Developing a Framework to Measure Fiscal Stress

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3.2.2 Developing a Framework to Measure Fiscal Stress

Several frameworks are used to measure financial condition – some more applied and some more theoretical Mead 2006. To measure fiscal stress it is first necessary to define what are the important factors of a state’s financial condition – in other words to define what fiscal stress is a deviation from. In this analysis financial condition is 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. By extension fiscal stress is a state’s inability to meet either its short-run or long-run financial obligations, raise enough revenues to provide goods and services. A financial condition framework allows researchers and practitioners to operationalize the broader definition of financial condition and begin to apply these standards to local or state governments. In public policy research, many scholars and practitioners draw on the International CityCounty Management Association ICMA model defined by the work of Groves et al 1981 in which financial condition is divided into four types of solvency: cash, budgetary, service-level, and long-run Mead 2006; Lewis 2003. With financial condition defined as all four of these solvencies, fiscal stress can be insolvency in any of these four areas. Cash solvency concerns a government’s liquidity and its ability to pay its bills Groves et al 1981. Budgetary solvency concerns a government’s ability to meet spending obligations without causing a deficit Groves et al 1981. Long-run solvency is a government’s ability to pay for all of its costs including those that may occur only every few years or in the future Groves et al 1981. Long-run solvency allows financial condition to capture government’s management of debt and capital assets. While cash and budgetary solvency look at short-term financial management, long-run solvency looks at a government’s management of longer-term issues. Service level solvency concerns a government’s ability to provide and pay for the level and quality of services required to meet the general health and welfare of a community Groves et al 1981. The importance of dividing financial condition into different types of solvency is echoed in 58 more recent research Berne 1992; Hendrick 2004; Wang et al 2007; Kamnikar et al 2006; Gomez et al 2009. In this analysis the scope and focus of this financial condition framework is appealing for three reasons. First, it concerns financial and fiscal factors without straying into variables that may differ state to state not due to underlying financial factors but rather state financial management practices or preferences. Second, state data that is currently available that allows the operationalization of these four solvencies. Third, the importance of each type of solvency is understandable. For instance, budget solvency is necessary to ensure states’ do not run budget deficits and run afoul of balanced budget requirements. Mead 2006, 385 details the factors that are important to consider when assessing government financial health: • Fund balances, equity or net assets • Revenues and expendituresexpenses as well as surpluses and deficits • Changes in revenue bases • Spending pressures and expenditure needs • Outstanding debts, debt service, and post-employment benefits • Liquidity Each of these factors is covered by the concepts of cash, budget, service-level, and long-run solvency. So this assures us that using this framework captures the relevant factors in understanding financial condition. Wang et al 2007 demonstrate the usefulness of this framework in analyzing state financial condition. This is an important consideration given the municipal focus of many financial condition frameworks. Even the financial condition framework developed by the Florida Auditor General is to assess local government financial condition Mead 2006. As will be discussed later, Wang et al 2007 also provides the financial ratios that measure each solvency. 59

3.2.3 A Good Measure of Fiscal Stress