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Figure 3.1: Spectrum of Public Financial Condition
3.1.1 Financial Condition
Financial condition describes a complex set of relationships covering a government’s ability to raise revenues, borrow funds, make expenditures, and provide
services. Definitions of financial condition and fiscal condition or fiscal health tend to contain two components, government’s ability to meet financial obligations and
government’s ability to provide services to its residents. Hendrick 2004, 80 and Jimenez 2009, 81 define fiscal health as “the ability of a government to meet its financial and
service obligations.” Wang et al 2007, 2-3 hews closely to this by defining financial condition as a “government’s ability to adequately provide services to meet current as
well as future obligations,” while noting that the most common concept of financial condition is “the ability of an organization to timely meet its financial obligations.”
Service obligations are the assumed cause of the financial obligations. With an accounting perspective, Kamnikar et al 2006, 32 present an approach that is along these
same lines, defining financial condition as “a government’s ability to meet its obligations as they come due and the ability to continue to provide the services its constituency
requires.” Berne and Schramm 1986, 5 define a government with a healthy financial condition as “being able to meet their financial obligations as they come due, in both the
short run and the long run, while raising resources and providing public goods and
48 services.” Rubin and Willoughby 2009, 54 define fiscal condition as a state’s “ability to
meet the public demand for public goods and services.” This definition explicitly lays out the service obligations while the financial obligations are assumed. Yet, each definition
recognizes the two functions of government. First, government must provide services to its residents. Second, in order to provide these services now and in the future,
government must meet its financial obligations. The main difference in these definitions is the description of a government’s
service obligations. Gauging a government’s service obligations is difficult because it is nearly impossible to measure whether a government is meeting ‘adequate’ or
‘constituency required’ services levels or ‘public demand’ Rubin and Willoughby 2009; Chaney et al 2002a. Measuring public demand is fraught with difficulties, as is
determining whether public demand in one state can be compared to public demand in others Rubin and Willoughby 2009.
To ensure consistency within this paper, financial condition will be defined as a government’s ability to meet its short-run and long run financial obligations as they arise,
while raising resources and providing goods and services. This definition, drawing heavily from Berne and Schramm 1986, details the commitments government must
meet without placing a standard or criteria on the level of services it must provide. The multiple time periods and multiple constituencies that must be served by government are
also laid out in this definition. With these obligations defined, it will be easier to pinpoint the areas in which a government experiences fiscal stress.
3.1.2 Fiscal Stress
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