Handbook of Local Government Fiscal Health, edited by Helisse Levine, Jonathan B. Justice, and Eric A. Scorsone. Burlington, MA: Jones & Bartlett Learning.
Article first published online: 11 MAR 2014
© 2014 Public Financial Publications, Inc.
Public Budgeting & Finance
Volume 34, Issue 1, pages 103–106, Spring 2014
How to Cite
Ebdon, C. (2014), Handbook of Local Government Fiscal Health, edited by Helisse Levine, Jonathan B. Justice, and Eric A. Scorsone. Burlington, MA: Jones & Bartlett Learning. . Public Budgeting & Finance, 34: 103–106. doi: 10.1111/pbaf.12031
- Issue published online: 11 MAR 2014
- Article first published online: 11 MAR 2014
Fiscal health has long been a focus area for scholars and practitioners. The Great Recession, though, heightened awareness of the importance of this topic, as it made clear that government service delivery and the wellbeing of citizens depend on fiscal health. Many local jurisdictions are still struggling with recessionary effects and are searching for ways to anticipate and deal with future challenges. This reference book is a welcome addition to the literature, as it compiles our knowledge of the many facets of fiscal health. The coverage is wide-ranging, from the ways in which fiscal health can be measured and monitored, to historical background, major determinants, reactions to fiscal stress, and the effects of management and policy decisions.
As the editors state in their introduction, “Fiscal health is ultimately driven by how governments manage revenue and spending decisions in an economic and social environment that is largely out of their control. Thus, fiscal health is an adaptive process of strategic decision making requiring knowledge of a variety of functions, services, and tools” (p. 2). The handbook provides an overview of these varied decisions and environmental factors that have an effect on fiscal health at the local level. It is divided into seven sections, with 20 chapters, including the introduction by the editors. Each chapter has a glossary, discussion questions, and recommended resources at the end. The format allows for each chapter to stand alone for use in the classroom or by practitioners interested in a specific topic, but the book can also serve as a text in its entirety for a budgeting or financial management class. In addition, the handbook is a good starting point for research in a given area, as the authors typically provide a comprehensive literature review and a summary of the key points and issues related to the subject.
The first section relates to fiscal health and sustainability. These two chapters provide historical context regarding fiscal stress at the local level, beginning with the bond defaults in the 1800s. They also identify frameworks for understanding financial condition and the many variables that influence it. The authors then discuss the variety of systems and indicators that have been developed to measure fiscal condition, and their advantages and shortcomings. This section highlights the wide variety of ways to consider fiscal health, its complexity, and the fact that it is easier to evaluate financial condition in the short-run than to predict solvency over the long-run.
This is followed by the second section which deals with financial reporting and long-term forecasting. The first chapter in this section outlines the history of financial reporting which was developed as a means to assess governmental fiscal health in a standardized manner. The author then focuses primarily on the components and uses of the Governmental Accounting Standards Board's (GASB) Statement 34 which significantly overhauled the financial reporting model. The second chapter identifies the principles of long-term forecasting and reviews a number of different forecasting methods, along with their advantages and weaknesses. This section leaves the reader with an understanding of the importance of good data for measuring, comparing, and forecasting fiscal health.
In the past, discussions of long-term liabilities generally related to debt. More recently, attention has increasingly turned to a focus on pensions and other retirement benefits, as the magnitude and implications of these commitments and funding issues have become clearer. The two chapters in the third section relate to these benefits. One chapter describes other postemployment benefits, how they are calculated and disclosed in financial statements, and how this information can be used to evaluate fiscal health. The other chapter identifies potential reforms to pension systems and other postemployment benefits to improve their sustainability and reduce the long-term threats to government fiscal health posed by these burdens; finding the appropriate balance of risk and reward between employees and taxpayers is a key focus of this discussion.
The fourth section includes two chapters that deal with revenues, which are of obvious importance to fiscal health. The first of these relates to the effects of fiscal federalism on local governments. Trends in decentralization, devolution, revenue mix and diversification are provided, and the author demonstrates the dramatic increase in federal grants to state and local governments over the past seven decades as these governments have become more involved in nationally set goals. The second chapter looks at the relationship of revenue elasticity, volatility, and fiscal health. The authors use case studies of several North Carolina counties to demonstrate the methods and value of calculating income elasticities of revenue for use in design of less volatile revenue structures that may improve fiscal health. This section emphasizes the interconnectedness between different levels of government in financing, and the importance of understanding the implications of the composition of revenues.
The business cycle plays a critical role in local government fiscal health. The Great Recession was an extreme example of this, but economic growth and recessionary periods have historically affected governments' ability to sustain consistently strong financial health. The four chapters in the fifth section of the handbook relate to the ways in which governments can manage their way through this cycle. Cutback management is addressed in the first chapter, which includes a literature review of the theories and evidence of the methods used by governments in dealing with earlier periods of fiscal stress, followed by a discussion of responses to stress in the past decade (including mini-case studies of New York City, Chicago, and Los Angeles). The next chapter develops a framework for understanding the fiscal environment. The framework includes the various factors that determine pressures to spend as well as revenue capacity and the potential future consequences of policy choices. The relationship between slack resources and financial condition is explored in the following chapter; from a literature review and other data, the author finds that local governments on average maintain slack resources far higher than recommended levels, while at the same time there is little empirical evidence to support the theory that high levels of slack improve financial condition. The final chapter in this section addresses methods by which governments can measure and manage the various types of investment risks while attempting to maintain safety of principle, liquidity, and maximization of income objectives.
Other governments have a major role in determining the constraints and opportunities within which local governments operate. The sixth section includes four chapters focused on considerations related to these intergovernmental institutional factors. The first chapter here provides a basic overview of local government structure and numerical trends in type of governments, then discusses how state and federal decisions and rules, as well as interlocal relations, can affect local fiscal health. The next chapter answers the question of how and by whom city fiscal health is monitored, including the role of federal bankruptcy laws, state monitoring systems, receiverships, financial control boards, city comptrollers, independent budget offices, bond rating agencies, and nonprofit organizations; examples are included to illustrate how these oversight mechanisms and entities work in various places. The impact of state-imposed tax and expenditure limitations (TELs) is the subject of the following chapter, which reports on a cross-sectional study of the relationship between financial condition and TELs in cities. The authors find that severity of TELs are positively associated with unreserved fund balance and pension funding, but negatively associated with own-source revenue, expenditures, and debt. Service consolidation is considered in the final chapter. The author simulates the potential effects of consolidation of school districts in Nassau County, New York, and finds that consolidation could result in significant cost savings.
The final section contains three chapters related to debt issues. Debt can be both a cause and an effect of fiscal stress. The first of these chapters considers both traditional and new methods of measuring and monitoring debt capacity: debt ceilings, benchmarking, regression, the normal curve model, stochastic simulation, and simultaneous equations. Strengths and weaknesses of the various approaches are included. The next chapter reviews the literature on the effects of state-imposed debt limits, bond referendum requirements, and TELs on size and cost of local government debt. Results of empirical studies have been mixed, partially due to the ability of governments to circumvent the spirit of these laws.
Overall, the book provides a significant amount of useful information, although by its nature, an edited volume has some weaknesses. There is overlap between various chapters; for example, the major measurement systems (e.g., ICMA's Financial Trend Monitoring System) are highlighted in several places throughout the book. There is also quite a bit of variation in the approaches used. A few chapters are primarily literature reviews, others provide “how to” guidance or trend data, a few report on a new quantitative analysis or case study, and several develop frameworks that can serve as models for future testing. In addition, there are elements that are underrepresented in the handbook. For example, while sections are devoted to long-term liabilities (pension, OPEB, and debt), there is relatively little focus on the operating expenditures portion of the equation which can play a substantial role in fiscal health. And given the paradox of spending pressures coupled with lack of willingness to pay for services, a chapter on the role of citizens and taxpayers could be helpful. Finally, the type(s) of local government discussed varies across the chapters. Some chapters are applicable to all local governments (cities, counties, school districts, and special districts) while others focus more specifically on one type, usually cities. It would be useful to have a chapter that aids in understanding how components of fiscal health, and these methods of measuring and monitoring it, might vary across different government types.
Minor issues aside, this is a significant contribution that will be valuable for many years to come. The handbook brings together our knowledge of a wide variety of topics related to local government fiscal health in one volume. The timing is very good; this work provides the opportunity to think about how the Great Recession fits into long-term trends, how thinking and experience has changed, and implications for the future. In addition to its usefulness as a textbook, it is also suitable for scholars who are beginning to delve into one of these areas of research. Each author identifies gaps in the literature, which could be particularly helpful for doctoral students in search of dissertation topics. In addition, practitioners can use this book to learn about fiscal health measurement and monitoring, along with other valuable ideas for financial management improvements.
School of Public Administration
University of Nebraska at Omaha