Handbook of Local Government Fiscal

Transcription

1 & Handbook of Local Government Fiscal Health Edited by Helisse Levine, PhD rning, Long Island LLC University Jonathan B. Justice, PhD University of Delaware Eric A. Scorsone, PhD Michigan State University Jones and Bartlett Publishers.

2 & World Headquarters Jones & Bartlett Learning 5 Wall Street Burlington, MA info@jblearning.com Jones & Bartlett Learning books and products are available through most bookstores and online booksellers. To contact Jones & Bartlett Learning directly, call , fax , or visit our website, Substantial discounts on bulk quantities of Jones & Bartlett Learning publications are available to corporations, professional associations, and other qualified organizations. For details and specific discount information, contact the special sales department at Jones & Bartlett Learning via the above contact information or send an to specialsales@jblearning.com. Copyright 2013 by Jones &, an Ascend Learning Company All rights reserved. No part of the material protected by this copyright may be reproduced or utilized in any form, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the copyright owner. This publication is designed to provide accurate and authoritative information in regard to the Subject Matter covered. It is sold Jones with the & understanding Bartlett that Learning, the publisher is LLC not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the service of a competent professional person should NOT be sought. FOR Handbook of Local Government Fiscal Health is an independent publication and has not been authorized, sponsored, or otherwise approved by the owners of the trademarks or service marks referenced in this product. Some images in this book feature models. These models do not necessarily endorse, represent, or participate in the activities represented in the images. Production Credits Publisher: Michael Brown Managing Editor: Maro Gartside Editorial Assistant: Chloe Falivene Editorial Assistant: Kayla Dos Santos Production Assistant: Rebekah Linga Senior Marketing Manager: Sophie Fleck Teague Manufacturing and Inventory Control Supervisor: Amy Bacus Library of Congress Cataloging- in- Publication Data Levine, Helisse. Composition: Cenveo Publisher Services Cover Design: Scott Moden Cover Image: Unscrew/ShutterStock, Inc. Printing and Binding: Edwards Brothers Malloy Cover Printing: Edwards Brothers Malloy Handbook of local government fiscal health / Helisse Levine, Jonathan B. Justice, and Eric Scorsone. 1st ed. p. cm. Includes bibliographical Jones & references Bartlett and index. Learning, LLC ISBN (pbk.) ISBN (pbk.) 1. Local finance United States. 2. Local government United NOT FOR States. SALE I. Justice, OR Jonathan DISTRIBUTION B. II. Scorsone, Eric A. (Eric Anthony) III. Title. HJ9145.L dc Printed in the United States of America Jones and Bartlett Publishers.

3 & Contents Foreword...xiii Contributors...xvii Chapter 1 Introduction... 1 by Eric A. Scorsone, Helisse Levine, and Jonathan B. Justice Reference... 7 Part I Fiscal Health and Sustainability Concepts and Measures Chapter 2 Assessing the Financial Condition of Local Governments: What Is Financial Condition and How Is It Measured? by Benoy Jacob and Rebecca Hendrick Introduction The Concept of Financial Condition The Components of Financial Condition Strategic Decision Making Strategies for Measuring Financial Condition Conclusion Endnotes Jones Glossary... & Jones 37 & Bartlett Lea NOT FOR Discussion SALE Questions... OR DISTRIBUTION NOT FOR 39SALE OR D Recommended Resources References iii Jones and Bartlett Publishers.

4 & iv Contents Chapter 3 Measuring and Predicting Local Government Fiscal Stress: Theory NOT FOR and Practice... NOT FOR 43 SALE OR DI by Jonathan B. Justice and Eric A. Scorsone Introduction Concepts of Fiscal Health and Stress U.S. Historical Context: Salient Episodes and Responses Modeling the Causes and Characteristics of Fiscal Stress Practicalities of Diagnosis and Prediction Some Construction Notes Bartlett Learning, Conclusion... LLC 66 Recommended Resources Endnotes Glossary Discussion Questions References Part II Financial Reporting and Modeling Chapter 4 The Development of External Financial Reporting and Its Relationship to the Assessment of Fiscal Health and Stress by Dean Michael Mead Introduction Professionalizing State and Local Government Financial Management in Response to Fiscal Stress The Standardization of Governmental Accounting Traditional Approaches to Assessing Fiscal Health and Stress Based on Financial Reporting The Advent of Consolidated Full Accrual Accounting Fiscal Health and Stress Analysis after Statements 34 and Jones Conclusion... & Jones 118 & Bartlett Lea NOT Endnotes... FOR NOT FOR 120 SALE OR D Glossary Discussion Questions Recommended Resources Jones & Bartlett References... Learning, LLC Jones & Bartlett 122 Learning, LLC Jones and Bartlett Publishers.

5 & Contents v Chapter 5 Long-Term Forecasting by Kenneth A. Kriz Introduction Definitions and Principles Jones & Bartlett Forecast Learning, Models... LLC rning, 135 LLC NOT FOR SALE OR Model DISTRIBUTION Validation and Error Measurement Conclusion Endnotes Glossary Discussion Questions Recommended Resources References Part III Pensions and Other Postemployment Benefits Chapter 6 Postemployment Benefits and Fiscal Analysis by Dean Michael Mead Introduction Overview of Postemployment Benefits Jones & Bartlett Measuring Learning, Postemployment LLC Benefit Costs and Obligations... Jones & Bartlett Learning, 161 LLC NOT FOR SALE OR Key DISTRIBUTION Postemployment Benefit Information The Place of Postemployment Benefits in Fiscal Health Assessments The Future of Postemployment Benefit Information Endnotes Glossary Discussion Questions Recommended Resources References Chapter 7 Sustainable Approaches to Retiree Benef its: Options and Implementation for Program Design and Financing by Jun Peng Introduction Basic Features of Benefit Plans Jones and Bartlett Publishers.

6 & vi Contents Pension Reform Summary OPEB Conclusion Jones & Bartlett Endnotes... Learning, LLC Jones & Bartlett 201 Learning, LLC NOT FOR SALE Glossary... OR DISTRIBUTION NOT FOR SALE OR 202 DISTRIBUTION Discussion Questions Recommended Resources References Part IV Revenue Elasticity and Adequacy Chapter 8 Public-Finance and Fiscal-Federalism Perspectives on Local Government Revenue Bases and Fiscal Sustainability by Donijo Robbins Jones Introduction... & Jones 207 & Bartlett Lea Why Government Does What It Does Which Layer of Government Provides Goods and Services How Government Intervenes The Effect of Fiscal Federalism on Local Governments NOT FOR SALE OR Conclusion... DISTRIBUTION NOT FOR SALE OR 222 DISTRIBUTION Endnotes Glossary Discussion Questions Bartlett Learning, Recommended LLC Resources References Chapter 9 Understanding and Measuring Revenue Elasticity, Volatility, and Implications for Local Government Fiscal Health by Deborah A. Carroll and Christopher B. Goodman Jones Introduction... & Jones 225 & Bartlett Lea An Illustration of Fiscal Health Revenue Elasticity and Implications for Volatility Composition of Revenue Structures Jones and Bartlett Publishers.

7 & Contents vii Volatility of Resource Flows and Fiscal Health Endnotes Glossary Discussion Questions Jones & Bartlett Recommended Learning, LLC Resources... rning, 249 LLC NOT FOR SALE OR References... DISTRIBUTION 249 Part V Business Cycle, Bubbles, and Reserve Funds: Cutback Management for the 21st Century Bartlett Learning, Chapter 10 LLC Fiscal Stress and Cutback Management Jones & among Bartlett State and Learning, LLC Local Governments: What NOT Have FOR We Learned SALE and OR What DISTRIBUTION Remains to Be Learned? by Christina Plerhoples and Eric A. Scorsone Introduction Jones Cutback & Bartlett Management Learning, and Budgeting... LLC Jones 254 & Bartlett Lea NOT FOR The Effects SALE of Different OR DISTRIBUTION Cutback Strategies... NOT FOR 274SALE OR DI Recommending Strategies for Cutback Management What Have We Learned? What Remains to be Learned? Jones & Bartlett Conclusion... Learning, LLC rning, 278 LLC Endnotes Glossary Discussion Questions Recommended Resources References Chapter 11 A Framework for Deciphering and Managing the Fiscal Environment by Josephine M. LaPlante Introduction Jones Research & Bartlett on the Fiscal Learning, Status of Local LLCGovernments... Jones 287 & Bartlett Lea NOT FOR The Visual SALE Fiscal OR Framework... DISTRIBUTION NOT FOR 293SALE OR D Revenue Capacity Comparative Analysis Conclusion Jones and Bartlett Publishers.

8 & viii Contents Glossary Discussion Questions Recommended Resources References Jones Chapter & Bartlett 12 Fiscal Learning, Slack, Reserves, LLCand Rainy-Day Funds... Jones & Bartlett 321 Learning, LLC NOT FOR SALE by OR Justin DISTRIBUTION Marlowe Introduction Types of Slack Fund Balance Net Assets Budget-Based Measures Slack Resource Levels Theory and Evidence on the Slack Financial Condition Link Jones Expenditure & Bartlett Stabilization... Learning, LLC Jones 330 & Bartlett Lea NOT Revenue FOR SALE Volatility... OR DISTRIBUTION NOT FOR 334 SALE OR DI Credit Quality GASB 54 and the Future of Financial Slack Conclusion Jones & Bartlett Discussion Learning, Questions... LLC Jones & Bartlett 339 Learning, LLC NOT FOR SALE OR Glossary... DISTRIBUTION NOT FOR SALE OR 339 DISTRIBUTION Recommended Resources References Chapter 13 Managing Investments and Investment Risk by William G. Albrecht Introduction The Concept of Opportunity Loss Delineating Risk Jones Managing & Bartlett Risk... Learning, LLC Jones 353 & Bartlett Lea NOT Conclusion... FOR NOT FOR 358 SALE OR D Endnotes Glossary Discussion Questions Jones and Bartlett Publishers.

9 & Contents ix Recommended Resources References Appendix Part VI Intergovernmental and Institutional Considerations NOT FOR Chapter SALE 14 OR Local DISTRIBUTION Government Fiscal Health: An Intergovernmental NOT FOR Perspective by Beth Walter Honadle Introduction The Structure of Government in the United States Types of Local Government Numerical Trends in Types NOT of Governments... FOR 371 Variety Abounds Conceptual Framework Local Government Absent Intergovernmental Relations? Enter Intergovernmental Relations Implications for Fiscal Health of Local Governments Conclusion Discussion Questions Jones & Bartlett Recommended Learning, LLC Resources... rning, 384 LLC NOT FOR SALE OR Keywords... DISTRIBUTION 385 Acknowledgment Endnotes References Bartlett Learning, Chapter 15 LLC Monitoring the Fiscal Health of Jones America s & Bartlett Cities... Learning, LLC387 by Lynne A. Weikart Introduction The Federal Role The State Role in Monitoring the Cities Fiscal Health NOT FOR Municipal SALE Level... OR DISTRIBUTION NOT FOR 395SALE OR D Alternative Institutions Building Capacity Bond Rating Agencies Nonprofits Jones and Bartlett Publishers.

10 & x Contents Conclusion Endnotes Glossary Discussion Questions Jones & Bartlett Recommended Learning, Resources LLC... Jones & Bartlett 402 Learning, LLC NOT FOR SALE References OR DISTRIBUTION... NOT FOR SALE OR 403 DISTRIBUTION Chapter 16 Measuring the Impacts of TELs on Municipal Financial Conditions by Craig S. Maher and Steven C. Deller Introduction Literature Review Methodology Results Conclusion Jones Endnotes... & Jones 424 & Bartlett Lea NOT Glossary... FOR NOT FOR 425 SALE OR DI Discussion Questions Recommended Resources References Jones Chapter & Bartlett 17 The Learning, Defragmentation LLCof Authority: A Consolidation Jones Approach & NOT FOR SALE OR to DISTRIBUTION Public Service Delivery... NOT FOR SALE OR 431 DISTRIBUTION by Helisse Levine Introduction Background and Literature Review Bartlett Learning, Nassau LLC County School Districts... Jones & 435 Conclusion Endnotes Glossary Jones Discussion & Bartlett Questions... Learning, LLC Jones 444 & Bartlett Lea NOT Recommended FOR SALE Resources... OR DISTRIBUTION NOT FOR 444 SALE OR D References Appendix A: Consolidated School Districts in Nassau County Appendix B: Average Tax and Savings by Nassau County Jones & Bartlett School Learning, District... LLC Jones & Bartlett 448 Learning, LLC Jones and Bartlett Publishers.

11 & Contents xi Part NOT VII FOR Debt Capacity, SALE OR Management, DISTRIBUTION and Policy Chapter 18 Measuring and Monitoring Debt Capacity and Affordability: Market- and Nonmarket-Based Models by Kenneth A. Kriz and Qiushi Wang Jones & Bartlett Introduction... Learning, LLC rning, 453 LLC NOT FOR SALE OR Background... DISTRIBUTION 454 Traditional Debt Capacity Models Debt Ceiling Bond-Rating Orientation Benchmarking Linear Regression Approach Assessment of Traditional Models New Approaches to Assessing Debt Capacity Jones Conclusion... & Jones 468 & Bartlett Lea NOT FOR Endnotes... NOT FOR 469SALE OR DI Glossary Discussion Questions Recommended Resources Jones & Bartlett References... Learning, LLC rning, 471 LLC NOT FOR SALE OR Appendix DISTRIBUTION A: Water and Sewer Rating Criteria Appendix B: Debt Affordability Indicators Appendix C: Analytical Characterizations of Ratios Appendix D: Selected 2007 Medians for All Standard & Poor s Local Government General Jones Obligation & Bartlett Ratings... Learning, LLC474 Chapter 19 State Fiscal Constraints on Local Government Borrowing: Effects on Scale and Cost by Juita-Elena (Wie) Yusuf, Jacob Fowles, Cleopatra Grizzle, and Gao Liu Jones Introduction... & Jones 475 & Bartlett Lea Debt Limits and Debt Restrictions Bond Referenda Requirements Tax and Expenditure Limits Jones & Bartlett Empirical Learning, Findings... LLC rning, 491 LLC Jones and Bartlett Publishers.

12 & xii Contents Conclusion Endnote Glossary Discussion Questions Jones & Bartlett Recommended Learning, Resources... LLC Jones & Bartlett 500 Learning, LLC NOT FOR SALE References... OR DISTRIBUTION NOT FOR SALE OR 501 DISTRIBUTION Chapter 20 Good Debt, Gone Bad: The Crisis in Municipal Debt Markets by Gary R. Rassel and Robert S. Kravchuk Bartlett Learning, Introduction... LLC 505 A Cautionary Tale Development of the U.S. Municipal Debt Market The Recent Market Turmoil Historical Default Rates Recent Developments in Key Market Segments Auction-Rate Securities The Future Credit Enhancement and the Future of Bond Insurance Jones & Bartlett Is There Learning, a Future for LLC Variable Rate Debt?... Jones & Bartlett 520 Learning, LLC NOT FOR SALE OR The Future DISTRIBUTION of the Municipal Bond Market: Buyers NOT and FOR Sellers... SALE OR 522 DISTRIBUTION Conclusion Endnotes Glossary Bartlett Learning, Discussion LLC Questions Recommended Resources References Appendix: The Municipal Debt Market Jones Index... & Jones 533 & Bartlett Lea Jones and Bartlett Publishers.

13 & Foreword The time is right for this book. We have NOT been experiencing FOR SALE a deep OR recession, DISTRIBUTION the national government s programs to help the local governments through the recession have been terminated, teachers throughout the country are receiving pink slips, public pension benefits are being cut back, and some cities and counties have declared bankruptcy or come very close to it. Vallejo, California, declared bankruptcy in May 2008, a victim of the burst Jones housing & bubble Bartlett in California. Learning, In November LLC 2011, Jefferson County, Jones Alabama, & Bartlett Lea entered NOT bankruptcy, FOR SALE caused OR by a DISTRIBUTION combination of a sewer bond gone wrong, NOT corruption, FOR SALE OR DI overspending, a devastating tornado, and a drop in revenues. By the end of 2011, public safety retirees had agreed to accept pension cuts in negotiations with bankrupt Central Falls, Rhode Island. Detroit, Michigan and Harrisburg, Pennsylvania were engaged in contentious wrangles over possibilities for retrenchment, state takeovers, or Chapter 9 filings. Michigan had appointed emergency managers to run the cities of Benton Harbor, Flint, NOT FOR and SALE Ecorse, OR as DISTRIBUTION well as the Detroit School District. Of course, NOT not FOR all cities SALE are OR quite DISTRIBUTION this seriously in trouble, and few observers lend credence to predictions of a massive wave of municipal bond defaults, but the loss of property tax revenues from the housing market collapse combined with state reductions in aid because of their own problems, and the failure of many pension funds because of stock market drops has affected many if not most U.S. cities, counties, and school districts. This book will not solve all these problems, but it should make many of them seem NOT more manageable. FOR This book is impressive, first, because of its scope. I think it is fair to say that local government fiscal health has never before been addressed simultaneously from so many different vantage points. The topic coverage is nothing short of stunning, from tax and expenditure Jones limitations & Bartlett to the intergovernmental Learning, LLCrevenue system, from postemployment benefits NOT to slack FOR and SALE rainy-day OR DISTRIBUTION funds, from definitions and problem identification NOT FOR to SALE OR D causes, solutions, and impacts over the short and long haul. Second, this book is impressive for its depth, covering in detail the literature on each topic, offering case studies, xiii Jones and Bartlett Publishers.

14 & xiv Foreword recent cross-sectional data, and original analysis, and for putting issues into historical context. NOT The essays, FOR each SALE written OR by DISTRIBUTION known scholars in their fields, fit together, NOT overlapping and providing context and support for each other. In my experience such thoughtful FOR SALE OR DI combinations of essays are rare. Third, this book is impressive because it moves beyond the literature: it links a thoughtful sifting of the literature with current research to formulate Jones practical & Bartlett advice for Learning, public officials LLCstruggling with fiscal stress. NOT FOR The SALE aim of OR the book DISTRIBUTION is not, however, to formulate a set of rules NOT that FOR can be SALE used without OR DISTRIBUTION much thought. The unstated premise of the book is that public managers don t need a how-to manual, but rather a deeper understanding of what is going on. They need to be able to identify problems down the road, not just current budgetary imbalances, and they need to be able to link the problems they see with a specific set of solutions. Bartlett Learning, Revenue mixes LLCare changing, with what effect? Jones To what & Bartlett extent are Learning, local fiscal problems LLC SALE OR brought DISTRIBUTION about by overly elastic revenue bases NOT that FOR grow with SALE good OR economic DISTRIBUTION times but fall too quickly, too far when the economy falters? What should you do if your revenue mix is likely to generate too much volatility? What do you need to project, in the way of revenues, or expenditures, or the effects of tax increases, or declines in the selling prices of housing? How do you make such projections and how much trust should you put in short-term versus long-term Jones models? & Bartlett How good Learning, a basis are LLC such projections for policymaking? Jones Many & Bartlett Lea financial NOT advice FOR givers, SALE including OR bond-rating DISTRIBUTION agencies, have insisted that contingency funds of various sorts should be squirreled away during the boom years to smooth revenue declines during periods of recession if revenues are overly elastic but does this work? Does it matter what form the savings take or how they are actually used? What about tax and expenditure limitations (TELs): are they a major contributor to fiscal stress, or would revenue increases have been off the table for political reasons regardless of the so-called NOT FOR TELs? SALE No matter OR what DISTRIBUTION the question, these authors take the NOT reader FOR a little SALE deeper into OR the DISTRIBUTION subject. Even those readers who know a lot about finance, and have a good grasp of how local officials deal with fiscal stress, will find something new in these chapters, something that will deepen their understanding or change the way they think about a given problem. Bartlett Learning, Academics LLC and their students as well as practitioners Jones & Bartlett will find Learning, this book satisfying, LLC though they may focus on different aspects of the presentations. The manner in which fiscal stress is portrayed results in a good understanding of local public finance more generally, the constraints on revenue and spending, the intergovernmental system, the tax mix, and revenue projections. The authors are thoughtful in their reviews of the literature, generally showing the weaknesses as well as the conclusions, pointing out where better reporting, more Jones consistent & Bartlett time series Learning, data, or more LLCsophisticated analysis is needed. Jones They & Bartlett Lea also point NOT to avenues FOR SALE for future OR research, DISTRIBUTION the logically important topics that have NOT not FOR yet SALE OR D been discussed in the academic literature. Equally important, the book represents a kind of model of how intellectual discussion should proceed, from thoughtful analysis of what Jones and Bartlett Publishers.

15 & Foreword xv is to be measured, to how various measures work and their shortcomings, to a careful look at the NOT problems FOR from SALE nearly OR all possible DISTRIBUTION angles. The authors home in on specifics NOT and FOR back SALE OR DI off to show the forest as well as the trees. The chapters are generally well written and free of most academic jargon, and where technical terms are used, they are defined and explained. It is easy and rewarding to dip Jones & into Bartlett individual Learning, chapters without LLC necessarily committing oneself Jones to & reading Bartlett the Learning, whole LLC NOT FOR book. SALE This OR book DISTRIBUTION is welcome, not only for its timeliness and NOT practical FOR usefulness SALE but OR also DISTRIBUTION for revivifying a literature that had begun to stultify. It is difficult to know what one can say that is new or useful about municipal fiscal stress, but this book points the way. Irene Rubin, Professor Emerita Jones & Bartlett Northern Learning, Illinois University LLC Jones and Bartlett Publishers.

16 & Jones and Bartlett Publishers.

17 & Contributors William G. Albrecht, PhD Associate Professor Department of Public Administration University of North Carolina at Pembroke Deborah A. Carroll, PhD Associate Professor Department of Public Administration and Policy University of Georgia Steven C. Deller, PhD Professor Agricultural and Applied Economics University of Wisconsin-Madison Jacob Fowles, PhD Assistant Professor School of Public Affairs and Administration University of Kansas Christopher B. Goodman, MPA Doctoral Candidate Department of Public Administration and Policy University of Georgia Cleopatra Grizzle, PhD Assistant Professor School of Public Affairs and Administration Rutgers University-Newark Rebecca Hendrick, PhD Associate Professor Department of Public Administration University of Illinois at Chicago Beth Walter Honadle, PhD Professor of Planning College of Design, Architecture, Art, and Planning University of Cincinnati Benoy Jacob, PhD Assistant Professor School of Public Affairs University of Colorado-Denver Robert S. Kravchuk, PhD Professor Department of Political Science and Public Administration University of North Carolina at Charlotte Kenneth A. Kriz, PhD Associate Professor School of Public Administration University of Nebraska-Omaha Josephine M. LaPlante, PhD Associate Professor Muskie School of Public Service University of Southern Maine xvii Jones and Bartlett Publishers.

18 & xviii Contributors Gao Liu, PhD Assistant Professor School of Public Administration University of New Mexico Craig S. Maher, PhD Associate Professor Department of Public Administration University of Wisconsin-Oshkosh Justin Marlowe, PhD Assistant Professor Daniel J. Evans School of Public Affairs University of Washington Dean Michael Mead Research Manager Governmental Accounting Standards Board Lecturer Rutgers Business School Rutgers University Jun Peng, PhD Associate Professor School of Government and Public Policy University of Arizona Christina Plerhoples, MA Doctoral Candidate Department of Agricultural, Food, and Resource Economics Michigan State University Gary R. Rassel, PhD Associate Professor Department of Political Science and Public Administration University of North Carolina at Charlotte Donijo Robbins, PhD Professor School of Public, Nonprofit, and Health Administration Grand Valley State University Qiushi Wang, PhD Assistant Professor School of Public Affairs and Administration Rutgers University-Newark Lynne A. Weikart, PhD Practitioner-in-Residence Political Science Department James Madison University Juita-Elena (Wie) Yusuf, PhD Assistant Professor Department of Urban Studies and Public Administration Old Dominion University Jones and Bartlett Publishers.