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
Fiscal stress is a term often used and occasionally defined. Rubin 1982 noted nearly thirty years ago that there are as many definitions of the term as there are scholars
interested in studying it, and this situation has not changed. Fiscal stress is hard to define for the same reasons that it is difficult to measure – it is a transient condition with
49 multiple facets and presentations Bahl 1984. Two states, California and Michigan, are
routinely described as experiencing fiscal stress. Some point to Michigan’s declining population and eroded economic base as indicators of the fiscal stress that state is
experiencing Menchik 2002. By contrast, California’s fiscal stress manifests itself in large budget deficits and in the state’s inability to raise taxes or cut services to effectively
close budget gaps Schunk and Woodward 2005; Savage 1992. The causes of fiscal stress in these states differ, as does the manifestation of fiscal stress; still, most would
agree that these two states are best characterized as experiencing fiscal stress. At the broadest level, the literature suggests that fiscal stress is a condition of
imbalance Gold 1992; Copeland and Ingram 1983; Scorsone and Plerhoples 2010. The imbalance may be between the services the public would like and what government
provides Copeland and Ingram 1983 or more clearly, the case of expenditures exceeding available financial resources Gold 1992. Operational definitions of fiscal
stress are also common. Levine 1980, 4 defines fiscal stress as when an “economy is unable to generate enough economic growth to expand or even sustain in some places
tax supported programs without putting unacceptable demands on taxpayers take home pay.” For Conant 1992, 4 fiscal stress occurs when “the predicted growth in revenues
for the upcoming biennium is sufficient to fund only the current year’s base appropriation level and a small addition to the base.” Along these lines, Sobel and Holcombe 1996a,
33-34 define fiscal stress as “the amount of discretionary tax increases plus the amount that expenditures were reduced from their long run trend growth during a recession.”
Kloha et al 2005, 314 defines fiscal distress as “a failure to meet standards in areas of operating position, debt, and community needs and resources over successive years.”
Again, these definitions share an interpretation of fiscal stress as imbalance between revenues and expenditures.
Some definitions of fiscal stress include the reactions to or symptoms of fiscal stress, rather than the condition itself. To avoid this tendency, recent authors relate fiscal
50 stress directly to financial condition and financial indicators Wang et al 2007; Kamnikar
et al 2006. In state level research, the trend is away from demographic and response- based definitions of fiscal stress toward a narrower focus on financial definitions that are
then used to determine how stress affects the delivery of services, demographic changes, poverty levels, and tax systems.
Fiscal stress encompasses situations where a government is unable to meet either its financial or service obligations. The causes of such situations may differ among
governments. Research identifies a number of potential causes of fiscal stress as well as reactions to fiscal stress. A definition of fiscal stress needs to be broad enough to capture
its different dimensions– budgetary imbalance, overreliance on debt to finance current expenditures, inability to pay for essential services – without including the causes and
consequences of fiscal stress. Otherwise comparisons across time and governments will be difficult.
For this analysis, fiscal stress is defined as a government’s inability to meet its short or long run financial obligations as they arise and may be accompanied by an
inability to raise revenues or provide goods and services.
4
Using this definition, a state may experience fiscal stress in one year but not the next. It is also possible for a state to
experience fiscal stress for several years in a row. The above definition is intentionally similar to the definition of financial condition used in this analysis. Using similar
definitions underscores the relationship between fiscal stress and financial condition; specifically, that fiscal stress is weak financial condition.
4
Goods and services include the goods and services directly provided by state governments and those provided by government enterprises.
51
3.1.3 Fiscal Crisis
