Understanding Financial Success:
Why Are Some Cities Healthy
Fiscal health is commonly viewed in the context of an organization’s ability to meet its liabilities. Research into the fiscal health of local governments has made significant progress over the past few decades. Since the Advisory Commission on Intergovernmental Relations first began to measure the financial condition of cities, the literature has expanded to include a variety of models and measurement systems of fiscal health, explanatory capacity of what influences fiscal behavior, and the implications that a government’s fiscal health can have on the community around it. The challenge of this literature is that it primarily focuses on the state of being fiscally unhealthy.
In a recent study, I explored the measurement of and factors behind fiscally healthy cities. Using a unique dataset of the 150 largest cities in the United States from 1990 to 2017, I tested several approaches to measuring fiscal health to determine the best approach for fiscally healthy cities. While doing so, I also considered what factors contribute to a city’s fiscal health status. Through the analysis, I found that the factors that contribute to a city’s fiscally healthy status differ from those that influence positions of fiscal stress. Specifically, the capacity of a city to manage its spending, regardless of debt, plays a significant role in this outcome, as does its demographic composition and geographic location.
The analysis shows that the measurement and prediction of fiscally healthy cities is inherently different from that of their financially stressed counterparts. Fiscal health is a spectrum where cities can fall between the extremes of fiscally healthy and fiscally stressed. As cities become financially strapped, the capacity to continue to pay off their debt becomes more critical, as issuing new debt is a way of accessing cash when revenue streams are insufficient. As that debt grows, so does the inability of the government to make payments towards the debt, forcing cuts in the city’s budget to accommodate. Alternatively, as cities become financially stable, the importance of debt decreases. Debt can then be used as a tool, but its impact is seen in a city’s finances. In the fiscal health spectrum context, a city in the middle of the spectrum would balance its budget and pay toward liabilities without any excess revenue. This city would be neither healthy nor stressed but relatively balanced. As revenue decreases or liabilities increase, the balanced city begins to lose its position and becomes stressed. Alternatively, if the city experienced either a decline in expenditures or an increase in revenue, creating a budget surplus, the balanced city would improve its positioning and become healthier.
The study also found a difference in the role of the government, economic, and demographic characteristics. While the government and economy are critical players in the financial problems of stressed cities, they showed no significant impact on healthy cities. Instead, after the financial drivers, healthy cities are primarily influenced by the demographics of their residents. This effect suggests troubling concerns about social equity among local governments. The importance of demographics to understanding a city’s health follows the literature about citizen engagement and population homogeneity. The more homogeneous a population, the fewer services that population will request from the government. Conversely, as the population increasingly diversifies, so does the expectation of services. This is because different communities have different needs.
This article is based on the paper “Understanding Financial Success: An Exploration of the Determinants of Fiscally Healthy Cities” in the Research Handbook on City and Municipal Finance.
