74 infrastructure assets. Instead they must have an asset management system for
infrastructure assets that must meet the following requirements: •
The government keeps up to date inventory records of its assets, •
Regular assessments are performed every 3 years using a measurement scale of the condition its infrastructure assets and must be reported in RSI,
• An annual estimate is made of the costs required to maintain and preserve
infrastructure assets at the condition level established by the government.
States adopting the modified approach may have lower expenses Wang et al 2007. These two requirements, particularly the modified depreciation approach, reduce
the uniformity of these government-wide statements Kravchuk and Voorhees 2001.
3.5 Conclusion
In this chapter, the various definitions and measures of fiscal stress are discussed. By synthesizing multiple definitions of fiscal stress, this chapter articulates a single
definition that encompasses four types of solvency: budget, cash, long-run, and service- level. A typology of fiscal stress measures is created and the different measures found
throughout fiscal stress literature are assessed on their ability to operationalize the four types of solvency that contribute to fiscal stress. Financial indicators are found to best
measure fiscal stress due to the amount of information they can represent.
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CHAPTER 4 CONSTRUCTING AND TESTING A FISCAL STRESS MEASURE
4.1 Introduction
Given an understanding of fiscal stress, a definition and measurement aspects, we now must determine how to express the concept numerically with the available data. This
chapter focuses on the second research question of this analysis - is there a better measure of fiscal stress than has been presented in the past, and why is this new measure valid and
reliable? In this case, a measure of fiscal stress is constructed from financial indicators that operationalize the following definition of the term: a government’s inability to meet
its short or long run financial obligations, as they arise, that may also be accompanied by an inability to raise revenues or provide determined levels of goods and services. The
definition of fiscal stress is then broken into various components. The first component, a state’s ability or inability to meet short run financial obligations as they arise, is captured
by a cash solvency index. The second component, a state’s ability or inability to meet long run financial obligations as they arise, is measured by a long-run solvency index.
The third component, a state’s ability or inability to raise revenue, is captured by a budget solvency index. And finally, the fourth component, a state’s ability or inability to provide
a previously determined level of goods and services, is measured by a service-level index.
There are many financial indicators that can measure aspects of a state’s financial condition and by extension, fiscal stress. The eleven financial indicators used in this
chapter are based on prior research and data availability. Using these financial indicators, four indices – cash, budget, long-run and service-level – are constructed. The reliability
and validity of these indices as measures of fiscal stress will also be assessed. Once these indices are constructed, tested and combined, a measure of fiscal stress exists that allows
