Fiscal Management of American Cities: Funds Flow Indicators

Abstract

What is municipal fiscal strain? One approach to this question is to focus on the municipal bond market. Fiscal strain may then be registered as a drop in (1) the offering price of a new issue, or (2) the price in the secondary bond market, both of which, are presumably related to (3) the probability of the issue meeting regular payments of principal and interest (see Petersen [1974]). However reasonable this perspective is to the municipal bond investor, it leaves fully undefined what it is that generates regular bond payments or a strong market position. A second approach, far broader, is that a municipality is strained if its population or economic base declines (cf. Peterson [1976]). This view supports the twofold characterization of American cities distinguishing those in the growing Sunbelt area from others declining in the Frostbelt. The problem with this second position is that it implies that the socioeconomic base either defines or determines (most discussions remain ambiguous) fiscal health for the municipality. A third approach has advantages if one wishes to probe the causes of fiscal strain, to establish early warning signals to help municipal leaders and others formulate policies to deal with their problems.