Sparring with the Governor Is Costing Cities Money

When Hurricane Harvey slammed into Houston in 2017, the city faced a humanitarian crisis, and then a political one. As the Democratic mayor of Texas’ largest city pleaded for billions in recovery dollars, Republican Gov. Greg Abbott’s office held the purse strings, sparking weeks of friction over tapping the Rainy Day Fund to help the city recover.

That kind of partisan drag on local finances isn’t just anecdotal, says Ramona Dagostino, assistant professor at the University of Virginia’s Darden School of Business.

Her new working paper, “Partisan Cities: How State–Local Political Alignment Shapes Credit Risk and Information Processing in the Municipal Bond Market,” co-authored with Anya Nakhmurina of the Yale School of Management, shows how partisanship affects how much a city pays to borrow money — and possibly how safe it is from flooding.

“We found that local governments are able to borrow much cheaper, at a much lower rate, when they are politically aligned with the state governor,” Dagostino says.

The findings come at time when America is sharply divided. Partisanship in the U.S. is characterized by high levels of political polarization and increasing hostility between parties. According to Gallup, Republicans’ and Democrats’ ideology is the most extreme in 30 years.

The Price of Misalignment

The research is based on a dataset covering the political affiliation of local and state officials across more than a thousand U.S. cities, spanning 2005 to 2019, as well as primary data on municipal bond offerings, secondary market transactions, and extensive information on the legal and institutional relationship between the state and city.

The findings are striking; when a city’s mayor and state governor belong to the same party, the spread — the difference between the yield on the municipal bond and the Municipal Market Analytics (MMA) curve — is about nine basis points smaller. That translates to a savings of over 20% for aligned cities.

“It’s a huge savings in terms of yields,” says Dagostino. “From a credit-risk perspective, it’s almost like getting a notch upgrade on the credit rating.”

Why would politics influence bond pricing at all? Because investors are increasingly factoring partisanship into their risk calculations.

“If you’re a city that’s aligned with the governor, it’s like being able to call Mom and Dad, and they wire you the money,” Dagostino says. When a city faces fiscal distress, investors assume an aligned state government is more likely to step in with aid. A misaligned city, by contrast, is on its own. “Mom and Dad hang up the phone,” she adds. “They don’t bail you out, and don’t support you when you’re having difficulties.”

Why Alignment Matters

This is what Dagostino calls "discretion" — the power of state governments to decide which cities get help and which don't.

When a city’s leadership is politically aligned with the state, that relationship can be a “blessing.” When it isn’t, that dependence could be a curse.

In states where governors have stronger formal powers, or where cities are fiscally dependent — needing state approval to raise taxes — the partisan gap is even larger.

Aligned cities also benefit most in times of fiscal distress. The researchers found that after a credit downgrade, they received about $75 more per capita in state aid than misaligned ones.

Dagostino calls this the “smoking gun”: evidence that political favoritism influences real money flows.

In other words, political loyalty doesn’t just shape rhetoric — it can shape balance sheets.

The research also shows that politics affects how investors interpret financial disclosures. When cities fail to release timely financial reports or receive negative audit findings, investors penalize misaligned cities more heavily, while aligned cities face smaller increases in borrowing costs.  Investors, it seems, are factoring this “discretion” into their considerations and expect the state to back up aligned cities if things go wrong.

The Politics Behind the Price

The political dynamics driving these financial patterns are visible across the country. Dagostino urges us to look at the bigger picture: the ongoing tension between cities trying to act independently and state governments asserting control.

Dagostino uses the metaphor of a “multi-tiered cake” to describe the tension between a centralized and decentralized system of government — federal, state and local layers sharing power — with states generally holding the most control over cities’ finances. The layers, she says, are wobbling under partisan stress.

“That tension has always existed, but now it’s sharpened by cities wanting or needing to act fast and act local, and by the fact that nearly every decision has become partisan,” she says. “Those dynamics are clashing in very visible, and costly, ways.”

Consider Huntington Beach, California. As SFGATE reports, “The conservative-majority city council representing its 200,000 residents has pushed right-leaning policies into action, sometimes directly in response to more progressive policies statewide.”

Local officials and Gov. Gavin Newsom have sparred over housing. In September, a California court of appeal ruled that the city of Huntington Beach must comply with state law requiring it to plan for its fair share of housing.

When Politics Shapes Public Investment

The consequences extend beyond borrowing costs. Partisan alignment appears to shape real-world investment decisions. Aligned cities tend to spend less on hazard preparedness projects, such as flood-risk adaptation — a sign, Dagostino says, that they might expect the state to step in with aid if disaster strikes. This creates a kind of moral hazard. Misaligned cities, by contrast, emphasize emergency preparedness more often, perhaps as they know they’ll likely need to fend for themselves.

Partisanship Is Warping Public Finance

Once a staid corner of the bond market, municipal finance has become entangled with politics. Whether a city shares its governor’s party now helps determine how much it pays to borrow and how quickly it can recover when budgets strain. In an era when every decision seems partisan, Dagostino’s research shows that the divide isn’t just political — it’s financial.

Ramona Dagostino is co-author of the working paper, “Partisan Cities: How State–Local Political Alignment Shapes Credit Risk and Information Processing in the Municipal Bond Market,” with Anya Nakhmurina of Yale School of Management.