The Fork in the Road: How a Local Government’s Approach to Fiscal Distress Can Determine Its Financial Future
Stockton, California may be the fiscally distressed municipality du jour, but it is certainly not alone in its financial struggles. In recent years, many local governments across the country have faced fiscal challenges - albeit to varying degrees - with names like Harrisburg, Jefferson County and Central Falls representing the more extreme cases over the past year.
However, as Tim Maniccia, founder of Policy Innovation, Inc., explains, unlike Jefferson County, Harrisburg, and other recent examples, Stockton’s financial problems appear to be the result of a more chronic situation - an important distinction to note.
In the interview that follows, Maniccia describes the difference between fiscal distress caused by cyclical and structural budget gaps, and how local governments might seek assistance along their road to financial recovery.
MuniNet: Are there any common threads that run through recently publicized cases of fiscally distressed local governments?
Maniccia: Most people associate Jefferson County’s fiscal crisis with its problematic sewer district financing. In the case of Harrisburg, many observers point the finger at its failed incinerator project. But the common theme that runs through these cases of extreme fiscal distress is the calling into question of leadership and management in the face of unforeseen - and difficult - financial challenges.
When unexpected challenges arise, especially those that are significant in scope, some local governments continue to focus their attention and pocketbooks on doing the easier things, “picking the lower-hanging fruit,” leaving the harder things looming in their path. In the extreme cases we’ve seen in recent years, the accumulation of not being able to accomplish the harder things turned “distress” into “crisis.”
Stockton’s case is different. Its financial problems appear to be the result of a more chronic situation, placing it in the company of hundreds of other municipalities currently under the radar.
Under “normal” circumstances, a municipality’s revenue and expenditures grow at an equal pace. At times, however, often due to underlying economic conditions over which a governmental official has no control, revenue might fall. This reduction in revenue, arising from less economic activity, is often accompanied by an increase in demand for public services, thereby increasing expenses. In most cyclical situations, revenues will start to improve as the economy recovers, reducing demand for services, and returning the municipality to a balanced financial position.
Most local governmental entities have a built-in mechanism - a “rainy day fund” - that allows them to cope with temporary budget fluctuations and cyclical budget deficits. But if a municipality begins to rely on its rainy day fund to close a structural budget deficit, it’s a little like cutting holes in the umbrella - and the result is fiscal distress.
MuniNet: What types of circumstances might result in a structural budget deficit?
Maniccia: Many factors can lead to a structural budget deficit, causing financial woes. For many local government officials, unfunded mandates can be the bane of their existence. An unfunded mandate can come from a state or the federal government. It states that the local government shall - not may - provide a specific service. These mandates often stipulate the type and magnitude of service, yet come without sufficient (or any) funding, thereby creating a strain on local budgets.
Some situations that can cause fiscal stress are often created at the local level - by choice rather than mandate. A local government might decide to build a new project or offer a new service tied to a dedicated revenue stream; but if projections on either the expenditure or revenue side are off, it can lead to trouble. A mismatch between a policymaker’s tenure and the programs they create or enact can also create challenges.
While it is unlikely that any one of these situations alone would necessarily create a structural budget deficit, if expenses grow faster than revenues, the vicious cycle can become an increasingly risky one. Using non-recurring sources of revenue to pay for recurring spending can lead to serious trouble.
MuniNet: Are we likely to see more fiscally distressed local governments due to cyclical budget deficits because of the duration of this past recession?
Maniccia: The shorter-term actions that municipalities might have employed in the past to get them through the rough patches may not be sufficient to see them through this time. The recovery portion of the current economic cycle may be slower than in the past - and may not be there at all in certain locations.
MuniNet: What strategies might fiscally-challenged local governments consider as a first-tier solution?
Maniccia: The first step for any local government seeking a solution to a fiscal challenge is to get an accurate assessment of its current financial picture. Knowing beats guessing. A local government may need to turn to outside help if its systems are antiquated or lack the sophistication to analyze the data. Outside assistance can also be helpful if opposing sides in the debate about how to restructure fail to agree on the underlying causes or potential remedies. The benefit of an outsider can be helpful in keeping the discussion factual and focused on solutions.
MuniNet: Can a fiscally challenged local government afford to pay for outside help? (Can they afford not to?!!)
Maniccia: Unfortunately, it is often the case that a local government needs third-party assistance to assess and repair its finances and service delivery at times when it can least afford it. Stockton, for example, will in all likelihood pay more than it would have paid had it obtained assistance before its condition was so dire.
Often times, the perspective afforded by distance can be quite helpful. And, that outside assistance does not always come with a fee for services. Some towns, for example, rely on the ongoing input of a budget advisory team - volunteers from the community that bring expertise in fiscal and budgetary matters.
Whether third-party assistance is provided by a paid consulting firm or a team of volunteers, the ideal result is that the local government builds an internal capacity to understand its current situation, assess its options to address it, and to anticipate and deal with fiscal distress in the future. The Chinese proverb “Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime” is very fitting here; many times, a consulting firm can be instrumental in helping a local government land on its feet - and remain on solid ground through strengthened internal capabilities.
About the Expert:
Tim Maniccia founded Policy Innovation in 2000. The firm has advised municipal market participants on most of the high profile distressed situations that have taken place since its founding.
Tim has served in a number of state and local government leadership positions, most recently as Deputy Secretary of the New York State Senate Finance Committee. Before that, Tim served as Director of Operations for Albany County, New York. He has also served as the Senior Policy Advisor to the New York City Deputy Mayor for Operations and as a Senior Fiscal Analyst with the New York State Assembly Ways & Means Committee.
In addition to his public service, Tim has served as the Director of Operations at the Rensselaerville Institute (The Think Tank with Muddy Boots), Executive Director of the New York State Government Finance Officers’ Association and is a former foreign exchange trader, where he worked for a number of international banks and brokerage firms.
Tim holds a Master of Public Administration degree from the Maxwell School of Citizenship and Public Affairs at Syracuse University and a Bachelor of Science degree from the University at Albany.
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