Magazine article The CPA Journal

Local Government Deficits

Magazine article The CPA Journal

Local Government Deficits

Article excerpt

Today, an increasing number of local governments find themselves fiscally stressed as they struggle through a severe and extended recession. Increasingly, local governments are raising taxes and user fees, making painful spending cuts, and using accounting gimmicks in a desperate attempt to keep the budgets balanced. With slow economic growth, the prospects are that local government revenues will not keep pace with spending demands. Thus local governments will face continuing fiscal pressures.

In October 1993, the U.S. General Accounting Office (GAO) issued a comprehensive report to the House of Representatives on state and local finances. This will enable Congress to better assess the ability of those governments to participate in welfare reform, health-care reform, and other major policy initiatives. The study covered a seven-year period (1985 to 1991) and revealed, not surprisingly, that spending in local governments continued to grow faster than revenues bringing year-end budget surpluses down. With the decline in the growth of the economy beginning in 1989, surplus balances as a percentage of operating expenditures declined significantly. Actions taken by governments were to raise fees and charges and cut expenses through salary and hiring freezes, furloughs, cutbacks in pension contributions, and reductions in capital expenditures.

The GAO visited eight urban areas in five states to see in detail the plight of local governments. Memphis, Tennessee, one of the urban areas visited, presented a typical picture of a younger city experiencing fiscal stress. According to the GAO, service needs are increasing as the city grows and attracts unemployed from surrounding areas. The tax base has weakened as property values have declined with the weakening in the national economy. In each year during the period 1987 to 1992, general fund expenditures exceeded revenues eating into the general fund balance.

The picture painted by the GAO shows local governments, such as Memphis, struggling to be viable within the constraints of declining tax bases and increasing costs. There will be long-term consequences to deal with such as aging infrastructure and deteriorating educational facilities.

DATABASES PROVIDE ADDITIONAL INSIGHT

The New York State Comptroller maintains a database of financial statistics for the wide range of local governments and school districts in New York State. This database shows some disturbing statewide fiscal trends.

The number of local governments reporting a fund deficit in their major operating fund (the general fund) has more than doubled from 35 in 1989 to 78 in 1991. The size of these deficits has also increased. While the highest reported deficit in 1989 was $6.8 million, in 1991 the highest deficit was $113 million, and five other local governments reported deficits that exceeded $6.8 million. Even those local governments fortunate to have weathered the storm have found their margin of safety has narrowed. The amount of unappropriated fund balance, which acts as a cushion against unexpected fiscal events, has declined as a percentage of expenditures in 1991, with every indication this trend continued in 1992. However, in New Jersey, where economic conditions mirror those in New York, local government fiscal conditions have generally been healthier than in New York. In recent separate analyses of New Jersey's 21 counties and New York's largest cities, Moodys reports most New Jersey counties enjoy favorable credit ratings, while the overall credit quality of New York's cities has declined. However, not all New Jersey counties are in good financial condition. In 11, state legislation gave New Jersey counties the right to issue bonds to cure operating deficits, and Moodys reports three counties have taken advantage of this provision.

In New York, when deficits have grown too large to be handled internally through budgetary and program actions, local governments have had to sort to seeking authorization from the State Legislature to issue bonds to finance prior operating deficits. …

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