater program responsibility to states. States also transferred responsibilities to local governments and special-purpose institutions. When these shifts were not accompanied by sufficient funding or revenue authority, they contributed to unfunded or underfunded mandate exposure.

The creation and expansion of Medicaid became one of the clearest examples of modern fiscal interdependence. Joint federal-state financing enabled broader healthcare coverage while also exposing state budgets to enrollment growth, healthcare inflation, federal policy changes, and matching requirements.

Concern about regulatory costs led Congress to enact the Unfunded Mandates Reform Act of 1995. The law improved the identification and review of certain mandate costs but did not eliminate the ability of the federal government to impose responsibilities on states and localities.

State and local balanced-budget requirements have also shaped fiscal dependency. During recessions, these governments often experience declining revenue and rising demand for services but have limited ability to finance deficits. As a result, they may depend on temporary federal assistance, reserve withdrawals, spending reductions, tax increases, or delayed investment.

The Great Recession demonstrated these pressures clearly. The American Recovery and Reinvestment Act of 2009 supplied substantial temporary aid for Medicaid, education, transportation, and other services. The assistance helped stabilize budgets, but its expiration created adjustment pressures where temporary funds had supported recurring obligations.

The COVID-19 emergency produced another major expansion of federal assistance through the CARES Act, the American Rescue Plan Act, and related programs. These funds supported public health, education, transit, housing, emergency response, and state and local fiscal recovery. They also renewed concerns about whether governments had used temporary resources to establish permanent staffing, programs, or public expectations.

More recent infrastructure and economic-development laws have expanded federal support for transportation, broadband, energy, manufacturing, and climate-related investment. Although these programs may strengthen long-term capacity, they can also create future matching, maintenance, staffing, and operating obligations.

At the same time, the growth of school districts, transit authorities, development agencies, public hospitals, housing authorities, and other special-purpose bodies has made public finance more institutionally fragmented. These entities may provide essential services while depending on dedicated taxes, annual appropriations, grants, reimbursements, or transfers controlled by other governments.

Modern public-finance practice has therefore moved beyond annual legal balance toward structural balance, long-term planning, reserve adequacy, and fiscal stress testing. These approaches recognize that a government can appear balanced while remaining vulnerable if recurring expenses depend on temporary, restricted, concentrated, or externally controlled revenue.

The current policy landscape is the product of decades of expanding shared financing. Intergovernmental funding has improved access to services, supported national priorities, and reduced some differences in local fiscal capacity. It has also created recurring risks involving funding restrictions, mandate exposure, grant expiration, revenue concentration, and blurred accountability.

This history supports the report’s distinction between managed interdependence and unmanaged dependency. Managed interdependence combines shared financing with predictable funding, clear responsibilities, adequate reserves, realistic conditions, and transition planning. Unmanaged dependency exists when an institution’s core operations rely on resources it does not control and cannot readily replace.

Fiscal dependency is an established feature of American public finance. Federal, state, and local governments operate through an interconnected system of taxes, grants, statutory transfers, reimbursements, dedicated revenues, matching requirements, borrowing, and public-service contracts. These arrangements allow governments to distribute costs and provide services that many jurisdictions could not independently support. They also expose institutions to funding decisions made by outside legislatures, agencies, and grant administrators.

The current policy concern is not whether intergovernmental financing should exist. Shared financing is necessary for healthcare, transportation, education, housing, public safety, infrastructure, workforce development, and social services. The central question is whether governments can sustain their essential responsibilities when a major funding source is reduced, delayed, restricted, or terminated.

Current Legal and Regulatory Framework

No single federal statute regulates fiscal dependency as a unified policy issue. Instead, dependency develops through separate program statutes, appropriations, regulations, grant agreements, reimbursement arrangements, and funding formulas.

Federal financial assistance may be distributed through formula grants, competitive grants, categorical programs, block grants, cooperative agreements, reimbursements, emergency appropriations, loans, or pass-through awards administered by states. Each program may establish different requirements concerning eligibility, allowable uses, matching funds, reporting, auditing, performance, procurement, and expiration.

Some programs provide recipients with broad discretion. Others restrict funding to narrowly defined services, populations, projects, or expense categories. Reimbursement programs may require a government or service provider to spend its own resources before receiving federal payment, creating additional cash-flow exposure.

The Unfunded Mandates Reform Act of 1995 requires Congress and federal agencies to consider the effects of certain mandates on state, local, and Tribal governments. The law does not prohibit federal mandates, and its procedures do not cover every federal action that may create subnational costs. Governments may therefore remain responsible for implementing federal requirements without receiving sufficient accompanying resources.

State constitutions and laws add another layer of fiscal control. Most states operate under constitutional, statutory, or practical balanced-budget requirements. Local governments may also face tax limits, debt restrictions, voter-approval requirements, and limits on the use of particular revenues.

These requirements encourage fiscal discipline but may limit the ability of governments to replace lost funding quickly. During an economic downturn or funding reduction, a state or local government may have to draw down reserves, reduce services, increase taxes or fees, postpone investments, or seek assistance from another level of government.

A legally balanced budget is not necessarily structurally balanced. Annual balance may be achieved through temporary grants, reserve withdrawals, asset sales, fund transfers, deferred maintenance, or delayed obligations. Fiscal dependency analysis must therefore examine whether recurring expenses are supported by reliable recurring revenues.

Current Institutional Arrangements

Funding authority, administrative responsibility, and service delivery are frequently divided among several institutions.

Federal resources support significant state responsibilities in healthcare, transportation, education, housing, environmental protection, workforce development, disaster response, and social services. States remain exposed to changes in federal appropriations, eligibility rules, statutory formulas, administrative conditions, and matching requirements.

State governments distribute school funding, municipal assistance, infrastructure support, shared taxes, reimbursements, and grants to local jurisdictions. Counties, municipalities, townships, school districts, and special-purpose bodies may have limited authority to replace this support if state funding is reduced.

Jointly financed programs distribute responsibility between governments. The federal government may supply a portion of the funding while states establish administrative systems, contribute matching resources, determine some program rules, and supervise local delivery. These arrangements increase capacity but can also shift costs when eligibility, enrollment, reimbursement, or funding policies change.

Special-purpose institutions such as transit systems, housing authorities, public universities, hospitals, development agencies, and infrastructure authorities often depend on combinations of dedicated taxes, user fees, legislative appropriations, grants, and debt. Their services may be essential even when they possess little independent authority to replace revenue controlled by another institution.

Nonprofit organizations also deliver many publicly financed services through grants and contracts. These providers may become vulnerable when government payments are delayed, reimbursement rates fail to cover actual costs, administrative requirements increase, or contracts expire.

Capital grants create another form of dependency. Federal or state funding may cover the construction or acquisition of a facility, transportation asset, technology system, or infrastructure project. The recipient may then assume responsibility for staffing, maintenance, utilities, insurance, repairs, and eventual replacement without receiving continuing operating support.

These arrangements are often beneficial, but risk increases when the institution responsible for providing a service does not control the revenue required to sustain it.

Current Financial Evidence

The Census Bureau’s Annual Survey of State and Local Government Finances is the principal national source for comparable information on government revenues, expenditures, debt, and assets. In 2026, the Census Bureau released complete fiscal year 2024 state-government finance data and a preliminary national-level “First Look” covering combined state and local revenue, spending, and debt.

Traditional financial reporting can show how much revenue a government receives from taxes, fees, federal aid, state aid, borrowing, and other sources. However, these data do not always reveal:

• whether the revenue is restricted;
• when a grant or transfer will expire;
• whether temporary funds support recurring expenses;
• which employees or services depend on a particular source;
• whether the funding could realistically be replaced;
• how long reserves could sustain affected operations;
• whether reimbursement delays create cash-flow risks; or
• whether a capital grant creates future operating obligations.

A government may therefore appear financially stable in aggregate while an individual agency, program, fund, or essential service remains highly dependent on a single source.

Pandemic-Era Funding Transition

The expiration and closeout of pandemic-era federal assistance present one of the clearest current tests of fiscal dependency.

The American Rescue Plan Act’s State and Local Fiscal Recovery Funds program provided approximately $350 billion to state, local, territorial, and Tribal governments. Recipients generally had to obligate their funds by December 31, 2024. Most eligible expenditures must be completed by December 31, 2026, and recipients remain subject to reporting, compliance, documentation, and closeout requirements.

These funds helped governments respond to public-health conditions, restore services, replace lost revenue, support economic recovery, and finance infrastructure. They also created transition risks where temporary resources supported activities expected to continue beyond the federal funding period.

Those risks include permanent employees or recurring programs supported by temporary funds, ongoing maintenance and staffing costs associated with federally financed projects, public expectations that temporary services will continue, and potential repayment exposure when expenditures do not comply with program requirements.

The pandemic-funding transition demonstrates the difference between temporary fiscal capacity and permanent institutional capacity. A government may have sufficient resources to establish a program without possessing the recurring revenue necessary to sustain it.

Principal Structural Risks

Several conditions currently create the greatest fiscal-dependency exposure.

Temporary funding for recurring costs: One-time grants, emergency appropriations, settlement proceeds, asset sales, and reserve withdrawals create vulnerability when they support permanent employees, continuing contracts, routine operations, or long-term program commitments.

Revenue concentration: A jurisdiction may depend heavily on one tax, employer, industry, taxpayer, economic sector, institution, or grant program. The degree of risk depends on the source’s size, volatility, legal status, replaceability, and relationship to essential services.

Restricted revenue: Governments may hold substantial resources that cannot be redirected toward payroll, administration, maintenance, technology, utilities, or emerging priorities. Total revenue may therefore overstate the institution’s actual operating flexibility.

Limited replacement capacity: Tax caps, statutory restrictions, voter-approval requirements, weak economic bases, or limited fee authority may prevent a government from replacing lost support. A theoretical alternative does not represent meaningful replacement capacity unless it is legally authorized, economically sustainable, administratively feasible, and available within the required period.

Cost shifting: Reductions in federal support may increase state costs. States may then reduce local aid or change reimbursement arrangements, transferring pressure to counties, municipalities, school systems, special-purpose institutions, and nonprofit providers.

Deferred obligations: Governments may protect immediate services by postponing infrastructure maintenance, vehicle and equipment replacement, technology modernization, reserve replenishment, pension contributions, or facility repairs. These practices reduce short-term pressure but may increase long-term costs and operational risk.

Federal Fiscal Exposure

Federal fiscal conditions create an indirect dependency risk for institutions that rely heavily on federal aid.

In June 2026, the Government Accountability Office reported that the federal fiscal path remained unsustainable. GAO projected that, without policy changes, federal debt held by the public would reach its historical high of 106 percent of gross domestic product in 2029 and continue rising substantially over the following decades.

This does not establish that any particular grant or transfer will be reduced. It does mean that state and local governments should not assume that all current federal appropriations, funding formulas, matching rates, or eligibility requirements will remain unchanged indefinitely.

Possible future changes could include slower funding growth, revised eligibility standards, greater state or local matching requirements, capped assistance, increased competition for grants, delayed reimbursement, or additional administrative conditions. Institutions with substantial federal exposure should include such possibilities in their long-term planning and fiscal stress tests.

Administrative Capacity

Fiscal dependency is also influenced by whether an institution can successfully obtain and administer outside funding.

Large governments may employ dedicated grant writers, accountants, attorneys, procurement specialists, auditors, compliance personnel, and project managers. Smaller governments may assign these responsibilities to a limited number of employees who also perform unrelated duties.

Insufficient administrative capacity can affect whether a government is able to identify funding opportunities, prepare competitive applications, provide matching funds, comply with procurement rules, track allowable costs, monitor contractors, satisfy reporting requirements, withstand audits, and complete grant closeout.

This creates an institutional inequality. Communities with the greatest financial need may have the least capacity to obtain or administer complex grants.

Outside funding may also generate indirect expenses for legal review, accounting systems, procurement, technology, reporting, audits, and additional personnel. When these costs are not fully reimbursed, the institution’s unrestricted operating resources may face greater pressure even while its total program funding increases.

Current Measures of Performance

Traditional measures such as annual budget balance, debt, fund balance, and revenue growth do not fully capture fiscal dependency. A stronger assessment should examine:

• the share of revenue controlled by another institution;
• the percentage of revenue supplied by the largest source;
• the amount of funding legally restricted to particular purposes;
• recurring expenditures supported by temporary resources;
• grants and transfers scheduled to expire within one to five years;
• the gap between mandated responsibilities and dedicated funding;
• the length of time reserves could sustain affected operations;
• the legal and practical ability to replace lost revenue;
• the programs, employees, facilities, and populations affected by funding loss;
• administrative expenses associated with managing external funding; and
• future operating costs created by grant-financed capital projects.

These measures should be applied at the government, fund, agency, program, and service levels. Government-wide totals can conceal severe vulnerability within a specific essential function.

Current Policy Gaps

The current system provides extensive financial reporting but limited standardized dependency reporting.

Governments commonly disclose revenues by source, expenditures, debt, assets, and fund balances. They are less likely to report how much recurring spending relies on temporary funding, which services depend on each external source, how soon major grants will expire, whether replacement revenue is realistically available, or how long reserves could sustain operations after a disruption.

This limits legislative oversight and public understanding. Policymakers may approve a program without seeing its long-term funding exposure. Institutions may accept capital grants without fully identifying future operating costs. Residents may also struggle to determine which level of government controls the funding decision affecting a local service.

Overall Assessment

Current conditions reflect an extensive and often beneficial system of fiscal interdependence. Shared financing expands public capacity, supports nationwide and statewide priorities, and helps communities with limited tax bases provide essential services.

The greatest vulnerability occurs when funding is temporary, restricted, concentrated, politically uncertain, administratively burdensome, difficult to replace, or connected to permanent obligations without sufficient reserves or transition planning.

The strongest funding arrangements combine recurring resources with recurring responsibilities, predictable formulas, realistic matching requirements, sufficient administrative support, transparent restrictions, advance notice of major changes, risk-based reserves, and documented transition plans.

The principal policy gap is not simply a lack of financial information. It is the absence of a standardized framework connecting major revenue sources to institutional control, recurring obligations, replacement capacity, and service-continuity risk.

The report reaches the following principal findings:

Finding 1: Fiscal dependency is a structural governance condition, not merely a budgetary issue.

A government or public institution may satisfy annual balance requirements while remaining vulnerable because its operations depend on revenue that is temporary, externally controlled, restricted, concentrated, or difficult to replace.

Finding 2: Intergovernmental financing is necessary and often beneficial.

Federal, state, and local funding relationships expand service capacity, distribute costs, reduce disparities among jurisdictions, and support programs that many institutions could not finance independently. The existence of external funding does not by itself establish harmful dependency.

Finding 3: Dependency becomes harmful when essential responsibilities cannot be sustained without continued outside support.

The greatest institutional risk arises when the loss of an external source would result in immediate service reductions, layoffs, tax or fee increases, reserve depletion, emergency borrowing, or the deferral of essential obligations.

Finding 4: Conventional financial reporting does not fully disclose dependency risk.

Budget documents generally report revenues, expenditures, debt, and fund balances, but often do not identify which services depend on each funding source, when major grants expire, how much revenue is restricted, or whether lost funding can realistically be replaced.

Finding 5: Temporary funding creates structural imbalance when used for recurring obligations.

One-time grants, emergency appropriations, settlements, reserve withdrawals, and asset sales may appropriately support temporary needs. They create fiscal vulnerability when used to finance permanent employees, continuing programs, recurring contracts, or routine operating expenses.

Finding 6: Revenue concentration increases exposure to localized shocks.

Governments and institutions that rely heavily on one tax, employer, industry, taxpayer, economic sector, grant program, or funding formula face greater risk when that source declines or changes.

Finding 7: Restricted funding can conceal operational weakness.

An institution may possess substantial total revenue while lacking sufficient unrestricted resources for payroll, administration, maintenance, technology, emergency response, or other core operating needs.

Finding 8: Replacement capacity is as important as the amount of external funding received.

Two institutions with similar levels of external funding may face very different levels of risk depending on their taxing authority, economic base, reserve position, expenditure flexibility, and ability to obtain alternative revenue.

Finding 9: Fiscal dependency can be concentrated within individual programs or services.

A government may appear diversified and financially stable overall while a specific agency, fund, program, or essential service remains almost entirely dependent on one outside source.

Finding 10: Operating dependency generally creates greater continuity risk than capital dependency.

External funding for a discrete capital project may be manageable when the recipient can support the resulting asset. Risk increases when the project creates permanent staffing, maintenance, repair, utility, insurance, or replacement obligations without a continuing funding source.

Finding 11: Unfunded and underfunded mandates weaken fiscal accountability.

When one level of government establishes a responsibility while another finances and administers it, the institution delivering the service may lack the resources necessary to meet the obligation effectively. The resulting division of authority can also make public accountability difficult to assign.

Finding 12: Fiscal pressure is frequently transferred among levels of government.

Reductions in federal support may increase state costs. States may respond by reducing local aid or changing reimbursement arrangements, shifting the burden to counties, municipalities, school systems, public institutions, or nonprofit service providers.

Finding 13: Administrative capacity affects access to and management of outside funding.

Smaller or lower-capacity governments may struggle to prepare grant applications, provide matching funds, meet procurement requirements, maintain records, monitor contractors, satisfy audits, and complete grant closeout. Communities with the greatest need may therefore be least able to secure or manage complex funding.

Finding 14: Emergency assistance can stabilize institutions while creating future transition risks.

Pandemic-era and recession-related aid protected services and reduced immediate fiscal disruption. However, temporary relief can create future funding gaps when it supports recurring programs, permanent staffing, or capital projects with continuing operating costs.

Finding 15: Balanced-budget requirements can increase reliance on outside assistance during downturns.

Because state and local governments generally have limited authority to finance operating deficits, revenue losses may require reserve use, service reductions, tax or fee increases, deferred obligations, or emergency support from another level of government.

Finding 16: Reserve adequacy must be evaluated against specific risks.

A single reserve percentage cannot determine resilience across all institutions. Adequacy depends on revenue volatility, service obligations, economic conditions, reimbursement timing, expenditure flexibility, and the expected duration of a funding disruption.

Finding 17: Fiscal stress testing provides a more complete measure of institutional resilience.

Governments are better prepared when they evaluate plausible reductions in external aid, grant expiration, loss of a major taxpayer, economic decline, reimbursement delays, and simultaneous revenue and expenditure shocks before those events occur.

Finding 18: Current reporting practices do not consistently connect revenue exposure to service consequences.

Policymakers and the public often cannot determine which employees, facilities, programs, and populations would be affected by the loss of a particular source. This limits oversight and weakens the ability to plan orderly transitions.

Finding 19: No universal dependency threshold is appropriate for all institutions.

The significance of external funding depends on the stability, restrictions, duration, purpose, replacement options, and operational importance of the source. Dependency must therefore be assessed within the legal and institutional context of each government or program.

Finding 20: The appropriate policy objective is managed interdependence, not complete fiscal self-sufficiency.

Governments should retain beneficial shared-financing arrangements while improving disclosure, structural balance, reserve planning, funding predictability, replacement capacity, and transition preparedness.

Overall Finding

Fiscal dependency can be measured and managed, but it is not adequately captured by traditional budget reporting alone. A stronger framework must connect each major revenue source to its restrictions, duration, institutional control, recurring obligations, replacement capacity, and consequences for essential public services.

Methodology

This report uses a policy-synthesis approach rather than a financial audit of individual jurisdictions. It draws from U.S. Census Bureau government-finance data, Government Accountability Office reports, federal grant rules, Treasury records, professional public-finance guidance, and documented state and local funding practices.

Fiscal dependency is evaluated through six factors: the amount of revenue involved, the duration of the funding, institutional control over the source, restrictions on its use, the ability to replace it, and the operational consequences of its loss.

External funding is not automatically classified as harmful dependency. Dependency becomes material when an institution cannot sustain an essential responsibility without continued access to funding it does not control or cannot reasonably replace.

Finding 1: Fiscal Dependency Is a Structural Condition

Annual budget balance does not necessarily indicate long-term stability. Governments may balance budgets through reserves, temporary grants, asset sales, fund transfers, deferred maintenance, or delayed obligations. Structural stability requires recurring revenues to support recurring expenditures.

Finding 2: Intergovernmental Funding Is Necessary

Federal, state, and local governments jointly finance healthcare, education, transportation, housing, infrastructure, public safety, and social services. These arrangements expand service capacity and help jurisdictions with limited tax bases provide essential public functions.

The issue is therefore not whether outside funding exists, but whether the arrangement is predictable, sustainable, and supported by adequate planning.

Finding 3: Dependency Becomes Harmful When Services Cannot Be Sustained

The seriousness of dependency is determined by what happens when funding changes. A material dependency exists when the loss of a source would require service reductions, layoffs, reserve depletion, emergency borrowing, tax increases, or failure to meet legal responsibilities.

A relatively small funding source may create major risk if it supports an essential service and cannot be replaced.

Finding 4: Current Reporting Does Not Fully Reveal Dependency

Government financial reports generally identify revenue, expenditures, debt, and fund balances. They do not consistently show which services depend on each source, when funding expires, whether funds are restricted, or whether replacement revenue is available.

Traditional reporting must therefore be supplemented with program, grant, staffing, reserve, and service-continuity information.

Finding 5: Temporary Funding Can Create Structural Imbalance

One-time grants, emergency appropriations, settlements, and reserve withdrawals may appropriately support temporary needs. They create vulnerability when used for permanent employees, continuing programs, recurring contracts, or routine operations.

When the funding ends, the institution must replace the revenue, reduce the obligation, or continue relying on temporary measures.

Finding 6: Revenue Concentration Increases Risk

Governments may depend heavily on one tax, employer, industry, taxpayer, grant program, or economic sector. A disruption affecting that source can produce serious consequences even when the broader economy remains stable.

Concentration risk depends on the source’s size, volatility, legal status, replaceability, and connection to essential services.

Finding 7: Restricted Funding Can Conceal Weakness

An institution may possess substantial total revenue while lacking unrestricted funds for payroll, administration, maintenance, technology, utilities, or emergencies.

Total revenue therefore does not necessarily equal usable operating capacity. Dependency analysis must distinguish restricted program funds from resources available for general operations.

Finding 8: Replacement Capacity Determines the Severity of Dependency

Two institutions with similar levels of outside funding may face very different risks. One may have reserves, broad taxing authority, and flexible expenditures, while another may have limited revenue authority and no realistic alternatives.

Replacement capacity must be legally available, economically sustainable, administratively feasible, and accessible before services are disrupted.

Finding 9: Dependency May Be Hidden Within Individual Programs

A government may appear financially diversified while a specific agency, fund, program, or service depends almost entirely on one external source.

Dependency should therefore be examined at the government, fund, agency, program, revenue-source, and service levels. Government-wide totals alone may conceal serious operational exposure.

Finding 10: Operating Dependency Is More Serious Than Most Capital Dependency

A capital grant does not necessarily create long-term dependency if the recipient can operate and maintain the resulting asset.

Risk increases when a funded facility, system, or project creates permanent staffing, maintenance, utility, repair, insurance, or replacement costs without an identified recurring funding source.

Finding 11: Underfunded Mandates Weaken Accountability

Mandate dependency occurs when one government establishes a responsibility while another must finance or administer it without sufficient support.

Costs may include personnel, reporting, technology, training, enforcement, and legal compliance. Accountability becomes unclear when the government imposing the requirement does not directly experience the resulting budget or service consequences.

Finding 12: Fiscal Pressure Is Often Shifted Rather Than Eliminated

A reduction in federal funding may increase state costs. States may then reduce local aid or change reimbursement formulas, shifting pressure to municipalities, counties, schools, public institutions, or nonprofit providers.

Fiscal analysis must follow the pressure through the full intergovernmental system to identify where the actual service consequences occur.

Finding 13: Administrative Capacity Affects Funding Access

Complex grant systems require application, accounting, procurement, reporting, audit, and compliance capacity.

Smaller governments may lack specialized personnel or matching resources. As a result, institutions with the greatest need may be least able to obtain or manage available assistance.

Outside funding can also increase administrative costs when grants do not fully cover legal, accounting, technology, or compliance expenses.

Finding 14: Emergency Aid Creates Transition Risks

Emergency assistance can preserve services during recessions, disasters, or public-health crises. However, temporary aid may create later funding gaps when it supports continuing personnel, permanent programs, or capital projects with long-term operating costs.

The $350 billion State and Local Fiscal Recovery Funds program illustrates this issue as governments approach the December 31, 2026 expenditure deadline.

Finding 15: Balanced-Budget Rules Increase Downturn Exposure

State and local governments generally have limited ability to operate with sustained deficits. During recessions, falling revenue and rising service demand may require reserve use, spending reductions, tax increases, deferred investment, or federal assistance.

Balanced-budget rules should therefore be supported by adequate reserves and contingency planning.

Finding 16: Reserve Adequacy Depends on Institutional Risk

No single reserve percentage is appropriate for every government.

Adequacy depends on revenue volatility, economic concentration, disaster exposure, service obligations, reimbursement timing, expenditure flexibility, and the expected length of a disruption. Reserve levels should be evaluated by how long they can sustain affected operations.

Finding 17: Stress Testing Improves Preparedness

Fiscal stress testing evaluates what would happen if conditions are worse than expected.

Relevant scenarios include reductions in federal or state aid, grant expiration, recession, loss of a major taxpayer, reimbursement delays, increased mandate costs, and simultaneous revenue and expenditure shocks.

A useful stress test identifies the revenue at risk, services affected, available reserves, replacement options, required reductions, and time needed to restore balance.

Finding 18: Financial Exposure Is Not Consistently Connected to Service Impact

Budget documents may identify a grant without showing how many employees, facilities, programs, or residents depend on it.

Major external or temporary funding sources should therefore include a service-impact statement identifying the operations supported and the expected response if funding is reduced or terminated.

Finding 19: A Universal Dependency Threshold Is Not Appropriate

A single percentage cannot determine whether every institution is excessively dependent.

The significance of outside funding depends on its stability, restrictions, purpose, duration, replacement options, and operational importance. Numerical thresholds should be used as screening indicators rather than automatic findings of fiscal weakness.

Finding 20: Managed Interdependence Is the Appropriate Goal

Complete fiscal self-sufficiency is neither realistic nor desirable. Shared funding improves equity, distributes risk, supports national priorities, and allows lower-capacity jurisdictions to provide essential services.

The appropriate goal is managed interdependence supported by recurring funding, clear responsibilities, predictable formulas, adequate reserves, realistic matching requirements, administrative support, stress testing, replacement planning, and orderly transition procedures.

Overall Analytical Conclusion

Fiscal dependency is best understood as an institutional risk created when essential responsibilities rely on funding that is externally controlled, temporary, restricted, concentrated, or difficult to replace.

The most important questions are not simply how much outside funding an institution receives, but who controls it, how long it will continue, what restrictions apply, which obligations depend on it, what alternatives exist, and what services would be affected by its loss.

Fiscal dependency cannot be solved simply by reducing intergovernmental transfers. Abrupt funding reductions may shift costs downward and increase service inequality. Effective policy should instead strengthen transparency, structural balance, reserve planning, stress testing, administrative capacity, funding predictability, and transition preparation.

Fiscal dependency can be managed through several different policy approaches. The strongest systems do not attempt to eliminate intergovernmental financing. Instead, they distinguish beneficial shared funding from risky dependency and require governments to disclose, plan for, and stress-test their exposure.

Comparison 1: Categorical Grants, Block Grants, Formula Funding, and Reimbursements

Different funding structures create different dependency risks.

Categorical grants provide funding for specific programs or populations. Their strength is that they direct resources toward defined public purposes. Their weakness is limited flexibility. A government may receive substantial funding but be unable to redirect it toward staffing, administration, maintenance, or emerging needs.

Block grants usually provide broader discretion. They allow states or localities to tailor programs to local conditions. However, they may also shift more fiscal risk to the recipient if funding does not grow with need, inflation, caseloads, or service costs.

Formula funding can improve predictability because funds are distributed according to established criteria. This supports planning, but formula changes can still create major disruption when governments have built recurring obligations around expected distributions.

Reimbursement systems can align payment with actual services delivered, but they may create cash-flow pressure. Governments or service providers must often incur expenses first and wait for repayment. This is especially difficult for smaller institutions with limited reserves.

The lesson is that no funding model is automatically superior. The best arrangement depends on the purpose of the program, the predictability of need, the flexibility required, and the recipient’s ability to manage timing and compliance risk.

Comparison 2: Operating Funding Versus Capital Funding

Operating funding and capital funding create different forms of dependency.

Operating dependency is usually more serious because it affects recurring services, permanent employees, routine administration, public safety, health services, education, transportation, and other continuing obligations. If operating funds expire, the institution may face immediate pressure to cut services, raise revenue, use reserves, or reduce staffing.

Capital dependency may be more manageable when outside funding supports a one-time project and the recipient has the resources to maintain the asset. However, capital grants can create future operating dependency if the project requires continuing staffing, utilities, repairs, technology support, security, insurance, or replacement costs.

The lesson is that capital awards should be reviewed for full life-cycle cost, not only construction or acquisition cost. A project that appears fully funded at the front end may create unfunded obligations later.

Comparison 3: High-Capacity Versus Low-Capacity Jurisdictions

Governments with strong administrative capacity are better positioned to manage fiscal dependency. They can identify grant opportunities, prepare applications, provide matching funds, comply with procurement rules, monitor contractors, submit reports, and complete audits.

Lower-capacity jurisdictions may have the greatest need but the least ability to obtain and manage complex funding. Smaller municipalities, rural communities, distressed local governments, and small nonprofit providers may lack dedicated grant writers, accountants, legal staff, compliance officers, or project managers.

This creates an equity concern. Competitive grants may reward technical capacity rather than community need. Formula grants may reduce that problem, but they may still require administrative systems that smaller institutions struggle to maintain.

The lesson is that dependency policy should include technical assistance, simplified reporting, shared administrative services, and realistic reimbursement for grant-management costs.

Comparison 4: Flexible Revenue Systems Versus Restricted Revenue Systems

A government with flexible revenue can respond more effectively to changing conditions. Flexible funds can be redirected toward urgent needs, emergency response, payroll, maintenance, technology, or service continuity.

Restricted revenue can support important programs but may conceal operational weakness. An institution may have large fund balances while lacking usable resources for basic operating needs. A transit agency, housing authority, school system, or public-health department may appear funded in total while still lacking flexible support for administration and continuity.

The lesson is that fiscal analysis should separate total revenue from usable operating capacity. A dependency framework should identify which funds are restricted, why they are restricted, and what services cannot be supported with them.

Comparison 5: Status Quo Reporting Versus Dependency Disclosure

Under the status quo, governments commonly report revenues, expenditures, debt, assets, and fund balances. These reports are important but often do not show the operational risk connected to individual funding sources.

A dependency-disclosure approach would require governments to identify major external, temporary, restricted, or concentrated revenue sources and explain what services depend on them.

A strong disclosure system would identify:

• the amount of funding involved;
• whether the source is recurring or temporary;
• whether the revenue is restricted;
• who controls the source;
• when the funding expires or renews;
• what services, employees, or facilities depend on it;
• whether replacement revenue is available; and
• what transition plan exists if funding changes.

The lesson is that better reporting does not require treating external funding as harmful. It requires making the risk visible before disruption occurs.

Comparison 6: Reserve Rules Versus Risk-Based Reserve Planning

Some governments use fixed reserve targets, such as maintaining a certain percentage of annual expenditures. This approach is simple and easy to communicate, but it may not reflect actual risk.

Risk-based reserve planning is stronger. It evaluates the specific threats facing the institution, including revenue volatility, economic concentration, reimbursement delays, disaster exposure, grant expiration, and expenditure flexibility.

A government with stable revenues and broad replacement authority may need a different reserve strategy than a government dependent on volatile taxes, temporary grants, or a dominant employer.

The lesson is that reserve adequacy should be tied to risk exposure. The question is not only how much money is in reserve, but how long reserves could sustain affected services during a plausible disruption.

Comparison 7: Reactive Budgeting Versus Fiscal Stress Testing

Reactive budgeting responds after a funding loss occurs. This often leads to abrupt service cuts, emergency tax proposals, reserve depletion, delayed maintenance, or rushed borrowing.

Fiscal stress testing evaluates possible disruptions before they occur. It asks what would happen if federal aid were reduced, a grant expired, a major taxpayer left, a recession lowered revenue, reimbursements were delayed, or several shocks occurred together.

A useful stress test identifies:

• the revenue at risk;
• the services affected;
• available reserves;
• replacement options;
• spending reductions that would be required;
• legal or contractual barriers; and
• the time needed to restore structural balance.

The lesson is that stress testing converts fiscal dependency from a hidden risk into a manageable planning issue.

Comparison 8: Unfunded Mandates Versus Funded Responsibility

Unfunded or underfunded mandates create dependency by assigning responsibility without sufficient support. One level of government may impose the requirement, while another must administer and finance it.

A funded-responsibility model is stronger. It pairs continuing obligations with continuing revenue, clear administrative authority, realistic compliance timelines, and transparent cost estimates.

The lesson is that governments should avoid assigning permanent responsibilities without identifying permanent funding. Where mandates are necessary, they should include cost review, funding alignment, and adjustment procedures.

Comparison 9: Revenue Diversification Versus Single-Source Dependence

Revenue diversification can reduce dependency on a single tax, employer, industry, grant, or economic sector. Diversification may include broader tax bases, multiple revenue instruments, shared-service arrangements, fee modernization, improved collection systems, or more stable intergovernmental formulas.

However, diversification is not always easy or appropriate. Some jurisdictions have limited legal authority, weak tax bases, or political barriers. In those cases, reserves, expenditure flexibility, state support, mandate reform, or regional cooperation may be more realistic than creating new revenue sources.

The lesson is that diversification is valuable but not universal. Policy responses must reflect the actual legal and economic capacity of the institution.

Comparison 10: Managed Interdependence Versus Complete Self-Sufficiency

Complete fiscal self-sufficiency is not realistic for many governments and public institutions. It may also be undesirable. Shared financing supports national priorities, reduces disparities, spreads risk, and allows lower-capacity jurisdictions to provide essential services.

Managed interdependence is the more practical objective. It accepts that governments will remain financially connected but requires those connections to be transparent, predictable, and sustainable.

Managed interdependence includes:

• recurring funding for recurring obligations;
• clear assignment of responsibility;
• realistic matching requirements;
• adequate administrative support;
• disclosure of restrictions and expiration dates;
• risk-based reserves;
• replacement planning;
• stress testing; and
• transition procedures when funding changes.

The lesson is that the goal is not to eliminate shared financing. The goal is to prevent shared financing from becoming unmanaged institutional vulnerability.

Best Practices Identified

The comparative analysis points to several best practices:

First, governments should distinguish recurring revenue from temporary revenue before approving recurring expenditures.

Second, major external funding sources should be linked to the services, personnel, and obligations they support.

Third, grant-funded capital projects should include a life-cycle operating-cost review.

Fourth, governments should identify revenue restrictions and separate total revenue from flexible operating capacity.

Fifth, fiscal stress testing should be incorporated into budget planning.

Sixth, reserve policies should reflect actual exposure rather than rely only on a fixed percentage.

Seventh, mandate reviews should include administrative and compliance costs, not only direct program expenses.

Eighth, smaller and lower-capacity jurisdictions should receive technical assistance when grants require complex administration.

Ninth, replacement capacity should be evaluated realistically, including legal authority, economic feasibility, timing, and political practicality.

Tenth, transition planning should be required when temporary funding supports programs that may create continuing public expectations.

Policy Alternatives

The report identifies five broad policy alternatives.

Alternative 1: Maintain the current reporting system.

This option avoids new administrative requirements but leaves dependency risk largely hidden. It is the least disruptive option but provides the weakest oversight.

Alternative 2: Require fiscal dependency disclosure.

This option would require governments and public institutions to report major external, restricted, temporary, and concentrated revenue sources. It improves transparency without prohibiting beneficial funding arrangements.

Alternative 3: Require stress testing for major funding exposure.

This option would require institutions to model the impact of losing major revenue sources or experiencing multiple fiscal shocks. It improves preparedness but requires administrative capacity.

Alternative 4: Limit the use of temporary funds for recurring obligations.

This option would reduce structural imbalance by discouraging governments from using one-time funds for permanent staffing or programs. It protects long-term stability but may limit flexibility during emergencies.

Alternative 5: Pair mandates with funding and transition requirements.

This option would require governments imposing continuing obligations to identify a sustainable funding source or transition mechanism. It strengthens accountability but may be politically difficult to implement.

Preferred Approach

The strongest approach combines Alternatives 2, 3, 4, and 5.

Fiscal dependency should be managed through disclosure, stress testing, structural-balance rules, mandate funding review, reserve planning, and transition procedures. This approach preserves useful intergovernmental financing while reducing hidden institutional risk.

The preferred model does not treat grants, transfers, or shared funding as inherently harmful. Instead, it asks whether the funding is reliable, flexible, replaceable, and aligned with the duration of the obligation it supports.

Conclusion

The comparative analysis shows that fiscal dependency is not best addressed through a single reform. Jurisdictions differ in size, legal authority, revenue capacity, service obligations, economic conditions, and administrative capacity.

The most transferable lesson is that governments should not evaluate fiscal health solely by annual balance or total revenue. They should evaluate whether essential responsibilities depend on funding that is temporary, restricted, concentrated, externally controlled, or difficult to replace.

The most effective policy approach is managed interdependence: preserving beneficial shared financing while requiring disclosure, planning, reserves, stress testing, funding alignment, and orderly transition when support changes.

Fiscal dependency has direct budgetary consequences because it affects the reliability, flexibility, and sustainability of public revenue. A government may appear fiscally stable when total revenues equal total expenditures, yet remain exposed if recurring services depend on temporary, restricted, concentrated, or externally controlled funds.

Revenue Effects

Intergovernmental transfers, grants, reimbursements, and shared revenues are major components of modern public finance. They allow governments to support healthcare, education, transportation, housing, infrastructure, public safety, workforce development, and social services. The Census Bureau’s 2024 State and Local Government Finance “First Look” provides national-level data on state and local revenues, expenditures, and debt, demonstrating the continuing importance of intergovernmental revenue in public budgets.

The fiscal risk is not the presence of outside revenue itself. The risk arises when a government builds recurring obligations around funding that may expire, be reduced, be delayed, or be restricted to narrow uses. Revenue that cannot be redirected during a disruption may strengthen one program while leaving the broader institution unable to respond to changing needs.

Cost Effects

Fiscal dependency can increase costs in several ways. First, temporary funding may support permanent employees, continuing programs, or recurring contracts. When the funding ends, the institution must either replace the revenue, reduce the service, use reserves, borrow, or shift costs elsewhere.

Second, grants often carry administrative costs. Governments may need staff time, legal review, procurement compliance, financial reporting, audits, performance tracking, and closeout documentation. Larger governments may absorb these requirements more easily, while smaller governments may face greater strain.

Third, externally financed capital projects can create future operating costs. A grant may pay for construction, equipment, infrastructure, or technology, but the recipient may later be responsible for staffing, utilities, maintenance, insurance, repairs, upgrades, and replacement.

Fourth, underfunded mandates may impose costs that exceed dedicated support. These costs may include personnel, enforcement, reporting, technology, training, and compliance.

Budgetary Impacts

Fiscal dependency affects annual and long-term budgets differently.

In the short term, outside funding may reduce pressure on local or state revenue. It can prevent immediate service cuts, support emergency response, or allow governments to complete projects that would otherwise be unaffordable.

In the long term, the same funding can create structural exposure if it supports obligations that continue after the funding ends. A budget may remain legally balanced while relying on temporary grants, reserves, asset sales, fund transfers, or deferred maintenance. This creates the appearance of stability while postponing difficult fiscal decisions.

Pandemic-era aid illustrates this issue. The American Rescue Plan Act’s State and Local Fiscal Recovery Funds program provided $350 billion to state, local, territorial, and Tribal governments. Funds generally had to be obligated by December 31, 2024, with most eligible expenditures completed by December 31, 2026. This assistance helped stabilize governments, but it also requires recipients to determine which funded programs or projects can continue after the federal support ends.

Distributional Effects on Public Finances

Fiscal dependency does not affect all governments equally. High-capacity jurisdictions may have broader tax bases, stronger reserves, grant-management staff, and more ability to replace lost revenue. Lower-capacity jurisdictions may rely more heavily on external support while having fewer administrative and fiscal tools to manage disruption.

This creates a distributional concern. Communities with limited tax capacity may depend most heavily on state or federal support for basic services. If funding is reduced without transition planning, the fiscal harm may fall hardest on jurisdictions least able to absorb it.

Dependency can also shift costs across levels of government. A federal reduction may increase state responsibility. A state response may reduce local aid. Local governments may then raise fees, defer maintenance, reduce services, or transfer pressure to nonprofit providers. GAO has warned that state and local fiscal pressures can affect the future delivery of intergovernmental programs.

Long-Term Fiscal Sustainability

Long-term sustainability depends on whether recurring responsibilities are supported by recurring, reliable, and flexible revenue. A fiscally sustainable institution should be able to identify which obligations depend on outside funding, when that funding may change, and how services would continue if the source is disrupted.

Federal fiscal conditions also matter. GAO reported in 2026 that the federal fiscal outlook remains unsustainable and projected that debt held by the public would reach 106 percent of GDP by 2029 and 251 percent of GDP by 2056 under current policy assumptions. This does not mean any specific grant will be reduced, but it makes indefinite reliance on unchanged federal support a less prudent planning assumption.

Long-term fiscal planning should therefore include stress testing for reduced aid, grant expiration, reimbursement delays, loss of a major taxpayer, recession, mandate cost growth, and capital operating obligations. Governments should also maintain reserves based on actual risk exposure rather than relying only on fixed percentage targets.

Fiscal Assessment

The fiscal effect of dependency is not measured only by the amount of outside funding received. The more important questions are:

• Is the funding recurring or temporary?
• Is it restricted or flexible?
• Who controls the source?
• What services depend on it?
• Can it realistically be replaced?
• How long could reserves sustain affected operations?
• Would the loss of funding shift costs to another level of government or to residents?
• Does the funding create future operating obligations?

A funding arrangement is fiscally stronger when recurring revenue supports recurring responsibilities, restrictions are transparent, formulas are predictable, administrative costs are covered, reserves are adequate, and transition plans exist.

A funding arrangement is fiscally weaker when temporary or uncertain funds support permanent obligations, when revenue is difficult to replace, when mandates exceed support, when capital grants create unfunded operating costs, or when service consequences are not disclosed.

Conclusion

Fiscal dependency creates both benefits and risks. It allows governments to finance services, equalize capacity, and respond to emergencies. It also creates vulnerability when essential responsibilities depend on revenue outside the institution’s control.

The central fiscal challenge is to preserve beneficial intergovernmental financing while preventing hidden structural imbalance. Public budgets should therefore disclose major external, temporary, restricted, and concentrated funding sources; identify the services supported by each source; estimate replacement capacity; and require transition planning before temporary funds are used for continuing obligations.

Fiscal dependency can be measured and managed, but doing so requires administrative capacity. The most feasible approach is not to create a new oversight bureaucracy, but to integrate fiscal dependency reporting into existing budget, grant-management, audit, and long-term financial planning processes.

Implementing Authority

Implementation could occur at several levels of government.

At the federal level, Congress and federal agencies could require clearer reporting of grant duration, allowable uses, matching requirements, closeout obligations, and the recurring costs created by federally supported programs or capital projects. Federal agencies already collect substantial grant and compliance information, so the main administrative challenge would be standardizing dependency-related disclosures rather than creating an entirely new reporting system.

At the state level, legislatures, budget offices, auditors, and oversight agencies could require state agencies and local governments to disclose major external, temporary, restricted, and concentrated funding sources. States are well positioned to apply these standards because they distribute aid to local governments, oversee many public institutions, and maintain budgetary control over state-administered programs.

At the local level, municipalities, counties, school districts, transit agencies, public authorities, and other institutions could incorporate fiscal dependency analysis into annual budget documents, capital planning, grant acceptance procedures, and financial reports.

The most practical model would assign responsibility to the institution receiving and using the funds, while allowing state or federal oversight bodies to establish minimum reporting standards.

Regulatory Capacity

The regulatory capacity required for fiscal dependency reporting is moderate. Governments already track many of the underlying inputs, including grant awards, revenues by source, expenditures, fund balances, debt, and program budgets. The missing step is connecting those data to operational exposure.

A dependency framework would require governments to identify:

• major funding sources controlled by another institution;
• temporary or expiring funds;
• restricted revenues;
• concentrated revenue sources;
• recurring expenses supported by nonrecurring funds;
• services and personnel tied to each major source;
• available reserves;
• replacement options; and
• transition plans if funding changes.

These requirements are administratively feasible because they build on existing budget and accounting information. However, smaller governments may require simplified templates, technical assistance, and phased implementation.

Operational Requirements

Implementation would require several operational changes.

First, governments would need to classify revenue by dependency risk. This means distinguishing recurring from nonrecurring revenue, flexible from restricted revenue, internally controlled from externally controlled revenue, and diversified from concentrated revenue.

Second, budget offices would need to connect major funding sources to the programs, employees, contracts, facilities, and services they support. This would allow policymakers to see the practical consequences of funding loss.

Third, institutions would need to identify expiration dates and renewal risks for grants, transfers, contracts, reimbursements, and temporary appropriations.

Fourth, governments would need to estimate replacement capacity. This includes available reserves, legal revenue authority, expenditure flexibility, alternative grants, and the time required to implement an adjustment.

Fifth, institutions would need to develop transition plans when temporary funds support programs that may create continuing costs or public expectations.

These steps do not require a complete redesign of public budgeting. They require a more disciplined connection between revenue source, program obligation, and service-continuity risk.

Interagency Coordination

Fiscal dependency often crosses institutional boundaries. A single program may involve federal funding, state administration, local delivery, nonprofit contracts, and private vendors. Effective analysis therefore requires coordination among budget offices, finance departments, program administrators, grant managers, legal counsel, auditors, and executive leadership.

Federal and state agencies should provide clear guidance on allowable uses, matching requirements, reporting deadlines, audit expectations, and closeout procedures. State agencies should also help local governments understand how changes in state or federal funding may affect local obligations.

Local governments and public institutions should coordinate internally so that financial staff understand program operations and program staff understand funding limitations. Without this coordination, an institution may know the amount of funding it receives but fail to identify which services would be affected if that funding changes.

Interagency coordination is especially important for pass-through grants. When federal funds move through a state agency to a local government or nonprofit provider, each level should understand its reporting duties, compliance obligations, and exposure to repayment or disallowance.

Administrative Burden

The administrative burden of fiscal dependency reporting would vary by institution.

Large governments and public agencies are likely to have the staff and systems needed to implement dependency reporting with moderate adjustments. They may already maintain grant inventories, financial forecasts, capital plans, reserve policies, and program budgets.

Smaller governments may face a greater burden. A small municipality, township, school district, or nonprofit provider may not have dedicated grant-management staff, legal counsel, or financial analysts. For these institutions, a complex reporting mandate could create additional strain.

To reduce burden, implementation should use:

• standardized templates;
• plain-language reporting categories;
• phased deadlines;
• materiality thresholds;
• simplified reporting for smaller institutions;
• shared-service options;
• technical assistance;
• model policies; and
• integration with existing budget and audit cycles.

The goal should be useful disclosure, not excessive paperwork.

Feasibility of Stress Testing

Fiscal stress testing is administratively feasible but should be scaled to institutional capacity.

A large state, county, city, transit agency, or public university may be able to model multiple scenarios, including recession, grant expiration, reimbursement delay, loss of a major taxpayer, or mandate cost growth.

Smaller institutions may begin with simpler tests, such as estimating the effect of losing their largest grant, largest taxpayer, largest state transfer, or largest restricted revenue source.

A basic stress test should answer five questions:

• How much revenue is at risk?
• Which services would be affected?
• How long could reserves sustain operations?
• What replacement options are available?
• What transition steps would be required?

This level of analysis would significantly improve preparedness even without advanced forecasting models.

Implementation Challenges

Several challenges may arise.

First, governments may resist disclosure if dependency analysis reveals vulnerability or politically difficult tradeoffs.

Second, data may be fragmented across departments, funds, grant systems, and outside providers.

Third, some funding risks are uncertain because appropriations, formulas, and political decisions can change.

Fourth, institutions may disagree over whether a funding source is truly temporary, restricted, or replaceable.

Fifth, smaller entities may lack sufficient staff capacity to comply without assistance.

These challenges are real but manageable. They support a phased and standardized approach rather than abandonment of the framework.

Administrative Safeguards

To avoid unnecessary burden, dependency reporting should include safeguards.

Materiality thresholds should limit detailed reporting to funding sources large enough to affect services or financial stability. Small or routine grants should not require extensive analysis unless they support essential operations.

Reporting should distinguish between high-risk dependency and normal intergovernmental funding. The purpose is not to label all outside revenue as problematic, but to identify where funding loss would cause material disruption.

Disclosure should also be tied to decision points. Dependency analysis is most useful when governments accept major grants, approve recurring expenditures, adopt annual budgets, issue debt, approve capital projects, or renew major contracts.

Administrative Conclusion

Fiscal dependency analysis is administratively feasible if implemented through existing budget, grant-management, audit, and planning systems. The main requirement is not new data collection from scratch, but better organization of information governments already possess.

The most practical model is a phased reporting framework that identifies major external, temporary, restricted, and concentrated funding sources; connects them to supported services; evaluates replacement capacity; and requires transition planning for material risks.

Implementation should be scaled to institutional capacity. Large governments can conduct more detailed analysis, while smaller institutions should use simplified templates and receive technical support.

With appropriate safeguards, fiscal dependency reporting can improve transparency, planning, and accountability without imposing unreasonable administrative burden.

Legal and Institutional Considerations

Fiscal dependency operates within a legal and institutional framework shaped by federalism, appropriations authority, grant law, state and local budget rules, and the division of responsibility among public institutions. This report does not provide legal advice or determine the validity of any specific statute, grant condition, mandate, or funding formula. Its purpose is to identify the legal and institutional considerations policymakers should evaluate when designing, accepting, or relying on public funding arrangements.

Constitutional and Federalism Considerations

The American fiscal system is based on divided authority among federal, state, and local institutions. The federal government may raise and distribute funds for national purposes, while states retain broad responsibility for public services, local government structure, education systems, public safety, land use, health administration, and many domestic functions. Local governments generally possess only the authority granted by state constitutions and statutes.

This division creates both capacity and dependency. Federal funds can support programs that exceed the fiscal capacity of individual states or localities. At the same time, state and local governments may become reliant on funding conditions established by Congress or federal agencies. State governments may also impose responsibilities on local governments while controlling the revenue authority available to meet those responsibilities.

Fiscal dependency therefore raises federalism concerns when one level of government controls the funding, another administers the program, and a third bears political or operational responsibility for service outcomes. Clear assignment of authority, funding responsibility, and accountability is essential to maintaining a functional intergovernmental system.

Statutory Authority and Grant Conditions

Most fiscal dependency arises through specific statutory and appropriations decisions rather than through a single governing law. Congress, state legislatures, agencies, and local governing bodies may create funding streams through statutes, budgets, grant programs, reimbursement systems, dedicated revenues, and contracts.

Federal awards are commonly governed by program-specific statutes and by government-wide administrative rules. The Uniform Guidance in 2 C.F.R. Part 200 establishes federal administrative requirements, cost principles, and audit requirements for many federal awards to nonfederal entities. These rules influence procurement, internal controls, allowable costs, subrecipient monitoring, reporting, audits, and closeout obligations.

Grant conditions are legally significant because they may limit how funds can be used, require matching resources, impose performance obligations, establish reporting duties, and create repayment exposure for noncompliance. A funding source may therefore increase institutional capacity while also narrowing administrative discretion.

Mandates and Funding Alignment

Unfunded and underfunded mandates are central to fiscal dependency analysis. A mandate may require a government or public institution to perform a duty without providing sufficient funding or revenue authority to carry it out.

The Unfunded Mandates Reform Act of 1995 was enacted to improve consideration of certain federal mandate costs imposed on state, local, and Tribal governments. However, UMRA does not prohibit federal mandates, and not every federal action that creates state or local costs falls within its procedures.

As a result, policymakers should evaluate whether continuing responsibilities are paired with continuing revenue. Where a government imposes a legal obligation, the analysis should identify direct service costs as well as administrative, reporting, technology, staffing, enforcement, and compliance costs.

Separation of Powers

Fiscal dependency also involves separation-of-powers considerations. Legislatures generally control appropriations, taxation, and statutory program design. Executive agencies administer programs, distribute funds, enforce grant conditions, and monitor compliance. Auditors and oversight bodies review financial management, legal compliance, and performance.

A dependency framework should respect these institutional roles. It should not allow administrative agencies to override legislative spending authority. It should also not allow legislatures to create recurring obligations without acknowledging their fiscal consequences.

The appropriate role for dependency reporting is informational and procedural. It should improve the quality of decisions by showing whether a proposed appropriation, grant acceptance, mandate, or capital project creates future fiscal exposure.

State and Local Legal Constraints

State and local governments often operate under legal restrictions that affect replacement capacity. These may include balanced-budget requirements, tax caps, debt limits, voter-approval rules, fund restrictions, levy limitations, and statutory limits on fees or charges.

These rules shape fiscal dependency because a government may not be legally able to replace lost external funding quickly. Even where replacement revenue is theoretically available, the process may require legislative action, voter approval, rate hearings, or statutory amendment.

Legal analysis should therefore distinguish between theoretical replacement capacity and practical legal capacity. A funding source should not be considered easily replaceable unless the institution has lawful authority, administrative ability, and sufficient time to implement the replacement before service disruption occurs.

Regulatory and Audit Framework

Fiscal dependency can also create regulatory and audit exposure. Federal recipients and subrecipients must comply with applicable award terms, reporting requirements, procurement rules, allowable-cost standards, and audit obligations. Under 2 C.F.R. Part 200, nonfederal entities that expend $1,000,000 or more in federal awards during a fiscal year are generally subject to single-audit requirements.

GAO has identified continuing challenges in federal grant oversight, including incomplete or inaccurate subaward information. These weaknesses can make it harder to determine where funds are ultimately spent and can increase risks related to compliance, transparency, and misuse of funds.

For fiscal dependency purposes, audit and compliance requirements matter because they impose administrative obligations that may not be fully reflected in program budgets. A grant may provide service funding while requiring legal, accounting, procurement, reporting, and monitoring capacity that must be supported by unrestricted resources.

Institutional Roles and Accountability

Fiscal dependency frequently blurs public accountability. One institution may design the policy, another may finance it, another may administer it, and another may deliver the service. When funding becomes inadequate, residents may not know which institution is responsible for the resulting service reduction or tax pressure.

A stronger institutional framework should identify:

• who controls the funding source;
• who determines eligibility and program rules;
• who administers the funds;
• who delivers the service;
• who bears compliance risk;
• who is responsible for replacement funding; and
• who must explain service consequences to the public.

This does not require eliminating shared responsibility. It requires making shared responsibility visible.

Implications for Policy Design

Legal and institutional safeguards should be built into major funding arrangements. Continuing mandates should include identified funding sources or adjustment procedures. Temporary grants should include transition planning when they support services likely to continue. Capital awards should include review of future operating and maintenance obligations. Restricted revenues should be disclosed separately from flexible operating resources.

Fiscal dependency reporting should be designed as a transparency tool rather than a prohibition on grants, transfers, or intergovernmental cooperation. It should help policymakers understand legal obligations, funding restrictions, compliance exposure, and service-continuity risks before those risks become emergencies.

Conclusion

Fiscal dependency is legally and institutionally significant because it affects the relationship between authority, responsibility, funding, and accountability. Public institutions can remain financially interconnected without becoming dangerously dependent, but only if funding arrangements are transparent, legally sustainable, and aligned with the obligations they support.

The central legal principle is alignment. The institution assigned responsibility for a continuing public function should have either a reliable funding source, sufficient revenue authority, or a clear transition mechanism if outside support changes. Without that alignment, fiscal dependency can weaken accountability, reduce institutional flexibility, and expose essential services to disruption.

Fiscal dependency does not affect all governments, institutions, or residents equally. Its consequences are distributed across regions, income groups, service populations, and levels of government depending on which funding sources are at risk, which services depend on them, and whether affected institutions have the capacity to replace lost revenue.

The central equity concern is that communities with the greatest service needs often have the weakest local fiscal capacity. If external funding is reduced, restricted, delayed, or allowed to expire without transition planning, the burden may fall most heavily on residents and institutions least able to absorb it.

Effects on Low-Income Communities

Low-income communities are more likely to rely on public services supported by federal, state, or charitable funding. These may include Medicaid, housing assistance, public transit, workforce programs, food assistance administration, public health services, school supports, emergency shelters, and community development programs.

When external funding is unstable, low-income residents may experience service reductions more directly than higher-income residents. They may have fewer private alternatives if public programs are reduced. For example, a reduction in transit support may affect access to work, healthcare, groceries, education, and public services. A reduction in housing or health funding may increase instability for households already facing limited options.

Fiscal dependency can therefore intensify existing inequality when essential services depend on temporary or uncertain funding.

Effects on Middle-Income Households

Middle-income households may be affected differently. They may not qualify for many direct assistance programs but may still rely on public schools, roads, emergency services, libraries, parks, public safety, public health systems, and local infrastructure.

When external funding declines, local governments may respond through property-tax increases, sales-tax increases, user fees, service reductions, or deferred maintenance. Middle-income homeowners and renters may therefore experience fiscal dependency through higher local costs or reduced service quality.

Renters may also be affected indirectly if landlords pass through higher property taxes, utility costs, or local fees.

Effects on Seniors and People with Disabilities

Seniors and people with disabilities may face heightened risk because many depend on publicly supported healthcare, transportation, housing, home- and community-based services, emergency response, and local social-service networks.

If programs supported by external funds are reduced, the effect may be more than financial. It may affect independence, mobility, access to care, and the ability to remain safely in the community.

For these populations, service continuity is especially important. Temporary funding that creates a program and then disappears can be disruptive if residents have come to rely on that service for daily needs.

Effects on Children and Families

Children and families may be affected through schools, childcare supports, public health programs, nutrition programs, housing stability, after-school services, and family-support agencies.

School districts and child-serving institutions often rely on combinations of local taxes, state aid, federal grants, and special-purpose funding. If one funding stream changes, the effect may appear as larger class sizes, fewer support staff, reduced transportation, delayed building maintenance, fewer intervention programs, or increased local levy pressure.

Families with lower incomes are less able to replace lost public services through private options, which increases the equity impact of funding instability.

Regional Effects

Fiscal dependency has different effects across regions.

Urban areas may rely heavily on transit funding, housing programs, public health systems, community development grants, and large service-delivery networks. They may also face concentrated poverty, aging infrastructure, and high demand for public services.

Rural areas may face different challenges, including limited tax bases, smaller administrative staffs, aging populations, longer service distances, fewer healthcare providers, and greater difficulty competing for complex grants. A small loss of funding may have a large effect when the local budget is already narrow.

Older industrial communities may be especially vulnerable when population loss, declining property values, legacy infrastructure, and reduced economic activity limit replacement capacity. Fast-growing regions may face the opposite problem: rapid service demand, infrastructure expansion, and capital needs that outpace recurring revenue.

Effects on Local Governments and Public Institutions

Fiscal dependency often shifts risk downward. A federal funding change may pressure state budgets. State governments may respond by reducing aid or changing formulas. Local governments may then face the choice of raising taxes, increasing fees, reducing services, using reserves, or delaying obligations.

Public institutions such as transit agencies, housing authorities, universities, hospitals, public-health departments, and school systems may be affected even when the parent government appears financially stable. These institutions may have limited independent revenue authority and may depend heavily on appropriations, reimbursements, grants, or dedicated taxes.

Nonprofit providers may also become indirect losers when government contracts fail to cover full costs or when payments are delayed. In those cases, nonprofits may reduce services, draw on donations, limit intake, or withdraw from public-service contracts.

Winners and Losers

The potential winners of better fiscal dependency management include residents who depend on stable public services, taxpayers who benefit from earlier planning, policymakers who receive clearer budget information, and institutions that can identify risks before they become emergencies.

Higher-capacity governments may also benefit because standardized dependency reporting can improve long-term planning and reduce surprise fiscal disruptions.

Potential losers include institutions that have relied on temporary or restricted funding without disclosing long-term exposure. Programs built on unstable funding may face closer scrutiny. Governments may also lose some short-term flexibility if policymakers limit the use of one-time funds for recurring obligations.

However, the purpose of dependency analysis is not to eliminate services. It is to make funding risks visible so that services can be sustained responsibly or transitioned honestly.

Equity Implications

The main equity implication is that unmanaged dependency can deepen disparities between high-capacity and low-capacity jurisdictions.

A wealthy community may replace lost aid through local taxes, reserves, fees, or borrowing. A lower-income community may lack those options and may be forced to reduce services. As a result, the same funding reduction can have very different consequences depending on local fiscal capacity.

Equity-focused dependency analysis should therefore ask:

• Which populations depend on the affected service?
• Can residents access private alternatives?
• Does the local government have replacement revenue authority?
• Would service reductions fall disproportionately on low-income, elderly, disabled, rural, or transit-dependent residents?
• Would a funding loss widen regional disparities?
• Would the burden shift to residents through taxes, fees, or reduced access?

Access Disparities

Fiscal dependency can create or worsen access disparities when temporary or competitive funding determines which communities receive services.

Competitive grants may favor jurisdictions with stronger administrative capacity, professional grant writers, and matching funds. Communities with the greatest need may be less able to apply successfully or comply with complex requirements.

Restricted grants may also create uneven access. A community may receive funding for one program while lacking support for the broader administrative system needed to deliver services effectively.

Access disparities may be reduced through formula funding, technical assistance, simplified reporting, regional grant support, administrative-cost reimbursement, and transition funding for low-capacity jurisdictions.

Distributional Conclusion

Fiscal dependency is not only a budget issue. It is also an equity issue. When essential services rely on unstable funding, the greatest harm often falls on residents with the fewest alternatives and governments with the weakest replacement capacity.

A stronger policy framework should therefore evaluate not only the amount of funding at risk, but also who depends on the service, who can replace the support, who bears the cost if it disappears, and whether the resulting burden is distributed fairly.

Managed interdependence should protect service continuity while recognizing differences in local capacity. Fiscal dependency reporting should therefore include equity analysis, replacement-capacity review, and transition planning for communities and populations most likely to be harmed by funding disruption.

Fiscal dependency affects a wide range of public, institutional, nonprofit, and community stakeholders. Each group has different interests depending on whether it provides funding, receives funding, administers programs, depends on public services, or bears the consequences when funding changes.

Federal Agencies

Federal agencies administer grants, reimbursements, regulatory requirements, audits, and reporting systems. Their interest is ensuring that federal funds are used lawfully, efficiently, and consistently with congressional intent.

Federal agencies may support stronger fiscal dependency reporting if it improves transparency, compliance, and program planning. However, they may be concerned about additional administrative burden, inconsistent state and local reporting capacity, and the difficulty of standardizing dependency measures across very different programs.

State Governments

State governments are both recipients and distributors of public funding. They receive federal funds, contribute state resources, administer major programs, and distribute aid to local governments, school systems, public institutions, and service providers.

States have an interest in stable federal funding, predictable formulas, manageable matching requirements, and flexibility to respond to local conditions. They may support dependency analysis as a planning tool, but they may also resist disclosure requirements that reveal reliance on temporary funds, underfunded mandates, or future budget exposure.

Local Governments

Counties, municipalities, townships, and other local governments are directly affected by changes in state aid, federal grants, local tax bases, and mandated responsibilities.

Local governments have a strong interest in predictable funding, clear rules, replacement capacity, and advance notice of funding changes. They may benefit from fiscal dependency reporting because it can show when state or federal decisions create local service pressure.

Their main concern is administrative burden. Smaller local governments may lack dedicated finance, grant, legal, or compliance staff. They are likely to support simplified templates, technical assistance, materiality thresholds, and phased implementation.

School Districts and Education Institutions

School districts, public colleges, and universities often rely on a mix of local revenue, state funding, federal grants, tuition, fees, and special-purpose funds.

Their interests include funding stability, flexibility, enrollment-sensitive formulas, support for special education and student services, and protection against sudden aid reductions. Education stakeholders may support dependency analysis where it identifies structural underfunding or unstable program support.

They may be concerned that dependency reporting could be used to justify cuts, restrict program innovation, or create new reporting requirements without additional administrative resources.

Public Authorities and Special-Purpose Institutions

Transit agencies, housing authorities, public hospitals, infrastructure authorities, water systems, port authorities, and development agencies often operate through specialized revenue structures. These may include dedicated taxes, user charges, grants, reimbursements, debt, and annual appropriations.

Their interest is ensuring that funding sources match long-term operating and capital needs. They are especially affected by capital grants that create future maintenance, staffing, repair, and replacement obligations.

These institutions may support life-cycle cost analysis and stress testing, but may resist disclosures that could affect bond ratings, public confidence, or political support.

Nonprofit Service Providers

Nonprofit organizations frequently deliver publicly funded services through grants, contracts, and reimbursements. These may include housing, behavioral health, food assistance, disability services, workforce programs, senior services, youth services, and emergency support.

Their interests include timely payments, adequate reimbursement rates, clear contract terms, realistic reporting requirements, and stable funding. Nonprofits may strongly support dependency analysis if it reveals that government contracts fail to cover full service costs.

Their likely concern is that additional reporting requirements could fall on providers already operating with limited administrative capacity.

Public Employees and Labor Organizations

Public employees and labor organizations are affected when fiscal dependency influences staffing, compensation, layoffs, vacancies, service levels, and workplace stability.

Their interest is in predictable funding for essential services, responsible workforce planning, and avoiding sudden cuts caused by grant expiration or revenue loss. Labor organizations may support disclosure when it shows that staffing depends on temporary or uncertain funding.

They may be concerned that dependency analysis could be used to justify hiring freezes, reductions, privatization, or changes to collective bargaining priorities.

Taxpayers and Residents

Taxpayers and residents are affected both as funders of government and as users of public services.

Their interests include stable services, reasonable taxes and fees, transparency, and accountability. Residents benefit when governments identify fiscal risks before they become emergencies requiring abrupt tax increases or service cuts.

Their concerns may vary. Some may see dependency reporting as a tool for controlling spending. Others may see it as a way to protect essential services. The public is likely to respond favorably if the information is presented clearly and tied to real service consequences rather than technical budget language.

Low-Income and Vulnerable Populations

Low-income residents, seniors, people with disabilities, children, transit-dependent residents, and households relying on public health, housing, food, transportation, or social-service systems are among the most affected by funding instability.

Their interest is service continuity. They may have limited private alternatives if public programs are reduced. For these groups, fiscal dependency is not only a budget concern but an access and equity concern.

Advocacy organizations representing these populations are likely to support dependency analysis if it helps protect essential programs, identify service risks, and require transition planning before funding expires.

Business Community and Employers

Businesses are affected by public finance through taxes, fees, infrastructure quality, workforce programs, transportation systems, public safety, utilities, and economic-development policy.

Their interests include predictable tax policy, reliable infrastructure, workforce readiness, and stable public services. Business groups may support fiscal dependency analysis if it reduces surprise tax increases and improves long-term planning.

They may be concerned if dependency reporting leads to proposals for new revenue, reduced incentives, or revised economic-development subsidies.

Bondholders, Credit Analysts, and Financial Institutions

Credit-rating agencies, bondholders, lenders, and financial advisors are interested in the long-term stability of government revenue, debt capacity, reserves, and operating commitments.

They are likely to view stronger dependency reporting positively if it improves transparency about revenue concentration, temporary funding, reserve adequacy, and future obligations.

However, greater disclosure of dependency risks may affect credit assessments if it reveals significant exposure that was not previously visible.

Professional Associations

Organizations representing government finance officers, budget officials, auditors, city and county officials, school administrators, public authorities, and grant managers may play an important role in implementation.

Their interests include clear standards, practical templates, training, and consistency across jurisdictions. They may support the concept of dependency reporting while urging caution against excessive complexity.

Professional associations are likely to recommend phased implementation, model policies, and alignment with existing budget and audit processes.

Auditors and Oversight Bodies

Auditors, inspectors general, legislative oversight offices, and budget review agencies have an interest in transparency, compliance, and risk identification.

They may support fiscal dependency analysis because it improves oversight of temporary funding, restricted revenue, grant compliance, and structural imbalance.

Their concern may be scope. Oversight bodies would need clear standards to determine whether dependency reporting is descriptive, evaluative, or part of formal compliance review.

Advocacy Groups and Policy Organizations

Taxpayer groups, social-service advocates, education advocates, infrastructure coalitions, public-sector unions, good-government organizations, and fiscal-policy think tanks may all engage with fiscal dependency reforms.

Their responses will vary. Fiscal restraint groups may emphasize the risk of using temporary funds for permanent spending. Service advocates may emphasize the need to stabilize essential programs. Good-government organizations may focus on transparency and accountability.

The framework is likely to attract broader support if it is presented as a neutral disclosure and planning tool rather than as an argument for either automatic spending reductions or automatic revenue increases.

Elected Officials

Legislators, county commissioners, city council members, school board members, governors, mayors, and other elected officials are central stakeholders because they approve budgets, taxes, grants, mandates, and long-term obligations.

Their interest is in making informed decisions and avoiding fiscal surprises. Dependency reporting can help them understand the long-term consequences of accepting temporary funds, creating new programs, imposing mandates, or approving capital projects.

Their likely concern is political exposure. Clearer reporting may reveal that current services depend on unstable funding or that past decisions created future obligations.

Overall Stakeholder Assessment

Most stakeholders have an interest in greater fiscal stability, but they may disagree over how to respond once dependency is identified. Some will emphasize spending restraint, others will emphasize revenue adequacy, and others will focus on protecting services or reducing administrative burden.

The strongest policy approach is therefore one that frames fiscal dependency reporting as a neutral transparency and planning tool. It should not presume that outside funding is harmful, nor should it automatically require program cuts or tax increases.

The common stakeholder interest is avoiding surprise disruption. Governments, service providers, residents, taxpayers, and oversight bodies all benefit when funding risks are identified early, service impacts are understood, and transition plans are developed before a fiscal shock occurs.

Fiscal dependency analysis can improve transparency, planning, and accountability, but it also carries implementation risks and uncertainties. The purpose of this section is to identify where the framework may be misunderstood, inconsistently applied, administratively burdensome, or unable to predict future fiscal conditions with precision.

Risk 1: Dependency Reporting Could Be Misinterpreted as Opposition to Intergovernmental Funding

One of the most significant risks is that fiscal dependency analysis could be misunderstood as an argument against grants, transfers, shared revenues, or cooperative federalism. That is not the purpose of the framework.

External funding is often necessary and beneficial. It supports essential services, reduces disparities among jurisdictions, and helps lower-capacity communities provide programs they could not finance independently.

The risk is moderate in likelihood and significant in magnitude. If dependency reporting is framed poorly, stakeholders may treat it as a justification for cutting public programs rather than as a tool for identifying funding exposure and improving sustainability.

This risk can be reduced by clearly distinguishing ordinary fiscal interdependence from unmanaged dependency.

Risk 2: Reporting Requirements Could Create Administrative Burden

Fiscal dependency reporting may impose new work on governments and public institutions, particularly smaller municipalities, townships, school districts, nonprofit providers, and special-purpose bodies with limited staff.

Large institutions may already track grant sources, expiration dates, restrictions, reserves, and program budgets. Smaller institutions may not have dedicated grant managers, fiscal analysts, legal counsel, or compliance officers.

The likelihood of administrative burden is high. The magnitude depends on implementation design. A complex framework could overwhelm small entities, while a simplified template with materiality thresholds would be more manageable.

This risk can be reduced through phased implementation, model forms, technical assistance, simplified reporting for smaller institutions, and integration with existing budget and audit processes.

Risk 3: Data May Be Incomplete, Fragmented, or Inconsistent

Fiscal dependency analysis requires information that may be spread across finance departments, grant files, program budgets, contracts, capital plans, payroll systems, and outside providers.

A government may know the amount of a grant but not have an easy way to identify every position, service, contract, or facility supported by that source. Data may also be reported differently across agencies or fiscal years.

The likelihood of incomplete or inconsistent data is high, especially during early implementation. The magnitude is moderate to high because poor data could produce misleading conclusions.

This risk can be reduced by starting with major funding sources, improving internal grant inventories, standardizing definitions, and distinguishing confirmed data from estimates.

Risk 4: Dependency Levels May Be Difficult to Compare Across Jurisdictions

A high level of external funding does not always mean fiscal weakness. Some programs are designed to be federally or state funded. Some communities depend on transfers because they have limited tax capacity. Others may rely on outside funding for capital projects without creating serious operating risk.

The likelihood of improper comparison is moderate. The magnitude is significant if policymakers or media use dependency ratios without context.

A useful framework must avoid simplistic rankings. Dependency should be evaluated according to funding stability, restrictions, duration, replacement capacity, reserve coverage, and service consequences.

Risk 5: Political Incentives May Discourage Full Disclosure

Governments may be reluctant to disclose fiscal dependency if doing so reveals that current services rely on temporary funding, that mandates are underfunded, or that a major program lacks a transition plan.

Elected officials may fear that disclosure will be used against them politically. Agencies may worry that identifying dependency will weaken support for their programs. Institutions may fear that transparency could affect credit ratings, public confidence, or future appropriations.

The likelihood of political resistance is moderate to high. The magnitude may be high where dependency is significant and previously undisclosed.

This risk can be reduced by framing the process as a planning and transparency tool rather than as a punitive audit.

Risk 6: Fiscal Stress Tests May Not Predict Actual Events

Stress testing improves preparedness, but it cannot predict future fiscal conditions with certainty. Recessions, federal policy changes, inflation, disasters, grant reductions, litigation, and economic shocks may occur differently than modeled.

The likelihood of forecast error is high because all projections involve uncertainty. The magnitude is moderate if stress tests are treated as planning tools, but high if they are treated as precise predictions.

Stress testing should therefore use multiple plausible scenarios and should be updated regularly. Its purpose is not to forecast the exact future, but to identify vulnerabilities before disruption occurs.

Risk 7: Disclosure Could Trigger Overcorrection

Once dependency is identified, policymakers may respond too aggressively by cutting programs, rejecting grants, or avoiding useful funding opportunities.

This would be an unintended consequence. The purpose of dependency analysis is not to discourage beneficial funding, but to ensure that institutions understand conditions, restrictions, expiration dates, and long-term obligations.

The likelihood of overcorrection is moderate. The magnitude could be high if essential services are reduced unnecessarily.

This risk can be reduced by requiring transition planning and replacement-capacity analysis before major changes are made.

Risk 8: Temporary Funding May Be Necessary During Emergencies

A strict rule against temporary funds supporting recurring costs may be difficult during emergencies. In a recession, disaster, public-health crisis, or sudden revenue collapse, temporary aid may be necessary to preserve essential operations.

The likelihood of this issue is high during crisis periods. The magnitude is significant because rigid rules could limit emergency response.

The framework should therefore distinguish between temporary emergency use and long-term structural reliance. Temporary funding may be appropriate when paired with a clear exit plan, sunset date, or recurring funding strategy.

Risk 9: Capital Projects May Create Underestimated Long-Term Costs

Externally funded capital projects may appear affordable because construction or acquisition costs are covered. However, recipients may later face operating, maintenance, staffing, insurance, repair, technology, utility, and replacement costs.

The likelihood of underestimated life-cycle costs is moderate to high. The magnitude can be high for infrastructure, transportation, public facilities, broadband, water systems, and technology projects.

This risk can be reduced by requiring life-cycle cost review before accepting major capital grants or approving externally financed projects.

Risk 10: Funding Changes May Shift Costs Rather Than Reduce Them

Reducing a grant or transfer may not eliminate the underlying need. It may simply shift costs to another level of government, nonprofit providers, households, or service users.

For example, a federal reduction may increase state pressure. A state reduction may increase local pressure. A local service cut may increase costs for families, hospitals, schools, or emergency responders.

The likelihood of cost shifting is high. The magnitude depends on the service involved and the affected population.

Dependency analysis should therefore identify who bears the cost if funding is reduced.

Risk 11: Low-Capacity Communities May Be Disadvantaged

Communities with limited fiscal and administrative capacity may be harmed if dependency reporting is implemented without support. They may lack staff to complete reports, conduct stress tests, or compete for replacement funding.

The likelihood is high unless implementation includes assistance. The magnitude is significant because these communities may also have the greatest service needs.

This risk can be reduced through technical assistance, regional support, simplified templates, shared administrative services, and state-level support for smaller jurisdictions.

Risk 12: Replacement Capacity May Be Overestimated

A government may appear to have replacement options on paper, but those options may be legally limited, politically unrealistic, economically harmful, or too slow to implement.

For example, a tax increase may require voter approval. A fee increase may be unaffordable for residents. Borrowing may be restricted. Alternative grants may be competitive or unavailable.

The likelihood of overestimating replacement capacity is moderate. The magnitude is high if policymakers assume a funding loss is manageable when it is not.

Replacement capacity should therefore be assessed realistically, not theoretically.

Risk 13: Federal and State Policy Changes Remain Uncertain

Many funding sources depend on future appropriations, legislative priorities, agency rules, economic conditions, and court decisions. Even well-designed reporting cannot fully control these uncertainties.

The likelihood of policy change is moderate over time. The magnitude may be high for institutions that depend heavily on federal or state transfers.

The appropriate response is not to predict every change, but to identify exposure and prepare for plausible scenarios.

Risk 14: Reporting May Become Compliance-Oriented Instead of Decision-Oriented

There is a risk that fiscal dependency reporting becomes another paperwork exercise rather than a tool for better decisions.

If reports are produced only to satisfy a requirement, they may not meaningfully influence grant acceptance, budget adoption, reserve policy, capital planning, or mandate review.

The likelihood is moderate. The magnitude is moderate to high because the framework’s value depends on use by policymakers.

This risk can be reduced by tying dependency analysis to specific decision points, including budget approval, grant acceptance, capital project approval, recurring program expansion, and major contract renewal.

Risk 15: Public Communication May Be Difficult

Fiscal dependency is technical. Terms such as restricted revenue, replacement capacity, structural balance, intergovernmental transfers, and mandate exposure may not be clear to the public.

The likelihood of communication difficulty is high. The magnitude is moderate because poor communication may reduce public trust or create confusion.

Reports should use plain language, explain service impacts, and avoid presenting dependency as a simple measure of good or bad fiscal management.

Overall Risk Assessment

The greatest risks are administrative burden, incomplete data, political resistance, misinterpretation of dependency findings, and overreliance on uncertain forecasts.

The greatest adverse outcomes would occur if dependency reporting is used to justify automatic cuts, if low-capacity communities are burdened without support, or if policymakers treat external funding as inherently harmful.

The framework is most likely to perform well when it is used as a planning tool rather than a punitive tool. Its value depends on clear definitions, realistic replacement analysis, service-impact disclosure, stress testing, technical assistance, and transition planning.

Fiscal dependency cannot be eliminated from modern public finance. The key risk is unmanaged dependency: continuing essential services with no clear understanding of who controls the funding, when it may change, what restrictions apply, whether it can be replaced, and who will be harmed if it disappears.

This report considers several alternative policy approaches for addressing fiscal dependency. Each approach offers potential benefits, but each also carries limitations that make it less suitable as the primary recommendation. The report therefore adopts a balanced framework focused on disclosure, stress testing, structural balance, replacement-capacity review, and transition planning.

Alternative 1: Maintain the Current Reporting System

One option is to maintain existing budget, audit, and financial-reporting practices without adding a fiscal dependency framework.

This approach has the advantage of avoiding new administrative requirements. Governments already report revenues, expenditures, debt, assets, fund balances, and grant activity through existing budget documents, financial statements, audits, and federal reporting systems.

This approach was not adopted because traditional reporting does not consistently connect major funding sources to service consequences. A government may disclose that it receives federal or state aid without identifying which programs depend on it, when the funding expires, whether the revenue is restricted, or whether replacement funding is available.

This option may be preferable for very small entities with minimal external funding exposure, limited staff capacity, or no material temporary or restricted funding sources. Even in those cases, simplified dependency review may still be useful.

Alternative 2: Treat External Funding as Inherently Risky

A second approach would classify all grants, transfers, reimbursements, and outside appropriations as dependency risks to be reduced wherever possible.

This approach has the advantage of emphasizing institutional independence and encouraging governments to avoid overreliance on funding they do not control.

This approach was rejected because external funding is often necessary and beneficial. Intergovernmental financing supports healthcare, education, infrastructure, transportation, public safety, housing, workforce development, disaster response, and social services. Many jurisdictions could not provide essential services at reasonable levels without state or federal support.

This approach may be preferable only where a specific funding source is temporary, unstable, highly restricted, politically uncertain, or being used to support permanent obligations without a transition plan.

Alternative 3: Establish a Universal Dependency Threshold

Another option would be to establish a fixed percentage threshold, such as declaring a government fiscally dependent if more than a certain share of revenue comes from external sources.

This approach would be simple to administer and easy to communicate. It could also help identify governments or programs requiring additional review.

This approach was not adopted as the primary standard because fiscal dependency depends on context. A high external-revenue share may be reasonable for a program designed to administer federal assistance. A smaller external source may create serious risk if it supports an essential service and cannot be replaced.

The report instead treats numerical thresholds as screening tools, not final conclusions.

This approach may be preferable for preliminary risk screening, statewide dashboards, legislative oversight reports, or early-warning systems, provided that the threshold triggers further analysis rather than automatic judgment.

Alternative 4: Prohibit Temporary Funds for Recurring Expenses

A stricter approach would prohibit governments from using temporary grants, emergency appropriations, settlements, reserves, or one-time revenues for recurring costs.

This approach would reduce structural imbalance and discourage governments from creating permanent obligations without permanent revenue.

This approach was not adopted as an absolute rule because emergencies sometimes require temporary support for continuing operations. During recessions, disasters, public-health emergencies, or sudden revenue losses, temporary aid may be necessary to preserve public safety, health services, schools, transportation, or other essential functions.

The preferred approach is to allow temporary funding for recurring costs only when accompanied by disclosure, a sunset provision, replacement funding plan, or transition strategy.

A stricter prohibition may be preferable during normal budget conditions, especially when governments are considering permanent staffing increases or ongoing programs funded entirely by one-time resources.

Alternative 5: Require Full Fiscal Self-Sufficiency

A more aggressive alternative would require governments and public institutions to finance core services primarily or entirely from locally controlled revenue.

This approach would increase local control and reduce exposure to external funding decisions.

This approach was rejected because full self-sufficiency is unrealistic for many governments and may increase inequality. Communities with weak tax bases, aging infrastructure, high service needs, or limited economic activity may be unable to provide essential services without state or federal support.

This approach could also undermine national and statewide policy goals that depend on shared financing, such as transportation systems, public health, education equity, disaster response, and assistance to low-capacity jurisdictions.

This approach may be preferable only for discretionary programs where a government has sufficient local resources and where outside funding would create unnecessary long-term obligations.

Alternative 6: Centralize Funding Responsibility at a Higher Level of Government

Another option would shift more responsibility to the federal or state level, reducing local fiscal exposure by having higher levels of government finance more services directly.

This approach may improve equity by reducing dependence on local tax capacity. It may also create more uniform service standards across jurisdictions.

This approach was not adopted because centralization can reduce local flexibility and responsiveness. It may also increase dependence on federal or state appropriations, leaving local institutions vulnerable to policy changes made elsewhere.

Centralized funding may be preferable for services with strong statewide or national interests, large equalization needs, or major disparities in local fiscal capacity. It is less suitable where local conditions require flexible service design.

Alternative 7: Shift More Responsibility to Local Governments

The opposite approach would give local governments greater responsibility for financing and managing services, reducing reliance on federal or state transfers.

This approach may improve local accountability because the same government would raise revenue, make spending decisions, and answer directly to residents.

This approach was not adopted because many local governments lack the tax base, administrative capacity, or legal authority to replace state and federal funding. Shifting responsibility downward without adequate revenue authority may worsen mandate dependency and increase regional inequality.

This approach may be preferable where local governments have strong revenue capacity, clear authority, and services are primarily local in nature.

Alternative 8: Rely Primarily on Revenue Diversification

Another option would address dependency mainly by encouraging governments to diversify revenue sources.

Revenue diversification can reduce exposure to one tax, employer, industry, grant, or transfer. It may improve long-term resilience and reduce volatility.

This approach was not adopted as the sole solution because diversification is not always legally or economically available. Some governments face tax caps, voter-approval requirements, narrow tax bases, or statutory limits. Others may diversify revenue but still remain dependent on restricted or temporary funding.

Revenue diversification is an important tool, but it must be combined with reserve planning, stress testing, mandate review, and transition planning.

This approach may be preferable for jurisdictions with legal authority to broaden their revenue base and where concentration risk is the primary dependency concern.

Alternative 9: Rely Primarily on Reserves

Another approach would focus on building larger reserves to protect against funding disruptions.

Reserves are essential for fiscal resilience. They provide time to respond to revenue loss, reimbursement delays, emergencies, and economic downturns.

This approach was not adopted as the sole solution because reserves do not solve permanent structural imbalance. Reserves can bridge a temporary disruption, but they cannot indefinitely sustain recurring obligations after a major funding source ends.

This approach may be preferable when the risk is short-term volatility, delayed reimbursement, or temporary revenue decline. It is less effective where the institution faces a permanent loss of funding or an ongoing mandate funding gap.

Alternative 10: Require Independent Fiscal Audits of Dependency Risk

Another option would require independent auditors to conduct formal fiscal dependency audits for governments and public institutions.

This approach could improve credibility and consistency. It may also provide policymakers with independent validation of dependency exposure.

This approach was not adopted as the primary recommendation because it could be costly and administratively burdensome, especially for smaller entities. Dependency analysis is also partly a planning function, not only an audit function. It requires judgment about future obligations, replacement capacity, and service consequences.

Independent review may be preferable for large governments, major public institutions, high-risk programs, or situations involving substantial temporary funding, debt exposure, or repeated structural imbalance.

Alternative 11: Create a New Oversight Agency

A more formal approach would create a new state or federal office responsible for monitoring fiscal dependency across governments and public institutions.

This approach could centralize expertise, standardize definitions, and improve oversight.

This approach was not adopted because it may duplicate existing budget, audit, legislative, and grant-management functions. It could also create additional bureaucracy without improving day-to-day fiscal decisions.

The preferred approach is to integrate fiscal dependency analysis into existing institutions, including budget offices, auditors, legislative fiscal offices, grant managers, and governing boards.

A new oversight office may be preferable only where existing institutions lack capacity, where dependency risks are severe and widespread, or where coordination failures prevent meaningful disclosure.

Preferred Approach

After considering these alternatives, the report favors a managed interdependence model.

This approach does not reject intergovernmental financing. It also does not assume that every external funding source is harmful. Instead, it requires governments and public institutions to identify major funding exposures, distinguish temporary from recurring revenue, disclose restrictions, evaluate replacement capacity, conduct stress testing, and prepare transition plans.

The preferred approach combines the strengths of several alternatives while avoiding their most serious weaknesses. It preserves beneficial shared financing, improves transparency, limits hidden structural imbalance, strengthens accountability, and allows implementation to be scaled according to institutional capacity.

Conclusion

The rejected alternatives are not without value. Thresholds can support screening. Reserves can manage short-term disruption. Revenue diversification can reduce concentration risk. Independent audits can improve credibility in high-risk cases. Centralized funding can promote equity for certain services.

However, no single alternative fully addresses the complexity of fiscal dependency. The strongest policy response is a combined framework that treats fiscal dependency as a measurable institutional risk and manages it through disclosure, planning, stress testing, funding alignment, reserve adequacy, and transition preparation.

Fiscal dependency is best understood as a structural condition within modern public finance rather than as a simple measure of financial weakness. Governments and public institutions are intentionally interconnected through grants, transfers, reimbursements, shared revenues, mandates, contracts, and jointly financed programs. These relationships are necessary to support essential services, reduce disparities among jurisdictions, and distribute the cost of programs that exceed the capacity of any single institution.

The central issue is not the existence of fiscal interdependence. The issue is whether that interdependence is transparent, sustainable, and aligned with the responsibilities it supports.

Across the report’s legal, fiscal, administrative, institutional, and distributional analysis, PRI finds that fiscal dependency becomes harmful when essential services rely on funding that is temporary, restricted, concentrated, externally controlled, or difficult to replace without an adequate transition plan. In those circumstances, a government may appear legally balanced while remaining institutionally vulnerable.

The most serious risks arise when recurring obligations are supported by nonrecurring revenue. Temporary grants, emergency appropriations, settlement funds, reserve withdrawals, and one-time transfers may be appropriate for temporary needs. They become structurally dangerous when used to support permanent staffing, continuing programs, recurring contracts, or routine operating costs. Once the funding ends, the institution must either replace the revenue, reduce services, use reserves, borrow, defer obligations, or shift costs to another institution or population.

Current financial reporting does not fully capture this risk. Budgets and financial statements commonly disclose revenues, expenditures, debt, and fund balances, but they often fail to show which services depend on each funding source, when major grants expire, whether funds are restricted, or whether lost revenue could realistically be replaced. As a result, policymakers and the public may not see fiscal exposure until it becomes a crisis.

PRI also finds that fiscal dependency is not evenly distributed. Lower-capacity communities, small local governments, rural jurisdictions, older industrial areas, transit-dependent residents, low-income households, seniors, people with disabilities, and nonprofit service providers may be more vulnerable when funding changes. High-capacity jurisdictions may have reserves, broader tax bases, professional grant staff, and replacement options. Lower-capacity jurisdictions may lack those tools, even when their service needs are greater.

Administratively, fiscal dependency analysis is feasible if it is integrated into existing budget, grant-management, audit, and planning systems. It should not be designed as a burdensome new bureaucracy. The strongest model is a scaled reporting framework that identifies major external, temporary, restricted, and concentrated funding sources; connects those sources to services and obligations; evaluates replacement capacity; and requires transition planning for material risks.

Legally and institutionally, the core principle is alignment. Continuing public responsibilities should be paired with continuing funding, sufficient revenue authority, or a clear transition mechanism. When one level of government imposes responsibilities while another bears the cost, accountability weakens. When a government accepts capital funding without planning for future operating costs, apparent short-term gain may become long-term exposure.

PRI’s integrated judgment is that the appropriate objective is managed interdependence, not fiscal self-sufficiency. Complete self-sufficiency is unrealistic and would likely worsen inequality among jurisdictions. At the same time, unmanaged dependency leaves essential services vulnerable to decisions made elsewhere.

Managed interdependence requires:

• recurring revenue for recurring obligations;
• clear disclosure of temporary and restricted funding;
• realistic assessment of replacement capacity;
• life-cycle review of capital projects;
• reserve policies tied to actual risk;
• fiscal stress testing;
• mandate funding review;
• administrative support for lower-capacity institutions;
• service-impact disclosure; and
• transition planning before temporary funding ends.

The policy challenge is therefore not to reduce all outside funding, but to distinguish stable shared financing from fragile institutional dependence. A government receiving substantial external support may be fiscally resilient if the funding is predictable, flexible, recurring, and supported by reserves and replacement plans. A government receiving less outside support may still be vulnerable if a small but critical funding source supports an essential service with no replacement option.

PRI concludes that fiscal dependency should be treated as a measurable governance risk. It should be disclosed before budgets are adopted, before major grants are accepted, before capital projects are approved, and before temporary funds are used for continuing obligations. This would allow policymakers to make deliberate choices rather than respond later through emergency cuts, tax increases, borrowing, or service disruptions.

The strongest policy response is a balanced framework that preserves beneficial intergovernmental financing while requiring greater transparency, planning, and accountability. Fiscal dependency cannot be eliminated from a modern public system, but it can be identified, measured, disclosed, stress-tested, and managed.

In PRI’s assessment, the long-term sustainability of public institutions depends not only on how much revenue they receive, but on whether that revenue is reliable, flexible, recurring, replaceable, and aligned with the responsibilities it supports.

Public Reason Institute reaches the following formal conclusions based on the evidence and analysis presented in this report.

Conclusion 1: Fiscal dependency is a measurable institutional risk.

Fiscal dependency should not be treated merely as a political argument about spending or intergovernmental aid. It is a measurable governance condition that can be evaluated by examining funding control, duration, restrictions, replacement capacity, reserve coverage, and service consequences.

Conclusion 2: Intergovernmental financing is necessary and should not be presumed harmful.

Federal, state, and local funding relationships are essential to modern public administration. They support healthcare, education, transportation, housing, infrastructure, public safety, public health, and social services. The presence of outside funding does not automatically indicate fiscal weakness.

Conclusion 3: The risk lies in unmanaged dependency, not shared funding itself.

Fiscal dependency becomes harmful when essential responsibilities depend on revenue that is temporary, restricted, concentrated, externally controlled, or difficult to replace without adequate reserves or transition planning.

Conclusion 4: Annual budget balance is an incomplete measure of fiscal health.

A government may satisfy legal budget requirements while relying on temporary grants, reserve withdrawals, fund transfers, deferred maintenance, or other nonrecurring measures. Structural balance requires recurring obligations to be supported by reliable recurring revenue.

Conclusion 5: Temporary funds should not become permanent operating foundations without a transition plan.

Emergency aid, one-time grants, settlements, and temporary appropriations may be appropriate for short-term needs. They create long-term risk when used for permanent staffing, continuing contracts, recurring services, or routine operations without identifying replacement funding.

Conclusion 6: Fiscal dependency can be hidden within individual programs or institutions.

A government may appear stable overall while a specific agency, fund, service, public authority, school system, transit system, or nonprofit provider remains highly dependent on one funding source. Dependency analysis must therefore occur below the government-wide level.

Conclusion 7: Restricted revenue can overstate usable fiscal capacity.

Total revenue does not necessarily reflect operational flexibility. Funds restricted by statute, grant terms, voter approval, bond covenants, or program rules may be unavailable for payroll, administration, maintenance, technology, or emergency needs.

Conclusion 8: Replacement capacity is central to assessing fiscal risk.

The same level of external funding may create different levels of risk depending on whether an institution has lawful revenue authority, reserves, expenditure flexibility, administrative capacity, and realistic alternatives.

Conclusion 9: Mandates should be aligned with funding responsibility.

When one level of government assigns responsibilities to another without sufficient funding or revenue authority, accountability weakens and fiscal pressure is shifted downward. Continuing obligations should be paired with continuing support or a clear adjustment mechanism.

Conclusion 10: Lower-capacity jurisdictions face greater exposure.

Communities with weaker tax bases, smaller staffs, limited reserves, and fewer administrative resources are less able to absorb funding disruptions or compete for complex grants. Fiscal dependency therefore has important equity and access implications.

Conclusion 11: Current reporting practices are insufficient.

Existing budget and financial reports provide important data, but they do not consistently show which services depend on each funding source, when funding expires, whether revenue is restricted, or what happens if the source changes.

Conclusion 12: Fiscal stress testing should become a standard planning tool.

Governments and public institutions should evaluate plausible funding disruptions before they occur, including grant expiration, reductions in state or federal aid, recession, reimbursement delays, loss of a major taxpayer, and increased mandate costs.

Conclusion 13: Capital funding should include life-cycle cost review.

Externally funded capital projects may create long-term obligations for staffing, utilities, maintenance, repairs, insurance, technology, and replacement. These costs should be identified before accepting or approving major capital awards.

Conclusion 14: Administrative capacity is part of fiscal resilience.

The ability to apply for, manage, document, report, audit, and close out funding is itself a fiscal-capacity issue. Grant systems should account for the administrative burden placed on smaller governments and service providers.

Conclusion 15: The proper objective is managed interdependence.

PRI does not recommend complete fiscal self-sufficiency. The appropriate goal is a system in which shared financing remains available but is transparent, predictable, sustainable, and aligned with the obligations it supports.

Overall PRI Conclusion

Public Reason Institute concludes that fiscal dependency should be treated as a core element of public-sector fiscal analysis. Governments should not ask only whether a budget is balanced or whether revenue is sufficient in the current year. They should ask who controls the revenue, how long it will continue, what restrictions apply, which obligations depend on it, whether it can be replaced, and what services would be affected if it changes.

Fiscal dependency cannot be eliminated from modern governance, nor should it be. But unmanaged dependency can weaken accountability, reduce institutional flexibility, increase service instability, and expose vulnerable communities to disproportionate harm.

PRI therefore concludes that policymakers should adopt a managed-interdependence framework built on disclosure, structural balance, reserve planning, stress testing, mandate alignment, life-cycle cost review, administrative support, and transition planning.

Public Reason Institute recommends a managed-interdependence framework for identifying, disclosing, and reducing harmful fiscal dependency while preserving beneficial intergovernmental financing. The following recommendations are specific, implementable, and derived from the report’s findings.

Recommendation 1: Establish Fiscal Dependency Disclosure Requirements

Governments and public institutions should disclose major external, temporary, restricted, and concentrated funding sources as part of their regular budget and financial reporting process.

Each disclosure should identify the amount of funding, who controls it, whether it is recurring or temporary, what restrictions apply, when it expires or renews, and which services depend on it.

Rationale: Current reporting often shows revenue totals without explaining operational exposure.

Expected Outcome: Policymakers and the public will better understand which services are vulnerable to funding disruption.

Recommendation 2: Distinguish Recurring Revenue from Nonrecurring Revenue

Budget documents should clearly separate recurring revenue from one-time or temporary resources, including emergency grants, settlements, reserve withdrawals, asset sales, and temporary appropriations.

Recurring expenditures should generally be supported by recurring revenues.

Rationale: Temporary funds create structural imbalance when used for permanent obligations.

Expected Outcome: Governments will reduce the risk of sudden budget gaps when temporary funding ends.

Recommendation 3: Require Transition Plans for Temporary Funding

When temporary funds are used for programs, staffing, contracts, or services that may continue beyond the funding period, governments should adopt a written transition plan.

The plan should state whether the program will end, be reduced, be absorbed into the regular budget, or be supported by another funding source.

Rationale: Temporary aid can create public expectations and recurring obligations.

Expected Outcome: Institutions will avoid abrupt service disruptions and make clearer decisions before funding expires.

Recommendation 4: Connect Major Funding Sources to Service Impacts

Governments should identify which employees, programs, facilities, contracts, and populations depend on each major external or temporary funding source.

Rationale: Financial reports often do not show what would actually happen if a funding source changed.

Expected Outcome: Policymakers will be able to evaluate funding loss in service terms, not only budget terms.

Recommendation 5: Adopt Fiscal Stress Testing

Governments and public institutions should conduct periodic fiscal stress tests for major funding disruptions.

Stress tests should evaluate scenarios such as grant expiration, reduction in federal or state aid, recession, reimbursement delay, loss of a major taxpayer, increased mandate costs, and simultaneous revenue shocks.

Rationale: Stress testing identifies vulnerabilities before they become emergencies.

Expected Outcome: Governments will improve preparedness and reduce reliance on rushed cuts, borrowing, or emergency tax increases.

Recommendation 6: Evaluate Replacement Capacity Realistically

Dependency analysis should assess whether lost funding can realistically be replaced.

Replacement capacity should consider legal authority, economic feasibility, voter-approval requirements, administrative timing, reserve availability, expenditure flexibility, and political practicality.

Rationale: A theoretical revenue option is not meaningful if it cannot be implemented in time or at a sustainable level.

Expected Outcome: Policymakers will have a more accurate understanding of whether exposure is manageable.

Recommendation 7: Require Life-Cycle Cost Review for Capital Grants

Before accepting major capital funding, governments should identify the long-term operating costs created by the project.

This review should include staffing, utilities, insurance, maintenance, repairs, technology, security, and eventual replacement.

Rationale: Capital funding can create future operating dependency if continuing costs are not planned.

Expected Outcome: Governments will avoid accepting projects that are affordable to build but difficult to sustain.

Recommendation 8: Review Mandates for Funding Alignment

Continuing mandates should be paired with continuing funding, sufficient revenue authority, or a clear adjustment mechanism.

Mandate analysis should include direct program costs as well as administrative, reporting, technology, staffing, enforcement, and compliance costs.

Rationale: Underfunded mandates shift fiscal pressure and weaken accountability.

Expected Outcome: Governments will better align public responsibilities with the resources needed to carry them out.

Recommendation 9: Develop Risk-Based Reserve Policies

Reserve policies should be tied to actual fiscal risks rather than only fixed percentage targets.

Governments should consider revenue volatility, grant dependency, economic concentration, reimbursement delays, disaster exposure, service obligations, and the expected duration of funding disruptions.

Rationale: A single reserve percentage cannot determine resilience for every institution.

Expected Outcome: Reserves will be better matched to the risks each government or institution actually faces.

Recommendation 10: Identify Revenue Concentration Risks

Governments should regularly identify whether they rely heavily on one tax, employer, taxpayer, industry, economic sector, grant program, or statutory transfer.

Rationale: Concentrated revenue increases exposure to localized shocks.

Expected Outcome: Policymakers will be better able to diversify revenue, build reserves, or develop contingency plans before disruption occurs.

Recommendation 11: Separate Restricted Revenue from Flexible Operating Capacity

Budget reports should distinguish total revenue from revenue that can actually be redirected to meet operating needs.

Restricted funds should be identified by source, purpose, legal limitation, and affected program.

Rationale: Large restricted balances can conceal shortages in flexible operating funds.

Expected Outcome: Policymakers will better understand whether institutions have usable fiscal capacity.

Recommendation 12: Provide Technical Assistance to Lower-Capacity Jurisdictions

States and larger institutions should provide templates, training, shared services, grant-management support, and simplified reporting tools for smaller governments and nonprofit providers.

Rationale: Communities with the greatest service needs may have the least administrative capacity to manage complex funding.

Expected Outcome: Dependency reporting will improve equity rather than create additional burdens for low-capacity institutions.

Recommendation 13: Use Materiality Thresholds

Detailed dependency reporting should focus on funding sources large enough to affect services, staffing, reserves, or institutional stability.

Small grants or minor revenues should not require extensive analysis unless they support essential operations.

Rationale: Without thresholds, reporting requirements could become administratively excessive.

Expected Outcome: Governments will focus attention on meaningful risks while limiting unnecessary paperwork.

Recommendation 14: Integrate Dependency Review into Existing Budget Processes

Fiscal dependency analysis should be incorporated into budget adoption, grant acceptance, capital planning, audit review, reserve policy, and long-term financial planning.

Rationale: Dependency analysis is most useful when it informs actual decisions.

Expected Outcome: The framework will become a practical planning tool rather than a separate compliance exercise.

Recommendation 15: Require Public Plain-Language Summaries

Governments should provide plain-language explanations of major dependency risks, including what funding is at risk, which services are affected, and what transition options exist.

Rationale: Fiscal dependency is technical, and public understanding is necessary for accountability.

Expected Outcome: Residents will be better able to understand who controls funding decisions and how those decisions affect local services.

Overall Recommendation

PRI recommends that policymakers adopt a managed-interdependence framework. This framework should preserve beneficial shared financing while requiring disclosure, structural balance, stress testing, reserve planning, mandate funding review, life-cycle cost analysis, administrative support, and transition planning.

The goal is not to eliminate intergovernmental funding. The goal is to ensure that essential services are not quietly built on funding that is temporary, restricted, concentrated, externally controlled, or impossible to replace.

A government should know not only how much revenue it receives, but who controls it, how long it will continue, what conditions apply, which obligations depend on it, and what happens if the funding changes.

Implementation Considerations

PRI recommends implementing the fiscal dependency framework through a phased, practical process that builds on existing budget, grant-management, audit, and long-term planning systems. The goal is not to create a new bureaucracy, but to make existing financial information more useful for policymakers and the public.

Implementation Principle

Implementation should be guided by four principles:

First, the framework should focus on material fiscal risks rather than every minor revenue source.

Second, reporting should be scaled to institutional capacity. Large governments and public authorities can provide more detailed analysis, while smaller jurisdictions should use simplified templates.

Third, fiscal dependency review should be connected to real decision points, including budget adoption, grant acceptance, capital project approval, mandate review, reserve planning, and long-term financial planning.

Fourth, the framework should be treated as a transparency and planning tool, not as an automatic trigger for spending cuts, tax increases, or rejection of intergovernmental funding.

Phase One: Define the Framework

The first implementation step is to establish common definitions. Policymakers should define key terms such as external funding, restricted revenue, temporary revenue, recurring obligation, replacement capacity, mandate exposure, service impact, and fiscal dependency risk.

A clear definition stage is necessary because dependency cannot be measured consistently if each institution applies different standards.

Phase One should also establish materiality thresholds. Detailed reporting should be required only for funding sources large enough to affect services, staffing, reserves, or institutional stability. Smaller grants or minor revenues should be excluded unless they support essential operations.

Phase Two: Inventory Major Funding Sources

Governments and public institutions should prepare an inventory of major revenue sources that may create dependency exposure.

The inventory should identify:

• external funding controlled by another government or institution;
• temporary or expiring funds;
• restricted revenues;
• concentrated revenue sources;
• grants or transfers supporting recurring costs;
• major reimbursements subject to delay;
• capital funds creating future operating obligations; and
• mandates not fully supported by dedicated funding.

This inventory should begin with readily available budget and grant records. Institutions should not be required to produce perfect data immediately. The first year should establish a baseline that improves over time.

Phase Three: Connect Funding to Services

After identifying major funding sources, institutions should connect each material source to the services, personnel, programs, contracts, facilities, and populations it supports.

This step is essential because fiscal dependency is not only about money. Policymakers need to know what would actually happen if a source were reduced or ended.

A service-impact review should answer:

• What service depends on this funding?
• Is the service legally required or discretionary?
• How many positions or contracts are supported?
• What population is served?
• Can the service continue without the funding?
• What would be reduced, delayed, or eliminated if the source changed?

Phase Four: Evaluate Replacement Capacity

Institutions should evaluate whether major funding sources can realistically be replaced.

Replacement-capacity review should consider legal authority, tax or fee limitations, voter-approval requirements, available reserves, expenditure flexibility, alternative grants, administrative timing, economic feasibility, and political practicality.

This review should distinguish theoretical options from realistic options. A revenue source should not be considered replaceable unless the institution can lawfully and practically implement the replacement before major service disruption occurs.

Phase Five: Require Transition Plans for Material Risks

When temporary, restricted, or externally controlled funding supports recurring services, institutions should prepare a transition plan.

The plan should state whether the program will end, continue at a reduced level, be absorbed into the regular budget, seek replacement funding, or be restructured.

Transition plans should be required before temporary funds are used for permanent staffing, continuing contracts, ongoing programs, or capital projects with future operating costs.

Legislative Steps

Legislatures can implement the framework by adopting fiscal dependency disclosure requirements in budget law, grant-acceptance procedures, capital planning statutes, or local-government reporting rules.

Legislation should require agencies and covered institutions to identify material dependency risks during the budget process. It should also require disclosure when accepting major temporary grants or approving capital projects that create future operating obligations.

Legislative fiscal offices should be authorized to review dependency disclosures and incorporate them into budget analysis. However, the framework should not prohibit beneficial intergovernmental funding. Its purpose is to improve visibility and planning.

Regulatory and Administrative Actions

Executive agencies, budget offices, auditors, and finance departments should develop standard reporting templates, definitions, and guidance.

Regulatory or administrative guidance should explain how to classify revenue, identify restricted funds, distinguish recurring from nonrecurring resources, estimate service impact, and evaluate replacement capacity.

Grant administrators should also require applicants to identify future operating costs when grants fund capital projects, pilot programs, or temporary service expansions.

Agency Coordination

Implementation requires coordination among budget offices, finance departments, grant managers, program administrators, auditors, legal counsel, and executive leadership.

Budget staff should identify revenue exposure. Program staff should identify service consequences. Grant managers should identify restrictions, deadlines, and compliance obligations. Legal counsel should identify statutory limits, mandate requirements, and replacement authority. Auditors should review whether disclosures are consistent with available records.

For pass-through funding, federal, state, local, and nonprofit partners should clearly identify reporting duties, compliance risks, payment timing, and closeout responsibilities.

Support for Smaller Institutions

Smaller governments and nonprofit providers should not be expected to implement complex fiscal dependency reporting without assistance.

States should provide simplified templates, training, shared grant-management support, technical assistance, and model policies. Smaller institutions should be allowed to begin with basic reporting on their largest external, temporary, restricted, or concentrated funding sources.

A phased approach will reduce administrative burden and improve data quality over time.

Suggested Implementation Milestones

During the first six months, policymakers should define key terms, set materiality thresholds, assign implementing authority, and develop model reporting templates.

During the first year, covered institutions should prepare an initial inventory of major external, temporary, restricted, and concentrated funding sources. This first inventory should be treated as a baseline rather than a compliance test.

During the second year, institutions should connect major funding sources to services, staffing, contracts, facilities, and affected populations. Replacement-capacity review should begin for the highest-risk sources.

During the third year, stress testing and transition planning should be incorporated into regular budget adoption, capital planning, grant acceptance, and reserve-policy review.

After the third year, fiscal dependency reporting should become a standard part of annual budget documents, long-term financial plans, audit review, and legislative oversight.

Implementation Safeguards

To prevent unnecessary burden, the framework should include materiality thresholds, simplified reporting for smaller entities, phased deadlines, and plain-language summaries.

To prevent misuse, dependency disclosures should not automatically trigger funding reductions. A finding of dependency should trigger analysis, planning, and oversight, not automatic punishment.

To improve public understanding, reports should explain service consequences in clear language. Residents should be able to understand which services depend on which funding sources and what options exist if funding changes.

Implementation Conclusion

The fiscal dependency framework should be implemented gradually, using existing institutions and decision points. The most important first step is not perfect measurement, but consistent disclosure of major risks.

A successful implementation process will allow governments to identify dependency before it becomes a crisis, connect funding decisions to service outcomes, protect vulnerable communities from sudden disruption, and improve long-term fiscal sustainability.

The objective is practical governance: public institutions should know which responsibilities depend on outside, temporary, restricted, or concentrated funding, and they should have a plan for what happens if that funding changes.

This report establishes a framework for identifying and managing fiscal dependency, but several areas require further research. Future PRI work should focus on improving measurement, comparing jurisdictions, evaluating policy outcomes, and identifying which reforms most effectively reduce institutional vulnerability without weakening beneficial intergovernmental financing.

1. Standardized Fiscal Dependency Metrics

Future research should develop standardized indicators for measuring fiscal dependency across governments and public institutions.

Key questions include:

• What percentage of external revenue should trigger closer review?
• How should temporary, restricted, and concentrated revenue be weighted?
• How should replacement capacity be measured?
• How should operating dependency be distinguished from capital dependency?
• How should dependency risk be scored without oversimplifying local conditions?

A standardized measurement system would allow policymakers to compare dependency exposure across agencies, programs, jurisdictions, and service areas.

2. Program-Level Dependency Mapping

More research is needed to connect funding sources to specific public services.

Budget documents often show revenue by source but do not clearly identify which employees, programs, facilities, or populations depend on each source. Future research should test methods for mapping major funding streams to operational outcomes.

This would help answer which services are most vulnerable to grant expiration, reimbursement delays, restricted funds, or reductions in state and federal aid.

3. Replacement Capacity Analysis

Future research should examine how governments actually replace lost revenue when major funding sources decline.

This research should compare legal authority, tax capacity, voter-approval requirements, reserve levels, borrowing options, expenditure flexibility, and political feasibility. It should also distinguish theoretical replacement options from options that can realistically be implemented before services are disrupted.

4. Fiscal Stress Testing Models

Additional work is needed to adapt fiscal stress testing to local governments, public authorities, school districts, and nonprofit service providers.

Future research should develop practical stress-test templates for:

• loss of a major grant;
• reduction in state aid;
• recession-related revenue decline;
• reimbursement delays;
• loss of a major taxpayer or employer;
• expiration of temporary federal assistance;
• increased mandate costs; and
• simultaneous revenue and expenditure shocks.

This research should focus especially on models that smaller institutions can use without advanced forecasting capacity.

5. Pandemic-Era Funding Transition

The long-term effects of pandemic-era federal aid require continued study.

Future research should examine whether State and Local Fiscal Recovery Funds and related programs were used for temporary needs, capital projects, recurring services, staffing, revenue replacement, or long-term institutional investments.

Important questions include:

• Which programs continued after federal funds expired?
• Which services were reduced or eliminated?
• Did governments use local revenue to sustain federally funded initiatives?
• Did temporary aid improve long-term fiscal resilience?
• Did it create new structural obligations?

This area will become more important as expenditure deadlines pass and final closeout data become available.

6. Capital Grants and Life-Cycle Costs

Future research should examine whether governments adequately plan for the operating costs created by externally funded capital projects.

This includes staffing, utilities, maintenance, technology support, insurance, security, repairs, and eventual replacement.

A future PRI study could compare capital grant acceptance policies and identify best practices for life-cycle cost disclosure before major projects are approved.

7. Mandate Funding Gaps

Additional research is needed on unfunded and underfunded mandates across federal, state, and local systems.

Future analysis should examine both direct costs and administrative costs, including reporting, technology, enforcement, training, compliance, and legal review.

This research should identify where responsibilities are assigned without sufficient funding or revenue authority and how those gaps affect service delivery, local budgets, and public accountability.

8. Administrative Capacity and Grant Access

Future research should examine whether complex grant systems disadvantage smaller or lower-capacity jurisdictions.

Key questions include:

• Which communities are least able to compete for grants?
• How often do matching requirements prevent participation?
• Do administrative costs exceed available reimbursement?
• Are technical assistance programs effective?
• Would simplified reporting improve access without weakening accountability?

This research would help determine whether grant systems distribute resources according to need or according to administrative capacity.

9. Distributional and Equity Effects

More research is needed on how fiscal dependency affects different populations and regions.

Future studies should examine whether funding disruptions disproportionately affect low-income residents, seniors, people with disabilities, rural communities, older industrial cities, transit-dependent residents, school districts, and nonprofit service networks.

This research should also examine whether high-capacity jurisdictions are better able to replace lost funding, while lower-capacity jurisdictions experience deeper service cuts.

10. Restricted Revenue and Operating Flexibility

Future research should evaluate how restricted funds affect institutional flexibility.

A government may have substantial total revenue but limited unrestricted resources. Future studies should examine how much revenue is legally or administratively restricted and whether those restrictions contribute to staffing shortages, deferred maintenance, administrative weakness, or emergency-response limitations.

11. Revenue Concentration and Local Economic Exposure

Future PRI research should examine communities that rely heavily on one employer, industry, taxpayer, institution, or tax category.

This research should identify how concentrated revenue affects fiscal stability, reserve needs, economic development policy, and long-term planning.

It should also examine whether governments with concentrated revenue bases are conducting adequate contingency planning.

12. Public Communication and Accountability

Fiscal dependency is difficult for the public to understand because funding authority, service delivery, and political responsibility are often divided among institutions.

Future research should examine how governments can communicate dependency risk in plain language.

This includes testing public-facing formats that explain:

• who controls the funding;
• which services depend on it;
• when the funding may change;
• what restrictions apply;
• what replacement options exist; and
• what residents may experience if funding is reduced.

13. Comparative State and Local Practices

Future research should compare how states, municipalities, counties, school districts, and public authorities currently disclose fiscal dependency risks.

This research should identify best practices in budget reporting, reserve policies, grant acceptance, capital planning, mandate review, and stress testing.

A comparative review would help determine which practices are most transferable across jurisdictions.

14. Long-Term Federal Fiscal Pressure

Future research should examine how federal fiscal pressure may affect state and local dependency over time.

This does not require predicting specific federal cuts. Instead, research should evaluate how changes in federal formulas, matching requirements, eligibility rules, reimbursement timing, or appropriations growth could affect state and local budgets.

This research would help governments prepare for plausible federal policy shifts.

15. Effectiveness of Dependency Disclosure

Finally, future research should evaluate whether fiscal dependency disclosure improves decision-making.

Key questions include:

• Do policymakers use dependency reports during budget decisions?
• Do transition plans reduce service disruptions?
• Does stress testing improve reserve policy?
• Do disclosures discourage use of temporary funds for recurring costs?
• Does public understanding improve?
• Are reporting requirements manageable for smaller institutions?

This research would help refine the framework and identify which reforms produce measurable improvements.

Future Research Agenda

PRI should treat fiscal dependency as an ongoing research area rather than a one-time report. Priority future projects should include:

• a fiscal dependency measurement index;
• a model disclosure template for governments and public institutions;
• a case study of pandemic-era funding transitions;
• a study of mandate funding gaps;
• a local-government stress-testing toolkit;
• a review of capital grant life-cycle cost practices;
• a study of grant access disparities for low-capacity jurisdictions; and
• a public-facing fiscal dependency dashboard model.

Conclusion

The evidence base is sufficient to justify stronger disclosure, stress testing, transition planning, and structural-balance review. However, additional research is needed to refine measurement, compare jurisdictions, evaluate equity effects, and determine which policy tools produce the strongest results.

Future research should focus on making fiscal dependency visible before it becomes a crisis. The long-term goal is to help governments preserve beneficial shared financing while reducing hidden exposure that threatens service continuity, public accountability, and institutional sustainability.

Government Data and Official Fiscal Sources

U.S. Census Bureau. (2026). Annual Survey of State and Local Government Finances: 2024 State & Local Government Finance First Look Dataset. U.S. Department of Commerce. Accessed July 5, 2026.

U.S. Census Bureau. (2026). State and Local Government Finances Datasets and Tables. U.S. Department of Commerce. Accessed July 5, 2026.

U.S. Census Bureau. (2026). Government Finances: State and Local Government Finance Data Releases. U.S. Department of Commerce. Accessed July 5, 2026.

U.S. Department of the Treasury. (2026). State and Local Fiscal Recovery Funds. Accessed July 5, 2026.

U.S. Department of the Treasury. (2026). State and Local Fiscal Recovery Funds: Reporting and Compliance. Accessed July 5, 2026.

Government Accountability Office Reports

U.S. Government Accountability Office. (2010). State and Local Governments: Fiscal Pressures Could Have Implications for Future Delivery of Intergovernmental Programs. GAO-10-899. Washington, DC: GAO.

U.S. Government Accountability Office. (2015). State and Local Governments’ Fiscal Outlook: 2014 Update. GAO-15-224SP. Washington, DC: GAO.

U.S. Government Accountability Office. (2020). Intergovernmental Issues: Key Trends and Issues Regarding State and Local Sector Finances. GAO-20-437. Washington, DC: GAO.

U.S. Government Accountability Office. (2025). Grants Management: Recent Guidance Could Enhance Subaward Oversight. GAO-25-107315. Washington, DC: GAO.

U.S. Government Accountability Office. (2026). Grants Management: Efforts to Address Challenges Through Government-wide Collaboration. GAO-26-108283. Washington, DC: GAO.

U.S. Government Accountability Office. (2026). The Nation’s Fiscal Health: Urgent and Sustained Action Needed to Address the Federal Government’s Fiscal Path. GAO-26-108610. Washington, DC: GAO.

U.S. Government Accountability Office. (2026). America’s Fiscal Future. Washington, DC: GAO. Accessed July 5, 2026.

Public-Finance Guidance and Stress-Testing Sources

Government Finance Officers Association. (n.d.). Achieving a Structurally Balanced Budget. Chicago, IL: GFOA. Accessed July 5, 2026.

Government Finance Officers Association. (2025). Structural Budget Balance. Chicago, IL: GFOA.

Government Finance Officers Association. (n.d.). Fund Balance Guidelines for the General Fund. Chicago, IL: GFOA. Accessed July 5, 2026.

The Pew Charitable Trusts. (2023). State Budget Stress Testing. Philadelphia, PA: Pew Charitable Trusts.

The Pew Charitable Trusts. (2023). Utah: Tools for Sustainable State Budgeting. Philadelphia, PA: Pew Charitable Trusts.

The Pew Charitable Trusts. (2018). State Strategies for Maintaining a Balanced Budget. Philadelphia, PA: Pew Charitable Trusts.

Utah Office of the Legislative Fiscal Analyst and Governor’s Office of Planning and Budget. (2022). Budget Stress Testing 2022. State of Utah.

Legal and Regulatory Authorities

American Rescue Plan Act of 2021, Pub. L. No. 117-2. Referenced for the State and Local Fiscal Recovery Funds program and related obligation and expenditure requirements. Treasury program guidance used as the controlling implementation reference.

Unfunded Mandates Reform Act of 1995, Pub. L. No. 104-4. Referenced for federal procedures addressing certain mandate costs imposed on state, local, and Tribal governments.

Congressional Research Service. (2024). The Unfunded Mandates Reform Act: A Primer. IF12431. Washington, DC: Library of Congress.

Congressional Research Service. (Updated). Unfunded Mandates Reform Act: History, Impact, and Issues. R40957. Washington, DC: Library of Congress.

Office of Management and Budget. (Current). Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. 2 C.F.R. Part 200. Electronic Code of Federal Regulations.

Office of Management and Budget. (Current). Single Audit Requirements. 2 C.F.R. Part 200, Subpart F. Electronic Code of Federal Regulations.

Academic and Conceptual Literature

Musgrave, Richard A. (1959). The Theory of Public Finance: A Study in Public Economy. New York, NY: McGraw-Hill.

Oates, Wallace E. (1972). Fiscal Federalism. New York, NY: Harcourt Brace Jovanovich.

Oates, Wallace E. (1999). “An Essay on Fiscal Federalism.” Journal of Economic Literature, 37(3), 1120–1149.

Shah, Anwar. (2006). A Practitioner’s Guide to Intergovernmental Fiscal Transfers. World Bank Policy Research Working Paper No. 4039. Washington, DC: World Bank.

Tiebout, Charles M. (1956). “A Pure Theory of Local Expenditures.” Journal of Political Economy, 64(5), 416–424.

PRI Publications and Internal Research Materials

Public Reason Institute. (2026). Fiscal Dependency and Institutional Sustainability: A Major Research Study of Revenue Dependence, Intergovernmental Transfers, and Long-Term Public-Sector Resilience. Major Research Report Series, No. 1. Public Reason Institute.

Public Reason Institute. (2026). Research Methodology. Internal publication standards document. Public Reason Institute.

Public Reason Institute. (2026). Publication Standards. Internal publication standards document. Public Reason Institute.

Public Reason Institute. (2026). Governance Statement. Internal governance document. Public Reason Institute.

Public Reason Institute. (2026). Structural Pressures in Ohio Property Taxation. Policy Research Report. Public Reason Institute.

Public Reason Institute. (2026). Modernizing Property Taxes: A Policy Framework for Transparency, Appeals Access, and Long-Term Relief. Policy Framework. Public Reason Institute.

Public Reason Institute. (2026). Future Appeals Accessibility Act. Legislative Proposal. Public Reason Institute.

Public Reason Institute. (2026). Stabilizing Debt Crisis: Federal Framework for Consumer Credit Hardship Protections.Research Brief. Public Reason Institute.

Citation Note

The PRI publications listed above should be cited as internal or institutional sources unless and until final versions are formally published on PRI’s website or issued with publication identifiers. If a final published version differs from the internal working version, the final publication date, title, report number, and access information should replace the internal citation.

Purpose of the Technical Notes

These technical notes document the methodology, data sources, analytical techniques, assumptions, and limitations used in this report. They are intended to allow policymakers, researchers, journalists, public administrators, and reviewers to understand how PRI developed its findings and to evaluate whether the conclusions are supported by the evidence.

This report is a policy research synthesis. It is not a financial audit, legal opinion, actuarial study, credit analysis, or jurisdiction-specific solvency review.

Research Design

The report uses a structured qualitative policy-analysis method supported by public-finance data, government reports, legal authorities, and professional fiscal-management guidance.

The analysis proceeds in five steps.

First, the report defines fiscal dependency as an institutional condition in which a government, public institution, program, fund, or service relies on funding that is externally controlled, temporary, restricted, concentrated, or difficult to replace.

Second, the report distinguishes ordinary fiscal interdependence from harmful dependency. Interdependence is treated as a normal and often beneficial feature of American federalism. Dependency becomes a risk when essential responsibilities cannot be sustained if a major funding source changes.

Third, the report identifies recurring forms of dependency, including external funding exposure, temporary funding reliance, restricted revenue, revenue concentration, mandate exposure, reimbursement risk, capital operating exposure, and administrative-capacity constraints.

Fourth, the report evaluates the likely institutional consequences of dependency, including service disruption, reserve depletion, emergency borrowing, tax or fee pressure, deferred maintenance, staffing instability, and weakened accountability.

Fifth, the report develops policy recommendations based on disclosure, stress testing, replacement-capacity review, structural-balance principles, reserve planning, mandate alignment, and transition planning.

Primary Data Sources

The report relies on publicly available government and institutional sources, including:

U.S. Census Bureau state and local government finance data, including the Annual Survey of State and Local Government Finances.

U.S. Government Accountability Office reports on state and local fiscal conditions, federal grants, intergovernmental programs, subaward oversight, and federal fiscal sustainability.

U.S. Department of the Treasury materials concerning the State and Local Fiscal Recovery Funds program.

Federal legal and regulatory sources, including the Unfunded Mandates Reform Act of 1995 and the Uniform Guidance for federal awards in 2 C.F.R. Part 200.

Government Finance Officers Association guidance on structural balance, fund balance, and public budgeting.

Pew Charitable Trusts research on state budget stress testing.

Selected academic and conceptual literature on fiscal federalism, intergovernmental transfers, and public finance.

PRI institutional research, publication standards, and related policy work.

Evidence Base

The report gives greatest weight to primary government sources, including official datasets, statutes, regulations, grant rules, federal agency guidance, and government accountability reports.

Professional guidance is used to identify accepted public-finance principles, especially regarding structural balance, reserves, recurring revenues, nonrecurring revenues, and stress testing.

Academic literature is used to frame concepts of fiscal federalism, intergovernmental finance, local fiscal capacity, and institutional accountability.

PRI materials are used only to establish the organization’s analytical framework, publication standards, and connection to prior research areas. PRI materials are not used as independent proof of external factual claims unless separately supported by public data or outside sources.

Unit of Analysis

Fiscal dependency is evaluated at multiple institutional levels.

The government-wide level examines the overall fiscal exposure of a state, municipality, county, or other public entity.

The fund level examines whether particular funds depend on restricted, temporary, or externally controlled revenues.

The agency level examines departments, authorities, school systems, public institutions, and other operating bodies.

The program level examines individual services or policy initiatives.

The revenue-source level examines dependence on a particular tax, grant, transfer, reimbursement, employer, taxpayer, sector, or funding formula.

The service level examines which residents, facilities, employees, contracts, or public functions would be affected by a funding disruption.

This layered approach is necessary because fiscal dependency may be hidden within a specific program even when the broader government appears financially stable.

Analytical Factors

Each material funding source is evaluated according to six primary factors.

Exposure: How much revenue is involved, and what share of the relevant budget, fund, program, or service depends on it.

Duration: Whether the source is recurring, temporary, expiring, subject to annual renewal, or dependent on future appropriations.

Control: Whether the recipient controls the amount, timing, and continuation of the revenue.

Restriction: Whether the funding can be redirected to meet changing operational needs.

Replacement Capacity: Whether the recipient has lawful, practical, timely, and economically sustainable alternatives if the source changes.

Operational Consequence: Which services, employees, contracts, facilities, and populations would be affected by reduction or loss of the source.

A funding source is treated as higher risk when multiple factors point in the same direction, such as temporary funding supporting recurring obligations, restricted funding supporting essential services, or external funding with no realistic replacement option.

Analytical Techniques

The report uses several analytical techniques.

Structural-balance analysis is used to distinguish recurring revenue from nonrecurring revenue and recurring expenditures from temporary or one-time costs.

Dependency classification is used to identify whether a funding source is external, temporary, restricted, concentrated, mandate-related, reimbursement-based, or connected to future operating costs.

Replacement-capacity review is used to determine whether a government could realistically replace lost funding through taxes, fees, reserves, alternative grants, spending changes, borrowing, or other lawful mechanisms.

Service-impact analysis is used to connect funding sources to actual public consequences, including affected programs, personnel, facilities, residents, and service levels.

Stress-test reasoning is used to evaluate plausible fiscal shocks, including grant expiration, reduced state or federal aid, reimbursement delay, recession, loss of a major taxpayer, increased mandate costs, and simultaneous revenue and expenditure pressures.

Distributional analysis is used to assess how funding disruption may affect different communities, income groups, regions, service populations, and institutional types.

Institutional analysis is used to examine whether authority, responsibility, funding, administration, and accountability are aligned.

Treatment of Quantitative Data

The report uses quantitative data primarily to identify fiscal structures, funding scale, and general patterns. It does not produce a jurisdiction-by-jurisdiction dependency index.

Where national data are used, the report recognizes that state and local governments vary substantially in legal authority, tax structure, expenditure responsibility, accounting practice, fiscal year, and administrative capacity.

Where preliminary data are referenced, they should be updated when final datasets become available. Preliminary fiscal data should not be used for final jurisdiction-specific conclusions without verification.

The report does not rely on a single numeric threshold to define excessive dependency. Numerical indicators are treated as screening tools that should trigger further analysis, not automatic findings of fiscal weakness.

Treatment of Legal Sources

Legal sources are used to identify the framework in which public funding operates. This includes appropriations authority, grant conditions, mandate procedures, federal administrative requirements, audit rules, and state or local fiscal constraints.

The report does not provide legal advice. It does not determine whether any specific mandate, grant condition, tax restriction, appropriation, or local funding arrangement is legally valid.

Jurisdiction-specific legal conclusions require review by qualified legal counsel.

Methodological Assumptions

The report is based on several core assumptions.

First, intergovernmental funding is a normal and often necessary feature of American public finance.

Second, dependency risk depends on the quality, duration, control, flexibility, and replaceability of a funding source, not merely its external origin.

Third, recurring obligations should generally be supported by recurring revenue unless a transition plan exists.

Fourth, total revenue is not the same as usable operating capacity when substantial funds are restricted.

Fifth, service consequences are essential to fiscal analysis. A revenue loss should be evaluated by what it does to public operations, not only by its dollar amount.

Sixth, replacement capacity must be practical, not merely theoretical.

Seventh, dependency can be managed through disclosure, reserves, stress testing, transition planning, and improved alignment between responsibility and funding.

Replication Steps

A researcher seeking to replicate the report’s analytical framework should proceed as follows.

First, identify the government, institution, agency, program, fund, or service to be studied.

Second, collect budget documents, audited financial statements, grant records, revenue reports, expenditure data, capital plans, reserve policies, and relevant legal authorities.

Third, identify all major revenue sources and classify them as recurring or nonrecurring, restricted or flexible, internally controlled or externally controlled, concentrated or diversified, and operating or capital-related.

Fourth, identify which services, employees, contracts, facilities, and populations are supported by each material source.

Fifth, determine expiration dates, renewal conditions, matching requirements, reimbursement timing, compliance obligations, and closeout risks.

Sixth, evaluate replacement capacity by reviewing lawful revenue authority, reserves, expenditure flexibility, alternative grants, borrowing capacity, voter-approval requirements, and administrative feasibility.

Seventh, conduct basic stress scenarios, including loss or reduction of the largest funding source, expiration of temporary funds, delayed reimbursement, recession, loss of a major taxpayer, and increased mandate costs.

Eighth, document likely service consequences and possible transition options.

Ninth, distinguish confirmed data from estimates, assumptions, and areas requiring further inquiry.

Tenth, use the findings to classify the funding arrangement as stable interdependence, manageable dependency, elevated dependency risk, or severe dependency risk.

Limitations

This report has several limitations.

It does not provide a complete audit of any individual jurisdiction.

It does not establish a universal dependency threshold.

It does not forecast specific federal, state, or local funding reductions.

It does not determine the legal enforceability of any particular funding arrangement.

It does not provide actuarial analysis of pensions, healthcare liabilities, or long-term benefit obligations.

It does not independently verify every public dataset cited.

It does not evaluate the program effectiveness of every grant-funded service.

It does not conclude that all external funding is harmful.

It does not recommend eliminating intergovernmental transfers, grants, reimbursements, or shared financing.

The report’s conclusions should therefore be understood as a general institutional framework, not a substitute for local financial analysis, legal review, actuarial study, credit analysis, or program evaluation.

Data Gaps

The report identifies several recurring gaps in available data.

Budget documents often do not connect revenue sources to specific services.

Grant records may not clearly show long-term operating obligations.

Public reports may identify total funding without separating restricted and flexible revenue.

Financial statements may not show whether temporary funds support recurring costs.

Capital plans may not fully disclose future operating and maintenance costs.

Intergovernmental transfers may be difficult to trace when funds pass through multiple agencies or subrecipients.

Administrative costs associated with grants may be understated or distributed across multiple departments.

Replacement capacity is often discussed generally but not tested against legal, economic, timing, and political constraints.

These gaps justify the report’s recommendation for standardized fiscal dependency disclosure.

Reliability and Critical Evaluation

The report’s conclusions are strongest where they rest on widely accepted public-finance principles, official government data, and repeated findings across multiple sources.

The conclusions are more limited where they concern future behavior, political feasibility, precise replacement capacity, or jurisdiction-specific outcomes.

Researchers reviewing this report should evaluate whether:

• the funding source is correctly classified;
• the service impact is adequately documented;
• replacement capacity is realistically assessed;
• temporary and recurring resources are properly distinguished;
• restricted revenues are separated from flexible resources;
• stress scenarios are plausible;
• equity effects are identified; and
• recommendations are proportional to the level of risk.

Technical Conclusion

The report’s methodology is designed to make fiscal dependency visible, comparable, and actionable without reducing it to a single oversimplified number.

The strongest analysis connects revenue sources to institutional control, legal restrictions, duration, replacement options, reserve coverage, and service consequences. This approach allows governments to distinguish beneficial fiscal interdependence from unmanaged dependency and to plan for funding changes before they become service crises.