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3.1.3 Fiscal Crisis
Fiscal crisis is a term used with even less precision than fiscal stress; however, it does appear to suggest a financial condition worse than fiscal stress. Although fiscal
stress and fiscal crisis are used interchangeably in some cases Downing 1991; Gold 1995, recent research attempts to distinguish between the two terms. Honadle 2003,
1433 defines fiscal crisis as “a threat to the continued operation of the government, a true emergency situation in which government is unable to meet payroll, bills, and debt
repayment.” Conant 1992, 4 defines fiscal crisis as the “funds needed to meet current year program obligations substantially exceed appropriated levels.” Inman 1995, 378
defines fiscal crisis as when “a city’s potential to raise revenues is insufficient to cover the city’s legally required expenditures.” Hirsch and Rufolo 1990 determine fiscal
crisis as when a city lacks the flexibility to deal with revenue losses. Taking these definitions together, fiscal crisis is a situation where government faces an inability to
meet financial obligations even after engaging typical fiscal actions. For example, tax revenues cannot be raised, or raised sufficiently, expenditures cannot be cut without
compromising the provision of a minimum level of services, rainy day funds are not available or the government faces default or bankruptcy. In the present research, fiscal
crisis is defined as a government’s inability to meet its short-run and long-run financial obligations as they come due coupled with an inability to raise revenues or provide goods
and services. Perhaps the state that has come closest to fiscal crisis in recent times is California.
In July 2009, the state issued registered warrants IOUs in lieu of cash for general fund obligations. After revising the budget, the state stopped issuing IOUs in September 2009
and the IOUs were then redeemable California State Controller’s Office 2009. Since the state still provided goods and services to its residents and resumed meeting its financial
obligations, in this instance, the state does not meet the definition of fiscal crisis defined in this chapter or any of those found in the fiscal crisis literature. Indeed, the unit of
52 analysis for most research on fiscal crisis is municipalities. Due to the fiscal options open
to cities, their size, and the services they typically provide, fiscal crisis is much more likely to occur at the local than at the state level Honadle 2003. As shown in Figure 3.1,
fiscal crisis is placed to the right of fiscal stress on the continuum of financial condition. This is to indicate that fiscal crisis signifies extremely poor financial condition.
3.1.4 Connotation of Fiscal Stress
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