Privately Provided Public Service and Local Financial Condition: The Cost of Externalized Service Accountability

ABSTRACT Objective This study investigates how special districts affect the financial condition of general‐purpose governments, specifically focusing on the nontraditional budgetary indicators focusing on the financial and service liabilities of local governments. Methods Based on the extant literature, the concept of financial condition of local government is operationalized through solvency and efficiency type measures as well as a construct of local finance to capture the dependent variable's sophisticated characteristics. Using a balanced MSA year dataset between 1972 and 2017, the estimations run several empirical models with panel‐corrected standard error. Results The estimation results generally indicate that the proliferation of special districts undermines the financial condition of cities and counties. While special districts may contribute positively to the local economy, their privately provided public services indirectly create financial stress. This burden falls on general‐purpose governments, particularly when social issues arise from insufficient universal service provision for the less affluent populations additionally. Conclusion The findings indicate that general‐purpose governments are compelled to adopt less efficient methods to deliver comparable services to underserved constituent groups without access to specialized services, emphasizing that the creation of special districts often incurs greater costs than anticipated.