Developing a Framework for Ranking State and Municipal Governments on Fiscal Sustainability

Abstract

Fiscally distressed governments tend to draw public attention only amid prominent events like bankruptcy filings, credit downgrades, and serious service cuts. Ideally, before the situation became so severe, the public would be able to quickly assess a government’s financial health, both individually and relative to peers. Recognizing the challenge of consistently assessing governments’ fiscal health, we developed a uniquely broad data set and proxy measures of fiscal health. For more than 10,000 state and municipal governments in the United States, we extracted comparable data points from audited annual financial reports (FY 2008-09 to 2013-14). We then calculated a budget balance ratio, an asset flexibility ratio, and a pension funding ratio, which we used to rank governments’ relative performance. Previous work largely focused on state- and country-level comparisons of fiscal condition using limited samples due to restricted data availability and great variability in accuracy, particularly at the municipal level. These limitations restricted comparability across governments over time and geography. However, we successfully compiled a broad, multi-year public finance database that makes comparisons across thousands of American cities, counties, and state governments possible. Furthermore, our high-level framework of analysis illustrates a way to create simple, broadly applicable measures of municipal financial health. Keywords: government fiscal condition, fiscal solvency, financial ratios, fiscal sustainability, budget balance, asset flexibility, pension funding, public finance, municipal finance JEL Classification: J18, H70, H80