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Impact and Strategies of Fiscal Stress on States and Municipalities Research Paper

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Updated: Aug 20th, 2019

Introduction

The following study will highlight how fiscal stress manifests itself in different states and municipalities, and how best it can be dealt with to avoid negative affect on the public. The public should not be deprived of essential services that should be provided to them by states and municipalities in times of fiscal stress.

Impact of fiscal stress on states

Fiscal stress in various states can be measured using certain indicators which are budgetary, service oriented, cash and long term. Fiscal stress is categorized into various groups which are low, medium and high level. To combat fiscal stress, the States can embark on short and long term measures.

Short term measures include cuts on expenditure, increase in taxation, and use of rainy days’ funds. The only solution that has been found to be more effective in the reduction of fiscal stress for states is balancing financial expenditure and revenue. The impact of fiscal stress on the States mainly affects delivery of services to the public. The most affected service is usually the provision of security to the public by a given state.

Other impacts of fiscal stress on states include failure by the latter to initiate development initiatives or projects, reduced health care services, and neglect of community based initiatives like health education. Fiscal stress can lay a lot of burden on the financial position of any state. Increased expenditure and global financial crises are major challenges to states.

Impact of fiscal stress on municipalities

Organs of California Municipality have been forced to cut down on their expenses. Job losses are experienced due to the economic recession which has also affected the state. Worst still, the California Local Government Machinery has been constrained in terms of the level of public services it can offer to the public due to shortage in financial revenue, and lack of fiscal ability to meet various financial needs (Marvin & Betty, 1993).

The effect of fiscal stress on municipalities is seen in a number of ways which include reduced funding for development initiatives like recreation parks. Other effects comprise poor maintenance of streets, roads, libraries and public parks. Other municipal responsibilities that are abdicated include animal controls. Security services are affected due to reduction in surveillance and police patrols. Water and sewer services are sometimes not given adequate financial resources.

Strategies that municipalities can use to mitigate fiscal stress

There are several ways in which local governments can mitigate fiscal stress. However, these ways can be subject to regulations that are governed by state or federal laws. These regulations control the extent to which the adjustments can be stretched. This would allow bridging the gap between expenditure and revenue (Dezhbakhsh et al, 2003).

In municipalities, the impact of fiscal stress manifests itself in terms of freezes on employees’ salaries as was evidenced in the municipality of California some years back. Employees’ health benefits are sometimes delayed by municipal governments. Pensions for retirees may not be disbursed in time. Municipalities can also freeze the hiring of employees.

Benefits of new employees can be reduced marginally. Some municipalities have in the past provided incentives to employees for an early retirement. Municipalities can also be forced to stop remitting funds for the rainy days’ fund. In very extreme cases, employees’ wages can be reduced. Restructuring of departments is another initiative that municipalities can employ to reduce fiscal stress (Gold, 1992).

Departments can be reduced and some employees can be retrenched. Municipalities can also raise fees for business permits and parking of motor vehicles. It is worth noting that municipalities can raise any fees depending on the kind of charges various municipalities levy, for instance, property taxes.

Strategies states can use to mitigate fiscal stress

Reduction of expenditure is one of the major ways in which states and local governments can opt for in reducing fiscal stress. This can be done by evaluating expenses that are deemed to be urgent and the ones that can be postponed. This could include short term and long term projects and budget proposals. In 2009, the US government reduced spending by 0.6 per cent in 2008 and by 1.9 per cent in 2009.

This came as a result of the recession that was being experienced at that time. During the same time, local governments for the first time since 1970 were forced to reduce their workforce as a way of dealing with the financial crisis. Local governments cut their labour force by an estimated 1.7 per cent translating into the laying off of 241,000 employees during the recession period.

Delays in disbursement of funds for retirees and pension can mitigate financial or fiscal stress. Governments opt for this solution since federal laws are not obliged to make annual contributions towards these allocations unless local employees are covered in the same bracket. This appears as a safer solution since the government does not prefer to cut on services or increase taxes since that would lead to a major outcry from the majority of its citizens.

However, this delay may ultimately prove to be challenging since there can be a breakdown in the system at some point. Local governments can borrow to manage fiscal stress. Borrowing is more or less the same as delaying payments; it only postpones the problem. Expenses may increase overtime as a result of debt-service costs.

There are major forms of borrowing which include the use of short-term debts to fund operating deficits and the use of long-term ones to fund capital expenses or contributions to pension or health care funds (Robert & Daniel, 2008). States rainy days’ funds have been more vivid since the 1980s with 48 states currently using some form of budget stabilization funds.

Conclusion: Impact and strategies of fiscal stress in California

In California, the main sources of revenue for local governments are various forms of taxes levied on various entities. These comprise business taxes, utility taxes, property taxes, taxes on fines, sales taxes, vehicle registration taxes, corporate taxes, capital gains taxes, and gasoline taxes. Due to increased spending of its local governments, California State faces a lot of financial problems (Sobel & Randall, 1996).

During recession, California State was compelled to cut down on certain forms of spending at the expense of the public. In this case, it was evident that the fiscal crisis was never brought about by lack of revenue growth but rather due to recurring variability of the states’ revenue sources. Due to the resurgence of fiscal crisis over the years, California State’s level of inefficiency and lack of cost effectiveness have yielded a lot of pressure on the healthcare system.

This is mainly evident on institutional fiscal stress such as healthcare which has experienced costly antipsychotic medications. There are also instances in which local governments in California State have endured a lot of pressure in their attempt to adopt various budgetary strategies (Lauth, 2003). Fiscal stress has obliged California State’s government to cut down on its expenses while a number of public servants have been laid off.

Employees of the private sector have also been affected by the same (Todd & Victor, 1982). Fiscal stress can, therefore, bring about joblessness in any given country. It can also mean lack of funds for public schools. Key state organs especially those that are charged with delivery of vital services like water, can also be affected (Chaney et al, 2002). California State has delayed disbursement of pension funds to beneficiaries as another measure to curb fiscal stress, according to a study carried out by Lincoln Institute of Land Policy Working Paper.

The research carried out goes further to show that there is now ease in fiscal stress for local government organs in California State. These changes and positive outlook of California state‘s government organs have been as a result of growing optimism about the developments and growth of the state’s economy.

California State needs to embrace better management strategies in averting occurrences related to fiscal stress. Proper planning and well constituted policy frameworks remain to be crucial aspects in avoiding fiscal stress for many states and governments.

Figure 1: Total State General Fund Revenues, Fiscal Years 2002 – 2011.

Source: NASBO Fiscal Survey of the State (Fall Edition)

Total State General Fund Revenues, Fiscal Years 2002 – 2011.

Figure 2:Consumer and Housing Price Index

Consumer and Housing Price Index

Source:

Percentages of municipal revenues consumed by pensions in California State

County Best Case(2019)3% Growth Worst Case(2015)No Growth Year No Longer Able To Pay
Larger Cities & Counties
FresnoCounty 78% 142% 2026
San Diego Co. 62% 119% 2028
SacramentoCounty 54% 110% 2030
L.A.County 41% 91% 2033
San BernardinoCounty 45% 90% 2029
KernCounty 51% 82% 2022
VenturaCounty 38% 76% 2029
San FranciscoCity& County 34% 74% 2032
AlamedaCounty 36% 69% 2028
City ofSan Jose 33% 61% 2027
Smaller Cites & Counties
SonomaCounty 51% 82% 2022
San JoaquinCounty 46% 78% 2024
San MateoCounty 35% 59% 2024
ContraCosta County 39% 68% 2025
Santa Barbara 32% 59% 2027
StanislausCounty 47% 90% 2028
TulareCounty 41% 93% 2034
City ofLaguna Niguel 19.85% 19.85% Never

Source:

References

Chaney et al. (2002). The Effect of Fiscal Stress and Balanced Budget Requirements on the Funding and Measurement of State Pension Obligations. Journal of Accounting and Public Policy, 21 (4-5), 287-313.

Dezhbakhsh et al. (2003). A New Approach for Testing Budgetary Incrementalism. The Journal of Politics, 65 (2), 532-558.

Gold, S. D. (1992). The Federal Role in State Fiscal Stress. Publius Journal, 22 (3), 33-47.

Lauth, T. P. (2003). Budgeting during a Recession Phase of the Business Cycle: The Georgia Experience. Public Budgeting & Finance Journal, 23 (2), 26-38.

Marvin, J., & Betty, D. R. (1993). States’ Responses to Budget Shortfalls: Cutback Management Techniques. In Handbook of Comparative Public Budgeting and Financial Management, edited by T. D. Lynch and L. L. Martin. New York, USA: Marcel Drekker.

Robert, S., & Daniel, J. W. (2008). State Investment Tax Incentives: A Zero-Sum Game. Journal of Public Economics, 92 (12), 2362-2384.

Sobel, R. S., & Randall, G. H. (1996). The Impact of State Rainy Day Funds in Easing State Fiscal Crises During the 1990-1991 Recession. Public Budgeting & Finance Journal, 16 (3), 28-48.

Todd, D., & Victor, V. M. (1982).The Management of Hard Times: Budget Cutbacks in Public Sector Organizations. Journal of Organization Studies, 3 (2), 141-169.

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