Local Governance and the Issue of Fiscal Health

• Author: Bruce D. McDonald
• Published date: 01 March 2018
• Date: 01 March 2018
• DOI: http://doi.org/10.1177/0160323X18765919
• Subject Matter: Governance Matters

Governance Matters
State and Local Government Review
2018, Vol. 50(1) 46-55
Local Governance and
ª The Author(s) 2018
Reprints and permission:
the Issue of Fiscal Health
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DOI: 10.1177/0160323X18765919
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Bruce D. McDonald, III1
Abstract
Since the start of the Great Recession, the issue of fiscal health possesses a prominent place in the
management of local governments. To ensure the government’s continuation and its provision of
services, administrators must balance the demands of the public with the resources it has available.
Although a number of measurement approaches appear to help administrators, there is a lack of
agreement on how fiscal health should be measured. To aid in the management of local governments
and push the academic literature forward, this article investigates the measurement systems of
financial condition established in the literature while considering their implications on governance.
Keywords
fiscal health, public management, local government
One of the challenges that local governments
seen in the decision of dozens of local govern-
face is how they can meet their service commit-
ments to file for bankruptcy since 2010
ments and obligations (Amrahova et al. 2017;
(Governing 2015; McDonald 2017).
Jacob and Hendrick 2013; McDonald 2015).
The ability of a local government to effec-
The advent of the Great Recession in 2008
tively manage is tied to its financial constraints.
brought this challenge to the forefront as the
Unfortunately, administrators have little at their
circumstances under which local administrators
disposal to help them determine when the con-
operated began to shift dramatically (Scorsone
straints have become too much and the fiscal
and Plerhoples 2010). Not only did administra-
health of the government is at risk. Although
tors face with declines in the revenue, but they
significant attention in the literature focused
tackled with an increased demand for their
on the issue of measuring fiscal health, no
goods and services (Kiewier and McCubbins
consensus emerged on what approach is best
2014; Scorsone, Levine, and Justice 2013).
(Trussel and Patrick 2013, 2018; McDonald
When there is a constraint on the ability of a
local government to provide a good or service,
a hardship appeared for both the residents of the
1 Department of Public Administration, School of Public
community and the management of the local
and International Affairs, North Carolina State University,
government that represents them. The presence
Raleigh, NC, USA
of a constraint also creates a tension between
residents, who want to have public goods pro-
Corresponding Author:
Bruce D. McDonald, III, Department of Public Administration,
vided, and local officials, who want to ensure
School of Public and International Affairs, North Carolina
the financial sustainability of the government.
State University, Campus Box 8102, Raleigh, NC 27695, USA.
The impact of the financial constraint can be
Email: bmcdona@ncsu.edu

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McDonald
47
2017). Administrators and researchers alike
government they are analyzing and relay that
typically relied upon ratio analysis, the exami-
perspective to their constituents.
nation of the relationship between financial
statement accounts, for this determination, but
What Is Fiscal Health?
too heavy of a reliance on ratios can produce
misleading results (Altman 1968). Alternative
Fiscal health is the ability of a government to
measurement approaches have been developed
balance its financial obligations with its avail-
in response to the problems with ratio analysis.
able revenue streams (Helpap 2016; Maher and
These approaches, however, are primarily ad
Nollenberger 2009). The type of financial obli-
hoc and may, at times, provide conflicting
gation an analyst is interested in determines
pictures of a government’s financial situation
how the measurement of a government’s condi-
(Justice and Scorsone 2013). Given this uncer-
tion is carried out. An analyst concerned about
tainty, what guidance should local government
the immediacy of a government’s capacity to
administrators be given on how to manage their
provide services may focus on the measure-
resources?
ment of its efficiency ratio (the ratio of total
Despite the additional attention the issue of
expenditures to total revenue). Alternatively,
fiscal health received in recent years, the inter-
someone who is concerned about the govern-
est of the field of public administration on the
ment’s ability to pay for its pension programs
financial position of a local government is
may reference coverage ratios (ratios that
nothing new. Concern within the field of public
reflect the capacity of an organization to meet
administration about the adequacy and efficient
its short-term and long-term liabilities). Such
management of its resources dates to the start of
approaches provide an interesting insight into
the twentieth century with the work of the New
the financial health of the organization, but that
York Bureau of Municipal Research, as it
insight focuses narrowly on a single aspect of
sought to clean up New York City’s financial
the broader fiscal condition.
position as a means to improve the city’s ser-
In general, the fiscal health of a government
vices (McDonald 2010). More mainstream
can be viewed through the lens of four dimen-
attention to the condition of government
sions. These are (1) the ability of the govern-
finances began in the 1970s with the looming
ment to meet its immediate or short-term
financial crisis of New York City (Arnett
financial obligations, (2) the ability of the gov-
2014).
ernment to meet its financial obligations over
This article explores the concept of fiscal
a budgeted fiscal year, (3) the ability of the
health and the ways in which the health of a
government to meet its long-term financial
local government is measured. While several
obligations, and (4) the ability of the govern-
measurement systems exist within the litera-
ment to finance the base-level programs and
ture, three approaches are discussed here.
services as required by law. A multidimen-
These are
sional approach allows for the consideration
of where the government is in meeting the
needs of the citizenry while considering the
ratio analysis,
demands that are placed on the organization
Brown’s (1993) ten-point test, and
in the future. Innate to this is the ability of the
Wang, Dennis, and Tu’s (2007) solvency
government to withstand unforeseen disrup-
test.
tions, such as a recession or change in the
demographics of the residents.
Each of these tests provides a different per-
spective of a government’s financial condition.
Measuring Fiscal Health
By comparing these perspectives, administra-
tors can choose the picture of health that
While the definition of fiscal health may be rel-
reflects the unique circumstance of the
atively straightforward, there is tremendous

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48
State and Local Government Review 50(1)
difficulty within both the academic literature
three is because of their wide spread use in both
and in practice on determining how a local
the academic literature and within the practice
government’s financial position is measured
of public budgeting and finance.
(Benson, Marks, and Raman 1988; Kloha,
Weissert, and Kleine 2005).
Ratio Analysis
Given the importance of understanding the
fiscal health, some states adopted systems for
Ratio analysis examines the relationship
monitoring the financial position of local gov-
between financial statement accounts to iden-
ernments (Pew Charitable Trusts 2016). These
tify trends in an organization’s financial posi-
state-based systems primarily rely on audits
tion (Kieso, Weygandt, and Warfield 2011).
of a local government’s financial reports,
Typically expressed as a percentage, propor-
though several are worthy of note. Michigan,
tion, or rate, ratios standardize the financial
for example, maintains a Community Engage-
data of a government so that it may view...