When looked in recent historical perspective, local government in the United States has been undergoing significant reorganization efforts. Examples include initiatives for city-county consolidation, new municipal incorporations, annexation law reform, and the formation of special purpose districts as alternative governance institutions. Multiple factors motive government reorganization; however, fiscal constraints play a critical role in altering the incentives of such reorganization efforts. This study will examine the formation of special purpose districts since 1970—the decade where a wave of tax and expenditure limitations disseminated through the United States. I will discuss the fundamental tradeoff involved in choice of local governance structure: for example, the proliferation of special districts may weaken accountability to citizens. On the other hand, special districts supply a needed institutional structure for financing and providing local public goods. I theoretically explain these ongoing institutional transformations through “second generation fiscal federalism” (SGFF). Although still emergent, SGFF is becoming a progressive, interdisciplinary literature that aims to explain problems of government organization under federalism. Although the reach of this literature is comparative, I propose that SGFF is particularly useful to understand the evolution of local government reorganization in light of hard budget constraints. In the study, I will examine empirically the formation of special purpose districts by employing panel data methodology. The study additionally extends the earlier literature on tax and expenditure limitations in the United States and propose to integrate it with second generation fiscal federalism. The study compiles a longitudinal dataset for local population and government finance from decennial editions of the U.S. Census of Population and the U.S. Census of Governments, respectively. The empirical methodology and the dataset, supported by grant funding, is being compiled in a way that can be shared and utilized by other researchers. In synthesis, this study will contribute to second generation theories of fiscal federalism and yield new empirical findings for specialists of local government, public budgeting and finance, and the institutions of federalism.