Abstract
This chapter amplifies the definition of fiscal sustainability by examining each of its parts: revenues, expenditures, debt, and employee benefits. It emphasizes that this definition is a long-run definition, with the components measured in present value terms. It discusses why the concept is important and identifies the structural pressures that affect a local government’s sustainability: structural, intergovernmental, and cyclical. It then disaggregates these pressures into sub-components. These components include suburbanization, changing consumption patterns, demographic changes, and changing mobility patterns. It also notes the importance of federal and state aids on sustainability as well as business cycle pressures. It then delineates the requirements that long-run fiscal sustainability must meet, including minimizing economic distortion, attempting to raise aggregate community welfare, equity considerations, and environmental sustainability. It finally discusses the concept’s relationship with Tiebout models and equity considerations.
A reminder: this monograph is not analyzing the critical budgetary details that local government finance directors routinely address. That in no way demeans their importance; rather it just means that the environment of the budget should also be explicitly addressed. For examples of the former, see Brown (1993) or GASB (2016).
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Notes
- 1.
There are a multitude of measures of severe financial stress. These are typically short-run ratios of financial variables calculated from the yearly budget. These go far beyond whether the budget is in surplus or deficit and are very valuable short-run measures (Government Accounting Stands Board, 2016). Most budgeting texts discuss these variables. However, fiscal sustainability is a long-run measure.
- 2.
Tannenwald (2004) objects to this reasoning. Tannenwald, Robert. (2003). Are State and Local Revenue Systems Becoming Obsolete? Research Report on America’s Cities. Washington, DC: National League of Cities. Additionally, in 2018, the Supreme Court ruled in the South Dakota v. Wayfair, Inc. 138 S. Ct. 2080 (2018) that states may be able to charge sales taxes on purchases from out of state sellers. Many states are in the process of implementing this additional tax base.
- 3.
However, not all intergovernmental activities have an effect on sustainability. Yang (2019) finds that if one major jurisdiction declares bankruptcy, it has no effect on the borrowing costs of nearby jurisdictions.
- 4.
See Chapman (2015) for a more formal definition. If the result is less than zero, the jurisdiction is running a surplus.
- 5.
This sustainability definition contains both normative and positive analysis. Normative in the sense that it assumes that local governments have the political power to make revenue and expenditure decision and they should use that power to reach and maintain fiscal sustainability. Positive in the sense that under the current legal system, this definition must hold over time—it is definitional not political.
- 6.
Empirically, municipal bankruptcy seldom occurs. Excluding dismissed bankruptcy filings, only eight localities out of 2710 successfully filed for bankruptcy between 2008 and 2018 (Maciag, 2013). For comparison purposes, there were 389,278 commercial bankruptcy filings during this same period. Further, as Yang (2019) has shown, there is no support for the hypothesis that a general contagion to other local governments arising from a municipal bankruptcy.
- 7.
This analysis will also occur later in this monograph.
- 8.
Fiscal sustainability is related but different from the Pagano and Hoene (2018) description of the fiscal policy space of cities. Their paper is more concerned about the constraints that face jurisdictions when they attempt to carry out new, exogenous, mandates, or raise revenues. These clearly affect fiscal sustainability but do not define it.
- 9.
Thompson and Gates’s analysis is far more sophisticated, involving the modern financial theory concepts of variance and drift.
- 10.
The interest rate is not necessarily the same discount rate used by pension boards to determine the present value of the pension liability. It is sometimes politically determined (Wang & Peng, 2018).
- 11.
The interest rate is not necessarily the same discount rate used by pension boards to determine the present value of the pension liability. It is sometimes politically determined (Wang & Peng, 2018).
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Chapman, J. (2022). What Is Fiscal Sustainability?. In: The Local Budget as a Complex System. Palgrave Studies in Public Debt, Spending, and Revenue. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-94903-7_2
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