The Role of Fiscal Health in Municipal Contracting Out

The purpose of this study is to examine the relationship between municipal fiscal health and municipal contracting out. It also seeks to provide insights into the role played by factors other than the fiscal characteristics of municipal governments in explaining contracting out decision of those governments. By analyzing municipal contracting out activity as a subset of shared service arrangements, it expands the existing literature on this topic by an empirically grounded investigation of the relationship between municipal contracting out and local government fiscal health. First, it carries out a descriptive analysis of contracting activities for a sample of 144 cities in Iowa for the 2006-2016 period. Second, 15 cities are interviewed to gain a detailed and nuanced understanding of municipal contracting process. Third, a series of regression analyses are conducted to test the relationship between municipal fiscal health and propensity to contract out. The qualitative part of the research reveals that contracting out process is not as rational as suggested by theories. First, cities lack resources to make such systematic comparisons between costs and benefits of contracting. Second, political factors such as the desire to support local businesses or maintain the loyalty of constituents get in the way. In contrast to hypothesized relationships, the quantitative part of the research does not find evidence linking fiscal conditions with the propensity to contract out and vice versa. However, the findings complement the previous research in the literature by indicating that size and metro location are important determinants of fiscal health.