54 section, the role of data availability in constructing an accurate measure of fiscal stress
and the impact of recent changes to statewide reporting will be discussed.
3.2.1 The Evolution of Fiscal Stress Measurement
Fiscal stress measurement has changed over the years, but there is still no consensus on the best measure or what it should encompass. The study of fiscal stress
began at the municipal level in response to financial problems in urban areas like New York and Cleveland Savage and Schwartz 1999. As such fiscal stress measures initially
focused on municipal data sources and municipal problems. The main purpose at this stage was to identify which cities were the most fiscally stressed in order to determine the
destination and size of federal and state aid as well as to distinguish between fiscally reliable and non-reliable investments Burchell et al 1981; Ross and Greenfield 1980;
Benson et al 1988. The debate over the appropriate measurement of fiscal stress focused on the breadth of the measure – should it reflect singular events, long-term decline, or a
city’s ability to adapt to socioeconomic changes Pammer 1990. Early researchers on the topic used many financial indicators 29 – Clark 1977
and 101 – Howell and Stamm 1979. Factor analysis and principle component analysis were used to extract the dimensions of fiscal stress or reduce the indicators into one
composite measure. As scholars teased out the most important measures of stress highest loading factors, they began to focus on specific indicators. Morgan and England 1983
used three measures: 1 long-term debt per capita divided by per capita income, 2 per capita expenditures for nine common functions divided by per capita income, and 3
own source revenue per capita divided by per capita income. Pammer 1990 takes this parsimony to an extreme, using one measure the difference between ratio of total long
term outstanding debt to total city income to assess fiscal stress. Criticism of this direction in fiscal stress research also began early. In many cases,
the criticism focused on the causal models of fiscal stress; these included the socio-
55 economic decline model, internal political determinants model, and the bureaucratic
expansion model Pammer 1990. The socio-economic decline model focused on external determinants of fiscal stress, namely economic and demographic trends such as
recessions and migration from urban to suburban areas. The internal political determinants model focuses on the role of municipal employee unions and other interest
groups in creating a spendthrift political culture. The bureaucratic expansion model has its roots in public choice theory and supposes that excessive government spending causes
municipal fiscal and financial problems. These models are not mutually exclusive but they have affected the focus of fiscal stress research and the type of fiscal stress measures
used. Stonecash and McAfee 1981 questioned the causal model underlying many measures of fiscal stress. Specifically, they doubted the assumption that all city leaders
react to local economic problems in the same way. In other words, measuring how cities react to stress does not necessarily capture the level of fiscal stress.
Ladd and Yinger 1989 took a different approach to measuring fiscal stress and fiscal health. A major goal of their research was to compare the effect of state imposed
restrictions and general economic trends on cities’ fiscal health and ability to provide services. As mentioned above fiscal stress can be assessed as the inability to provide a
certain level of services to citizens. Ladd and Yinger 1989 developed a methodology that allowed them to standardize the amount of expenditures needed to provide the
average amount of services – they then compared this to each city’s revenue raising capacity. Using this system, they were able to look at a city’s fiscal health with and
without fiscal institutions and at the general trends in city fiscal health. More recently, research presents indices with predictive power using financial
measures Kloha et al 2005; Brown 1993; Honadle and Lloyd-Jones 1998; Patton and Kahn 2003. Despite different constructions, these measures are quite similar to earlier
efforts to measure fiscal stress using financial variables. Brown 1993 proposes ten ratios, including per capita revenue, percentage of general fund from own sources,
56 operating expenditures as a percentage of total expenditures, total revenues divided by
total expenditures, and per capita direct long-term debt. Once these measures are calculated, Brown 1993 proposes a scoring scheme by which a city’s relative risk of
fiscal distress can be ranked and compared to other cities. Kloha et al 2005 builds on this scale by adding population growth and then setting standards by which an absolute
level of risk can be determined. Several researchers have used these indices to assess municipal fiscal stress Honadle and Lloyd-Jones 1998; Patton and Kahn 2003; Miller
2001. Another method of fiscal stress measurement was put forward by Hendrick 2004
in which fiscal health is described as encompassing multiple dimensions that have different time frames. The financial context used to develop this measure is that
developed by Berne and Schramm 1986. The three major dimensions of fiscal health proposed are: properties of each government’s environment factors outside the control of
government, the balance of government fiscal structures with that environment comparison of the environment to government financial choices, properties of each
government’s fiscal structure how the government adapts to its environment. The author presents this measure as a starting point for exploring the multidimensional nature of
fiscal health within suburban communities and the need to account for different time horizons and interactions. A major finding of this research is that either using a single
measure to denote fiscal health or combining a number of different measures into a single index distorts the actual nature of fiscal health. As with the methodology developed by
Ladd and Yinger 1989, the applicability of this framework is limited by the amount of data needed to develop the measure.
At the state level, fiscal stress measures tend to be directly relevant to the subject of the article and availability of data. The different types of state fiscal stress measures
along with their strengths and weaknesses will be discussed later in this chapter.
57
3.2.2 Developing a Framework to Measure Fiscal Stress
