How to Manage Fiscal Health of Suburban Municipal Governments

Overview of the Book

Hendrick’s (2011) book is a more extensive and comprehensive update of her 2004 article. Her previous research primarily examines both expenditures per capita and own-source revenue per capita to assess fiscal balance in municipal governments. In this book, she covers more contextual factors and events relevant to overall financial condition, financial decisions, and strategies. The book not only embraces diverse indicators to analyze major fiscal and institutional factors surrounding municipal governments (e.g., fiscal capacity, administrative capacity, governance, fiscal threats, and fiscal opportunities) but also conceptualizes fiscal conditions and health in general.

Financial Conditions and Decision Making

Chapters 1–3 address financial conditions as well as decision making and problem solving with respect to fiscal concerns. Chapter 1 begins with a helpful introduction that captures critical points of each chapter and explains the research questions, data sources, and research designs. It also provides a glimpse into the complex financial conditions and notable financial management practices of 264 suburban municipalities in the Chicago metropolitan region in the 1990s and 2000s. As a starting point for her investigation, Hendrick briefly describes six key contextual factors—population, total spending, household income, white population, labor force with managerial or professional occupation, and equalized assessed value (EAV)(p. 7). These factors are converted into three different values that are applicable to each of the Chicago municipalities—lowest, median, and highest. The author points out that these diverse factors can affect financial decisions, such as revenue-raising capacity and debt level, independently or simultaneously.

Chapter 2 offers a comprehensive picture of financial conditions in suburban municipalities. The concept of financial health is neither easily measured nor easily defined from a single perspective since it affects a government’s obligations to serve both current residents and future generations. Recognizing the possibility of diverse interpretations of the concept, Hendrick addresses internal and external fiscal resources and their influence on local fiscal health. She notes that the relationship among internal policy choices involving revenues (receipts) and spending and external factors such as spending pressures, constraints, and obligations set the financial condition. For example, the balance between revenues and spending is directly connected to surpluses or deficits during a fiscal year. In addition, past spending commitments, such as debt and long-term contracts, play a critical role in determining current local government financial condition. Using different time frames and service-level solvency indicators, Hendrick confirms that such fiscal resources can explain whether current local fiscal health could improve, deteriorate, or remain at the same compared with previous years.

The author also finds complex links among fiscal environment, fiscal opportunity, current and future constraints, responsibility, and political environment in local governments (p. 25). She conceptualizes one large framework to explain local financial condition, examining how current policy choices and practices lead to changes in future investments and long-term assets and liabilities. She argues that good financial health can be maintained when financial officials’ policy choices continuously provide a fiscal structure that is balanced with, adapted to, and even improved by changes in the fiscal environment, including fiscal stress or munificence (p. 27). Policy choices are more likely than other factors in the decision-making process to be directed by the political environment (e.g., governing culture, rules, and form of governments, such as a council-manager or mayor-council form). For example, in large metropolitan regions, many municipal governments may face competition to attract businesses. As a result, financial officials’ policy options are determined by political values and appointees.

Chapter 3 explains financial decision making in municipal governments based on local government officials’ perspective. Highlighting strategic management and problem solving, Hendrick uses 62 interviews and news reports published in 2003 to examine how the Chicago metropolitan government has dealt with fiscal risks. She finds that most municipal governments were under a medium to high level of fiscal stress and managed their fiscal capacity by increasing or adding revenues (77 percent), using short-term borrowing and subsidizing from other sources (75 percent), and cutting spending (63 percent)(p. 75). Thus, in addition to balancing governments’ internal and external environments, both professionalism and innovation have played an important role in handling fiscal risks. For instance, sound maintenance of bond ratings and debt financing of capital infrastructure require that financial officials apply their professional knowledge and skills. In addition, for effective delivery of public services, collaboration and joint production can be entrepreneurial options for managing fiscal stress (p. 79).

Political and Institutional Factors

While the three previous chapters are based on fiscal and managerial perspectives, chapter 4 focuses on political and institutional factors that shape public officials’ behaviors and decisions. In this chapter, Hendrick looks at suburban fiscal governance status at both micro and macro levels. From the micro-level viewpoint, she discusses institutional and structural features of the Chicago region in the 2000s. In particular, she portrays the institutions in terms of formal and informal constraints, rules, and expectations about public officials’ behaviors and decisions. In theory, institutions shape the behavior of policy makers, including elected officials or bureaucrats, through reward or punishment (Clingermayer and Feiock 2001; North 1991). Public officials’ policy choices can therefore be directed or limited by election or mayoral appointment in the council-mayor or council-manager form of government. There exists a greater variation of financial policies and practices across municipal governments (pp. 83–85).

At the macro level, the author explores state–local fiscal governing relations in Illinois and interlocal governing relations in the Chicago region. The former relations represent a continuum of state control versus local autonomy (Stephens 1974). Hendrick uses fiscal decentralization as an indicator of state versus local control: in 2007, Illinois was ranked seventh in local operational spending, eighth in local revenue of state and local revenue, and twelfth in local revenue from state, respectively (p. 100). For interlocal governing relations, she looks at combined indicators of fragmentation and fiscal dispersion in fifty of the largest metropolitan regions in 2002. She finds that Chicago had the highest level of fragmentation and dispersion, ranking first or second (p.104). Overall, her findings show that Illinois is relatively decentralized compared with other states, and the Chicago region is highly fragmented and fiscally dispersed.

Fiscal Threats and Opportunities

Chapter 5 identifies determinants of fiscal threat and opportunity in the Chicago metropolitan region from the mid-1990s to the mid-2000s. Hendrick notes that fiscal stress and munificence represent negative and positive changes in financial condition, respectively. She contends that population growth and economic development are the biggest sources of threat and opportunity for any government’s financial future. Using quantitative data from 1994–1995 to 2004–2005 and the results of interviews conducted in 2003 and 2009 (capturing the 2001 recession and the Great Recession of 2007, respectively), she looks at changes in financial condition on the revenue and expenditure sides. Hendrick analyzes general revenue source trends (e.g., property tax, income tax, consumer price index, EAV, and grants), fund balance, and outliers, concluding that the revenue decline and uncertainty that occurred in the 2001 recession are main determinants of fiscal challenge (p. 114). On the spending and cost side, pension fund declines in 2008 were found to be the biggest problem in addition to cost changes for flood, water, and sewer services, and health insurance (p. 125). Interestingly, the author views lawsuits as another threat since they can cause political conflicts that are related to a government’s ability to maintain financial conditions overall (pp. 126–127).

Financial Problem Solving and Strategies

Tools for financial problem solving are discussed in both chapters 6 and 7. However, the purpose and scope of the tools mentioned in each chapter are entirely different. In chapter 6, the ways in which municipal governments used financial tools from 1999 to 2005 are examined, the focus being on key contextual factors such as fiscal and administrative capacity, fiscal structure, and exogenous fiscal threats and opportunities. The tools were used to not only respond to immediate threats and opportunities but also improve financial condition in the short term. Diverse methods of capturing measures of fiscal stress and munificence, such as two-stage least squares regression analyses, news reports, and interviews, are employed. For the regression analysis, three ratio changes of municipal budgets—own-source revenue, operational spending, and capital spending—are utilized as dependent variables (pp. 176–177). The findings show that corporate governments that have a chief administrative officer (CAO) or a finance director are more inclined to increase own-source revenue and reduce spending than are noncorporate governments. In addition, under the most severe fiscal crises, governments tend to make more dramatic cuts in services and increase revenues in their respective fiscal toolboxes. Hendrick argues that the best tools pertain not to fiscal capacity on revenue and spending—raising revenue or cutting spending/services—but to long-term financial management. In other words, governments should ask themselves what options they already have and how much fiscal stress they will face and for how long (p. 182).

While the historical ways in which municipal governments have used financial tools are examined in chapter 6, in chapter 7, the focus is long-term strategies for managing financial conditions in municipalities. At the macro level, Hendrick finds that fiscal strategies and policies directly influenced fiscal stability and health of municipal governments in Chicago in the late 1990s. The underlying assumption is that fiscal capacity (own-source revenue-raising ability) is of central importance in maintaining optimum financial condition. Her regression analyses show that a government with low fiscal capacity or fund imbalance may have fewer options to respond to exogenous financial challenges than a government with high fiscal capacity or fund balance. Ironically, the greater the severity and extent of fiscal problems, the more important it is to have a large number of strategies.

Furthermore, the availability of appropriate financial tools such as revenue diversification (e.g., property tax, sales tax, other tax, and nontax sources calculated as a percentage of total own-source revenue) as well as government structure affect municipalities’ ability to maintain long-term fiscal health (Hendrick 2002). Corporate and professionally administered governments with a CAO or a finance director are less likely to be sensitive to debt. In turn, they tend to recognize capital infrastructure as an effective means of improving financial condition and solving long-term financial problems.

The various trend graphs that Hendrick presents illustrate the reactions of Chicago municipal governments to fiscal stress with respect to historical changes in median spending, own-source revenue, general obligation, total bonds, and total debt per capita. From 1998 to 2005, basic strategies such as spending cuts and revenue increases did not change incrementally. Capital planning and spending tend to amplify fluctuations in fund balance in both good times and bad times fiscally speaking. Thus, the author argues that economic development along with sales tax-generating enterprises and population growth can be effective financial tools.

Responsibility and Accountability

Chapter 8 is a comprehensive overview and ties together the themes of each chapter. By analyzing the ways in which local governments have managed fiscal stress and maintained financial conditions in the Chicago metropolitan region, Hendrick shows that fiscal health is indeed complex and multidimensional. She maintains that fiscal health is attributable to municipalities’ fiscal capacity and structure, the threats and opportunities they face, and the financial tools they utilize (p. 248). In the author’s view, there is no doubt that many local governments need new devices to become financially sustainable and to maintain healthy budgets. Chicago’s suburban municipalities are not unique; they rely heavily on sales taxes or growth revenue. Further, as the author shows in many empirical analyses, their fiscal capacity has not changed in a linear fashion over time. The book concludes by emphasizing the responsibility of local government officials to ensure that their governments are well managed financially and to make sound financial decisions (p. 256). For many fiscally low-performing municipalities, the managerial decision-making strategies addressed in this book may be viable devices for overcoming fiscal difficulties.

Why This Book Matters

Overall, this book presents well-organized research targeted to those in charge of the budgetary decision-making process, including financial managers and elected or appointed officials, who are particularly concerned about the impact of fiscal crises. This book stimulates research interest in the way in which local governments manage fiscal and institutional environments effectively and how they can improve their financial health. In addition, it employs mixed methods of research. For the quantitative analysis, cross-sectional and time-series data ranging from the late 1990s to the 2000s, including the 2001 recession, were utilized along with descriptive graphs and tables and explanations. Extensive interviews with municipal officials and managers and reviews of new reports published in the region were employed for the qualitative analysis. Such diverse methods give readers more reliable evidence and help them better understand the variety of fiscal threats confronting municipal governments as well as the opportunities available to them.

There are a few limitations to this study—including particularized time frames and the self-selected unit of analysis—that readers should bear in mind when generalizing the results since, nationwide, local governments have very different demographic, cultural, and political environments as well as varying fiscal capacity and institutions. Future research might include analyses of financial condition and measures of fiscal health from the mid-2000s to the late 2000s. In addition, it would be interesting to compare the financial policies, practices, and health of suburban municipalities in the 2001 recession with those in the Great Recession of 2007 or current year. Follow-up studies could attempt to answer the question that Hendrick asks (p. 255): “Will the Great Recession permanently alter the financial condition of municipal governments in the region and their fiscal policies, practices, and structure?”

The issue of fiscal health and condition, regardless of level of government, continues to be controversial and the subject of ongoing debate among many scholars and practitioners in the public administration and policy field. Even though suburban municipalities in metropolitan regions are highly susceptible to national and state economic situations, there is little comprehensive research into their fiscal conditions. This book successfully fills the gap and helps encourage financial officials and other policy makers in local governments to ponder feasible decision-making strategies to address fiscal distress. Practitioners and students whose research interests focus on financial management and the fiscal health of municipal governments will find this to be worthwhile reading.