International Encyclopedia of Public Policy and Administration - Vol. 2

By Jay M. Shafritz | Go to book overview

tional grants of money do little to punish or change local behavior.

Municipalities should have an economic incentive to end quickly their coverage under the law. Prolongation of a fiscal emergency should not be in the state's interests. In Ohio, the state pays the bill for the control board. Thus municipalities have little fiscal incentive to end the control period.

Laws should allow the state to use a flexible response for municipal fiscal distress. Requiring the state to create costly control boards, with hired or contracted staff, may be overkill. Sometimes the municipality may need little more than strong state pressure to correct a problem, interim aid in drafting effective fiscal plans, or assistance in installing fiscal controls.

The law should allow a flexible definition for judging fiscal inadequacy. The tests for detecting a fiscal emergency incorporate some arbitrary hurdles. An Ohio municipality that does not pay its entire payroll on time is in trouble. If a municipality pays the payroll from the cashrich enterprise fund and not from the cash-short general fund, it fails a fiscal test. In four additional tests the Ohio law specifies that 30 days (one-twelfth of a year) have to elapse before certain fiscal practices are considered to yield fiscal emergency. The rationale for a one-month window is unclear.

Fiscal emergency laws should encourage the state, and other municipalities, to learn from those municipalities that fail the fiscal tests. The state should have an interest in distributing the results of its remedial actions to discourage other municipalities from neglecting the norms of fiscal adequacy. States may find it cheaper to promote effective fiscal procedures than to "clean up" after a bankruptcy, default, or fiscal emergency.

W. BARTLEY HILDRETH


BIBLIOGRAPHY

Advisory Commission on Intergovernmental Relations, 1973. City Financial Emergencies. Washington, DC: Government Printing Office.

Advisory Commission on Intergovernmental Relations, 1985. Bankruptcies, Defaults and Other Local Government Financial Emergencies. Washington, DC: Government Printing Office.

Bailey, R. W., 1984. The Crisis Regime: The MAC, the EFCB, and the Political Impact of the New York City Financial Crisis. Albany: State University of New York Press.

Gross, George, 1986. The Changing Role of the City's Fiscal Monitor. New York: New York State Financial Control Board.

Mackey, S. R., 1993. State Programs to Assist Distressed Local Governments. Denver: National Conference of State Legislatures.

New York State Financial Control Board, 1992. Structural Balance. New York: New York State Financial Control Board.

Volk, Helen D., and Louis Grumet, 1979. "New York State's Action for Fiscal Survival: City of Yonkers". New York State Bar Journal, vol. 51 (August): 370-373, 402-405.

FINANCIAL INDICATORS . Any financial measures that are used to evaluate the financial performance of government activities.


Origin and Subsequent History

When a governmental unit is established, it is generally the initial intent that the revenues be sufficient to cover the expenditures. Consequently, the key financial measure is a balanced budget. In other words, one dollar in estimated revenue equals one dollar in appropriations. However, the wants of any political body may exceed the desire of its constituents to pay. Through debates and public hearings, the elected or appointed officials reach consensus regarding the level of expenditures relative to the revenue to be generated.

Over time, as the governmental unit becomes larger and more sophisticated, debt is incurred to construct buildings, highways, and so on. Consequently, it becomes more difficult to determine the financial performance of the governmental unit. The level of debt incurred, and the subsequent repayment of principal and interest, are critical factors in determining the funds available to meet current operational needs.

To evaluate the extent to which units in the public sector can incur debt, bond rating agencies have been established. These agencies generally include four broad areas of concern covering established sectors of credit: economic, debt, administrative, and fiscal. Economic factors are used to ascertain the strength of the tax structure and the overall debt burden for repayment of debt. The stability of the administrative unit is evaluated along with an examination of fiscal performance versus the budget (Standard and Poor's 1989).


Underlying Theoretical Framework

The basic framework within which a governmental unit attempts to operate is referred to as intergenerational equity. Each generation is expected to pay for the services that it receives and the cost of these services should not be passed on to future generations.

The means by which financial measures are used to determine whether each generation is paying for services received is dependent upon the type of accounting method. The accounting methods are referred to as cash, modified accrual, or full accrual. The cash basis of accounting only recognizes the cash received and cash disbursed. Since this method is subject to manipulation and does not attempt to implement the concept of intergenerational equity, it is strongly discouraged.

The modified accrual basis of accounting is an attempt to move toward charging the costs of services to the

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International Encyclopedia of Public Policy and Administration - Vol. 2
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