Fiscal Distress Research Articles

Knowledgeable Navigation to Avoid the Iceberg: Considerations in Proactively Addressing School District Fiscal Stress in Michigan

School districts in fiscal crisis are highly unlikely to provide educational environments in which students learn, grow, and thrive; yet in Michigan, 57 school districts and public school academies ended the 2014 fiscal year either in deficit or with a deficit projected for the subsequent year. These districts’ deficits range from slightly more than $5,000 to more than $169 million in the Detroit Public Schools (Michigan Department of Education, 2014). Helping these districts return to a position of fiscal health from which they can deliver quality education is an immediate concern of incredible importance. Although less pressing, implementing a system that could help prevent other districts from being mired in fiscal crisis is equally significant and the focus of this paper. In response to the increasing number of districts experiencing fiscal stress, in December 2014, the Michigan legislature proposed an early warning finance system to allow the state government to intervene in districts that are either experiencing financial stress or appear to be headed in that direction. In this paper, the authors first describe the evolution of Michigan’s state-level response to school districts’ fiscal crises. Subsequently, the authors will compare the early warning system being discussed in Michigan in late 2014-early 2015 with such systems in other states as well as research related to indicators of school district fiscal distress. Finally, the authors will provide recommendations for consideration when developing an effective and efficient early warning system for school districts.

Fiscal decentralization, political centralization, and land urbanization in China

This study investigates the driving forces of land urbanization in China. Drawing upon insights from the institutional perspective, this study argues that fiscal decentralization tightens local budget constraints, stimulating local governments to urbanize land to relieve fiscal distress. Political centralization triggers interregional competition among government officials for better economic performance, inspiring local governments to employ land development to mobilize more capital investment for growth. Based on official land-use change data from 2002 to 2008 for prefectural cities, and the application of spatial econometric models, this study presents empirical evidence to support these theoretical arguments. Results imply that fiscal and political incentives derived from land development drive China’s land urbanization process. This study enriches the urbanization literature by providing an institutional understanding of rapid land urbanization in a transitional economy.

From the Field: It's Always Something: Maryland's Path through the “Great Recession”

Like most states, Maryland experienced a significant revenue decline following the “Great Recession” of 2008. The State balanced its annual budgets using a combination of spending cuts, new revenues, use of general fund balance and reserves, modifications to State–local government revenue and spending relationships, and transfers from various dedicated special fund balances. During this period, states also received generous federal support via the American Recovery and Reinvestment Act of 2009. This case study differs in two ways from previous analyses of state budget balancing actions during times of fiscal distress. First, it demonstrates how elected officials established and implemented action to preserve spending priorities; chiefly relating to the social safety net and primary/secondary education. Secondly, it documents the combination of budget balancing actions adopted over a multi‐year period and shows the extent to which each type of action was relied upon. Future study can build upon this research, to show to what extent other states relied upon similar or divergent measures when balancing their budgets in post‐recessionary periods. Along with other states, Maryland was substantially affected by the so called “Great Recession.” But unlike many other places, Maryland did not substantially curtail employment or services. In particular, Maryland resisted substantial reductions in spending on health and education even after federal American Recovery and Reinvestment Act of 2009 support was exhausted, while maintaining a 5 percent balance in its Rainy Day Fund. This entailed a combination of spending restraint, balance transfers, rededication of revenues, health provider taxes, gambling, and higher taxes. This paper describes the actions taken each year, and illustrates how spending priorities were protected to the extent possible.

Economic Conditions and SSI Applications

The Supplemental Security Income (SSI) program provides federally-funded income support for individuals with disabilities, and has become one of the most important means-tested transfer programs in the United States. Previous studies have examined the effects of economic conditions on growth in disability caseloads, but most focus on the Social Security Disability Insurance (SSDI) program. Most work on SSI dates from before welfare reform, which had both direct and indirect effects on the composition of the population at risk for SSI participation. In this paper we examine the relationship between SSI application risk and economic conditions between 1996 and 2010, using data from the Survey of Income and Program Participation (SIPP) linked to the Social Security Administration’s 831 file, which includes monthly data on SSI (and SSDI) application and receipt. Results from hazard models suggest that higher state unemployment rates have a large, positive effect on the risk of SSI application among jobless individuals, and our evidence suggests that female potential applicants may be more responsive to local economic conditions than men. State-level TANF policies have no effect on SSI application risk but state fiscal distress significantly increases application risk. Given the continued growth of the SSI program, understanding these relationships is increasingly important and policy-relevant.

Determinants of Fiscal Distress in Italian Municipalities

Fiscal distress of local governments and municipalities is a non-negligible component of the public finance turmoil after the Great Recession. In this paper we consider a dataset of Italian municipalities over the period 2000-2012 and look for the main budget determinants of local default. According to our results the default probability is positively affected by the share of loan repayment over total spending.This result is robust to alternative model specifications as well as inclusion of fixed effects, time dummies and macroeconomic control variables.

EDITOR'S NOTES

EDITOR'S NOTES

Lessons from the European Financial Crisis

This paper distils three lessons for bank regulation from the experience of the 2009-12 euro-area financial crisis. First, it highlights the key role that sovereign debt exposures of banks have played in the feedback loop between bank and fiscal distress, and inquires how the regulation of banks' sovereign exposures in the euro area should be changed to mitigate this feedback loop in the future. Second, it explores the relationship between the forbearance of non-performing loans by European banks and the tendency of EU regulators to rescue rather than resolving distressed banks, and asks to what extent the new regulatory framework of the euro-area banking union can be expected to mitigate excessive forbearance and facilitate resolution of insolvent banks. Finally, the paper highlights that capital requirements based on the ratio of Tier-1 capital to banks' risk-weighted assets were massively gamed by large banks, which engaged in various forms of regulatory arbitrage to minimize their capital charges while expanding leverage. This argues in favor of relying on a set of simpler and more robust indicators to determine banks' capital shortfall, such as book and market leverage ratios.

A Tale of Two Hatchet Men

Fiscal stress in local governments has reached catastrophic levels in Michigan, which has implemented emergency management legislation in an attempt to keep apace of the problems it faces, including Detroit’s bankruptcy. It is time to consider what kind of public administrator is needed to address the problems of modern fiscal distress. Whereas the political approaches and policies for emergency financial management across the country may differ, the emergency manager can still bring successful generalized approaches and practices to many problems. This research studies two such bureaucrats in Michigan, one who has been instrumental in the development of emergency management policy for decades and one who is bringing his skills in corporate bankruptcy counsel to task.

Reporting and grading financial toxicity.

DOI: 10.1200/JCO.2014.57.8740 In my hematology-oncology practice, I often see the worry and burden of financial concerns when patients share their stories with me, looking for comfort or tangible help investigating their financial options. I imagine other patients whisper to their families and friends instead, not wanting to influence my treatment recommendations by injecting such considerations into the discussion. I suspect I ought to ask all patients about financial vulnerabilities. After all, shouldn’t it be part of my full review of symptoms? Maybe it is not quite in the same league as shortness of breath, fevers, new neurologic symptoms, or fatigue. Or is it? Ms R is a 59-year-old woman diagnosed with a second primary breast cancer with axillary lymph node involvement 3 years ago. She had a bilateral mastectomy followed by adjuvant chemotherapy and radiation and at least three lines of endocrine therapy and chemotherapy for repeated local recurrences. Currently she is being treated with everolimus and exemestane. Her out-of-pocket expenses (from deductibles and copayments for office visits and prescriptions) have been increasing exponentially since her diagnosis to the point where she has spent close to $40,000 in the last 3 years for her medical care. She lost her job during treatment and has needed to withdraw money from her retirement account to pay for medical care, which has added extreme emotional stress to the physical stress of her cancer and its treatment. She worries about how she will pay for medical care once she exhausts her retirement funds. Her questions are difficult and thought provoking: “Will I have to sell my home? Should I declare bankruptcy? Do I need to stop spending money on food and utilities to be able to pay for medical care? Will I have to go to hospice when I am unable to pay any more? Does hospice charge very much?” These questions make me uncomfortable and aware of the fact that I am not really prepared to manage this adverse effect of cancer treatment. Thirty-eight-year-old Mr M and his wife found themselves in a similar situation 8 months after his allogeneic transplant for acute myeloid leukemia. They depleted their savings to cover medical bills, child care for their two young children, and out-ofpocket expenses from traveling back and forth to the transplant center. Their fiscal distress was amplified when his wife—his primary caregiver—lost her job. They were forced to sell their home and move into a rental apartment. The final blow came with the loss of his employer-funded insurance around the time he relapsed. Mr M’s desire to avoid spending all their resources and leaving his wife and children bereft clearly had an impact on his decision to stop anticancer treatment. It was clear to me that financial distress added to the family’s anguish during the final days of Mr M’s life. Stories like Ms R and Mr M’s illustrate the concept of financial toxicity, defined as adverse economic consequences resulting from medical treatment. Similar to medical toxicity, financial toxicity can result in treatment nonadherence and lifestyle changes for patients, which then impact quality of life and increase the morbidity and mortality of treatments. Similar to medical toxicity, financial toxicity can have different degrees of severity and can progress if the treatment approach is not adjusted or if appropriate supportive measures are not initiated in a timely manner. It is easy to think that the Affordable Care Act holds the key to solving the problem of financial toxicity through its provisions that help limit the financial burden of medical care. Unfortunately, it may have the unintended consequence of actually increasing the financial toxicity by causing expansion of high-deductible health plans. In addition, if an insurance plan purchased through a health care exchange does not cover care at a major cancer center, the patient may be faced with high out-of-pocket costs that will not be part of the annual limitation on cost-sharing. Ubel et al have advocated full disclosure of financial considerations when discussing benefits and risks of different treatments. This seems consistent with the current practice of informing patients about the physical risks of anticancer treatment such as nausea, hair loss, and neuropathy. Could a standardized scoring system for financial toxicity be beneficial? For example, the Common Terminology Criteria for Adverse Events used during evaluation of new clinical agents/treatments provides a graduated, standardized nomenclature. The system grades conditions as mild (grade 1), moderate (grade 2), severe (grade 3), life-threatening or disabling (grade 4), or fatal (grade 5). A prototype for such a grading scale for financial toxicity is presented JOURNAL OF CLINICAL ONCOLOGY A R T O F O N C O L O G Y VOLUME 32 NUMBER 29 OCTOBER 1

Monitoring the Fiscal Health of Taiwan's Local Government: Application of the 10-Point Scale of Fiscal Distress

Monitoring the Fiscal Health of Taiwan's Local Government: Application of the 10-Point Scale of Fiscal Distress

Through the Complexity of Brankruptcy in Local Governments

Local governments’ fiscal distress is a complex and multidimensional process. The causes behind jurisdictions that fall into bankruptcy are varied and no simple linear relationship exists. Given the complex nature behind municipal bankruptcy, it is natural to ask questions about the policy rationale that underlines the bankruptcy process. Bankruptcy in local governments remains under the spotlight of practitioners and academics and this special issue contributes to the discussion.

Dictatorships for Democracy: Takeovers of Financially Failed Cities

States have traditionally offered support to their fiscally distressed municipalities. When less intrusive forms of assistance fail to bring stability, some states employ supervisory institutions that exercise approval authority over local budgets or, more intrusively, that displace locally elected officials. These are frequently accused of representing an antidemocratic form of local government and a denial of local autonomy.In this Article, I suggest that the extent to which takeover boards are subject to an anti-democratic critique is frequently overstated. Efforts to revive near-insolvent localities cannot be oblivious to the causes that generated their distress. Depopulation, high unemployment, depleted municipal services, and blight do not arise spontaneously. They are frequently the consequence of long periods of local mismanagement, in which expenditures deviate substantially from those goods and services that residents prefer, inducing the most mobile among them to gravitate to more hospitable jurisdictions. Any viable response must therefore address the causes of political dysfunction. I contend that by addressing the political underpinnings of fiscal distress, takeover boards may be more capable of satisfying the interests of local residents for public goods than local elected officials, and may also represent the interests of nonresidents and creditors who are not considered by those officials. Moreover, I suggest, the authority of takeover boards should be expanded to allow them to engage in restructuring of municipal governance in order to avoid the entrenched and defragmented institutions that are often associated with local fiscal distress. The temporary nature of takeover board jurisdiction means that when local governance returns to the realm of normal politics, residents will be in a more informed position to evaluate the optimal structure of local governance.

The Symptoms and Consequences of Fiscal Distress in Municipalities: An Investigation of Reductions in Public Services

ABSTRACTThis paper uses survival analysis to investigate financial indicators of impending reductions of public services provided by U.S. municipalities. We hypothesize that reductions in public services are positively correlated with revenue risk and debt usage, and negatively correlated with organizational slack and entity resources. We develop and test a model to predict whether a municipality will significantly reduce public services. The model correctly classifies up to 83 percent of the sampled municipalities. The results show that the most important signal of an impending reduction in public services is a high level of intergovernmental revenues relative to total revenues. These results provide important information to citizens, policy-makers, and stakeholders interested in preventing, detecting, and mitigating fiscal conditions that could lead to a reduction in public services.JEL Classifications: H72, H83, M48Data Availability: Data are available from public sources identified in this study.

Local fiscal distress and investment efficiency of local SOEs

In this paper, we use A-share listed firms between 2002 and 2010 to investigate the relationship between local fiscal distress and the investment efficiency of local SOEs, along with the effect of corporate tax payments on this relationship. We find a positive relationship between the extent of local SOEs’ overinvestment and the fiscal distress of the corresponding local government where the enterprise and this relationship become stronger for firms that pay fewer taxes. The pattern of underinvestment among local SOEs was in contrast, and these relationships do not exist for non-SOEs or central SOEs. Moreover, we find that expanding a firm’s investment scale leads to an increase in total taxes paid, including income and turnover taxes, which further result in more local fiscal revenue. Overall, we conclude that local governments have an incentive to increase fiscal revenue when faced with fiscal distress by raising the investment scale of local SOEs and that the incentives and effects of such interventions appear to be stronger among firms that contribute less to local fiscal revenue.

Lessons from the Asian financial crisis for the eurozone: a comparative analysis of the perilous politics of austerity in Asia and Europe

This paper comparatively examines diverse responses from three major actors in the global political economy (the state, civil society, international financial institutions) to the Asian financial crisis of 1997 and the current eurozone crisis. First, it analyses conditional lending policies of international financial institutions (IFIs) such as the International Monetary Fund toward countries in fiscal distress. It then critically examines how the lending policies engendered social tensions and conflicts as austerity measures such as cuts to social welfare programmes hit hard on the populace. Examining how the state and civil society in Asia reacted to and, as a result of contentious state–civil society interactions, altered the policies of IFIs, the paper draws lessons from the Asian financial crisis for the European Union and puts forwards alternative policy suggestions.

Predicting fiscal distress in special district governments

This paper uses survival analysis to investigate fiscal distress in special district governments. We hypothesize that fiscal distress is positively correlated with revenue concentration and debt usage, and negatively correlated with organizational slack and entity resources. Our model addresses differences in district functions, financing and legislation. Our regression model predicts the likelihood of fiscal distress and correctly classifies 93.4 percent of the districts as fiscally distressed or not. The results show that the most important indicator of fiscal distress is a low level of capital expenditures relative to total revenues and bond proceeds. The information needed to predict fiscal distress is publicly available, making our model useful in the prevention, detection, and mitigation of fiscal distress in U.S. districts.

Public Finance and Land Use in the Shadow of Fiscal Distress

Since the Great Depression of the 1930s, all recessions have been relatively short, causing no changes in the fundamental structures of public finance and state and local government economics—except the Great Recession of 2007. For states and local governments the Great Recession has not ended; in some sense it is ongoing. Real property values continue falling, testing real property taxes as the basic source of local government revenue. The number of persons employed by state and local governments continues to decline. State and federal mandates and pension and other postemployment benefit (OPEB) obligations continue to rise, stretching governments’ ability to maintain annually balanced budgets. These trends have continued unabated for the past four years and show no sign of ending. There is nothing resembling the dot-com boom of the 1990s or the real estate boom of the 2000s in the offing that would reverse these trends. For the first time since the end of the Second World War, the fundamental structures of public finance and state and local government economics are changing to adjust to lower levels of government revenues. These changes can be observed in the areas of public finance, economic development, land use economic development, land use planning, and financial restructuring.

Relevance of GASB No. 34 to Financial Reporting by Municipal Governments

SYNOPSIS The Governmental Accounting Standards Board issued Statement No. 34, creating a new accrual-based financial reporting model. This study examines whether information from this model is associated with the default risk (a proxy for fiscal distress) of municipal governments and whether this information is incremental to that provided by the fund-based, modified-accrual reporting model. Ordered logistic regressions are used to analyze financial data from 2005 for a sample of 409 municipalities that participated in the Government Finance Officers Association award program. This study extends the work of Plummer et al. (2007) to municipal governments. In addition to the financial position indicator variable (total net assets/total revenues) examined by Plummer et al. (2007), this study provides evidence of the relevance of three other financial indicators (change in net assets/total net assets; total liabilities/total assets; and current assets/current liabilities). We also find that these accrual-based indicators provide information incremental to the fund-based model and that one fund-based measure (total fund balances/total fund revenues) also provides information incremental to the accrual indicator. These results are consistent with perceptions of regulators and others who expect accrual accounting to be a better measure of the economic costs of running a government than the traditional fund-based model. Data Availability: Contact the authors.

Michigan's Local Leaders are Divided Over the State's Emergency Manager Law

This report presents the opinions of Michigan’s local government leaders regarding the state’s emergency manager law, officially called the Local Government and School District Fiscal Accountability Act (Public Act 4 of 2011). This law provides for the appointment of emergency managers to oversee local governments and school districts in fiscal distress. The findings in this report are based on statewide surveys of local government leaders in the Spring 2012 wave of the Michigan Public Policy Survey (MPPS).

A New Predictor of Local Financial Distress

The development of predictive models for financial distress is a recurring topic in both private and public contexts, although currently its repercussions are greater in the public sphere, where efforts are being made to define new warning systems for fiscal crises. The present study thus aims first to show the similarities and differences between the absolute and relative models based on a 10-point scale, in order to subsequently combine the positive aspects of both proposals to find a system that can determine local fiscal distress in a more robust way. The results obtained show that the optimum predictive system is a slight variant of the model proposed by Kloha et al. (2005). This variant consists of the inclusion of two indicators of financial independence proposed by Zafra-Gómez et al. (2009a) for which an alert threshold has been empirically determined.