This article was adapted from a GFOA whitepaper, "The New Financial Sustainability Framework: A How-To Guide for Changing Governance to Sustain Your Community without Breaking Your Piggy Bank. " For more information, see the paper at http://gfoa.org/nnancial-sustainability-resource-center.
We will explore the second piece of this integrated solution --institutional design principles--in the August 2017 issue of Government Finance Review.
Financial sustainability was the main concern for an overwhelming number of respondents to the 2015 GFOA member survey. In fact, respondents raised financial sustainability almost three times more often than the next-biggest issue. Even though this survey was years removed from the 2007 Great Recession, financial sustainability remained top-of-mind for a large portion of GFOA's membership.
Even without an economic storm like the Great Recession, local governments face a number of financial headwinds that increase the probability of rough budgetary waters ahead:
* Pensions and Health Care. Health-care cost increases are still well above inflation and typical government revenue growth, and local governments can assume that this will remain the case. (1) The well-publicized pension funding challenges many local governments face add an additional large expenditure to the ledger.
* Infrastructure Maintenance and Renewal. According the American Society of Civil Engineers 2017 report card on American infrastructure, the United States rates a D+ overall and requires $2 trillion in infrastructure investments over 10 years. (2) Not all of that falls on local governments, but it will still create a significant financial burden.
* Aging Population. An aging population generates less income, uses more public services, and spends a greater portion of its income on services, rather than taxable goods. This translates into less revenue per citizen. (3)
* The Impact of Technology. Governments will need to spend more on technologies like cybersecurity, while also facing technology-enabled challenges to traditional taxing systems.
* State and Federal Financial Uncertainty. State and federal governments have adopted policies that place more responsibility on local government while also reducing revenues.
The implication is that local governments must look for a way to ensure their ongoing financial health and thereby ensure their ongoing ability to provide for the health, safety, and welfare of their citizens.
A NEW FRAMEWORK
A popular answer to the financial challenges of local governments is to run government "like a business." This prescription does offer value; it emphasizes efficiency in service provision and measurement of government performance, for example. But it ignores the fundamental difference between government and business: government is a public organization, and business is private.
In public organizations, decisions require the assent of multiple people, perhaps across different social groups, and the use of resources has to be negotiated among diverse stakeholders. The chief executive of a private company has far greater unilateral decision-making authority than a mayor or city/county manager could ever hope for. Furthermore, businesses have a clear overriding goal: profit. The goals of public organizations are often more ambiguous. For these reasons, the public sector requires a different model of leadership than the private sector.
Also, the design of a government institution empowers people to exert influence over how a government's resources are used, simply by virtue of being a citizen. When a citizen works together with other citizens who have similar interests, their combined influence can be substantial, including voting public officials out of office. Compare this with a private company, where the individual consumer has relatively little influence over a company's direction and collective action on the part of consumers is rare.
A more satisfying answer to the challenge of local government financial sustainability must account for these substantial differences in how leadership is exercised and how institutions are designed.
A promising new approach for local governments in the 21st century has its roots in 19th century England. A Victorian economist, William Forster Lloyd, described a situation where a group of farmers had common ownership of a grazing area. An individual farmer had an incentive to send his animals to the common grazing area as much as possible because there was no additional cost for using it, and if he didn't send his animals, the other farmers' animals would still graze, thus depriving the farmer's herd of potential food. The result was that the common area was eventually overgrazed and became barren. This "tragedy of the commons" inspired a line of modern economic research called "common pool resource theory," which is concerned with how to create sustainable...