The Importance and Complexity of Assessing Urban Fiscal Health

Defining Urban Fiscal Health: Complex and Consequential

One of the most consistent themes throughout the collection is the challenge associated with defining fiscal health. In fact, each chapter includes a specific definition, though the first three address the issue most directly. While this might seem like unneeded repetition to some, the editors and chapter contributors deserve credit for continually highlighting the issue. As several of the authors note, large numbers of metrics are included in existing literature. Over the last forty years, indicators have been developed by government agencies (Congressional Budget Office 1978; Advisory Commission on Intergovernmental Relations 1979), professional organizations (International City/County Management Association), and academic scholars (Clark and Ferguson 1983; Kloha, Weissert, and Kleine 2005a; Ladd and Yinger 1989; Levine, Justice, and Scorsone 2013). One of the most comprehensive collections of these efforts is included in Rebecca Hendrick’s (2004) assessment of fiscal health in Chicago’s suburban municipalities. However, even commonly used groups of indicators such as Kenneth Brown’s ten-point test (1993) have been reexamined and updated (Maher and Nollenberger 2009). In short, whether an author is examining the conceptual aspects of fiscal health or “how to” strategies, the multiplicity of options and the challenges associated with each must be addressed.

In the second chapter of the book, Bird specifically highlights the variety of indicators that have been developed over time and the complexity of the assessment process. In particular, he uses indicators and frameworks from both the United States and Canada to illustrate the many ways in which fiscal health can be examined. Nonetheless, he suggests even frequently used indicators—net operating surplus, for example—are limited in their ability to provide a clear picture of a city’s fiscal condition. Indicators and frameworks also can be compromised by limited data and biased interpretations by policy makers with specific agendas. Overall, Bird (2015) concludes by suggesting, “the ‘best’ set of fiscal indicators to assess fiscal health is likely to be a mixed bag” (p. 30), composed of many different measures from a variety of perspectives.

This particular point is highlighted to an even greater degree in Hanniman’s direct assessment of credit markets in chapter 3. He begins by highlighting the common perception that credit markets are thought to promote fiscal health. As fiscal health increases, cities attain a high credit rating and, therefore, lower interest rates. The problem for Hanninam, however, is the definition of fiscal health used by primary credit rating agencies. Fundamentally, these agencies define fiscal health as a city’s ability to meet its debt obligations in full and on schedule. As a result, cities can appear fiscally healthy if they can repay their debt. At the same time, however, other important obligations and stakeholders may be neglected as a consequence of prioritizing debt repayment.

From the perspectives of both Bird and Hanniman, service quality and infrastructure maintenance are two of the most important considerations often left out of the fiscal health equation. In an effort to maintain a strong fund balance, low debt, or limited personnel expenditures, cities may reduce the quality of services they provide to their citizens or defer needed capital investment or maintenance on large projects such as roads, civic buildings, cultural institutions, or parks. As the authors correctly note, the policy implications associated with these omissions are extensive. For citizens, limited attention to service quality can be incredibly problematic, especially for low-income residents who tend to rely on public services the most. Poorly maintained infrastructure, while challenging for residents, can create even greater public costs as conditions deteriorate to a point that necessitates costly repairs or complete replacement. In sum, defining fiscal health is not simply an exercise in semantics. The indicators that are eventually selected can have a large impact on a city, its services, image, and residents (Justice and Scorsone 2013).

Context Matters

The four subsequent chapters in the text are dedicated to the assessment of the fiscal health of cities across the United States, Canada, and various OECD countries. In particular, the two chapters that focus on Canadian municipalities and another dedicated to a wider array of cities across the globe are some of the most noteworthy and unique contributions of the volume. As Merk and Hulbert (2015) note, “since the early 1990s, studies analyzing the fiscal health of cities have become scarcer and remain U.S.-centered” (p. 63). Cities in various countries such as Spain (Zafra-Gómez, López-Hernández, and Hernández-Bastida 2009), Australia (Dollery, Crase, and Byrnes 2006), and Israel (Carmeli 2002), among others, have been examined from an academic perspective and country-specific indicators have been developed. Nonetheless, the international literature remains less robust when compared to the United States more generally.

Although laudable, assessing the fiscal health of cities across international borders can further complicate the problems endemic to assessing and comparing cities within a single country or metropolitan region. In particular, the location of a city within a country, similar to its location within a subnational government or region, can greatly impact the city’s fiscal health. The scope of authority and service responsibilities associated with the various types of local government under consideration also is important. If these differences are not taken into account, the challenge of developing accurate comparisons across cities can become even more muddled. Thankfully, the authors are careful to explain important distinctions as needed and, when taken together, the chapters illustrate the degree to which these types of characteristics can structure the financial conditions faced by cities.

Regarding specific chapters, the selection written by Merk and Hulbert represents the most ambitious effort to examine global urban fiscal health. Rather than explore and compare the fiscal health of cities in a single country, the authors expand their analysis to thirty cities from twelve different OECD countries. At the outset, the chapter reinforces the challenges associated with defining fiscal health and the importance of high-quality, comparable financial data. In fact, comparable data across major international cities are limited to such a degree that information from credit rating agencies is used as the primary data source—a practice critiqued by Hanniman in the previous chapter. While the authors echo the limitations highlighted by both Bird and Hanniman, they determine the information contained in Standard & Poor’s International Finance Database is appropriate for their particular question. Given the scope of the project, its uniqueness, and incredibly challenging data limitations, use of this type of data seems both appropriate and necessary.

Using credit profiles, the authors examine eight specific indicators: institutional framework, economy, financial management, budgetary flexibility, budgetary performance, liquidity, debt burden, and contingent liabilities. As would be expected, at least some degree of variation is present across each of the indicators. In many cases, these variations are impacted by the country in which a city is located. For example, cities with the best ratings were located in countries with similarly impressive credit ratings. The degree to which national governments manage health, education, or social services also impact a city’s budgetary flexibility and, similarly, local financial management practices can be structured by broader national policies. Although exploratory and largely descriptive, the research provides a strong foundation to determine further the ways in which environmental conditions, particularly the relationship between national and subnational governments, impact the fiscal health of cities.

The chapters that examine cities in the United States, Québec, and Ontario provide even more detailed evidence of the importance of context. In particular, the location of a city can either mitigate or exacerbate external fiscal shocks. For instance, Chernick and Reschovsky begin their examination of U.S. cities by highlighting the high-profile bankruptcies of Detroit, San Bernardino, and Stockton. Although many large U.S. cities have faced a wide array of historic and complex financial challenges, the authors use a predictive model to demonstrate the extent to which the Great Recession intensified these problems, particularly those associated with revenues. In contrast, Meloche, Strub, and Vaillancourt (2015) conclude, “the recession had no impact on property values in Québec and did not really affect municipal revenues” (p. 145). Furthermore, “the impact of the recent recession on municipalities in Ontario was considerably milder than it was in other parts of the world” (Slack, Tassonyi, and Grad 2015, 152).

A particular location within states, provinces, or metropolitan areas can be an important correlate of fiscal health as well. In their wide-ranging assessment of large cities in Ontario, Slack, Tassonyi, and Grad find cities with the worst fiscal health tend to be located in the northern portion of the province. Similarly, Chernick and Reschovsky utilize the Milwaukee metropolitan area as a case study to illustrate the fiscal disadvantages of central cities relative to their suburbs. Although, as would be expected, the authors find large disparities among individual suburbs as well. Overall, the chapter contributors provide very tangible examples of the ways in which cities interact with their larger national, provincial, and metropolitan environments. A variety of common fiscal indicators account for these types of environment conditions, but the truly unique nature of individual cities often can be forgotten when comparing cities. As Bird (2015) appropriately cautions early in the volume, “those who wish to improve urban fiscal health must understand in depth not only exactly what is meant by specific benchmarks, but also the context within which they are interpreted in order to provide sound recommendations” (p. 37).

A Multiplicity of Methods

The third theme highlighted throughout the collection involves the multitude of different approaches that can be used to assess urban fiscal health. The opening chapters address the possibilities in some detail but, perhaps even more importantly, the methodological techniques used by the chapter authors illustrate the depth of available and equally useful options. Several chapters employ multiple methods in their assessments. Again, the editors and authors should be recognized for addressing important conceptual and methodological points, while also demonstrating the ways in which they can be used in practice.

Conceptually, Bird begins with a discussion of the various types of indicators and assessment techniques available to cities, stakeholders, and researchers. Indicators, for example, can be quantitative or qualitative, predictive or descriptive, objective or normative, easily comparable to other cities or unique to a single case. To be effective, however, “assessing how well the system is doing requires both a systematic analytical approach and detailed local knowledge” (Bird 2015, 37). For practitioners, the methods employed by the authors provide excellent examples of the various techniques that can be used to assess cities. For scholars, the methodological variation in the book accurately reflects the wide array of descriptive analyses, case studies, and predictive models included in existing public budgeting and financial management scholarship.

The importance of using basic descriptive data to illustrate fiscal health is highlighted throughout the text, though most directly by Slack, Tassonyi, and Grad. The bulk of their chapter is dedicated to applying various measures of fiscal health to the thirty largest cities in Ontario. The measures address revenues, expenditures, debt, ratios, and capital assets. For stakeholders in these particular cities, the lists allow cities to be compared with others. It is apparent, for example, that London has higher debt charges as a percentage of operating expenditures when compared to cities such as Greater Sudbury, Sault Ste. Marie, or Brantford. For communities outside of Ontario, the chapter highlights beneficial indicators and the ways in which they can be utilized. In most cases, particularly in the United States, information contained in publically available annual financial reports would permit the development of similar tables and analyses. Data aggregated across multiple cities, as is used in the assessments of United States and Québec cities, can be used to broadly compare specific cities to state or metropolitan averages.

The value of examining individual cities or metropolitan areas is highlighted as well. This technique has been relatively common among public budgeting scholars. For example, citizen participation in the budget process (Franklin and Ebdon 2005), budget reforms (Rubin 1992; Rubin and Stein 1990), and fiscal crises (Stone et al. 2015) have been explored using case studies of specific cities. Chernick and Reschovsky continue this approach by examining the Milwaukee metropolitan area within their broader assessment of large U.S. cities. By focusing on a particular area, the authors are able to highlight the interactions between central cities and their suburbs in a way that would not be as effective with a much larger sample. From a practical perspective, intimate knowledge of a city or metropolitan area can be invaluable to the proper interpretation of indicators and the development of conclusions regarding fiscal health. Stated another way, “even the best set of fiscal health indicators is not, and cannot be, a substitute for careful case analysis” (Bird 2015, 32).

Finally, the volume includes a variety of predictive models. The use of these techniques, particularly those highlighted in the text, is important to determine why fiscal health varies across cities, which indicators or conditions are important, and the impact current conditions could have on future conditions. Within the broader fiscal health literature, models have been developed to examine correlates of fiscal stress (Dougherty, Klase, and Song 2000), the development and use of stabilization funds (Snow, Gianakis, and Haughton 2015; Stewart 2009), and the degree to which fund balances impact expenditures (Marlow 2005).

The assessment of municipalities in the United States and Ontario by Chernick and Reschovsky and Slack, Tassonyi, and Gard, respectively, reflects a similar research approach. In particular, the authors utilize the need-capacity indices developed by Ladd and Yinger (1989), which include the calculation of expenditure needs and revenue-raising capacity. Within the U.S. context specifically, Chernick and Reschovsky use the needs–capacity gaps to predict future economic performance. Although the results are not what the authors initially hypothesize, the effort illustrates the complexities of predicting economic performance and provides a more robust foundation for future research. The chapter also includes the development of fiscally standardized cities (FiSCs) to account for the revenues of overlapping governments (e.g., counties, special districts). A predictive model is then developed that highlights revenue concerns for many large, central cities as a result of the recent recession. These models, when coupled with the other methods employed in the collection, represent a wide variety of indicators and methodological approaches that can be used by both practitioners and academic scholars. Additionally, the chapters provide strong and needed support for the use of a mixed-methods approach when assessing the fiscal health of cities.

A Need for Additional Research

The final theme that resonates throughout the book is the continued need for research that further clarifies indicators of fiscal health, their application, and their implications. At the outset, this seems somewhat counterintuitive. Authors, including those represented in this book, generally are careful to define fiscal health and related limitations. Furthermore, this text, as well as a relatively robust collection of existing scholarship, details a large number of potential indicators, frameworks, and guidelines to assess fiscal health. For practitioners in particular, the array of indicators and tools available represents, to some degree, an embarrassment of riches. However, as discussed above, even the most basic definitions of fiscal health can be problematic and the unique characteristics of individual communities can make comparisons with other municipalities difficult. Previous assessments of fiscal health and stress have expressed similar concerns. In their discussion of fiscal stress, Justice and Scorsone (2013) conclude, “we may find ourselves slightly disappointed, even if not at all surprised, to acknowledge that there is unlikely to be a magic solution to the problem of measuring and predicting fiscal stress” (p. 66). In short, the need for additional conceptual clarity regarding fiscal health remains.

These challenges are even more pronounced when an assessment extends from a single city or region to one with an international and comparative scope. In these instances, one of the largest barriers is not a lack of indicators or frameworks. Rather, reliable and comparable data are needed before a comparative analysis can begin. In part, the uniqueness of cities and countries—whether in the United States, Canada, or elsewhere—contribute to these limitations. In U.S. cities, for example, the large variations in revenue sources, expenditures, and organizational structure were the motivation for Chernick and Reschovsky to use the FiSC calculation. As a result, the international focus of Merk and Hulbert’s contribution should be viewed as an initial step for additional academic research and as a more practical call to develop better and more comparable financial data from cities across the globe.

Efforts also should be made to apply additional existing research to a larger, more international collection of cities. For example, the relationship between cities and their subnational governments is highlighted throughout the text, though particularly in the assessment of cities in Québec and Ontario. Attention could be given to the degree to which state or provincial governments actually monitor the fiscal health of their cities. Although monitoring appears limited in the United States (Kloha, Weissert, and Kleine 2005b), the generalizability of these findings to other countries merits exploration. Furthermore, if monitoring does occur, does it affect fiscal outcomes? Again, initial indications do not appear promising in the United States (Spreen and Cheek 2015), but the potentially important implications of this research warrant replication in other countries. Similarly, it also may be worthwhile to examine the degree to which objective measures of fiscal health match the assessments of public officials. Although previously examined in a single state (Maher and Deller 2011), understanding the information used to make financial decisions is paramount in any context.

Finally, as mentioned above, several authors in the text correctly highlight the implications of using certain indicators rather than others. These choices can paint very different pictures of a city’s fiscal health. Although debt may be low, for example, service and infrastructure quality may be poor. The political agendas of elected officials and the professional concerns of public managers have the potential to alter the selection of indicators even further (Bird 2015). As a result, additional attention should be given to the ways in which indicators are selected and used. For instance, why do certain communities use or focus on a particular indicator or set of indicators while others receive limited or no attention? To what degree are existing frameworks or best practices utilized? What explains the degree to which they are used, or not used? Are the indicators used by communities adequately capturing a realistic picture of their fiscal health? If not, which interests are not represented and what can be done to ensure a city’s definition of fiscal health meets the needs of as many stakeholders as possible. In short, despite the relatively robust literature related to fiscal health, there are many opportunities to expand the discussion.

Conclusion

The title of Bird and Slack’s edited volume presents a simple question. Is your city healthy? For both academics and practitioners, this is not a new enquiry. However, after more than forty years of consistent attention, the answer remains elusive. Given the lack of a consensus regarding what defines good or poor fiscal health, this should not be surprising. Nonetheless, the implications associated with the question are vital to the well-being of cities and their residents. These, then, are the challenges and opportunities for those who research and assess fiscal health, including the contributors to this collection.

On balance, this text provides a strong overview of the simple yet complex tasks of measuring and assessing urban fiscal health. Consequently, it is relevant to both practitioners and academics. Although not entirely a how to text for those working for cities or tasked with assessment, when taken together, the chapters provide useful background information, methods, and examples of indicators that could be used to assess fiscal condition in nearly any city. While repeatedly addressing the conceptual aspects of fiscal health may seem like an academic exercise to some, it is imperative for stakeholders in the field to be aware of the ways in which a definition can dictate the indicators that are chosen and subsequent conclusions regarding financial health or stress. For academics, the text adds to the current conversation regarding fiscal health but also includes a variety of methodological innovations worth examining further. Its emphasis on the importance of incorporating infrastructure, service quality, and a more robust international scope into existing research is a notable contribution as well. Regardless of one’s perspective, the book represents an important contribution to existing and ongoing efforts to define, measure, and assess urban fiscal health.