MEASURING AND EVALUATING THE FINANCIAL CONDITION OF LOCAL

GOVERNMENT

A Thesis

Presented to the faculty of the Department of Public Policy and Administration

California State University, Sacramento

Submitted in partial satisfaction of

the requirements for the degree of

MASTER OF PUBLIC POLICY AND ADMINISTRATION

by

Tina Kim Ramsey

SPRING

2013

ii

2013

Tina Kim Ramsey

ALL RIGHTS RESERVED

iii

MEASURING AND EVALUATING THE FINANCIAL CONDITION OF LOCAL

GOVERNMENT

A Thesis

by

Tina Kim Ramsey

Approved by:

__________________________________, Committee Chair

Mary K. Kirlin, D.P.A.

__________________________________, Second Reader

Steve Boilard, Ph.D.

Date

iv

Student: Tina Kim Ramsey

I certify that this student has met the requirements for format contained in the University

format manual, and that this thesis is suitable for shelving in the Library and credit is to

be awarded for the thesis.

, Department Chair

Robert W. Wassmer, Ph.D. Date

Department of Public Policy and Administration

v

Abstract

of

MEASURING AND EVALUATING THE FINANCIAL CONDITION OF LOCAL

GOVERNMENT

by

Tina Kim Ramsey

Turnkey solutions to measuring and evaluating the financial condition of local

government do not exist. The contextual diversity between local jurisdictions precludes a

one-size-fits-all approach; however, there are more similarities than differences. While

many impediments, (lack of normative standards, lack of empirical evidence, and

perceived ambiguities regarding the efficacy of various approaches, shifting

intergovernmental relationships, and lack of control over revenue generating capacity)

present, techniques, tools, and methodologies do exist. The key lies in developing

jurisdiction-specific analytical models to routinely monitor, assess, and identify potential

issues early enough to avoid and mitigate fiscal vulnerabilities. Developing such a

framework requires intimate contextual and domain knowledge, as well as awareness of

the multi-causal relationships that exist between a jurisdictions external environment, its

internal finances, and its management practices.

, Committee Chair

Mary K. Kirlin, D.P.A.

Date

vi

TABLE OF CONTENTS

Page

List of Tables .......................................................................................................................x

Chapter

1. INTRODUCTION .........................................................................................................1

Overview ..................................................................................................................2

Project Background ..................................................................................................3

Project Approach .....................................................................................................5

2. IMPEDIMENTS TO FINANCIAL CONDITION ANALYSIS ...................................6

Defining Financial Condition is Not an Exact Science ...........................................6

What Measure Defines Financial Condition? ....................................................6

What Time Period Defines Financial Condition? ............................................10

How Does Accounting Approach/Reporting Define Financial Condition? ....11

Lacking Empirical Research ..................................................................................13

Financial Condition Analysis Requires Resources ................................................15

Organizational Culture ...........................................................................................16

Lack of Local Government Control Over Financial Condition .............................17

3. SHIFTING OBJECTIVES AND APPROACHES TO FINANCIAL

CONDITION ANALYSIS...........................................................................................18

Regulatory Models -- Controls and Restrictions ...................................................18

Theoretical Models ................................................................................................19

Preventative Models...............................................................................................20

Predictive Decision Models ...................................................................................22

4. UNDERSTANDING TECHNICAL APPROACHES .................................................26

Closed Systems ......................................................................................................26

Cross-Jurisdictional Comparisons ...................................................................27

Bi-Variate Analysis ..........................................................................................30

vii

Pseudo-Open Systems ............................................................................................32

Indicator Analysis ............................................................................................33

Trend Analysis .................................................................................................34

Open Systems.........................................................................................................35

Regression Analysis .........................................................................................40

Simultaneous Equations ...................................................................................40

Financial Management Practices .....................................................................41

5. RECURRING DATA AND MODEL SPECIFICATION LIMITATIONS ................43

Data Limitations .....................................................................................................44

Data Availability ..............................................................................................45

Data Accuracy ..................................................................................................46

Model Specification Limitations ............................................................................49

Data Approach .......................................................................................................51

General Fund ....................................................................................................52

Government-Wide............................................................................................53

Strategic ...........................................................................................................53

Technical Approach ...............................................................................................53

Indicator Analysis ............................................................................................54

Cross-Jurisdictional Comparisons ...................................................................56

Composite Scores, Indexes, and Ranking ........................................................56

Trend Analysis .................................................................................................57

Correlation Analysis ........................................................................................58

Regression Analysis .........................................................................................59

Simultaneous Equations ...................................................................................60

Fiscal Environment Analysis ...........................................................................61

Timeliness of Threat Notification ..........................................................................61

6. STRENGTHS IN MODEL DESIGN ..........................................................................64

Dialogue, Education, Buy-in ..................................................................................66

viii

Feasibility ...............................................................................................................66

Ease of Use ............................................................................................................67

Efficiency ...............................................................................................................67

Adaptability............................................................................................................68

Predictive Capacity/Payoff ....................................................................................68

7. GUIDELINES FOR DEVELOPING A JURISDICTION SPECIFIC

ANALYTICAL FRAMEWORK FOR ANALYZING FINANCIAL

CONDITION ...............................................................................................................70

Identify and Prioritize Management Objectives ....................................................71

Strategic ...........................................................................................................71

Operational .......................................................................................................72

Requirements Analysis .......................