Developing effective mechanisms that promote fiscal sustainability: research shows that fiscal stresses are not a temporary feature of the local government landscape, and the lessons learned on leadership for fiscal sustainability will become increasingly valuable.

• Author: Pisano, Mark
• Position: Solutions

State and local governments will likely continue to face the stress and shortfalls caused by the Great Recession for an extended period. Three years of research on fiscal sustainability in local government in Southern California (1) identifies strategies that can be used to address this stress, including options for the executive, budget, and finance functions of these jurisdictions.

From the beginning of this research, the most obvious feature of the local government landscape in Southern California was the significant stress on each jurisdiction's budget, particularly in the context of a state government budget deficit reaching tens of billions of dollars. Now, as the third year of studies--totaling 12 cases--comes to a close, it becomes clear that fiscal stresses are not a temporary feature of the local government landscape, and will undoubtedly continue. As shown in Exhibit 1, the U.S. General Accountability Office projects increasing operating deficits in state and local government.

Additional research performed in conjunction with the GAO suggests that the demographic changes in the country may increase costs of government expenditure, reduce the growth of individuals' incomes and expenditures, and significantly reduce the growth of individual tax payments. This analysis points to continued pressure on all government budgets for decades.

As a result, the lessons learned on leadership for fiscal sustainability will become increasingly valuable to career government finance and budget officers, as well as to the appointed public executives and elected officials who rely on their expertise.

RESEARCHING IN THE CURRENT FISCAL CONTEXT

The research looked at how leadership practices, including strategy development, correlated with a jurisdiction's fiscal sustainability. The leadership challenge was not limited to the impact of the Great Recession on local government property and sales tax revenues, coupled with state government deficits. An equally challenging component for staff in the California local jurisdictions studied has been how the political and social systems deal with the fiscal and demographic realities. The unwillingness of the populace and leadership to confront the numbers has been described as "magical thinking." (2) Similarly, a noted authority (3) outlined a budget approach where an electorate wanted a "free lunch" and elected leadership sought ways to deliver increased services without raising taxes.

The research team developed a process of searching for jurisdictions that had successfully advanced fiscal sustainability, as well as those that did not --including one case of a city council filing for bankruptcy. The case study governments are listed in Exhibit 2.

The research explored how these local jurisdictions developed, or failed to develop, processes that not only addressed the "bad news" of the economic...